Sorrento Therapeutics, Inc. (NASDAQ: SRNE), together with its subsidiaries (collectively, the “Company”) is a clinical stage biotechnology company focused on delivering clinically meaningful therapies to patients and ~~their families, globally. The Company’s primary focus is to transform cancer into a treatable or chronically manageable disease. The Company also has programs assessing the use~~Summary of ~~its technologies~~Significant Accounting Policies

Basis of Presentation and ~~products in auto-immune, inflammatory, neurodegenerative, infectious diseases and pain indications with high unmet medical needs.~~

At its core, the Company is an antibody-centric company and leverages its proprietary G-MAB™ library to identify, screen and validate fully human antibodies against high impact oncogenic targets and mutations, immune modulators and intracellular targets. To date, the Company has screened over 100 validated targets and generated a numberPrinciples of fully human antibodies against these targets which are at various stages of preclinical development. These include PD-1, PD-L1, CD38, CD123, CD47, c-MET, VEGFR2, CCR2, OX40, TIGIT and CD137 among others.

The Company’s 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 antibody drug conjugates (“ADCs”), bispecific approaches, as well as T-Cell Receptor (“TCR”)-like antibodies. With LA Cell, Inc. (“LA Cell”), the Company’s joint venture with City of Hope, the Company’s objective is to become the global leader in the development of antibodies against intracellular targets such as STAT3, mutant KRAS, MYC, p53 and TAU. Additionally, the Company has acquired and is assessing the regulatory and strategic path forward for its portfolio of late stage biosimilar/biobetter antibodies based on Erbitux®~~, Remicade~~®~~, Xolair~~®~~, and Simulect~~® ~~as these may represent nearer term commercial opportunities.~~

With each of its programs, the Company aims to tailor its therapies to treat specific stages in the evolution of cancer, from elimination, to equilibrium and escape. In addition, the Company’s objective is to focus on tumors that are resistant to current treatments and where the Company can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. The Company has 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 its global aim to provide a wide range of therapeutic products to meet underserved therapeutic markets, the Company has made investments and developed a separate pain focused franchise which the Company believes will serve to provide short term upside to its core thesis.

~~Through September 30, 2017, the Company had devoted substantially all of its efforts to product development, raising capital and building infrastructure.~~

Consolidation

The accompanying ~~condensed~~ consolidated financial statements include the accounts of the ~~Company’s subsidiaries.~~subsidiaries of Sorrento Therapeutics, Inc. (the “Company”). For consolidated entities where the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its ~~condensed~~ consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal, recurring and necessary for a fair statement of financial position, results of operations and cash flows.

These ~~condensed~~ consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2022, filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2023. Operating results for interim periods are not expected to be indicative of operating results for the Company’s ~~2017~~2023 fiscal year, or any subsequent period. The unaudited interim financial statements included herein reflect all normal and recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented.

Voluntary Filing Under Chapter 11

As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on February 13, 2023, on February 13, 2023 (the “Petition Date”), the Company and its wholly owned direct subsidiary, Scintilla Pharmaceuticals, Inc. (“Scintilla” and together with the Company, the “Debtors”), commenced voluntary proceedings under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings are jointly administered by the Bankruptcy Court under the caption In re Sorrento Therapeutics, Inc., et al. (the “Chapter 11 Cases”). The Debtors continue to operate their business in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

On February 28, 2023, the Office of the United States Trustee (the “U.S. Trustee”) appointed an Official Committee of Unsecured Creditors, which was reconstituted on March 28, 2023, June 7, 2023 and July 28, 2023. The purpose of the Official Committee of Unsecured Creditors is to represent the interests of the Debtors’ unsecured creditors. On April 10, 2023, the U.S. Trustee appointed an Official Committee of Equity Security Holders, which was reconstituted on April 14, 2023. The purpose of the Official Committee of Equity Security Holders is to represent the interests of the Debtors’ equity security holders.

Nant Arbitration / Mediation

Prior to commencing the Chapter 11 Cases, the Company had engaged in arbitration before the American Arbitration Association against NantPharma, LLC (“NantPharma”) relating to breaches of the May 14, 2015 Stock Sale and Purchase Agreement entered into between the Company and NantPharma related to the development of the cancer drug Cynviloq™ (the “Cynviloq Arbitration”). In April 2019, the Company filed an action in the Los Angeles Superior Court (the “Court”) derivatively on behalf of Immunotherapy NANTibody LLC (“NANTibody”) against NantCell, Inc. (“NantCell”) and Patrick Soon-Shiong, among others, related to alleged breaches of the June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between the Company and NantCell (the “Derivative Action”). The suit alleges breaches of fiduciary duties and seeks, among other things, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring its equity method investment in NANTibody to its invested amount as of June 30, 2017 of $40.0 million.

Additionally, in 2020, the Company filed a legal action against Patrick Soon-Shiong in the Court, asserting claims for fraudulent inducement and common law fraud alleging that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq for the purpose of halting its progression to the market. This action is pending.

The Company had also engaged in arbitration before the American Arbitration Association against NantCell and NANTibody relating to alleged breaches of the April 21, 2015 Exclusive License Agreement entered into between the Company and NantCell and the June 11, 2015 Exclusive License Agreement entered into between the Company and NANTibody (the “NantCell/NANTibody Arbitration”).

On December 2, 2022, the arbitrator in the NantCell/NANTibody Arbitration issued an award granting contractual damages and pre-award interest in the amounts of $156,829,562 to NantCell and $16,681,521 to NANTibody, exclusive of post-award, prejudgment interest, which will accrue at 9% per annum (the “Nant Award”). On December 20, 2022, the arbitrator in the Cynviloq Arbitration issued an award granting contractual damages of $125 million to the Company, reflecting the value of lost milestone payments for the

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approval of Cynviloq for the treatment of breast and lung cancers (the “Cynviloq Award”).

On February 7, 2023, the Court confirmed the Nant Award and issued a 70-day stay of enforcement of the judgment beyond $50 million (i.e., the difference between the amount of the Nant Award and amount of the Cynviloq Award). Following such confirmation, the Company believed that NantCell and NANTibody, in an attempt to satisfy the unstayed $50 million portion of the Nant Award, would imminently take steps to levy its assets, which would cause significant disruption and harm to the Company’s business, including its ability to continue developing life-saving and cutting-edge drugs. To protect the Company’s business and maximize its value, on February 13, 2023, the Company commenced the Chapter 11 Cases.

On March 16, 2023, the Court granted the Company’s motion to confirm the award in the Cynviloq Arbitration over NantPharma’s opposition. On April 7, 2023, the Court entered final judgment (the “Final Judgment”) upon the confirmed award in the Company’s favor in the amount of $127,686,210, which includes arbitration costs and accrued interest on the award since December 20, 2022. The Final Judgment is accruing interest at the rate of 10 percent per annum from March 16, 2023.

Following mediation in the Chapter 11 Cases, the Company reached a settlement with NantPharma, NantCell and NANTibody (along with their related parties) (collectively, the “Nant Parties”) regarding the Nant Award, the Cynviloq Award, and other legal causes of action (the “Nant Settlement”)—subject to Bankruptcy Court approval. Under the settlement, either (i) the Company will pay NantCell and NANTIbody in full in cash by August 31, 2023 to satisfy the Nant Award (the “Nant Settlement Payments”) and the Company and the Nant Parties will retain all their other respective claims and causes of action, joint venture interests, and royalty rights and obligations, or (ii) if the Company does not make the Nant Settlement Payments, then the Company and the Nant Parties will mutually release each other from any and all claims and causes of action, the Company will transfer its joint venture interests (and rights related thereto) in certain Nant Parties to the Nant Parties, and the Company will receive $1.5 million from the Nant Parties in exchange for a release of the Company’s royalty rights to PD-L1 (and address certain rights and obligations related thereto). In the interim, the Company and the Nant Parties have agreed to stay all litigation matters until August 31, 2023. A hearing for the Bankruptcy Court to consider approval of the settlement is currently scheduled for August 14, 2023.

Sale Procedures

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2023, on April 14, 2023, the Bankruptcy Court entered an order approving procedures for the Debtors to conduct a dual-track (i) financing process for the potential raising of debt, equity, or hybrid financing or consummation of a restructuring transaction through a Chapter 11 plan of reorganization and (ii) marketing process for the sale or disposition of all or any portion of the Debtors’ assets under section 363 of the Bankruptcy Code, including (x) the Debtors’ equity interests in its non-debtor subsidiaries, including, but not limited to, Scilex Holding Company (“Scilex Holding”), and (y) the Debtors’ other assets. The sale and financing process remains ongoing. As set forth in greater detail below, the Company has entered into a stalking horse purchase agreement for the sale of substantially all of the Company’s equity interests in Scilex Holding.

On April 27, 2023, the Bankruptcy Court entered an order providing that the Company may consummate one or more block sales of its shares of common stock of Scilex Holding without requiring any further approval from the Bankruptcy Court, subject to certain other conditions set forth in the order (namely, the prior approval from the Debtors’ lender in their Chapter 11 Cases, the Official Committee of Unsecured Creditors and the Official Committee of Equity Security Holders). As of August 10, 2023, the Debtors have not consummated any such block sales.

On June 12, 2023, the Bankruptcy Court also entered an order approving certain sale procedures for the Debtors to sell certain “de minimis” assets (up to $10 million in the aggregate) on an expedited basis and subject to certain notice and consent requirements (as applicable depending on the type of de minimis asset or stock). As of the date hereof, the Debtors have not consummated any such de minimis asset sales.

Debtor-In-Possession Financing - Senior DIP Facility

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on February 22, 2023 (the “February 22 Form 8-K”), on February 19, 2023, the Debtors executed that certain Debtor-In-Possession Term Loan Facility Summary of Terms and Conditions (the “Senior DIP Term Sheet”) with JMB Capital Partners Lending, LLC (“JMB Capital” or the “Senior DIP Lender”), pursuant to which JMB Capital (or its designees or its assignees) provided the Debtors with a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $75,000,000 in term loan commitments (the “Senior DIP Facility”), subject to the terms and conditions set forth in the Senior DIP Term Sheet.

As previously disclosed in the February 22 Form 8-K, at a hearing before the Bankruptcy Court on February 21, 2023, the Bankruptcy Court entered an interim order (the “Interim Senior DIP Order”) approving the Senior DIP Facility on an interim basis and providing the Debtors with liquidity to continue to operate during the Chapter 11 process. Upon entry of the Interim Senior DIP Order and satisfaction of all applicable conditions precedent, as set forth in the Senior DIP Term Sheet, the Debtors were authorized to make a single, initial draw of $30,000,000 on the Senior DIP Facility (the “Senior Draw”). The Debtors then negotiated and executed definitive financing documentation, including a Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement

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(the “Senior DIP Credit Agreement”) and other documents evidencing the Senior DIP Facility (collectively with the Senior DIP Credit Agreement, the “Senior DIP Documents”).

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 31, 2023, after a hearing before the Bankruptcy Court on March 29, 2023, the Bankruptcy Court entered a final order (the “Final Senior DIP Order”) approving the Senior DIP Facility on a final basis and providing the Debtors with access to the remaining $45,000,000 of the Senior DIP Facility (subject to the terms, conditions, and covenants set forth in the Senior DIP Documents), through additional draws of no less than $5,000,000, each upon five business days’ written notice to the Senior DIP Lender (as defined above), and the Debtors and Senior DIP Lender proceeded to enter into the Senior DIP Documents on March 30, 2023. The Senior DIP Facility matured on July 31, 2023 and was repaid in full on August 9, 2023 from proceeds from the Replacement DIP Facility (as defined below).

See Note 7 for further discussion of the key terms of the Senior DIP Facility.

Debtor-In-Possession Financing - Junior DIP Facility

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on July 10, 2023, after a hearing before the Bankruptcy Court, on July 5, 2023, the Bankruptcy Court entered an interim order (the “Interim Junior DIP Order”) approving the Junior DIP Facility (as defined below) on an interim basis and providing the Company with liquidity to continue to operate during the Chapter 11 process. Upon entry of the Interim Junior DIP Order and satisfaction of all applicable conditions precedent, as set forth in the Junior DIP Term Sheet, the Company was authorized to make (and did make) a single draw of the Junior DIP Facility (the “Junior Draw”), which is subject to a certain intercreditor and subordination agreement entered into by and among the Senior DIP Lender and the Junior DIP Lender (the “Subordination Agreement”). The Bankruptcy Court entered an order approving the Junior DIP Facility on a final basis (the “Final Junior DIP Order”) on July 27, 2023.

On July 5, 2023, the Company executed that certain Debtor-in-Possession Term Loan Facility Summary of Terms and Conditions (the “Junior DIP Term Sheet”) with its subsidiary, Scilex Holding (the “Junior DIP Lender”), pursuant to which Scilex Holding (or its designees or its assignees) has provided the Company with a non-amortizing super-priority junior secured term loan facility in an aggregate principal amount not to exceed the sum of (i) $20,000,000 (the “Base Amount”), plus (ii) the amount of the commitment fee and the funding fee, each equal to 1% of the Base Amount, plus (iii) the amount of the DIP Lender Holdback (as defined in the Interim Junior DIP Order) (the “Junior DIP Facility”), subject to the terms and conditions set forth in the Junior DIP Term Sheet. The Junior DIP Term Sheet grants to Scilex Holding a right of first refusal to provide any debtor-in-possession financing during the course of the Chapter 11 Cases to the Company occurring after the date of the Interim Junior DIP Order until the Chapter 11 Cases are concluded. In connection with the Junior DIP Term Sheet, Scilex Holding entered into the Subordination Agreement with the Senior DIP Lender, which specifies that the Junior DIP Facility is subordinated in right of payment to the Senior DIP Facility as more fully set forth therein. The Debtors negotiated and executed other definitive financing documentation, including a Junior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “Junior DIP Credit Agreement”) and other documents evidencing the Junior DIP Facility (collectively with the Junior DIP Credit Agreement, the “Junior DIP Documents”).

The Junior DIP Facility will bear interest at a per annum rate of 12.00% payable in kind on the first day of each month in arrears and on the DIP Termination Date (as defined in the Junior DIP Credit Agreement). Upon the occurrence and during the continuance of an event of default as defined in the Junior DIP Credit Agreement, the interest rate on outstanding DIP Loans (as defined in the Junior DIP Credit Agreement) would increase by 2.00% per annum. The commitment fee and the funding fee described above shall be payable upon the funding of the DIP Loans (as defined in the Junior DIP Credit Agreement), in each case as set forth in the Junior DIP Credit Agreement. Upon repayment or satisfaction of the DIP Loans (as defined in the Junior DIP Credit Agreement) in whole or in part, the Company shall pay to Scilex Holding in cash an exit fee equal to 2% of the aggregate principal amount of the Junior DIP Facility on the date of the Junior Draw.

The Junior DIP Facility matures on the earliest of: (i) September 30, 2023; (ii) the effective date of any Chapter 11 plan of reorganization with respect to the Debtors; (iii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iv) the date of the acceleration of the DIP Loans and the termination of the DIP Commitments in accordance with the Junior DIP Documents (each as defined in the Junior DIP Credit Agreement); and (v) the dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code. Further, in no event shall the Junior DIP Facility mature before the maturity date of the Senior DIP Facility obligations as in effect on the date of the Interim DIP Order. Pursuant to the terms of the Subordination Agreement, the Debtors’ obligations to the Junior DIP Lender under the Junior DIP Facility are subordinated to the obligations of the Debtors to the Senior DIP Lender on the terms and conditions set forth therein.

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Debtor-In-Possession Financing - Replacement DIP Facility

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on August 10, 2023, after a hearing before the Bankruptcy Court, on August 7, 2023, the Bankruptcy Court entered a final order (the “Replacement DIP Order”) approving the Replacement DIP Facility (as defined below) on a final basis.

Oramed Pharmaceuticals Inc. (“Oramed” and, in its capacity as lender under the Replacement DIP Facility, the “Replacement DIP Lender”) has agreed to provide the Company with a non-amortizing super-priority debtor-in-possession term loan facility in an aggregate principal amount of $100,000,000 (the “Replacement DIP Facility” and together with the Junior DIP Facility, the “DIP Facilities”), pursuant to definitive financing documentation entered into on August 9, 2023, including a Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “Replacement DIP Credit Agreement”) and other documents evidencing the Replacement DIP Facility (collectively with the Replacement DIP Credit Agreement, the “Replacement DIP Documents”). Upon entry of the Replacement DIP Order and satisfaction of all applicable conditions precedent, as set forth in the Replacement DIP Documents, the Debtors were authorized to make (and did make) a single draw of the entire amount of the Replacement DIP Facility. The Debtors used the proceeds from the Replacement DIP Facility to, among other things, repay the Senior DIP Facility in full on August 9, 2023. After applying approximately $82 million of the proceeds from the Replacement DIP Facility to pay off the Senior DIP Facility in full, the remaining proceeds of the Replacement DIP Facility are expected to be used for working capital and other general corporate purposes of the Debtors, subject to the budgets contemplated in the Replacement DIP Credit Agreement, the payment of certain statutory fees and allowed professional fees of the Debtors, bankruptcy-related expenses and fees, expenses, interest and other amounts payable under the Replacement DIP Facility.

The Replacement DIP Facility bears interest at a per annum rate equal to 15%, payable in cash on the first day of each month in arrears (and a default interest rate that shall accrue at an additional per annum rate of 3% plus the non-default interest, payable in cash on the first day of each month) and other fees and charges as described in the Replacement DIP Documents. The Replacement DIP Facility is secured by first-priority priming liens on substantially all of the Debtors’ assets (that prime, among other things, the liens under the Junior DIP Facility), subject to certain enumerated exceptions.

The Replacement DIP Facility matures on the earliest of: (i) October 15, 2023; (ii) the effective date of any Chapter 11 plan of reorganization with respect to the Debtors; (iii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors’ assets pursuant to section 363 of the Bankruptcy Code; (iv) the date of the acceleration of the DIP Obligations in accordance with (and as defined in) the Replacement DIP Credit Agreement; (v) the dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code; (vi) the date of termination of the Stalking Horse Stock Purchase Agreement (as defined below) or other definitive documentation related to the subject matter thereof, solely in the event such termination results from a material breach of such documentation by any Loan Party (as defined in the Replacement DIP Credit Agreement) or other seller thereunder; and (vii) the date on which a “Trigger Event” (as defined in the Restated Certificate of Incorporation of Scilex Holding) has occurred. The Replacement DIP Facility does not contain a roll-up or cross-collateralization of prepetition debt or otherwise dictate how prepetition claims will be addressed in a Chapter 11 plan.

The Replacement DIP Credit Agreement contains customary conditions, affirmative and negative covenants and events of default for similar types of agreements. The Debtors have agreed to indemnify the Replacement DIP Lender against certain liabilities arising in connection with the Replacement DIP Facility.

Stalking Horse Stock Purchase Agreement

The Replacement DIP Order also approved that certain Stock Purchase Agreement, dated August 7, 2023 (the “Stalking Horse Stock Purchase Agreement”), between the Company and Oramed relating to the purchase and sale of (A) 59,726,737 shares of the common stock of Scilex Holding (the “Scilex Common Stock”), (B) 29,057,096 shares of Series A preferred stock of Scilex Holding (the “Scilex Preferred Shares”), which constitutes one fewer Scilex Preferred Share (the “Remaining Preferred Share”) than all of the issued and outstanding Scilex Preferred Shares; and (C) warrants exercisable for 4,490,617 shares of Scilex Common Stock (“Scilex Warrants”), of which 1,386,617 Scilex Warrants are ”public warrants” and 3,104,000 Scilex Warrants are “private placement” warrants issued in connection with the initial public offering of the special purpose acquisition company (“SPAC”) that merged with Scilex Holding for its initial business combination and which the Company acquired from the SPAC sponsor (“Sponsor”) in accordance with the terms of a warrant transfer agreement between the Company and the Sponsor ((A), (B) and (C) collectively, the “Scilex Purchased Securities”). The sale of the Scilex Purchased Securities would be conducted pursuant to section 363 of the Bankruptcy Code.

Pursuant to the Stalking Horse Stock Purchase Agreement, Oramed agreed to buy, and the Company agreed to sell (following an auction of the Scilex Purchased Securities (the “Auction”) that is scheduled to commence on August 14, 2023 (if another qualified bidder emerges) and subject to further Bankruptcy Court approval in the form of a sale order (the “Sale Order”)) the Scilex Purchased Securities for a purchase price (subject to the submission of higher or otherwise better offers in accordance with the approved procedures for the Auction) of $105 million (the “Purchase Price”) (which purchase price shall consist of a credit bid on a dollar-for-dollar basis in respect of the full amount of outstanding obligations as of the closing date under the Replacement DIP Facility, with the

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remaining balance to be paid in cash to the Company). The Company has also granted Oramed an option in the Stalking Horse Stock Purchase Agreement to purchase up to 2,259,058 additional shares of Scilex Common Stock held in abeyance for the benefit of certain holders of warrants to purchase shares of the Company’s common stock (the “Option Shares”). Such option will be exercisable for a period of 30 days after the Company notifies Oramed that the Company no longer holds all or part of such Option Shares in abeyance and can freely transfer such Option Shares to Oramed. The purchase price per Option Share payable by Oramed in connection with the exercise of such option shall be $1.13 per Option Share. The sale of the Scilex Purchased Securities by the Company to Oramed is subject to the Auction and a further order from the Bankruptcy Court approving such sale before such purchase and sale becomes a final agreement between the parties thereto. The Stalking Horse Stock Purchase Agreement also contained certain stalking horse protections (the “Stalking Horse Protections”), consisting of (A) a break-up fee payable to Oramed of $3,412,500 and (B) reimbursement of costs and expenses of external counsel up to $1 million (to the extent not paid under the Replacement DIP Facility), in each case, payable to Oramed one business day following the closing of an Alternative Transaction (as defined in the Stalking Horse Stock Purchase Agreement, being a sale of any portion of the Scilex Purchased Securities to a party other than Oramed or its affiliate(s)) if the Stalking Horse Stock Purchase Agreement is or has been terminated in certain circumstances. Payments pursuant to the Stalking Horse Protections shall be treated as an allowed superiority administrative expense claim in the Debtors’ bankruptcy case pursuant to Section 503(b)(1) and 507(a)(2) of the Bankruptcy Code. The Stalking Horse Protections were approved in the Replacement DIP Order and are not subject to any further approval by the Bankruptcy Court.

Automatic Stay

Subject to certain specific exceptions under the Bankruptcy Code, the Bankruptcy Petitions automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

Executory Contracts

Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including, where applicable, a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. As of June 30, 2023, no motions were filed with the Bankruptcy Court (and none remain on the Bankruptcy Docket) to assume, amend or reject certain executory contracts; the Debtors did, however, file certain agreed stipulations to reject certain unexpired leases, which the Bankruptcy Court approved and entered on April 13, 2023 and April 24, 2023.

See Note 10 for further discussion of the rejected leases.

Claims Reconciliation

The Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Pursuant to an order of the Bankruptcy Court, certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by June 26, 2023 (the "General Bar Date"), the general claims bar date. Governmental units are required to file proofs of claim by August 12, 2023.

As of the General Bar Date, approximately 358 proofs of claim have been filed against the Debtors. This includes duplicate and amended claims. The Debtors are in the process of reviewing, investigating, and reconciling proofs of claims filed against the Debtors with the amounts reflected in their books and records. The Debtors will continue the claims reconciliation process and object, as necessary, to asserted claims, including on the basis that they have been amended or superseded by subsequently filed proofs of claims, are without merit, have already been paid, are overstated or should be adjusted or expunged for other reasons. As a result of this process, the Debtors may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. As part of its ongoing review, except to the extent otherwise disclosed, the Company is not aware of any claims that may require a material adjustment to the accounts and balances as reported as of June 30, 2023.

Listing

On February 13, 2023, the Company received written notice (the “Delisting Notice”) from the staff of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101,

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5110(b) and IM-5101-1, the staff of Nasdaq had determined that the Company’s common stock would be delisted from Nasdaq, effective February 23, 2023. In the Delisting Notice, the staff of Nasdaq referenced the Chapter 11 Cases and associated public concerns raised by them, concerns regarding the residual equity interest of the existing listed securities holders and concerns about the Company’s ability to sustain compliance with all requirements for continued listing on Nasdaq. In accordance with the Delisting Notice, trading of the Company’s common stock on Nasdaq was suspended at the opening of business on February 23, 2023, and at such time, the Company’s common stock commenced trading on the Pink Open Market under the symbol “SRNEQ”.

Use of Estimates

To prepare consolidated financial statements in conformity with accounting principles generally accepted in the U.S., management must make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Adoption of ASC 852

Beginning on the Petition Date, the Company applied Financial Accounting Standards Board (“FASB”) Codification Topic 852, Reorganizations (“ASC 852”) in preparing the consolidated financial statements. ASC 852 requires the financial statements, for the periods subsequent to the Petition Date and up to and including the period of emergence from Chapter 11, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the bankruptcy proceedings, such as legal and professional fees incurred directly as a result of the bankruptcy proceeding are recorded as Reorganization items, net in the consolidated statements of operations. In addition, prepetition obligations that may be impacted by the Chapter 11 process have been classified on the Consolidated Balance Sheet as of June 30, 2023 as liabilities subject to compromise. These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See Note 14 and Note 15 for more information.

Convertible Debentures

The Company has elected the fair value option to account for the Scilex Holding Convertible Debentures (as defined in Note 7). The Company recorded the Convertible Debentures at fair value upon issuance. The Company records changes in fair value in the consolidated statements of operations, with the exception of changes in fair value due to instrument-specific credit risk which, if present, will be recorded as a component of other comprehensive income. Interest expense related to the Convertible Debentures is included in the changes in fair value. As a result of applying the fair value option, direct costs and fees related to the Convertible Debentures were expensed as incurred.

Customer Concentration Risk

Scilex Holding had three customers during each of the three and six months ended June 30, 2023, each of which individually generated 10% or more of the Company’s consolidated gross product revenue. These customers accounted for 88% and 85% of the Company’s consolidated gross product revenue for the three and six months ended June 30, 2023, respectively, individually ranging from 24% to 32% and 22% to 32%, respectively. As of June 30, 2023, these customers represented 81% of the Company’s outstanding accounts receivable, individually ranging from 21% to 30%. Additionally, during each of the three and six months ended June 30, 2023 and 2022, Scilex Holding purchased inventory from its sole supplier, Itochu Chemical Frontier Corporation. This exposes Scilex Holding to concentration of customer and supplier risk. Scilex Holding monitors the financial condition of its customers, limits its credit exposure by setting credit limits, and has not experienced any credit losses during each of the three and six months ended June 30, 2023 and 2022.

Inventory

As of June 30, 2023, net inventory was $9.7 million, comprised of $3.0 million of finished goods and $6.7 million of raw materials and supplies.

Recent Accounting Pronouncement

In October 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The adoption of the standard beginning January 1, 2023 did not have a material impact on the Company’s consolidated financial statements.

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Revenue Recognition

The following table shows revenue disaggregated by product and service type for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Scilex Pharmaceuticals Inc. product sales	$	12,582	$	7,926	$	23,164	$	14,738
Sorrento Therapeutics, Inc. product revenues		23		665		38		3,844
Net product revenues	$	12,605	$	8,591	$	23,202	$	18,582
Concortis Biosystems Corporation	$	1,773	$	1,983	$	4,780	$	6,617
Bioserv Corporation		388		592		1,059		1,467
Other service revenues		259		295		2,235		3,179
Service revenues	$	2,420	$	2,870	$	8,074	$	11,263

The accompanying ~~condensed~~ consolidated financial statements have been prepared assuming that the Company will continue as a going ~~concern.~~concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has ~~incurred~~negative working capital and recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date. The Company expects to incur significant professional fees and ~~negative~~other costs in connection with, and throughout, the Chapter 11 Cases. The Company expects to continue operations in the normal course for the duration of the Chapter 11 Cases. To ensure ordinary course operations, the Company obtained approval from the Bankruptcy Court for certain “first day” motions to continue its ordinary course operations after the filing date. The Company also received final approval from the Bankruptcy Court for $75.0 million of financing from JMB Capital Partners Lending, LLC, which provided it with immediate liquidity so that the Company could continue operating ~~cash flows~~its business as usual during the Chapter 11 Cases and ~~anticipates~~pay the costs and professional fees associated therewith, although the Company plans to lower its operating budget and further reduce the scale of its operations in connection with the Chapter 11 Cases. In July 2023, the Company received final approval from the Bankruptcy Court for $20.0 million of financing from Scilex Holding, for additional liquidity during the Chapter 11 Cases. In August 2023, the Company received final approval from the Bankruptcy Court for $100.0 million of financing from Oramed in the form of the Replacement DIP Facility, which was used to repay the Senior DIP Facility in full and will be used for additional liquidity during the Chapter 11 Cases.

However, for the duration of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan, its financial condition, liquidity and its continuation as a going concern are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of the Company’s control, including actions of the Bankruptcy Court. The Company can give no assurances that it will ~~continue~~be able to ~~do so for the foreseeable future as it continues~~secure additional sources of funds to ~~identify and invest in advancing product candidates, as well as expanding corporate infrastructure.~~

~~As of September 30, 2017,~~support its operations, or, if such funds are available to the Company, had a $30.0 million outstanding principal balance on the long-term debt associated with the Loan and Security Agreement, dated November 23, 2016, by and among the Company and certain of its domestic subsidiaries (together with the Company, the “Borrowers”) and Hercules Capital, Inc. (“Hercules”), as amended (as so amended, the “Loan Agreement”). The Loan Agreement contains covenants requiring the Company (i) to achieve certain fundraising requirements by certain dates and (ii) to maintain $20.0 million of U.S. unrestricted cash prior to achieving the corporate and fundraising milestones. The Company's public offering of common stock in April 2017 for net proceeds of $43.5 million satisfied the fundraising requirements and fundraising milestone. As of September 30, 2017, the Company had $38.3 million of cash and cash equivalents (includes approximately $6.0 million of foreign cash), of which $20.0 million is required to be maintained subject to the minimum cash requirement of the Loan Agreement. Effective November 6, 2017, the Company and Hercules entered into an amendment to the Loan Agreement that ~~reduced the minimum amount of U.S. unrestricted cash that the Company must maintain under the Loan Agreement to $8.0 million (see Note 18). The Company’s available cash and~~such additional financing ~~sources~~ will ~~not~~ be sufficient to meet its current and anticipated cash requirements without additional fundraising. Accordingly, these factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has plans in place to obtain sufficient additional fundraising to fulfill its operating and capital requirements for the next 12 months and to maintain compliance with the Loan Agreement covenants. The Company’s plans include continuing to fund its operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed as planned, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. needs.

As such, management cannot ~~be certain that~~conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued.

ToAs a result, management has concluded that the ~~extent~~aforementioned conditions, among others, raise substantial doubt about the ~~Company is unable~~Company’s ability to execute on these plans, or is unable to amend the Loan Agreement to maintain compliance with the Loan Agreement covenants, the Company would be in default under the Loan Agreement and the outstanding loan balance may be declared immediately due and payable. Further, the provisions of the Loan Agreement allow for Hercules to exercisecontinue as a ~~material adverse event clause should the Company incur a material adverse event within the meaning provided by the Loan Agreement, which could include the~~ going concern ~~matters described herein. Should Hercules invoke~~for one year after the ~~material adverse event clause,~~date the outstanding loan balance may be declared immediately due and payable. Although reasonably possible, the Company believes that it is not probable that the material adverse event clause associated with the Loan Agreement will be exercised.

financial statements are issued.

If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the ~~research,~~ development or commercialization of one or more of its product candidates. The Company may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available.

The ~~condensed~~ consolidated financial statements do not reflect any adjustments that might be necessary if the Company is unable to continue as a going concern.

In November 2014, the Company filed a universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”) with the SEC, which was declared effective by the SEC in December 2014. This Shelf Registration Statement provides the Company with the ability to offer up to $250 million of securities, including equity and other securities as described in the registration statement. Included in the 2014 shelf registration is a sales agreement prospectus covering the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $50.0 million of the Company’s common stock that may be issued and sold under a sales agreement with MLV & Co. LLC (the “ATM Facility”). During the twelve months ended December 31, 2016 and the nine months ended September 30, 2017, the Company sold approximately $3.6 million and $4.1 million of net proceeds from shares of common stock under the ATM Facility, respectively. The Company can offer up to $41.9 million of additional shares of common stock under the ATM Facility, subject to certain limitations. On April 19, 2017, the Company completed a public offering of $47.5 million shares of common stock pursuant to the Shelf Registration Statement for net proceeds of approximately $43.5 million.

Pursuant to the Shelf Registration Statement, the Company may offer additional securities from time to time and through one or more methods of distribution, subject to market conditions and the Company’s 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. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all.

On April 3, 2016, the Company entered into a Securities Purchase Agreement (the “ABG Purchase Agreement”) with ABG SRNE Limited and Ally Bridge LB Healthcare Master Fund Limited (collectively, “Ally Bridge”), pursuant to which, among other things, the Company agreed to issue and sell to Ally Bridge and other purchasers designated by Ally Bridge (collectively, the “ABG Purchasers”), in a private placement transaction (the “ABG Private Placement”), up to $50.0 million in shares of the Company’s common stock and warrants to purchase shares of common stock. Upon the closing of the ABG Private Placement, the Company issued to the ABG Purchasers (1) an aggregate of 9,009,005 shares (the “ABG Shares”) of common stock,and (2) warrants to purchase an aggregate of 2,702,700 shares of common stock (each, an “ABG Warrant”). Each ABG Warrant had an exercise price of $8.50 per share, was immediately exercisable upon issuance, had a term of three years and was exercisable on a cash or cashless exercise basis.

Under the terms of the ABG Purchase Agreement, the Company was obligated to prepare and file with the SEC, within 30 days of the closing date of the ABG Private Placement, a registration statement to register for resale the ABG Shares and the shares of common stock issuable upon exercise of each ABG Warrant (the “ABG Warrant Shares”), and may be required to effect certain registrations to register for resale the ABG Shares and the ABG Warrant Shares in connection with certain “piggy-back” registration rights granted to the ABG Purchasers.

On April 3, 2016, the Company also entered into a Securities Purchase Agreement (collectively, the “Additional Purchase Agreements”) with each of Beijing Shijilongxin Investment Co., Ltd. ( “Beijing Shijilongxin”), FREJOY Investment Management Co., Ltd. (“Frejoy”) and Yuhan Corporation (“Yuhan”), pursuant to which, among other things, the Company agreed to issue and sell, in separate private placement transactions: (1) to Beijing Shijilongxin, 8,108,108 shares of common stock, and a warrant to purchase 1,176,471 shares of common stock, for an aggregate purchase price of $45.0 million; (2)to Frejoy, 8,108,108 shares of common stock, and a warrant to purchase 1,176,471 shares of common stock, for an aggregate purchase price of $45.0 million; and (3)to Yuhan, 1,801,802 shares of common stock, and a warrant to purchase 235,294 shares of common stock, for an aggregate purchase price of $10.0 million. The warrants issued pursuant to each of the Additional Purchase Agreements (collectively, the “Additional Warrants” and, together with each ABG Warrant, the “Warrants”) had an exercise price of $8.50 per share, were immediately exercisable upon issuance, had a term of three years and were exercisable on a cash or cashless exercise basis.

Under the terms of the Additional Purchase Agreements, each of Beijing Shijilongxin, Frejoy and Yuhan had the right to demand, at any time beginning six months after the closing of the transactions contemplated by the applicable Additional Purchase Agreement, that the Company prepare and file with the SEC a registration statement to register for resale such investor’s shares of common stock purchased pursuant to the applicable Additional Purchase Agreement and the shares of common stock issuable upon exercise of such investor’s Additional Warrant. In addition, the Company may be required to effect certain registrations to register for resale such shares in connection with certain “piggy-back” registration rights granted to Beijing Shijilongxin, Frejoy and Yuhan.

On May 2, 2016, the Company closed its private placement of common stock and warrants with Yuhan for gross proceeds of $10.0 million. Yuhan purchased 1,801,802 shares of common stock at $5.55 per share and a warrant to purchase 235,294 shares of common stock. The warrant was exercisable for three years at an exercise price of $8.50 per share.

Between May 31, 2016 and June 7, 2016, the Company closed on the remainder of the $150.0 million financing with the ABG Purchasers, Beijing Shijilongxin, and Frejoy. The ABG Purchasers led the financing and, together with Beijing Shijilongxin and Frejoy, collectively purchased 25,225,221 shares of common stock at $5.55 per share, and warrants to purchase 5,055,642 shares of common stock for total cash consideration of $86.5 million and secured promissory notes (the “Notes”) in an aggregate principal amount of $53.5 million.

On December 31, 2016, the Company entered into Warrant and Note Cancellation and Share Forfeiture Agreements (the “Cancellation and Forfeiture Agreements”) with certain investors (the “Investors”) that held an aggregate of 7,838,259 shares of common stock and certain of the Warrants granting the right to purchase an aggregate of 1,137,316 shares of common stock. Pursuant to the Cancellation and Forfeiture Agreements, effective December 31, 2016, the Warrants held by the Investors and the Notes, of which $43.5 million was then outstanding, were cancelled and the shares of common stock held by the Investors were forfeited and returned to the Company.

If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.

~~The preparation~~Silicon Valley Bank

On March 10, 2023, the Company became aware that the Federal Deposit Insurance Corporation (“FDIC”) issued a press release stating that Silicon Valley Bank, Santa Clara, California (“SVB”) was closed by the California Department of ~~consolidated financial statements in conformity with accounting principles generally accepted in~~Financial Protection and Innovation, which appointed the ~~United States~~FDIC as receiver. On March 12, 2023, the Treasury Department announced that depositors of ~~America (“GAAP”) requires management~~SVB

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will have access to ~~make estimates and assumptions that affect the reported amounts~~all of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.

their money starting March 13, 2023. The Company ~~considers all highly liquid investments purchased~~had approximately $2.8 million cash deposited with original maturities of three months or less to be cash equivalents. The Company minimizes its credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. The Company has not experienced any losses on such accounts.

~~The Company follows accounting guidance on fair value measurements for financial instruments measured on a recurring basis,~~SVB as well as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair value is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial instruments:

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires it to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.

The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable and payable, and other financial instruments in current assets or current liabilities.

Marketable securities are designated either as trading or available-for-sale securities and are accounted for at fair value. Marketable securities are classified as short-term or long-term based on the nature of the securities and their availability to meet current operating requirements. Marketable securities that are readily available for use in current operations and are classified as short-term available-for-sale securities are reported as a component of current assets in the accompanying condensed consolidated balance sheets. Marketable securities that are not trading securities and are not considered available for use in current operations are classified as long-term available-for-sale securities and are reported as a component of long-term assets in the accompanying condensed consolidated balance sheets.

Securities that are classified as trading are carried at fair value, with changes to fair value reported as a component of income. Securities that are classified as available-for-sale are carried at fair value, with temporary unrealized gains and losses reported as a component of stockholders' equity until their disposition. The cost of securities sold is based on the specific identification method.

Grants receivable at September 30, 2017 and December 31, 2016 represent amounts due under several federal contracts with the National Institute of Allergy and Infectious Diseases (“NIAID”), a division of the National Institutes of Health (“NIH”). The Company considers the grants receivable to be fully collectible; accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations.

Accounts receivable at September 30, 2017 and December 31, 2016 consist of trade receivables from sales and services provided to certain customers, which are generally unsecured and due within 30 days. Estimated credit losses related to trade accounts receivable are recorded as general and administrative expenses and as an allowance for doubtful accounts within grants and accounts receivable, net. The Company reviews reserves and makes adjustments based on historical experience and known collectability issues and disputes. When internal collection efforts on accounts have been exhausted, the accounts are written off by reducing the allowance for doubtful accounts. As of each of September 30, 2017 and December 31, 2016, the allowance for doubtful accounts was $20 thousand and $26 thousand, respectively.

Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Leasehold improvements are amortized over the lesser of the life of the lease or the life of the asset. Repairs and maintenance are charged to expense as incurred.

The Company has 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.

During the first quarter of 2017, the Company identified an error in the valuation of acquisition consideration associated with the Scilex Pharmaceuticals Inc. (“Scilex”) acquisition, primarily related to the acquisition consideration payable, resulting in an overstatement of acquisition consideration payable of $6.5 million, and a corresponding overstatement of intangible assets of $6.7 million, goodwill of $4.6 million, deferred income tax liability of $2.8 million, additional paid-in capital of $0.6 million, and noncontrolling interest of $1.4 million as of December 31, 2016. The Company evaluated the materiality of this misstatement from quantitative and qualitative perspectives, and concluded that it was immaterial to the prior periods. Consequently, the Company corrected this error by recording the adjustment in the Company’s condensed consolidated balance sheet in the quarter ended March 31, 2017.

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 its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its 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, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company proceeds 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, the Company performs 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. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. The Company performed its annual assessment for goodwill impairment in the fourth quarter of 2016, noting no impairment. There have not been any triggering events indicating the potential for impairment through September 30, 2017.

The Company evaluates its long-lived and intangible assets with 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

Acquisition consideration payable relates to the Company’s acquisition of businesses and various other assets and is recorded on the Company’s condensed 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. The Company estimates the fair value of contingent consideration based on level 3 inputs primarily driven by the probability of achieving certain financing or operating related milestones.

The condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2016 and stockholders’ equity and of cash flows for the nine months ended September 30, 2016 have been restated to correct for the effects of an immaterial error in the interim periods related to the re-measurement of acquisition consideration payable. As a result of the restatement, an adjustment of $1.7 million and $6.2 million to gain on contingent liabilities and an adjustment of $0.2 million and $0.3 million to research and development expense have been reflected in operating costs and expenses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016, respectively. This adjustment includes a gain of $991 thousand that relates to 2015 but was recognized in the three months ended March 31, 2016, thus is included in the condensed consolidated statement of operations for the nine months ended September 30, 2016. As a result of this adjustment, the financial results for the three months ended September 30, 2016 reflect the impact of the adjustment which resulted in a decrease in operating costs and expenses from $16.0 million to $14.5 million, an increase in net income attributable to the Company from $14.4 million to $15.9 million, and an increase in net income per share from $0.22 to $0.24 for the quarter ended September 30, 2016. The financial results for the nine months ended September 30, 2016 reflect the impact of the adjustment, which resulted in a decrease in operating costs and expenses from $89.0 million to $83.1 million, a decrease in net loss attributable to the Company from $48.9 million to $43.1 million, and a decrease in net loss per share from $(1.03) to ($0.91) for the nine months ended September 30, 2016.

Derivative liabilities are recorded on the Company’s condensed consolidated balance sheets at their fair value on the date of issuance and are revalued on each balance sheet date until such instruments are exercised or expire, with changes in the fair value between reporting periods recorded as other income or expense. The Company estimates the fair value of derivative liabilities using the Black-Scholes option pricing model.

The Company holds a portfolio of investments in equity securities that are accounted for under either the equity method or cost method. Investments in entities over which the Company has significant influence but not a controlling interest are accounted for using the equity method, with the Company’s share of earnings or losses reported in loss on equity investments.

The Company’s cost method investments are included in cost method investments on the condensed consolidated balance sheets. The Company’s equity method investments are included in equity method investments on the condensed 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 market value was below the cost basis; financial condition and business prospects of the investee; the Company’s 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 the Company may be aware of related to the investment. The Company does not report the fair value of its equity investments in non-publicly traded companies because it is not practical to do so.

~~All research and development costs are charged to expense as incurred. Such costs primarily consist of lab supplies, contract services, stock-based compensation expense, salaries and related benefits.~~

The Company has 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, as well as future milestone payments, are immediately expensed as acquired in-process research and development 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 in-process research and development was expensed immediately. The acquired in-process research and development related to the business combination of Virttu Biologics Limited ("Virttu") and Scilex for which certain products are under development and expected to be commercialized in the future was capitalized and recorded within “Intangibles, net” on the accompanying condensed consolidated balance sheet. Capitalized 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.

~~The provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740~~ ~~“Income Taxes,”~~ addresses 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, the Company 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. The Company has determined that it has uncertain tax positions.

The Company accounts 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.

The Company has 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 each of December 31, ~~2016~~2022, the Petition Date and ~~September 30, 2017,~~March 10, 2023. On March 14, 2023, the Company maintained a full valuation allowance against its deferred tax assets, with the exception of an amount equal to its deferred tax liabilities, which can be expected to reverse over a definite life, an amount equal to its alternative minimum tax credits and state research and development tax credits for which there is no expiration and the deferred tax assets related to its Scilex investment.

The Company’s revenues are generated primarily from license fees, various NIH grant awards, and from the sale of customized reagents and the provision of contract development services. The revenue from the NIH grant awards is based upon subcontractor and internal costs incurred that are specifically covered by the grant, and where applicable, a facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors or when the Company incurs internal expenses that are relatedregained access to the ~~grant.~~

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 upon the transfer of value to the customer.

Revenues from sales are generated from the sale of customized reagents which include industrial standard cytotoxins, linkers, and linker-toxins used for preparing ADCs. Contract development services include providing synthetic expertise to customers’ synthesis by delivering proprietary cytotoxins, linkers and linker-toxins and ADC service using industry standard toxin and antibodies provided by customers. Revenue is recognized when, (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. Royalty revenues will be recognized as earned per the terms of underlying royalty bearing contracts.

The Company is obligated to accept from customers the return of products sold that are damaged or do not meet certain specifications. The Company may authorize the return of products sold in accordance with the termsfull amount of its ~~sales contracts, and estimates allowances for such amounts at the time of sale. The Company has not experienced any sales returns.~~cash that was deposited with SVB.

~~The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718 “Compensation – Stock Compensation,~~” which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is generally measured at the grant date, based on the calculated fair value of the award and an estimate of forfeitures, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).

The Company accounts 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 and restricted stock granted to non-employees is re-measured over the vesting period, and the resulting changes in fair value are recognized as expense in the period of the change in proportion to the services rendered to date.

Comprehensive loss is primarily comprised of net loss and adjustments for the change in unrealized gains and losses on the Company’s investments in available-for-sale marketable securities, net of taxes. The Company displays comprehensive loss and its components in its condensed consolidated statements of comprehensive (loss) income.

Basic net loss per share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or the exercise of outstanding warrants. The treasury stock method and if-converted method are used to calculate the potential dilutive effect of these common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive. In periods where a net loss is presented, all potentially dilutive securities are anti-dilutive and are excluded from the computation of diluted net loss per share.

The Company is engaged primarily in the discovery and development of innovative therapies focused on oncology and the treatment of chronic cancer pain as well as immunology and infectious diseases based on its platform technologies. Accordingly, the Company has determined that it operates in one operating segment.

~~In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~, which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. ASU No. 2014-09 was originally effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard for annual reporting periods beginning after December 15, 2017, and interim periods thereafter. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company is in the process of evaluating the impact of ASU No. 2014-09 on its royalty and license revenues and does not expect a material impact to its grants and sales and services revenues. The standard allows for either a full retrospective or modified retrospective method of adoption. The Company expects to adopt this standard using the modified retrospective approach on its effective date, January 1, 2018.

~~In January 2016, the FASB issued ASU No. 2016-01,~~ ~~Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.~~ The ASU amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU No. 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases~~. ASU No. 2016-02 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU No. 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU No. 2016-02 will have on its consolidated financial position, results of operations and cash flows.

~~In March 2016, the FASB issued ASU No. 2016-06,~~ ~~Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments,~~ which clarifies the steps required when assessing whether the economic characteristics and risks of call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts based on a four-step decision process. ASU No. 2016-06 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~In March 2016, the FASB issued ASU No. 2016-07,~~ ~~Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,~~ requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method and eliminates the requirement for retroactive adjustment of the investment as a result of an increase in the level of ownership interest or degree of influence. ASU No. 2016-07 is effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~ The ASU includes various provisions to simplify the accounting for share-based payments with the goal of reducing the cost and complexity of accounting for share-based payments. The amendments may significantly impact net income, earnings per share and the statement of cash flows as well as present implementation and administration challenges for companies with significant share-based payment activities. ASU No. 2016-09 is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU No. 2016-13 will have on its consolidated financial position, results of operations and cash flows.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,~~ to improve financial reporting in regards to how certain transactions are classified in the statement of cash flows. The ASU requires that (1) debt extinguishment costs be classified as cash outflows for financing activities and provides additional classification guidance for the statement of cash flows, (2) the classification of cash receipts and payments that have aspects of more than one class of cash flows to be determined by applying specific guidance under generally accepted accounting principles, and (3) each separately identifiable source or use within the cash receipts and payments be classified on the basis of their nature in financing, investing or operating activities. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe the adoption of ASU No. 2016-15 will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business,~~ to clarify the definition of a business to add guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Specifically, this ASU provides a screen to assist entities in determining when a set should not be considered a business, which screen provides that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar assets, the set is not a business. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe the adoption of ASU No. 2017-01 will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment (Topic 350)~~. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,~~ to provide clarity and reduce both the diversity in practice and cost of complexity when applying the guidance. Specifically, the ASU provides additional modification conditions in determining whether or not modification accounting should be applied. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe the adoption of ASU No. 2017-09 will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

On April 27, 2017, the Company entered into a Share Purchase Agreement (the “Virttu Purchase Agreement”) with TNK Therapeutics, Inc., a majority-owned subsidiary of the Company (“TNK”), 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”), the Company 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 Virttu 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, the Company 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, the Company will issue to the Virttu Shareholders an aggregate number of shares of the Company’s 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 the Company’s common stock after the Closing).

At April 27, 2017, the 80% of the Virttu Base Consideration was valued at $12.8 million. The fair value of the 80% of the Virttu Base Consideration is recorded as a current liability and will be adjusted quarterly for changes in fair value or as events and circumstances arise. At April 27, 2017, the contingent Regulatory Approval Consideration was valued at $1.0 million. The fair value of the contingent Regulatory Approval Consideration is recorded as a non-current liability within "Deferred rent and other" on the accompanying condensed consolidated balance sheet and will be adjusted quarterly for changes in fair value or as events and circumstances arise.

The consolidated financial statements include the preliminary results of operations from this transaction, which have been accounted for as a business combination, and require, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The preliminary valuation of the acquired assets and liabilities resulted in the recognition of identifiable assets of approximately $16.0 million comprised mainly of in-process research and development of approximately $15.4 million, deferred tax liabilities of $0.8 million and goodwill of approximately $1.4 million subject to final adjustments including tax related items. Various factors contributed to the establishment of goodwill, including an assembled workforce.

In connection with the Virttu transaction, we recorded acquisition costs of approximately $0.9 million in general and administrative expenses for the nine months ended September 30, 2017, for legal and related costs. Acquisition costs are expensed as incurred.

The purchase consideration, assets acquired, and liabilities assumed are preliminary and, as a result, are subject to change due to purchase price adjustments, additional information obtained related to fair value estimates, final tax adjustments and related items.

~~The acquisition of Virttu was not material to the Company's consolidated financial statements.~~

On November 8, 2016, the Company 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, the Company acquired from the Scilex Stockholders, and the Scilex Stockholders sold to the Company, approximately 72% of the outstanding capital stock of Scilex (the “Scilex Acquisition”). The remainder of the outstanding capital stock of Scilex represents a noncontrolling interest of which approximately 23% continues to be held by ITOCHU CHEMICAL FRONTIER CORPORATION following the Scilex Acquisition.

Scilex focuses on the development and commercialization of specialty pharmaceutical products for the treatment of pain; its lead product, ZTlidoTM, is a branded lidocaine patch formulation being developed for the treatment of chronic pain. ZTlido™ (lidocaine patch 1.8%) will be manufactured by a contract manufacturer.

At the closing of the Scilex Acquisition, the Company issued to the Scilex Stockholders that were accredited investors (the “Accredited Scilex Stockholders”) consideration valued at $4.8 million, which consisted primarily of an aggregate of 754,911 shares of the Company’s common stock (the “Common Stock”). Under the terms of the Scilex Purchase Agreement, the Company agreed to provide additional consideration to the Accredited Scilex Stockholders upon the achievement of certain milestones, as follows:

(1) Upon receipt of notice from the U.S. Food and Drug Administration (the “FDA”) that the FDA has accepted Scilex’s resubmitted new drug application for ZTlidoTM for the treatment of postherpetic neuralgia (the “NDA”), the Company will deliver to the Accredited Scilex Stockholders a number of shares of Common Stock equal to the quotient obtained by dividing 10% of the total undiscounted purchase consideration of approximately $47.8 million (the “Adjusted Base Consideration”) by a price (the “FDA Acceptance Price”) equal to the closing market price of one share of Common Stock, as reported by the Nasdaq Stock Market LLC (“Nasdaq”) on the date of Scilex’s receipt of the FDA notice or, if no closing price is reported for such date, the closing price on the last preceding date for which such quotation exists; provided, however, that in no event shall the FDA Acceptance Price be greater than $25.32 or less than $6.33 (in each case as adjusted, as appropriate, to reflect any stock splits or similar events affecting the Common Stock).

On September 11, 2017, the Company received notice from the FDA that the FDA had accepted the NDA and the Company issued to the Accredited Scilex Stockholders consideration valued at $1.4 million, which consisted primarily of an aggregate of 754,930 shares of Common Stock.

(2) Upon receipt of notice from the FDA that the FDA has approved the NDA for commercialization, the Company will deliver to the Accredited Scilex Stockholders cash and shares of Common Stock in such proportion to be determined in the Company’s sole discretion, with a total value equal to 80% of the Adjusted Base Consideration (the “FDA Approval Consideration”). To the extent that the Company elects to pay any portion of the FDA Approval Consideration in shares of Common Stock, the number of shares shall be equal to the quotient obtained by dividing (a) the portion of the FDA Approval Consideration to be paid in shares of Common Stock by (b) a price (the “FDA Approval Price”) equal to the closing market price of one share of Common Stock, as reported by Nasdaq on the date of the Scilex’s receipt of the FDA notice or, if no closing price is reported for such date, the closing price on the last preceding date for which such quotation exists; provided, however, that in no event shall the FDA Approval Price be greater than $25.32 or less than $6.33 (in each case as adjusted, as appropriate, to reflect any stock splits or similar events affecting the Common Stock). However, in no event may the Company make an election with respect to the FDA Approval Consideration so as to cause the total number of shares of Common Stock issued in connection with the Scilex Acquisition to exceed 4.99% of the total number of shares of Common Stock of the Company outstanding as of immediately prior to the Closing (as adjusted, as appropriate, to reflect any stock splits or similar events affecting the Common Stock), unless the Company has obtained stockholder approval to issue a greater number of shares.

During the first quarter of 2017, the Company identified an error in the valuation of acquisition consideration associated with the Scilex Acquisition, primarily related to the acquisition consideration payable, resulting in an overstatement of acquisition consideration payable of $6.5 million, and a corresponding overstatement of intangible assets of $6.7 million, goodwill of $4.6 million, deferred income tax liability of $2.8 million, additional paid-in capital of $0.6 million, and noncontrolling interest of $1.4 million as of December 31, 2016. The Company evaluated the materiality of this misstatement from quantitative and qualitative perspectives, and concluded that it was immaterial to the prior periods. Consequently, the Company corrected this error by recording the adjustment in the Company’s condensed consolidated balance sheet in the quarter ended March 31, 2017.

At November 8, 2016, the contingent consideration was valued at $33.5 million, resulting in a total purchase consideration of approximately $38.2 million. The fair value of the contingent consideration is recorded as a current liability and will be periodically adjusted for changes in fair value or as events and circumstances arise. The remainder of the outstanding capital stock of Scilex represents a noncontrolling interest which was valued at $12.3 million at November 8, 2016.

The consolidated financial statements include the results of operations from this transaction, which have been accounted for as a business combination, and require, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The valuation of the acquired assets resulted in the recognition of identifiable assets of approximately $54.9 million comprised mainly of in-process research and development of $21.9 million and patents of $32.6 million. The valuation of the acquired liabilities resulted in the recognition of liabilities of approximately $17.9 million comprised mainly deferred tax liabilities of $13.9 million. The Company recorded goodwill of $13.5 million associated with the acquisition. The amounts in this footnote reflect the adjustment described above. Various factors contributed to the establishment of goodwill, including an assembled workforce.

In August 2015, the Company and TNK entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with BDL Products, Inc. (“BDL”) and the stockholders of BDL (“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 does not occur by October 15, 2017 (which is subject to further extension as implied and based on previously amended dates) or TNK does 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 shall receive an aggregate of 309,917 shares of the Company’s common stock, subject to adjustment in certain circumstances.

Although a Qualified Financing did not occur by October 15, 2017 and TNK did not complete an initial public offering by September 15, 2017, as of the date of the filing of this Quarterly Report on Form 10-Q, the Company has not issued shares to the Stockholders pursuant to the Stock Purchase Agreement as it is currently negotiating the terms of the Stock Purchase Agreement with the Stockholders.

In August 2015, the Company and TNK entered into a Membership Interest Purchase Agreement (the “Membership Interest Purchase Agreement”) with CARgenix Holdings LLC (“CARgenix”) and the members of CARgenix (the “Members”) pursuant to which the Members sold all of their membership interests in CARgenix to TNK for: (1) a cash payment of $100.00, and (2) $6.0 million in shares of TNK Class A common stock (“TNK Class A Stock”), subject to adjustment in certain circumstances, to be issued to the Members 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 an amendment to the Membership Interest Purchase Agreement entered into in March 2016, in the event a Qualified Financing did not occur by September 15, 2016 or TNK did not complete an initial public offering of shares of its capital stock by October 15, 2016, in lieu of receiving shares of TNK pursuant to the acquisition, the Members would receive an aggregate of 309,917 shares of the Company’s common stock, subject to adjustment in certain circumstances and to account for fractional shares. TNK did not complete a Qualified Financing by the amended financing deadline and the Company issued 309,916 shares of its common stock to the Members on October 7, 2016.

~~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.~~

Marketable Investments

As disclosed in Note 4, the Company holds 20,422,124 shares of Class A Common Stock of Celularity Inc. (Nasdaq: CELU) (“Celularity”). The ~~Company's financial assets and liabilities carried~~shares held by the Company are measured at fair value ~~are comprised~~at each reporting period based on the closing price of ~~cash~~Celularity’s common stock on the last trading day of each reporting period.

Convertible Debentures

In March and ~~cash equivalents,~~ ~~acquisition consideration payable~~ ~~and derivative instruments. Cash and cash equivalents consist~~April 2023, Scilex Holding issued the Convertible Debentures in the principal amount of ~~money market accounts and~~

~~The following table includes a summary~~

4. Investments

As of June 30, 2023, the Company’s ~~contingent~~equity method investments include an ownership interest in Immunotherapy NANTibody, LLC (“NANTibody”), NantCancerStemCell, LLC (“NantStem”), Deverra Therapeutics, Inc. and ~~financing liabilities, related inputs used to determine~~ImmuneOncia Therapeutics, LLC, among others. The Company’s equity investments without readily determinable fair value include an ownership interest in NantBioScience, Inc. and Aardvark Therapeutics, Inc. (“Aardvark”), among others. The Company’s equity investments with readily determinable fair value include an ownership interest in Celularity.

Celularity

As of June 30, 2023, the ~~valuation methodologies used~~Company owned 20,422,124 shares of Class A Common Stock of Celularity. The Company recorded unrealized losses on marketable investments of $1.8 million and $15.5 million for the ~~fair value measurements using significant unobservable inputs (Level 3) at September~~three and six months ended June 30, ~~2017:~~

2023, respectively. As of June 30, 2022, the Company owned 19,922,124 shares of Class A Common Stock of Celularity that were subject to transfer restrictions until July 16, 2022 (the “Restricted Shares”). The ~~principal significant unobservable inputs used~~Company also owned 500,000 shares of Class A Common Stock of Celularity not subject to transfer restrictions (the “Private Placement Shares”). During the three months ended June 30, 2022, the Company recorded unrealized losses on marketable investments of $92.8 million and $2.7 million in connection with the ~~valuations of the contingent considerations are the discount rates and probabilities assigned to scenario outcomes. An increase~~changes in ~~the discount rate or regulatory milestone will cause a decrease in the~~ fair value of the ~~contingent consideration. Conversely, a decrease~~Restricted Shares and the Private Placement Shares, respectively. During the six months ended June 30, 2022, the Company recorded unrealized losses on marketable investments of $26.1 million and $0.9 million in connection with the ~~discount rate will cause an increase~~changes in ~~the~~ fair value of the ~~contingent consideration. An increase in~~Restricted Shares and the probabilities assigned to certain scenarios will cause the fair value of contingent consideration to increase. Conversely, a decrease in the probabilities assigned to certain scenarios will cause the fair value of contingent considerations to decrease.

~~Marketable securities consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):~~

September 30, 2017
Cost Gross Unrealized Gains (Losses) Gross Realized Gains (Losses) Fair Value
Trading securities:

MedoveX common shares and warrants $ 750
$ 138
$ —
$ 888

On August 5, 2016, the Company entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with MedoveX Corporation (“MedoveX”). Pursuant to the terms of the Unit Purchase Agreement, the Company purchased three Units for $750,000. Each Unit had a purchase price of $250,000 and consisted of (i) 208,333 shares of MedoveX common stock (the “MedoveX Common Stock”), and (ii) a warrant to purchase 104,167 shares of MedoveX Common Stock (the “MedoveX Warrant”). The MedoveX Warrant has an initial exercise price of $1.52 per share, subject to adjustment, and is initially exercisable six months following the date of issuance for a period of five years from the date of issuance. In addition, the Company entered into a Registration Rights Agreement with MedoveX pursuant to which MedoveX was required to file a registration statement registering for resale all shares of MedoveX Common Stock and shares of MedoveX Common Stock issuable pursuant to the MedoveX Warrant issued as part of the Units.

For the three months ended September 30, 2017 and 2016, the Company recorded a gain of $0.2 million and a gain of $0.5 million on trading securities. For the nine months ended September 30, 2017 and 2016, the Company recorded a loss of $0.2 million and a gain of $0.5 million on trading securities.Private Placement Shares, respectively. The Company’s investment in ~~MedoveX will be revalued on each~~Celularity is included within marketable investments under current assets within its consolidated balance ~~sheet date.~~sheets.

Aardvark

In 2021, the Company paid $10.0 million in cash for an aggregate of 7,777,864 shares of Series B Preferred Stock of Aardvark. The Company accounts for its investment in Aardvark as an equity investment without a readily determinable fair value of the Company’s holding in MedoveX Common Stock at September 30, 2017 is a Level 1 measurement. The fair value of the Company’s holdings in the MedoveX Warrant was estimated using the Black-Scholes option-pricing method. The risk-free rate was derived from the U.S. Treasury yield curve, matching the MedoveX Warrant’s term, in effect at the measurement date. The volatility factor was determined based on MedoveX’s historical stock prices. The warrant valuation is a Level 3 measurement.

~~The following table includes a summary of the warrant measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017 (in thousands):~~

~~On July 27, 2015, NantKwest, Inc. (“NantKwest”) completed~~and carries its ~~initial public offering (“IPO”). Prior to the IPO, the Company’s~~ investment in ~~NantKwest was accounted~~Aardvark at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for using the cost method and the total investment of $10.0 million was classified as part of cost method investments on the Company’s consolidated balance sheets. The common shares were subject to restrictions in a lock-up agreement through December 27, 2015 as well as limitations under Rule 144 of the Securities Act of 1933, as amended. As these were short term restrictions, the Company did not apply a marketability discount. At December 31, 2015, the Company recorded an unrealized gain of $73.6 million, representing the difference between the $10.0 million cost basis and the estimated fair value net of tax, as accumulated other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet and as a change in unrealized gains and losses on marketable securities in the Company’s consolidated statements of comprehensive income (loss).identical or similar investments. The Company’s investment in ~~NantKwest~~Aardvark was ~~revalued on~~$10.0 million as of each ~~balance sheet date. The fair value~~of June 30, 2023 and December 31, 2022. Tien-Li Lee, M.D., a member of the board of directors of Scilex Holding, a majority owned subsidiary of the Company, is the founder and chief executive officer of Aardvark. Kim D. Janda, Ph.D., a member of the Company’s ~~holdings in NantKwest at December 31, 2015 was~~Board of Directors (the “Board”), is a ~~Level 1 measurement.~~

In July 2016, the Company completed the transactions contemplated by a letter agreement (the “Letter Agreement”) with the Chan Soon-Shiong Family Foundation (“Foundation”) and Cambridge Equities, LP (“Cambridge”). Pursuant to the termsmember of the ~~Letter Agreement, among other things, (i) the Company agreed to sell to Foundation, and Foundation agreed to purchase from the Company, an aggregate~~advisory board of ~~5,618,326 shares~~Aardvark.

NANTibody

As of ~~common stock~~each of NantKwest held by the Company (representing all shares of NantKwest held by the Company), (ii) Foundation agreed to sell to the Company, and the Company agreed to purchase all reported shares held by Foundation and Cambridge, constituting an aggregate of 7,878,098 shares of Common Stock, (iii) Cambridge agreed to forfeit its right to purchase 500,000 shares of Common Stock issuable pursuant to a warrant to purchase 1,724,138 shares of Common Stock issued by the Company, and (iv) the Company agreed to pay to Foundation an aggregate of approximately $15.6 million. Effective upon closing, the Company repurchased the 7,878,098 shares of Common Stock. The Company recognized a gain of $27.2 million on the sale of the NantKwest stock in its consolidated statement of operations for the twelve months ended December 31, 2016 as a result of the transaction.

~~Property and equipment consisted of the following as of September~~June 30, ~~2017~~2023 and December 31, ~~2016 (in thousands):~~

September 30,
2017 December 31,
2016
Furniture and fixtures 1,089
458
Office equipment 518
326
Machinery and lab equipment 18,787
13,220
Leasehold improvements 6,833
3,625
27,227
17,630
Less accumulated depreciation (8,258 ) (4,922 )
$ 18,969
$ 12,707

Depreciation expense for the quarters ended September 30, 2017 and 2016 was $1.4 million and $0.5 million, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $3.3 million and $1.4 million, respectively.

As of September 30, 2017, the aggregate carrying amount of the Company’s cost-method investments in non-publicly traded companies was $237.0 million and included an ownership interest in NantCell, Inc. (“NantCell”), NantBioScience, Inc. (“NantBioScience”), Globavir Biosciences, Inc., Brink Biologics, Inc., Coneksis, Inc., and Celularity Inc. (See Note 9).

As of December 31, 2016, the aggregate carrying amount of the Company’s cost-method investments in non-publicly traded companies was $112.0 million and included an ownership interest in NantCell, NantBioScience, Globavir Biosciences, Inc., Brink Biologics, Inc. and Coneksis, Inc.

~~The financial statements~~had a carrying value of NANTibody are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.

zero. NANTibody recorded a net ~~profit~~loss of ~~$375 thousand and net profit of $0.1~~$1.5 million for the three months ended ~~June 30, 2017 and March~~December 31, 2017, respectively. NANTibody recorded net loss of $1.0 million for the nine months ended June 30, 2017. The Company recorded its portion of loss from NANTibody in loss on equity investments on its condensed consolidated statement of operations for the three and nine months ended September 30, 2017 and 2016.2022. As of ~~June 30, 2017,~~December 31, 2022, NANTibody had ~~$100.0~~$2.4 million in current assets, ~~and $387 thousand~~$11.6 million in current liabilities, ~~and no~~$0.1 million in noncurrent assets orand no noncurrent liabilities.

In July 2015, the Company and NantBioScience, a wholly-owned subsidiary of NantWorks, established a new entity called NantCancerStemCell, LLC (“NantStem”) as a stand-alone biotechnology company with $100.0 million initial joint funding. As initially organized, NantBioScience was obligated to make a $60.0 million cash contribution to NantStem for a 60% equity interest in NantStem, and the Company was obligated to make a $40.0 million cash contribution to NantStem for a 40% equity interest in NantStem. Fifty percent of these contributions were funded in July 2015 and the remaining amounts were to be made by no later than September 30, 2015. The Company ~~had NantPharma contribute its portion~~no longer receives the financial statements from NANTibody.

NantStem

As of ~~the initial joint funding~~each of $20.0 million to NantStem from the proceeds of the sale of IgDraSol. Pursuant to a Side Letter dated October 13, 2015, the NantStem joint venture agreement was amended to relieve the Company of the obligation to contribute the second $20.0 million payment,June 30, 2023 and its ownership interest in NantStem was reduced to 20%. NantBioScience’s funding obligations were unchanged. The Side Letter was negotiated at the same time the Company issued a call option on shares of NantKwest that it owned to Cambridge Equities, a related party to NantBioScience (“Cambridge”).

In the fourth quarter of 2015, the Company determined it had an other-than-temporary decline in the value of NantStem and recognized a loss of $4.0 million in loss on equity investments on its condensed consolidated statement of operations for the year ended December 31, ~~2015. There was no loss related to other-than-temporary impairment recognized for the equity investment for the year ended December 31, 2016 and the three and nine months ended September 30, 2017.~~

The Company is accounting for its interest in NantStem as an equity method investment, due to the significant influence the Company has over the operations of NantStem through its board representation and 20% voting interest. The Company’s investment in NantStem is reported in equity method investments on its condensed consolidated balance sheets and its share of NantStem’s loss is recorded in loss on equity investments on its condensed consolidated statement of operations. As of September 30, 2017, the carrying value of2022, the Company’s investment in NantStem ~~was approximately $18.6 million. The~~

The financial statements of NantStem are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.

zero. NantStem recorded net income of ~~$461 thousand and net income of $369 thousand~~$2.8 million for the three months ended ~~June 30, 2017 and March~~December 31, 2017, respectively. NantStem recorded net income of $375 thousand for the nine months ended June 30, 2017. The Company recorded its portion of loss from NANTibody in loss on equity investments on its condensed consolidated statement of operations for the three and nine months ended September 30, 2017 and 2016.2022. As of ~~June 30, 2017,~~December 31, 2022, NantStem had ~~$82.1~~$86.4 million in current assets, ~~and $1 thousand in~~no current liabilities, ~~and no noncurrent assets or noncurrent liabilities.~~

In March 2016, the Company and Yuhan Corporation, a South Korea company (“Yuhan”), entered into an agreement to form a joint venture company called ImmuneOncia Therapeutics, LLC (“ImmuneOncia”) to develop and commercialize a number of immune checkpoint antibodies against undisclosed targets for both hematological malignancies and solid tumors. Under the terms of the joint venture agreement, Yuhan contributed an initial investment of $10.0 million to ImmuneOncia, and the Company granted ImmuneOncia an exclusive license to one of its immune checkpoint antibodies for specified countries while retaining the rights for the U.S., European and Japanese markets, as well as global rights for ImmuneOncia to two additional antibodies that will be selected by ImmuneOncia from a group of pre-specified antibodies from the Company’s immuno-oncology antibody portfolio. During October 2016, funding and operations of ImmuneOncia commenced. Yuhan owns 51% of ImmuneOncia, while the Company owns 49%.

The Company is accounting for its interest in ImmuneOncia as an equity method investment, due to the significant influence the Company has over the operations of ImmuneOncia through its board representation and 49% voting interest while not sharing joint control with Yuhan. The Company’s investment in ImmuneOncia is reported in equity method investments on its condensed consolidated balance sheets and its share of ImmuneOncia’s loss is recorded in loss on equity investments on its condensed consolidated statement of operations. As of September 30, 2017, the carrying value of the Company’s investment in ImmuneOncia was approximately $8.5 million. The difference between the Company’s investment in ImmuneOncia and the Company’s 49% interest in the net assets of ImmuneOncia was approximately $0.3 million at September 30, 2017.

ImmuneOncia recorded net loss of $0.5 million and $2.0 million for the three and nine months ended September 30, 2017, respectively. The Company recorded its portion (49% equity interest) of loss from ImmuneOncia in loss on equity investments on its condensed consolidated statement of operations for the three and nine months ended September 30, 2017. As of September 30, 2017, ImmuneOncia had $8.0 million in current assets, $32 thousand in current liabilities, $9.9$0.1 million in noncurrent assets and no noncurrent liabilities. The Company no longer receives the financial statements from NantStem.

~~Celularity incurred operating expense of approximately $1.4 million and $4.1 million for~~2023.

During the three and ~~nine~~six months ended June 30, ~~2017, respectively, in its interim financial results. The~~2023, the Company recorded ~~its portion~~losses on impairment of ~~loss from Celularity in loss on equity investments on its condensed consolidated statement~~intangible assets of ~~operations until its conversion to cost method investment on August 15, 2017.~~

On March 7, 2016, TNK agreed to issue to SiniWest Holdings, Inc. (“SiniWest Holdings”) $4.0 million in shares of TNK Class A Stock, subject to certain circumstances, to be issued upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $10.0$0.5 million and ~~a $1.0~~$12.4 million, upfront cash payment in exchange for SiniWest Holdings transferring certain assets to TNK, including SiniWest Holdings’ 25% interest in Shanghai Three-Alliance Biotech Co. LTD, a China based company (“Shanghai Three”). The Company is accounting for its interest in Shanghai Three as an equity method investment, due to the significant influence the Company has over the operations of Shanghai Three through its 25% voting interest. The Company’s investment in Shanghai Three is reported in equity method investments on the condensed consolidated balance sheets and its share of Shanghai Three’s income or loss is recorded in income (loss) on equity investments on the condensed consolidated statement of operations. As of September 30, 2017, the carrying value of the Company’s investment in Shanghai Three was approximately $3.8 million.

The financial statements of Shanghai Three are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.

Shanghai Three incurred no operating expenses for the three and nine months ended June 30, 2017. As of June 30, 2017, Shanghai Three had $0.4 million in current assets, $2.9 million in current liabilities, $5.3 million in noncurrent assets, and $5.0 million in noncurrent liabilities.

In June 2016, the Company and TNK entered into a joint venture agreement with Shenyang Sunshine Pharmaceutical Company Ltd (“3SBio”), a China based company, to develop and commercialize proprietary immunotherapies, including those developed from, including or using TNK’s “CAR-T” technology targeting carcinoembryonic antigen (“CEA”) positive cancers. Due diligence and negotiations between 3SBio and the Company for the definitive agreement(s) are currently ongoing.

Under the terms of the agreement 3SBio will contribute an initial investment of $10.0 million to the joint venture and TNK will grant the joint venture an exclusive license to the CEA CAR-T technology and two additional CARs for cellular therapy for the Greater China market, including Mainland China, Hong Kong and Macau. 3SBio will own 51% of the joint venture while TNK will own 49%. As of September 30, 2017, funding and operations of the joint venture had not yet begun,respectively, as a result ~~no investment has been recorded as~~ of ~~September 30, 2017.~~

~~In June 2016, 3SBio purchased $10.0~~discontinuing its in-process research and development programs associated with Shanghai Medical Technologies and SmartPharm Therapeutics, Inc., respectively.

Intangible assets with indefinite useful lives totaling $81.9 million ~~of shares of common stock and warrants as part of the Company’s private placement offering.~~

~~At September 30, 2017, the Company had recorded goodwill of $38.3 million, which reflects the adjustment described~~are included in Note 4. At December 31, 2016, the Company had recorded goodwill of $41.5 million. The Company performed a qualitative test for goodwill impairment as of December 31, 2016. Based upon the results of the qualitative testing the Company concluded that it is more-likely-than-not that the fair values of the Company’s goodwill was in excess of its carrying value and therefore performing the first step of the two-step impairment test was unnecessary. No goodwill impairment was recognized for the three and nine months ended September 30, 2017 and 2016. A summary of the Company's goodwill as of September 30, 2017, including the impact of acquisitions described in Note 4 is as follows (in thousands):

~~The Company’s intangible assets, excluding goodwill, include acquired license and patent rights, core technologies, customer relationships and~~ acquired in-process research and ~~development. Amortization for~~development in the ~~intangible assets that have finite useful lives is generally recorded on a straight-line basis over their useful lives.~~table below. A summary of the Company’s identifiable intangible assets as of ~~September~~June 30, ~~2017, including the adjustment described in Note 4,~~2023 and December 31, ~~2016~~2022 is as follows (in ~~thousands)~~thousands, except for years):

September 30, 2017
Gross Carrying Amount Accumulated Amortization Intangibles, net
Customer relationships $ 1,585
$ 1,018
$ 567
Acquired technology 3,410
665
2,745
Acquired in-process research and development 37,660
—
37,660
Patent rights 32,720
2,017
30,703
Total intangible assets $ 75,375
$ 3,700
$ 71,675

As

19

Table of ~~September 30, 2017, the remaining weighted average life for identifiable intangible assets is 14 years.~~Contents


			June 30, 2023						December 31, 2022
June 30, 2023	Weighted Average Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization		Intangibles, Net		Gross Carrying Amount		Accumulated Amortization		Intangibles, Net
Customer relationships		2	$	1,585	$	1,493	$	92	$	1,585	$	1,479	$	106
Acquired technology		19		3,410		1,676		1,734		3,410		1,588		1,822
Acquired in-process research and development		—		81,874		—		81,874		94,240		—		94,240
Technology placed in service		15		21,940		6,948		14,992		21,940		6,216		15,724
Patent rights		15		32,720		14,553		18,167		32,720		13,463		19,257
Assembled workforce		5		605		524		81		605		465		140
Internally developed software		2		520		520		-		520		434		86
Acquired licenses		15		5,711		368		5,343		5,711		184		5,527
Total intangible assets			$	148,365	$	26,082	$	122,283	$	160,731	$	23,829	$	136,902

~~Patent rights are stated at cost~~

Aggregate amortization expense was $1.1 million and amortized on a straight-line basis over the estimated useful lives of the assets, determined to be approximately fifteen years or nineteen years from the date of transfer of the rights to the Company. Amortization expense$1.0 million for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022, respectively. Aggregate amortization expense was ~~$538 thousand~~$2.3 million and ~~$1 thousand, respectively, which has been included in intangible amortization on the condensed consolidated statement of operations. Amortization expense~~$2.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016 was $1,597 thousand and $4 thousand, respectively, which has been included in intangible amortization on the condensed consolidated statement of operations.~~

Acquired technology is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately 19 years from the date of acquisition of the technology in December 2013. Amortization expense for the three months ended September 30, 2017 and 2016 was $44 thousand and $44 thousand, respectively, which has been included in intangibles amortization. Amortization expense for each of the nine months ended September 30, 2017 and

Customer relationships are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately five years from the date of acquisition. Amortization expense for the three months ended September 30, 2017 and 2016, was $73 thousand and $66 thousand, respectively, which has been included in intangibles amortization. Amortization expense for the nine months ended September 30, 2017 and 2016 was $218 thousand and $198 thousand, respectively, which has been included in intangible amortization on the condensed consolidated statement of operations.

Acquired in-process research and development is stated at cost and may be immediately expensed if there is no alternative future use. Otherwise, the acquired in-process research and development is 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.

2022, respectively. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at ~~September~~June 30, ~~2017~~2023 is as follows (in thousands):


Years Ending December 31,	Amount
2023 (Remaining six months)	$	2,162
2024		4,239
2025		4,214
2026		4,214
2027		4,187
Thereafter		21,393
Total expected future amortization	$	40,409

~~On July 11, 2016,~~

Zhengzhou Fortune Bioscience Co., Ltd. (“ZFB”)

In February 2023, the Company ~~announced~~entered into a ~~license~~repurchase agreement with ZFB for the buyback of the Company’s 49% equity interest in ZFB for net proceeds of $1.8 million, consisting of $4.8 million, offset by $3.0 million in accounts payable. In connection with the repurchase agreement with ZFB, the Company recorded a net loss on equity investments of $0.4 million during the six months ended June 30, 2023 and ~~collaboration~~the carrying value of its investment in ZFB is zero as of June 30, 2023. The Company no longer holds any ownership interest in ZFB.

ELYXYB License

On February 12, 2023, Scilex Holding acquired from BioDelivery Sciences International, Inc. (“BSDI”) and Collegium Pharmaceutical, Inc. (“Collegium”, and together with BDSI, the “Collegium Sellers”) the rights to certain patents, trademarks, regulatory approvals, data, contracts, and other rights related to ELYXYB (celecoxib oral solution) (the “Product”) and its commercialization in the United States and Canada (the “Territory”).

As consideration for the acquisition, Scilex Holding assumed various rights and obligations under that certain asset purchase agreement, dated August 3, 2021 (the ~~"Servier License Agreement"~~“DRL APA”) ~~with Les Laboratoires Servier, SAS,~~, between BDSI and Dr. Reddy’s Laboratories Limited, a ~~corporation~~company incorporated under the laws of ~~France,~~India (“DRL”), including a license from DRL including an irrevocable, royalty-free, exclusive license to know-how and ~~Institut de Recherches Internationales Servier, a company duly organized~~patents of DRL related to the Product and ~~existing~~necessary or used to exploit the Product in the Territory. Additionally, under the ~~laws~~DRL APA, Collegium Sellers granted Scilex Holding an irrevocable, royalty-free, exclusive license to know-how related to the Product and necessary or used to exploit the Product in the Territory. No cash consideration was or will be payable to Collegium Sellers for such acquisition; however, the obligations under the DRL APA that were assumed by Scilex Holding include contingent sales and regulatory milestone payments and sales royalties. Scilex Holding is also obligated to make quarterly royalty payments to DRL on net sales of ~~France (individually~~the Product in the Territory. In April 2023, Scilex Holding launched ELYXYB in the U.S. As of June 30, 2023, no sales and ~~collectively, “Servier”)~~regulatory milestone payments had accrued as there were no potential milestones yet considered probable of achievement.

~~In August 2015,~~2023, the Company entered into, ~~an exclusive licensing agreement to develop~~ and ~~commercialize multiple prespecified biosimilar and biobetter antibodies from Mabtech Limited. Under~~made full draws under, the terms of the agreement, the Company will develop and market these four mAbs for the North American, European and Japanese markets. The Company made an initial license payment of $10.0 million and in February 2016, paid an additional $10.0 million license payment, both of which were recognized as acquired in-process research and development expense in the condensed consolidated statements of operations as the Company determined there was no alternative future use for the license.

In June 2016, the Company agreed to accelerate and pay a $30.0 million milestone license payment which has been recognized as acquired in-process research and development expense in the condensed consolidated statements of operations,

In April 2016, the Company entered into an immunotherapy research collaboration agreement with Roger Williams Medical Center to provide certain clinical trial, research and manufacturing services. Under the terms of the agreement, Roger Williams Medical Center will perform pre-clinical and clinical research related to the development and delivery of CAR-T immunotherapies. In exchange, the Company granted Roger Williams Medical Center $6.0 million in shares of TNK Class A Stock, subject to adjustment in certain circumstances, to be issued upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $20.0 million. The Company determined the fair value of this obligation was $3.4 million as of the April of 2016 agreement effective date,Junior DIP Facility and the amount was recognized as prepaid expense and other and acquisition consideration payable in the condensed consolidated balance sheet. The Company will recognize the upfront payment over the expected performance period of five years. During each of the quarters ended September 30, 2017 and 2016, the Company recognized approximately $170 thousand in pre-clinical research and development expense pursuant to the agreement. During the nine months ended September 30, 2017 and 2016, the Company recognized approximately $510 thousand and $283 thousand in pre-clinical research and development expense pursuant to the agreement, respectively.

In April 2015, the Company and NantCell entered into a license agreement. Under the terms of the agreement the Company granted an exclusive license to NantCell covering patent rights, know-how, and materials related to certain antibodies, ADCs and two CAR-TNK products. NantCell agreed to pay a royalty not to exceed five percent (5%) to the Company on any net sales of products (as defined) from the assets licensed by the Company to NantCell. In addition to the future royalties payable

Borrowings under this agreement, NantCell paid an upfront payment of $10.0 million to the Company and issued 10 million shares of NantCell common stock to the Company valued at $100.0 million based on a recent equity sale of NantCell common stock to a third party. As of September 30, 2017, the Company had not yet provided all of the items noted in the agreement and therefore has recorded the entire upfront payment and value of the equity interest received as deferred revenue. The Company will recognize the upfront payment and the value of the equity interest received over the expected license period of approximately ten years on a straight-line basis. The Company’s ownership interest in NantCell does not provide the Company with control or the ability to exercise significant ~~influence; therefore the $100.0 million investment is carried at cost in the condensed consolidated balance sheets and evaluated for other-than-temporary impairment on a quarterly basis.~~

In January 2010, the Company entered into a license agreement (the “TSRI License”) with The Scripps Research Institute (“TSRI”). Under the TSRI License, TSRI granted the Company an exclusive, worldwide license to certain TSRI patent rights and materials based on quorum sensing for the prevention and treatment of Staphylococcus aureus (“Staph”) infections, including Methicillin-resistant Staph. In consideration for the license, the Company: (i) issued TSRI a warrant for the purchase of common stock, (ii) agreed to pay TSRI a certain annual royalty commencing in the first year after certain patent filing milestones are achieved and (iii) agreed to pay a royalty on any sales of licensed products by the Company or its affiliates and a royalty for any revenues generated by the Company through its sublicense of patent rights and materials licensed from TSRI under the TSRI License. The TSRI License requires the Company to indemnify TSRI for certain breaches of the agreement and other matters customary for license agreements. The parties may terminate the TSRI License at any time by mutual agreement. In addition, the Company may terminate the TSRI License by giving 60 days’ notice to TSRI and TSRI may terminate the TSRI License immediately in the event of certain breaches of the agreement by the Company or upon the Company’s failure to undertake certain activities in furtherance of commercial development goals. Unless terminated earlier by either or both parties, the term of the TSRI License will continue until the final expiration of all claims covered by the patent rights licensed under the agreement. For the quarters ended September 30, 2017 and 2016, the Company recorded $72 thousand and $18 thousand in patent prosecution and maintenance costs associated with the TSRI License, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded $112 thousand and $40 thousand in patent prosecution and maintenance costs associated with the TSRI License, respectively. All such costs have been included in general and administrative expenses.

In June 2014, the NIAID awarded the Company a Phase II Small Business Technology Transfer (“STTR”) grant (the “Staph Grant III Award”) to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat ~~Staphylococcus aureus~~ (“~~S. aureus” or “Staph”) infections, including methicillin-resistant~~ ~~S. aureus~~ ~~(“MRSA”). The project period for the Staph Grant III Award covered a two-year period which commenced in June 2014, which was~~

On August 15, 2016, the Company’s 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 will, through a subsidiary, purchase all of the issued and outstanding equity of Semnur (the “Semnur Acquisition”). The Semnur Binding Term Sheet provides that, contingent upon the execution of a definitive agreement between the parties (the “Definitive Agreement”) and subject to certain conditions, Scintilla will, at the closing of the Semnur Acquisition (the “Semnur Closing”), make an initial payment of $60.0 million (the “Initial Consideration”) to the equityholders of Semnur in exchange for all of the issued and outstanding equity of Semnur. The Initial Consideration will consist of $40.0 million in cash and $20.0 million in shares of the Company’s common stock (the “Semnur Stock Consideration”). The Semnur Binding Term Sheet also provides that the number of shares of the Company’s common stock comprising the Semnur Stock Consideration will be calculated based on the volume weighted average closing price of the Company’s common stock for the 30 consecutive trading days ending on the date that is three days prior to the execution of the Definitive Agreement. $6.0 million of the Semnur Stock Consideration will be placed into escrow, a portion of which will be held for a period of up to six or 12 months to secure certain obligations of Semnur and its equityholders in connection with the Semnur Acquisition. At the Semnur Closing, the Company will enter into a registration rights agreement with certain of Semnur’s equityholders, pursuant to which the Company will agree to seek the registration for resale of the shares of the Company’s common stock comprising the Semnur Stock Consideration.

In addition to the Initial Consideration, Scintilla may pay additional consideration of up to $140.0 million to Semnur’s equityholders upon Scintilla’s completion of certain clinical studies and trials, receipt of certain regulatory approvals and the achievement of certain sales targets following the Semnur Closing. The Company paid $6.9 million associated with the development activities since the inception of the Semnur Binding Term Sheet through September 30, 2017.

~~Under the Semnur Binding Term Sheet, either party may terminate the Semnur Binding Term Sheet.~~

~~On October 6, 2017, the Semnur Binding Term Sheet was terminated without additional consideration, effective immediately.~~

A member of the Company’s board of directors is Semnur’s Chief Executive Officer and a member of its Board of Directors and currently owns approximately 5.5% of Semnur’s total outstanding capital stock.

In September 2013, the Company entered into a $5.0 million loan and security agreement with two banks pursuant to which: (i) the lenders provided the Company a term loan which was funded at closing, (ii) the Company repaid its then outstanding equipment loan balance of $762,000, and (iii) the lenders received a warrant to purchase an aggregate 31,250 shares of the Company’s common stock at an exercise price of $8.00 per share exercisable for seven years from the date of issuance. The value of the warrants, totaling $215 thousand, was recorded as debt ~~discount and additional paid-in capital.~~

In March 2014, the Company entered into an amended and restated loan and security agreement, increasing the September 2013 facility to $12.5 million from $5.0 million, with the same two banks. Such loan was funded at closing and is secured by a lien covering substantially all of the Company’s assets, excluding intellectual property, which is subject to a negative pledge. In October 2014, the Company entered into a second amendment to its amended and restated loan and security agreement to extend the interest only payments on the outstanding amount of the loan from October 1, 2014 to May 1, 2015, after which equal monthly payments of principal and interest are due until the loan maturity date of September 30, 2017. The amended and restated loan: (i) provided for an interest rate of 7.95% per annum, and (ii) provided the lenders additional warrants to purchase an aggregate of 34,642 shares of the Company’s common stock at an exercise price of $12.99 per share, exercisable for seven years from the date of issuance. The value of the warrants, totaling $322 thousand, was recorded as debt discount and additional paid-in capital.

On November 22, 2016, the Company paid off all obligations owing under, and terminated, the amended and restated loan and security agreement, as amended (the “Terminated Loan Agreement”). In connection with the repayment and discharge of indebtedness, the Company was required to pay pre-payment fees of approximately $49 thousand. The secured interests under the Terminated Loan Agreement were terminatedarrangements assumed in connection with the Company’s ~~discharge~~acquisition of ~~indebtedness.~~ACEA consisted of the following (in thousands):


	June 30, 2023			December 31, 2022
Principal	$	25,449		$	26,718
Unamortized debt discount		(6,786	)		(7,878	)
Carrying value	$	18,663		$	18,840
Estimated fair value	$	15,900		$	15,000

~~The first tranche~~unpaid principal and any accrued but unpaid interest, may be converted into shares of ~~$50.0 million was funded upon execution~~Scilex Common Stock, at a conversion price of $8.00 per share, at the option of the ~~Loan Agreement on November 23, 2016. Under the terms~~holder of the ~~Loan Agreement,~~Convertible Debentures.

Scilex Holding has the ~~Borrowers may,~~option to repay either (i) in cash, with premium equal to 5% in respect of the principal amount of such payment, or (ii) by submitting a notice for an advance under the amended and restated standby equity purchase agreement between Scilex Holding and Yorkville (the “A&R Yorkville Purchase Agreement”), or a series of Yorkville advances, or any combination of (i) or (ii) as determined by the Scilex Holding. In case of (ii), the proceeds from the shares sold to Yorkville are applied against the outstanding amounts.

Scilex Holding has the right, but ~~are~~ not ~~obligated~~the obligation, in its sole discretion, to ~~request additional funds~~redeem, upon five business days’ prior written notice to Yorkville (the “Redemption Notice”), all or any portion of upthe amounts outstanding under the Convertible Debentures; provided that the trading price of the Common Stock is less than the Conversion Price at the time of the Redemption Notice. The redemption amount shall be equal to ~~$25.0 million which are available until June 30, 2018, subject to approval~~the outstanding principal balance being redeemed by ~~Hercules’ Investment Committee.~~ Scilex Holding, plus the redemption premium of 10% of the principal amount being redeemed, plus all accrued and unpaid interest in respect of such redeemed principal amount.

Pursuant to the ~~terms~~Securities Purchase Agreement with Yorkville, Scilex Holding issued additional Convertible Debentures in an aggregate principal amount of ~~the third amendment~~$15.0 million in April 2023 for $14.4 million in net cash proceeds. In April 2023, Yorkville elected to the Loan Agreement entered into on March 15, 2017, the Company paid Hercules $1.5 million for a portion of the backend fee. Pursuant to the terms of the fourth amendment to the Loan Agreement entered into on March 23, 2017 (the “Fourth Amendment”), the Company repaid Hercules, without repayment penalty, $20.0convert $5.0 million of the outstanding principal and ~~unpaid~~accrued interest ~~accrued thereon on March 23, 2017.~~of the first Convertible Debentures issued to Yorkville, resulting in the issuance of 632,431 shares of Scilex Common Stock at a conversion price of $8.00 per share and reducing the outstanding Convertible Debentures balance by $7.7 million. Scilex Holding repaid $1.3 million of Convertible Debentures in June 2023. Interest expense related to the Convertible Debentures and included in the changes in fair value was $288,000 for each of the three and six months ended June 30, 2023.

Scilex Pharma Revolving Facility

On June 27, 2023, Scilex Pharma entered into a Credit and Security Agreement (the “eCapital Credit Agreement”) with eCapital Healthcare Corp. (the “Lender”). The ~~Fourth Amendment also provided for~~eCapital Credit Agreement provides that the ~~following: (1) Hercules reduced the minimum~~Lender shall make available to Scilex Pharma revolving loans (the “Revolving Facility”) in an aggregate principal amount of ~~unrestricted cash that~~up to $30,000,000 (the “Facility Cap”). The Facility Cap may, at the ~~Company must maintain~~request of Scilex Pharma and with the consent of the Lender, be increased in increments of $250,000 at such time as the outstanding principal balance under the ~~Loan~~eCapital Credit Agreement equals or exceeds 95% of the then-existing Facility Cap. The amount available to Scilex Pharma under the Revolving Facility at any one time is the lesser of the Facility Cap and ~~(2)~~85% of the ~~parties agreed to change~~“Net Collectible Value” of “Eligible Receivables” (in each case, as defined in the ~~date~~eCapital Credit Agreement) minus the amount of any reserves or adjustments against receivables required by ~~which~~ the ~~Company must achieve a fundraising milestone.~~

~~Pursuant to~~Lender, in its discretion.

Under the terms of the ~~seventh amendment~~eCapital Credit Agreement, interest will accrue daily on the principal amount outstanding at a rate per annum equal to the ~~Loan~~Wall Street Journal Prime Rate plus 1.50%, based on a year consisting of 360 days, and which shall be payable by Scilex Pharma monthly in arrears, commencing July 1, 2023. The eCapital Credit Agreement ~~entered into on November 6, 2017 (the “Seventh Amendment”), (i) the Company repaid Hercules, without repayment penalty, $10.0 million~~provides for an early termination fee of 0.50% of the Facility Cap if Scilex Pharma voluntarily prepays and terminates in full the Revolving Facility prior to the first anniversary of the closing of the Revolving Facility.

The eCapital Credit Agreement provides that Scilex Pharma and Lender shall enter into a blocked account control agreement with respect to Scilex Pharma’s collections account, which permits the Lender to sweep all funds in such collections account to an account of the Lender for application to the outstanding ~~principal and unpaid interest accrued thereon on November 6, 2017, and (ii) Hercules agreed to reduce the minimum amount of unrestricted cash that the Company must maintain~~amounts under the ~~Loan~~Revolving Facility. All indebtedness incurred and outstanding under the eCapital Credit Agreement ~~from $20.0 million~~will be due and payable in full on July 1, 2026, unless the eCapital Credit Agreement is earlier terminated.

22

Table of Contents

Scilex Pharma’s obligations under the eCapital Credit Agreement are secured by a continuing security interest in Scilex Pharma’s accounts receivable, related deposit accounts, and in the other “Collateral” as defined in the eCapital Credit Agreement. In addition, Scilex Holding has guaranteed the payment and performance obligations of Scilex Pharma under the eCapital Credit Agreement by executing a guaranty agreement, dated as of June 27, 2023.

The eCapital Credit Agreement contains certain representations and warranties and various affirmative and negative covenants applicable to ~~$8.0 million.~~

facilities of this type, including covenants that, among other things, will limit or restrict the ability of Scilex Pharma, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, enter into transactions with affiliated persons, or make investments. The ~~Loan~~eCapital Credit Agreement also contains a financial covenant requiring Scilex Pharma to maintain cash on hand in “Controlled Deposit Accounts” (as defined in the eCapital Credit Agreement) plus availability under the Revolving Facility of at least $1,000,000 at all times.

The eCapital Credit Agreement contains customary ~~affirmative~~events of default and restrictive covenants and representations and warranties, including financial reporting obligations and significant limitations on dividends, indebtedness, liens (including a negative pledge on intellectual property and other assets), collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries. Additionally, the Loan Agreement contains covenants requiring the Borrowers (i) to achieve certain fundraising requirements by certain dates and (ii) to maintain $20.0 million of unrestricted cash prior to achieving its corporate and fundraising milestones. The Company's public offering for net proceeds of $43.5 million satisfied the fundraising requirements and fundraising milestone. Effective November 6, 2017, the Seventh Amendment to the Loan Agreement reduced the minimum amount of U.S. unrestricted cashalso provides that ~~the Company must maintain under the Loan Agreement to $8.0 million. The breach of certain covenants under the Loan Agreement would result in the occurrence of~~ an event of ~~default.~~default includes a change of control of Scilex Pharma and Scilex Holding’s failure to issue at least $75,000,000 of debt or equity by September 30, 2023. The ~~Loan~~events of default under the eCapital Credit Agreement ~~also contains~~are subject to customary thresholds and grace periods as set forth in the eCapital Credit Agreement.

Subject to certain notice requirements and other ~~customary provisions, such as expense reimbursement, non-disclosure obligations, as well as indemnification rights for the benefit of the Lenders. Upon~~conditions, upon the occurrence of an event of default, ~~and following any applicable cure periods, if any, a default interest rate of an additional 5.00%~~commitments may be ~~applied to~~terminated and all amounts outstanding under the

In connection with the ~~Loan~~eCapital Credit Agreement, (ii) working capital needs of the Borrower and (iii) other uses not prohibited under the eCapital Credit Agreement.

As of June 30, 2023, Scilex Pharma has an outstanding balance of $15.9 million under the Revolving Facility, which is classified as current liabilities in the consolidated balance sheet.

In September 2009, prior to the adoption of the 2009 Stock Incentive Plan, the Company’s Board of Directors approved the reservation and issuance of 8,000 non-statutory stock options to the Company’s non-employee directors. The options vested on the one year anniversary of the vesting commencement date in October 2010, and are exercisable for up to ten years from the grant date. No further shares may be granted under this plan and, as of September 30, 2017, 3,200 options with a weighted-average exercise price of $1.12 were outstanding.

In October 2009, the Company’s stockholders approved the 2009 Stock Incentive Plan. In July 2017, the Company’s stockholders approved, among other items, the amendment and restatement of the 2009 Stock Incentive Plan (as amended and restated, the “Stock Plan”) to increase the number of shares of(i) the Company’s common stock ~~authorized~~(such stock, the “Company Common Stock”) as of the close of business on January 9, 2023 (the “Record Date”) and (ii) certain warrants to ~~be issued~~purchase Company Common Stock that, among other things, had not been exercised prior to the ex-dividend date under the rules of Nasdaq (and which had or may have the right to participate in the Dividend pursuant to the ~~Stock Plan~~terms of their respective warrants).

On January 5, 2023, the Board fixed the date on which the Dividend would be paid to ~~11,260,000. Such~~be January 19, 2023 (the “Payment Date”), such Payment Date being within 60 days following the Record Date.

On January 19, 2023, the Dividend was paid. No fractional shares were issued in connection with the Dividend and the equityholders of the Company who otherwise were entitled to receive fractional shares of the ~~Company’s common stock are reserved for issuance~~Dividend Stock received cash (without interest or deduction) in lieu of such fractional shares in an amount equal to ~~employees, non-employee directors and consultants~~the product obtained by multiplying (a) $5.87, the closing price of the ~~Company.~~Scilex Common Stock on the Nasdaq Capital Market on the Record Date, by (b) the fraction of one share of Scilex Common Stock that such equityholder would have otherwise been entitled to receive as a Dividend in respect of shares of Company Common Stock held by such equityholder (after aggregating all such fractional shares otherwise issuable to such equityholder in connection with the Dividend). The Dividend Stock ~~Plan provides~~was initially subject to certain transfer restrictions through May 11, 2023, which the Bankruptcy Court subsequently extended to September 1, 2023.

Following the payment of the Dividend and as of June 30, 2023 the Company's ownership interest in Scilex Common Stock is 41.7%. As of June 30, 2023, the Company's total ownership interest in total Scilex Common Stock (assuming conversion of Scilex Preferred Shares into Scilex Common Stock) is 51.22%.

As discussed in Note 1, subsequent to June 30, 2023, the Company entered into the Stalking Horse Stock Purchase Agreement for the grant of incentive stock options, non-incentive stock options, stock appreciation rights, restricted stock awards, unrestricted stock awards, restricted stock unit awards and performance awards to eligible recipients. Recipients of stock options shall be eligible to purchase sharessale of the ~~Company’s common stock at~~Scilex Purchased Securities, subject to an ~~exercise price equal to no less than~~Auction and a further order from the ~~estimated fair market value~~Bankruptcy Court approving the sale.

~~The following table summarizes stock option activity as of September 30, 2017 and the changes for the period then ended (dollar values in thousands):~~

Options
Outstanding

Weighted-
Average
Exercise Price

Aggregate
Intrinsic
Value
Outstanding at December 31, 2016 4,332,876
$ 7.86
$ 427
Options Granted 3,110,100
$ 1.82

Options Canceled (510,676 ) $ 8.26

Options Exercised —
$ —

Outstanding at September 30, 2017 6,932,300
$ 5.14
$ 617

~~The aggregate intrinsic value of options exercised during each of~~ the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022, respectively, and $11.1 million and $13.8 million for the six months ended June 30, 2023 and 2022, respectively. The total unrecognized compensation expense related to unvested stock option grants as of June 30, 2023 was $0$24.6 million, with a weighted average remaining vesting period of 1.8 years. Total unrecognized compensation expense related to unvested restricted stock unit (“RSU”) grants as of June 30, 2023 was $17.0 million, with a weighted average remaining vesting period of 2.9 years.

A summary of stock option activity under the 2019 Plan for the six months ended June 30, 2023 is as follows:


	Options Outstanding			Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2022		20,861,760		$	6.05	$	—
Options Granted		—			—
Options Canceled		(1,113,032	)		6.63
Options Exercised		—			—
Outstanding at June 30, 2023		19,748,728		$	6.02	$	—
Vested and Expected to Vest at June 30, 2023		19,748,728		$	6.02	$	—

A summary of RSU activity under the 2019 Plan for the six months ended June 30, 2023 is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Outstanding at December 31, 2022		8,284,498		$	3.73
RSUs Granted		—			—
RSUs Released		—			—
RSUs Canceled		(1,381,951	)		4.23
Outstanding at June 30, 2023		6,902,547		$	3.63

On March 15, 2023, the Board approved the suspension of any issuance, vesting, and ~~$0 for each~~payments related to the awards under the Company’s 2020 Employee Stock Purchase Plan and 2019 Plan effective as of the ~~nine~~Petition Date. The Company determined that there are no incremental compensation costs recognized as a result of this suspension for the three and six months ended ~~September~~June 30, 2017 and 2016, respectively. The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of employee stock options was estimated at the grant date using the following assumptions:

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options.

~~The~~2023.

Scilex Plan

For Scilex Holding, total ~~employee and director~~ stock-based compensation recorded as operating expenses was ~~$1.1~~$3.6 million and ~~$0.9~~$1.4 million for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively, and ~~$3.6~~$7.3 million and ~~$3.0~~$2.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

The total unrecognized compensation cost related to unvested employee and director stock option grants as of ~~September~~June 30, ~~2017~~2023 was ~~$8.8~~52.3 million and the weighted average period over which these grants are expected to vest is ~~3.0~~3.4 years.

The Company records equity instruments issued to non-employees as expense at their fair value over the related service period as determined in accordance with the authoritative guidance and periodically revalues the equity instruments as they vest. Stock-based

Employee Stock Purchase Plan

Total stock-based compensation ~~expense related to non-employee consultants~~ recorded as operating ~~expenses~~expense for the Company’s 2020 Employee Stock Purchase Plan was ~~$52 thousand and $67 thousand~~not material for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016, respectively, and $178 thousand and $163 thousand for the nine months ended September 30, 2017 and 2016, respectively.~~

In June 2017, the Company’s subsidiary, Scilex, adopted the Scilex 2017 Stock Option Plan, reserved 4.0 million shares of Scilex common stock and awarded 1.0 million options to certain Company personnel, directors and consultants under such plan. Stock options granted under this plan typically vest 1/4th of the shares on the first anniversary of the vesting commencement date and 1/48th of the remaining options vest each month thereafter. As of September 30, 2017, 0.8 million options were outstanding.

In May 2015, the Company’s subsidiary, TNK, adopted the TNK 2015 Stock Option Plan, reserved 10.0 million shares of TNK class A common stock and awarded 3.6 million options to certain Company personnel, directors and consultants under such plan. In November 2015, TNK awarded 0.5 million options to certain Company personnel. Stock options granted under this plan typically vest a portion immediately upon grant and the remaining options over two to four years or monthly over four years from the grant date and have a contractual term of ten years. Effective August 29, 2017, options to purchase an aggregate of 1.0 million shares were canceled. As of September 30, 2017, 1.7 million options were outstanding.

In May 2015, TNK granted a warrant to the Company’s CEO to purchase 9.5 million shares of TNK class B common stock, which have 10 to 1 voting rights. Warrant shares totaling 4.0 million were exercisable evenly over forty months and the remaining warrant shares were exercisable if certain defined events occur within four years from date of issuance at an initial exercise price of $0.01 per share. This warrant was canceled in its entirety effective August 29, 2017.

In May 2015, the Company’s subsidiary, LA Cell, Inc. (“LA Cell”), adopted the LA Cell 2015 Stock Option Plan reserved 10.0 million shares of LA Cell class A common stock and awarded 2.9 million options to certain Company personnel, directors and consultants under such plan. Stock options granted under this plan typically vest a portion immediately upon grant and the remaining options over two to four years or monthly over four years from the grant date and have a contractual term of ten years. Effective August 29, 2017, options to purchase an aggregate of 1.0 million shares were cancelled. As of September 30, 2017, 0.8 million options were outstanding.

In May 2015, LA Cell granted a warrant to the Company’s CEO to purchase 9.5 million shares of LA Cell class B common stock, which have 10 to 1 voting rights. Warrant shares totaling 4.0 million were exercisable evenly over forty months and the remaining warrant shares were exercisable if certain defined events occur within four years from date of issuance at an initial exercise price of $0.01 per share. This warrant was canceled in its entirety effective August 29, 2017.

In October 2015, the Company’s subsidiary, Concortis Biosystems, Corp. (“CBC”), adopted the CBC 2015 Stock Option Plan and reserved 10.0 million shares of CBC class A common stock and awarded 1.8 million options to certain Company personnel, directors and consultants under such plan. Stock options granted under this plan typically vest a portion immediately upon grant and the remaining options over two to four years or monthly over four years from the grant date and have a contractual term of ten years. Effective August 29, 2017, options to purchase an aggregate of 1.6 million shares were cancelled. As of September 30, 2017, 0.1 million options were outstanding.

In October 2015, CBC granted a warrant to the Company’s CEO to purchase 9.5 million shares of CBC class B common stock, which have 10 to 1 voting rights. Warrant shares totaling 4.0 million were exercisable evenly over forty months and the remaining warrant shares were exercisable if certain defined events occur within four years from date of issuance at an initial exercise price of $0.25 per share. This warrant was canceled in its entirety effective August 29, 2017.

In October 2015, the Company’s subsidiary, Scintilla, adopted the Scintilla 2015 Stock Option Plan, reserved 10.0 million shares of Scintilla class A common stock and awarded 2.1 million options to certain Company personnel, directors and consultants under such plan. Stock options granted under this plan typically vest a portion immediately upon grant and the remaining options over two to four years or monthly over four years from the grant date and have a contractual term of ten years. Effective August 29, 2017, options to purchase an aggregate of 0.8 million shares were canceled. As of September 30, 2017, 0.1 million options were outstanding.

In October 2015, Scintilla granted a warrant to the Company’s CEO to purchase 9.5 million shares of Scintilla class B common stock, which have 10 to 1 voting rights. Warrant shares totaling 4.0 million were exercisable evenly over forty months and the remaining warrant shares were exercisable if certain defined events occur within four years from date of issuance at an initial exercise price of $0.01 per share. This warrant was canceled in its entirety effective August 29, 2017.

In October 2015, the Company’s subsidiary, Sorrento Biologics, Inc. (“Biologics”), adopted the Biologics 2015 Stock Option Plan, reserved 10.0 million shares of Biologics class A common stock and awarded 2.6 million options to certain Company personnel, directors and consultants under such plan. Stock options granted under this plan typically vest a portion immediately upon grant and the remaining options over two to four years or monthly over four years from the grant date and have a contractual term of ten years. Effective August 29 2017, options to purchase an aggregate of 1.0 million shares were cancelled. As of September 30, 2017, 0.2 million~~options were outstanding.~~

In October 2015, Biologics granted a warrant to the Company’s CEO to purchase 9.5 million shares of Biologics class B common stock which have 10 to 1 voting rights. Warrant shares totaling 4.0 million were exercisable evenly over forty months and the remaining warrant shares were exercisable if certain defined events occur within four years from date of issuance at an initial exercise price of $0.01 per share. This warrant was canceled in its entirety effective August 29, 2017.

~~The total director~~2022. Total stock-based compensation recorded as operating ~~expenses by the Company for TNK, LA Cell, CBC, Scintilla and Biologics~~expense for the ~~three~~Company’s 2020 Employee Stock Purchase Plan was not material for the six months ended ~~September~~June 30, ~~2017 and 2016 was $285 thousand and $42 thousand, respectively,~~2023, and was ~~$380 thousand and $125 thousand~~$0.2 million for the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016, respectively. No unrecognized stock-based compensation expense related to unvested director stock option and warrant grants remained for these entities as of September 30, 2017. The Company records equity instruments issued to non-employees as expense at their fair value over the related service period as determined in accordance with the authoritative guidance and periodically revalues the equity instruments as they vest. Stock based compensation expense related to non-employee consultants recorded as operating expenses by the Company for TNK, LA Cell, CBC, Scintilla and Biologics was $46 thousand and $47 thousand for the three months ended September 30, 2017 and 2016, respectively, and was $137 thousand and $139 thousand for each of the nine months ended September 30, 2017 and 2016, respectively.

The weighted-average assumptions used in the Black-Scholes option and warrant pricing model used by TNK, LA Cell, CBC, Scintilla and Biologics to determine the fair value of stock option grants for directors and non-employee consultants for the nine months ended September 30, 2017 were as follows: expected dividend yield – 0%, risk-free interest rate –2.42% to 2.48%, expected volatility – 65% to 77%, and expected term of 4.0 to 6.1 years.

In May 2014, the Company’s subsidiary, Ark Animal Health, Inc. (“Ark”), adopted the Ark 2014 Stock Option Plan and reserved and awarded 600,000 options to certain directors and consultants under such plan. Stock options granted under such plan typically vest a portion immediately upon grant and the remaining options over one year from the grant date and have a contractual term of ten years. Effective August 29, 2017, options to purchase an aggregate of 135,000 shares were canceled.As of September 30, 2017, 88,000 options were outstanding.

~~The total director and consultant~~2022.

CEO Performance Award

Total stock-based compensation recorded as operating ~~expenses by~~expense for the 10-year CEO performance award that was granted to the Company’s chief executive officer in 2020 and tied solely to the Company ~~for Ark for each of~~achieving market capitalization milestones (the “CEO Performance Award”) was $7.0 million and $15.2 million during the three and six months ended ~~September~~June 30, ~~2017 and 2016 was $0 for each~~2023, respectively. As of June 30, 2023, the ~~nine months ended September 30, 2017 and 2016. No~~Company had approximately $31.0 million of total unrecognized stock-based compensation expense ~~remains related to stock option grants as~~remaining under the CEO Performance Award.

On October 13, 2015, the Company wrote a call option to Cambridge, on up to 2.0 million shares of NantKwest common stock held by the Company (the “Option Agreement”). As of December 31, 2015, the Company held approximately 5.6 million shares of common stock of NantKwest, par value $.0001 per share, which was classified as available-for-sale and reported in its consolidated financial statements as marketable securities. The Option Agreement gave Cambridge the right to purchase up to 2.0 million shares at a price of $15.295 per share from time to time in the first quarter of 2016. There was no contractual option premium associated with this Option Agreement. The Option Agreement was a derivative as defined in ASC Topic 815 and was recognized at fair value every reporting period the Option Agreement was in effect, with changes in fair value recognized in current operations.

~~The call option expired unexercised on March 31, 2016 and the Company recorded a gain of $5.5 million upon the cancellation of the derivative liability.~~

~~As of September 30, 2017 and December 31, 2016, no derivative liability was recorded on the Company’s condensed consolidated balance sheets.~~

In the normal course of business, the Company may be named as a defendant in one or more lawsuits. ~~The~~Other than as set forth below, the Company is not a party to any outstanding material litigation and management is currently not aware of any legal proceedings that, individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.

On April ~~25, 2016, Wildcat Liquid Alpha,~~3, 2019, the Company filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. Specifically, the Company has filed:

•

An arbitration demand with the American Arbitration Association in Los Angeles, California, against NantPharma, LLC (“~~WLA”~~NantPharma”), and its Chief Executive Officer, Patrick Soon-Shiong, related to alleged fraud and breaches of the Stock Sale and Purchase Agreement, dated May 14, 2015, entered into between NantPharma and the Company, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2015. On May 24, 2019, NantCell, Inc., Dr. Soon-Shiong and NANTibody’s General Counsel Charles Kim filed a ~~complaint~~motion in the Los Angeles Superior Court (the “Court”) to stay or dismiss the Company’s arbitration demand. On October 9, 2019, the Court denied the motion to stay or dismiss the arbitration demand, and the arbitration continued against NantPharma (the “NantPharma Arbitration”). On March 5, 2020, the Company filed a legal action against Dr. Soon-Shiong in the Court, asserting claims for fraudulent inducement and common law fraud, arising out of ~~Chancery~~Dr. Soon-Shiong’s purchase of the ~~State of Delaware seeking an order compelling~~drug Cynviloq™ from the Company in May 2015. The action alleges that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq™ for the purpose of halting its progression to ~~provide WLA~~the market. In connection with ~~certain documents, books and records for inspection and copying pursuant to an April 11, 2016 demand made by WLA (the “Inspection Demand Action”).~~

~~On May 13, 2016, WLA filed a derivative~~filing this civil action in the Court, where the Company will have the right to a jury trial against Dr. Soon-Shiong, the Company dismissed Dr. Soon-Shiong from the NantPharma Arbitration; and

•

An action in the Court derivatively on behalf of ~~Chancery~~NANTibody against NantCell, Inc., NANTibody Board Member and NantCell, Inc., Chief Executive Officer Patrick Soon-Shiong, and NANTibody officer Charles Kim, related to several breaches of the ~~State~~June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between the Company and NantCell, Inc. The suit also alleges breaches of ~~Delaware (the “WLA Action”~~fiduciary duties and ~~together~~seeks, inter alia, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring the Company’s equity method investment in NANTibody to its invested amount as of June 30, 2017 of $40.0 million. On May 24, 2019, NantCell, Inc. and Dr. Soon-Shiong filed a cross-complaint against the Company and Dr. Henry Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Exclusive License Agreement for certain antibodies (dated June 11, 2015 and entered into between NANTibody, LLC and the Company), and alleged tortious interference with contract. On May 24, 2019, NANTibody and NantPharma filed a new complaint in the action against the Company and Dr. Henry Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Stock Sale and Purchase Agreement, alleged breaches of the Exclusive License Agreement for certain antibodies (dated April 21, 2015 and entered into between NantCell, Inc. and the Company), and alleged tortious interference with contract. On July 8, 2019, the Company and Dr. Henry Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc., and NantPharma have re-filed their claims in arbitration with the ~~Inspection Demand Action,~~American Arbitration Association (the “NantCell/NANTibody Arbitration”). On May 4, 2020, the ~~“Actions”)~~Company filed counterclaims against ~~each~~NANTibody and NantCell related to breaches of the ~~members~~April 21, 2015 and June 11, 2015 Exclusive License Agreements. The claims against Dr. Soon-Shiong were stayed pending resolution of the claims filed in arbitration.

On December 2, 2022, the arbitrator in the NantCell/NANTibody Arbitration issued an award (the “Antibody Award”) granting contractual damages and pre-award interest in the amounts of $156,829,562 to NantCell and $16,681,521 to NANTibody, exclusive of post-award, prejudgment interest, which will accrue at 9% per annum. The award also held that the Company has no further obligations under the Exclusive License Agreement with NANTibody. The Exclusive License Agreement with NantCell remains in effect only with respect to one anti-PD-L1 antibody that previously was delivered by the Company to NantCell. The Company has no further obligation to contribute any materials or know-how to NantCell with respect to that antibody but will receive potential future royalties on future net sales. The Company continues to hold 40% of the outstanding equity of NANTibody. The award does not resolve the additional legal proceedings brought by the Company against Patrick Soon-Shiong and entities controlled by him, which remain pending. On December 21, 2022, NantCell and NANTibody filed in the Los Angeles Superior Court a petition to confirm the

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NantCell/NANTibody Arbitration award. On January 16, 2023, the Company filed in the Court a petition to vacate the Antibody Award. On February 7, 2023, the Court granted the Nant entities’ petition, entered judgment upon the Antibody Award and ordered the Company to pay to the Nant entities the previously disclosed amounts awarded in the Antibody Award.

On December 20, 2022, the arbitrator in the NantPharma Arbitration issued an award granting contractual damages of $125.0 million to the Company, reflecting the value of lost milestone payments for the approval of Cynviloq for the treatment of breast and lung cancers. The Company filed a petition to confirm the award with the Los Angeles Superior Court on February 2, 2023. NantPharma filed an opposition motion to vacate the award on February 13, 2023. On March 16, 2023, the Court granted the Company’s motion to confirm the award in the NantPharma Arbitration over NantPharma’s opposition. On April 7, 2023, the Court entered final judgment (“Final Judgment”) upon the confirmed award in favor of the Company in the amount of $127,686,209.93, which includes arbitration costs and accrued interest on the award since December 20, 2022. The Final Judgment is accruing interest at the rate of 10 percent per annum, from March 16, 2023. On April 17, 2023, the Court ordered Patrick Soon-Shiong, to appear, on behalf of NantPharma, before the Court on May 31, 2023, to furnish information to aid the Company in the enforcement of its Final Judgment. On April 18, 2023, the Court issued a writ of execution, which the Company may use, other things, to begin the process of levying NantPharma’s bank account(s). On April 18, 2023, the Court also issued an Abstract of Judgment, which the Company may use to perfect a judgment lien against NantPharma’s real property.

On February 6, 2023, the Company applied ex parte to the Court for a stay of enforcement of the judgment entered upon the Antibody Award until the Company is procedurally able to seek an offset of the judgment entered upon the Antibody Award by the amount of the Final Judgment that the Company has petitioned the Court to confirm and enter judgment upon. The Nant Entities opposed the Company’s ex parte application.

On February 7, 2023, the Court granted the Company’s ex parte application in part. The Court stayed enforcement of the Antibody Award judgment for seventy days only to the extent the Antibody Award judgment exceeds the approximately $50.0 million difference of the amounts of the Antibody Award and the Final Judgment.

Following mediation in the Chapter 11 Cases, the Company reached a settlement with NantPharma, NantCell, and NANTibody (along with their related parties) (collectively, the “Nant Parties”) regarding the Nant Award, the Cynviloq Award, and other legal causes of action (the “Nant Settlement”)—subject to Bankruptcy Court approval. Under the settlement, either (i) the Company will pay NantCell and NANTIbody in full in cash by August 31, 2023 to satisfy the Nant Award (the “Nant Settlement Payments”) and the Company and the Nant Parties will retain all their other respective claims and causes of action, joint venture interests, and royalty rights and obligations, or (ii) if the Company does not make the Nant Settlement Payments, then the Company and the Nant Parties will mutually release each other from any and all claims and causes of action, the Company will transfer its joint venture interests (and rights related thereto) in certain Nant Parties to the Nant Parties and the Company will receive $1.5 million from the Nant Parties in exchange for a release of the Company’s ~~board~~royalty rights to PD-L1 (and address certain rights and obligations related thereto). In the interim, the Company and the Nant Parties have agreed to stay all litigation matters until August 31, 2023. A hearing for the Bankruptcy Court to consider approval of ~~directors at~~ the ~~time,~~settlement is currently scheduled for August 14, 2023.

The Company has recorded an accrued legal settlement in the consolidated balance sheet of $176.6 million and $174.8 million, including post-award interest, as of June 30, 2023 and December 31, 2022, respectively, relating to the Final Judgment. The accrued legal settlement has been classified as liabilities subject to compromise as of June 30, 2023 (see Note 14).

Even if the Company successfully reorganizes through a Chapter 11 plan of reorganization, pending litigation brought by the Company against other parties would generally continue after the Chapter 11 Cases, unless specifically released by the Company (including the potential release of claims described above).

For a discussion of the Company’s ongoing bankruptcy proceedings, see Note 1.

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On May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-00966-AJB-DEB, against the Company, Dr. Henry Ji ~~William S. Marth, Kim D. Janda, Jaisim Shah, David H. Deming,~~ and ~~Douglas Ebersole (the “Prior Board”~~its SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D. The action alleges that the Company, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public by publicly issuing false and/or misleading statements regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection and that such statements violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The suit seeks to recover damages caused by the alleged violations of federal securities laws, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On June 11, 2020, Jeannette Calvo filed a second putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-01066-JAH-WVG, against the same defendants alleging the same claims and seeking the same relief. On February 12, 2021, the U.S. District Court for the Southern District of California issued an order consolidating the cases and appointing a lead plaintiff, Andrew Zenoff (“Plaintiff”), and lead counsel. On April 5, 2021, Plaintiff filed a consolidated amended complaint in accordance with the U.S. District Court for the Southern District of California’s scheduling order. Pursuant to that scheduling order, the defendants filed a motion to dismiss on May 20, 2021 and Plaintiff filed its opposition to the motion on July 2, 2021. The defendants’ reply was filed on August 4, 2021. On or about November 18, 2021, the U.S. District Court for the Southern District of California issued an order granting the motion to dismiss with leave to amend. On November 30, 2021, Plaintiff filed a first amended consolidated complaint. On December 30, 2021, the defendants filed a motion to dismiss the first amended consolidated complaint. Pursuant to a stipulated scheduling order, the defendants filed their opposition to the motion on February 7, 2022, and the Plaintiff filed its reply on February 28, 2022. On April 11, 2022, the U.S. District Court for the Southern District of California issued an order granting the motion to dismiss with leave to file an amended complaint by April 22, 2022. Plaintiff did not file an amended complaint by April 22, 2022. On June 2, 2022, the U.S. District Court for the Southern District of California directed the clerk of the court to enter judgment in favor of defendants and close the case. On June 3, 2022, judgment was entered in favor of defendants, and the case was closed. On June 30, 2022, Plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit (Case No. 22-55641). On October 3, 2022, Plaintiff/Appellant filed an opening brief. On December 2, 2022, the defendants/appellees’ filed their answering brief. On January 23, 2023, Plaintiff/Appellant filed his reply brief. The Company is defending these matters vigorously.

On July 26, 2021, Sachin Chaudhari filed a verified stockholder derivative complaint in the U.S. District Court for the Southern District of California, Case No. 0723211, against Dr. Ji, Mr. Brunswick, and the Company’s Board of Directors as defendants, and against the Company as a nominal defendant. ~~After the members~~The action alleges, among other things, that defendants breached their fiduciary duties, violated Section 20(a) of the ~~Prior Board~~Securities Exchange Act of 1934, as amended, engaged in waste and were unjustly enriched in connection with the alleged false and misleading statements referenced above. The suit seeks to recover on behalf of the Company ~~moved to dismiss, on August 12, 2016, WLA~~those damages caused by the alleged breaches of duty and related claims, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On July 27, 2021, Michael Sabatina filed ~~an amended~~a verified stockholder derivative complaint ~~containing both direct~~in the Delaware Chancery Court, Case No. 2021-0654 against Dr. Ji and ~~derivative claims against each of the members of the Prior Board~~Mr. Brunswick as defendants and against the Company as a nominal defendant alleging ~~among other things: (1) breach~~the same general claims and seeking the same general relief. Both of ~~fiduciary duty with respect to the formation of, and certain options and warrants issued~~these derivative cases have been stayed by ~~certain~~their respective courts pending resolution of the ~~Company’s subsidiaries~~motion to ~~Dr. Ji and members~~dismiss the federal securities class action described above. The Company is defending these matters vigorously.

Operating Leases

Supplemental quantitative information related to leases includes the following ($ in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	4,089		$	3,422		$	7,991		$	6,304
ROU assets obtained in exchange for new and amended operating lease liabilities	$	2,680		$	2,328		$	2,680		$	2,961
Weighted average remaining lease term in years	6.7			14.4			6.7			14.4
Weighted average discount rate		12.7	%		12.8	%		12.7	%		12.8	%

27

Table of ~~the Prior Board (the “Subsidiary Options Claim”); (2) breach~~Contents

Maturities of fiduciary duty with respect to the Company’s prior announcement that it had entered into a voting agreement with Yuhan Corporation (“Yuhan”) in connection with a transaction through which it purchased $10 million of shares of the Company’s common stock and warrants (the “Yuhan Agreement Claim”); (3) waste of corporate assets regarding the foregoing; (4) unjust enrichment regarding the foregoing; and (5) violation of 8 Del. C. § 160 based on the Yuhan voting agreement. lease liabilities were as follows (in thousands):


Years ending December 31,	Operating leases
2023 (Remaining six months)	$	7,114
2024		14,152
2025		13,219
2026		12,878
2027		13,052
2028		13,380
Thereafter		23,991
Total lease payments		97,786
Less imputed interest		(32,289	)
Total lease liabilities as of June 30, 2023	$	65,497

~~On March 17, 2017,~~

In April 2023, the Company and the ~~members of~~respective landlords for the ~~Prior Board~~premises leased by the Company located at 4930 Directors Place, 9151 Rehco Road and ~~WLA entered into a confidential settlement agreement~~4690 Executive Drive, San Diego, California, 92121, executed stipulations and ~~release (the “Settlement Agreement”)~~agreed orders, which the Bankruptcy Court approved, pursuant to which ~~among other things,~~the Company and each ~~party~~such landlord agreed to ~~forever release~~reject the respective lease agreements. In conjunction with signing the leases, the Company established a cash collateral account and ~~not to sue the other party with respect~~issued letters of credit to the ~~claims asserted~~landlords for a total of $4.1 million, which was drawn by the landlords upon rejection of the leases. The cash collateral drawn was recorded as lease termination cost. The Company derecognized the related right-of-use assets and liabilities, which resulted in a gain of $0.6 million. The lease termination cost and the gain on derecognition were included in Reorganizations items, net in the ~~Actions and WLA agreed to take all actions to seek to dismiss the Actions without prejudice within ten business days following the execution~~consolidated statement of operations.

The termination of the ~~Settlement Agreement.~~4930 Directors Place lease resulted in remeasurements of four other leases as their lease terms were previously extended to be coterminous with the lease end date for the 4930 Directors Place lease. As ~~part of~~ the ~~Settlement Agreement,~~4930 Directors Place lease was terminated, the Company also agreed (1) to terminate all options and warrants currently outstanding in Company subsidiaries that have been granted to Dr. Ji and any other directors of the Company no later than 60 days after the Company’s next annual meeting of stockholders, (2) to grant WLA the right to designate a representative to attend all meetings of the Company’s board of directors in a nonvoting observer capacity, (3) to act in good faith to attempt to add two additional independent directors to the Company’s board of directors, and (4) to pay $400,000 as reimbursement for WLA’s out of pocket fees and expenses. In addition, WLA agreed to comply with a two-year standstill period, during which WLA is prohibited from engaging in certain actions relating to controlling or influencing the management of the Company. On August 29, 2017, the options and warrants were canceled in accordance with thelease terms of the ~~Settlement Agreement~~other four leases reverted back to their original terms. The related remeasurements resulted in a decrease to right-of-use assets and aslease liabilities of $25.8 million.

In April 2023, Scilex Holding modified the lease term for its principal executive office located in Palo Alto, California. The modification extended the lease term for an additional three years, with the lease term expiring in September 2027. As a result unrecognized compensation expense associated with these previously issued time-vesting stock options and warrants was accelerated and recognized upon cancellation. Additionally, on September 26, 2017, the Company appointed two new independent directors to serve as members of the ~~Board~~modification, Scilex Holding recognized additional ROU assets and corresponding lease liabilities of ~~Directors.~~$2.5 million.

On May 31, 2017, the Court of Chancery of the State of Delaware entered an order providing for dismissal of the Actions without prejudice pursuant to the terms of the Settlement Agreement, to be effective upon the Company submitting to the Court of Chancery of the State of Delaware a notice of the filing of a Current Report on Form 8-K with the Securities and Exchange Commission, which was filed on June 1, 2017.

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 against each of the members of 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 Subsidiary Options Claim; and (2) breach of fiduciary duty with respect to the Yuhan Agreement Claim (the “Williams Action”). The Company is unable to determine whether any loss will occur with respect to the Williams 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 Quarterly Report on Form 10-Q. Furthermore, there is no guarantee that the Company will prevail in this suit or receive any relief if it does prevail.

~~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”) against the Board of Directors of Roger Williams Medical Center, 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 and The Office of the Board of Advisors of Tufts University School of Medicine as defendants. Roger Williams Medical Center 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, TNK, BDL and CARgenix as defendants. TNK is a subsidiary of the Company and purchased BDL and CARgenix in August 2015. The Third Amended Complaint includes, among other things, allegations against the Company, TNK, BDL and CARgenix regarding (1) conversion; (2) tortious interference; and (3) unjust enrichment. On December 2, 2016, the Company, TNK, BDL, and CARgenix filed a motion to dismiss Immunomedics’s complaint against them for lack of personal jurisdiction. On January 25, 2017, the District of New Jersey granted this motion, and the Company, TNK, BDL and CARgenix were dismissed as defendants from the case. The Immunomedics Action remains pending in the District of New Jersey against defendants Roger Williams Medical Center, Dr. Junghans, and Dr. Katz. A trial date has not yet been set. The Company believes that 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, certain patent rights optioned, owned and/or licensed 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 Quarterly Report on Form 10-Q.

~~Operating Leases~~

The Company currently leases in San Diego, California approximately 43,000 square feet of corporate office and laboratory space, approximately 6,350 square feet of laboratory and office space at a second location and approximately 1,405 square feet of office space at a third location. The Company also previously leased approximately 1,800 square feet of office space in Cary, North Carolina, under a lease which expired in March 2016 and was not renewed. The Company’s lease

agreements in San Diego, as amended, for its corporate office and laboratory space, its second laboratory and office space and its third office space, expire in December 2026, November 2025 and September 2020, respectively. The Company also leases 25,381 square feet of office and laboratory space in Suzhou, China, which lease expires in June 2018. The Company leases 1,920 square feet of office, laboratory, and storage space in Scotland, which lease expires in March 2021.

Additionally, the Company entered into a new lease in San Diego, California for approximately 76,700 square feet of additional corporate office and laboratory space as well as approximately 36,400 square feet for offices, facilities for cGMP fill and finish and storage space. The lease began in February of 2017 and expires in November 2023.

In July 2017, the Company entered into a new 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.

~~16.~~

11. Income Taxes

The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. ~~These~~The deferred tax assets include net operating loss carryforwards, research credits and temporary differences. In assessing the ~~Company's~~Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, management has determined that it is appropriate to maintain a valuation allowance against the ~~Company's~~Company’s U.S. federal and state deferred tax assets, ~~with the exception of~~except for an amount equal to ~~its~~schedulable deferred tax ~~liabilities, which can be expected to reverse over~~liabilities.

The stock dividend of Scilex Common Stock (see Note 8) is a ~~definite life and~~taxable distribution of property governed by Section 311(b) of the Internal Revenue Code. As a result, the Company recognized an ~~amount equal to its alternative minimum~~income tax ~~credits and state research and development~~liability of $12.7 million as of June 30, 2023 through tax ~~credits for which there is no expiration and the deferred tax assets related to its Scilex subsidiary.~~

expense.

The Company’s income tax expense of ~~$54.4~~$12.1 million and $0.4 million reflect effective tax rates of 4.8% and 0.2% for the six months ended June 30, 2023 and 2022, respectively. The Company’s income tax expense of $0.7 million and income tax benefit of ~~$195 thousand~~$1.1 million reflect effective tax rates of ~~102.01%~~0.7% and ~~1.13%~~0.5% for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

The difference between the expected statutory federal tax ~~expense~~rate of ~~35%~~21% and the ~~102.01%~~4.8% effective tax ~~expense~~rate for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023 was primarily attributable to ~~the~~changes in valuation allowance, ~~against most~~offset by gain recognized on distribution of ~~the Company’s deferred tax assets and the deferred tax expense related to the Company’s Celularity investment.~~Scilex Common Stock. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, when compared to the same period in ~~2016,~~2022, the increase in ~~the~~ tax expense and ~~change in~~ effective ~~income~~ tax rate was primarily attributable to the ~~deferred tax expense recorded related~~gain recognized on distribution of Scilex Common Stock.

12. Net Loss Per Share

For the three and six months ended June 30, 2023 and 2022, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.

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The following table sets forth the reconciliation of basic and diluted loss per share for the three and six months ended June 30, 2023 and 2022 (in thousands, except per share amounts):


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Numerator
Net loss attributable to the Company	$	(95,212	)	$	(218,759	)	$	(234,729	)	$	(259,574	)
Net loss used for diluted earnings per share	$	(95,212	)	$	(218,759	)	$	(234,729	)	$	(259,574	)

Denominator for basic loss per share		551,281			402,801			547,232			370,144
Denominator for diluted loss per share		551,281			402,801			547,232			370,144
Basic loss per share	$	(0.17	)	$	(0.54	)	$	(0.43	)	$	(0.70	)
Diluted loss per share	$	(0.17	)	$	(0.54	)	$	(0.43	)	$	(0.70	)

Shares of common stock issuable pursuant to stock options and RSUs that have been excluded because the effect would have been anti-dilutive consisted of the following (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Anti-dilutive shares for outstanding options and RSUs		26,585		24,065		27,656		23,177

13. Segment Information

The Company operates in two operating and reportable segments, Sorrento Therapeutics and Scilex. With the exception of unrestricted cash balances, the Company’s ~~Celularity investment.~~Chief Operating Decision Maker does not regularly review asset information by reportable segment and, therefore, it does not report asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.

The following table presents information about the Company’s reportable segments for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended June 30,
	2023									2022
	Sorrento Therapeutics			Scilex			Total			Sorrento Therapeutics			Scilex			Total
External revenues	$	2,443		$	12,582		$	15,025		$	3,535		$	7,926		$	11,461
Operating expenses		56,861			35,397			92,258			109,709			20,113			129,822
Operating loss		(54,418	)		(22,815	)		(77,233	)		(106,174	)		(12,187	)		(118,361	)
Unrestricted cash		34,572			35,177			69,749			63,470			6,875			70,345


	Six Months Ended June 30,
	2023									2022
(in thousands)	Sorrento Therapeutics			Scilex			Total			Sorrento Therapeutics			Scilex			Total
External revenues	$	8,112		$	23,164		$	31,276		$	15,107		$	14,738		$	29,845
Operating expenses		144,796			70,055			214,851			219,359			35,730			255,089
Operating loss		(136,684	)		(46,891	)		(183,575	)		(204,252	)		(20,992	)		(225,244	)
Unrestricted cash		34,572			35,177			69,749			63,470			6,875			70,345

~~A reconciliation~~

14. Liabilities Subject to Compromise

Since the Petition Date, the Debtors have been operating as debtors in possession under the jurisdiction of the ~~income tax provision from~~Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. In the accompanying consolidated balance sheets, the caption “Liabilities subject to compromise” reflects the expected allowed amount of the pre-petition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount. Liabilities subject to compromise at June 30, 2023 consisted of the following (in thousands):

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	June 30,
	2023
Accounts payable	$	56,078
Accrued expenses and other current liabilities		7,839
Accrued legal settlements		176,549
Deferred revenue		6,959
Contingent consideration and acquisition consideration		61,498
Total liabilities subject to compromise	$	308,923

The Company will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly and the aggregate amount of liabilities subject to compromise may change.

15. Reorganization Items, Net

Reorganization items incurred as a result of the Chapter 11 Cases are presented separately in the accompanying statements of operations ~~computed by applying the statutory federal income tax rate of 35% to income (loss) from operations before income taxes to the income tax provision~~ for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017 was~~2023 and 2022 were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
DIP facility financing costs	$	1,468	$	—	$	4,229	$	—
DIP facility exit fees		—		—		5,250		—
Professional fees		15,565		—		27,786		—
Lease termination		4,195		—		4,195		—
Others		775		—		775		—
Total	$	22,003	$	—	$	42,235	$	—

September 30, 2017
Income tax provision at federal statutory rate $ 18,661
State tax, net of federal tax benefit $ (176 )
Non-deductible expense and other $ 269
Impact of indefinite-lived deferred tax liabilities $ 38,962
Income tax credits $ (828 )
Decrease in valuation allowance $ (2,502 )
Income tax provision $ 54,386

16. Condensed Combined Debtor-In-Possession Financial Information

~~Internal Revenue Code Section 382 rules apply to limit a corporation’s ability to utilize existing net operating loss carry forwards once~~

The financial statements below represent the corporation experiences an ownership change as defined in the rules of Section 382. The Company’s ability to use its federal and state net operating losses may be limited due to Section 382 ownership change limitations that may have occurred or that could occur in the future. The Company has not yet completed a study to assess whether an ownership change has occurred or whether there have been changes since the Company became a “loss corporation” under the definition of Section 382. Due to the existencecondensed combined financial statements of the ~~valuation allowance, it is not expected that any possible limitation will have an impact on the results~~Debtors as of ~~operations or financial position of the Company.~~

~~The Company is subject to taxation in the U.S.~~June 30, 2023 and ~~various state jurisdictions. The Company's tax years for 2007 and later are subject to examination by the U.S. and state tax authorities due to the existence of the NOL carryforwards.~~

As of September 30, 2017, the Company had approximately $2.7 million of unrecognized tax benefits that, if recognized, would impact the effective income tax rate for continuing operations, subject to possible offset by an increase in the deferred tax asset valuation allowance. As of September 30, 2016, the Company had approximately $1.8 million ofunrecognized tax benefits that, if recognized, would impact the effective income tax rate for continuing operations, subject to possible offset by an increase in the deferred tax asset valuation allowance.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the nine months ended September 30, 2017 and 2016, no expense was recorded related to interest and penalties. The Company believes that no significant amount of the liabilities for uncertain tax positions will expire within twelve months of September 30, 2017.

~~17. Related Party Agreements~~

~~During the year ended~~ December 31, ~~2015,~~2022 and for the Company entered into a joint venture called Immunotherapy NANTibody, LLC, with NantCell, a wholly-owned subsidiary of NantWorks. In July 2015, the Company contributed its portion of the initial joint funding of $40.0 million to the NANTibody joint venture. The Companythree and ~~NantCell have also entered into a license agreement pursuant to which the Company received a $10.0 million upfront license payment and $100.0 million of vested NantCell common stock.~~

During the year ended December 31, 2015, the Company entered into a joint venture called NantCancerStemCell, LLC, with NantBioScience, a wholly-owned subsidiary of NantWorks. In connection with negotiated changes to the structure of NantStem the Company issued a call option on shares of NantKwest that it owned to Cambridge, a related party to the Company and to NantBioScience. In April 2015, the Company purchased 1.0 million shares of NantBioScience common stock for $10.0 million.

In March 2016, the Company and Yuhan entered into an agreement to form a joint venture company called ImmuneOncia Therapeutics, LLC, to develop and commercialize a number of immune checkpoint antibodies against undisclosed targets for both hematological malignancies and solid tumors. As of September 30, 2017, the carrying value of the Company’s investment in ImmuneOncia Therapeutics, LLC was approximately $8.5 million. During the threesix months ended June 30, ~~2016, Yuhan purchased $10.0~~2023 and 2022.

CONDENSED COMBINED DEBTOR-IN-POSSESSION BALANCE SHEET

(Amounts in thousands)

(Unaudited)

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ASSETS	June 30, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	29,205	$	9,562
Marketable investments		10,889		26,348
Accounts receivables, net		64		23,136
Prepaid expenses		2,209		3,554
Other current assets		1,926		1,429
Total current assets		44,293		64,029
Property and equipment, net		30,069		30,623
Operating lease right-of-use assets		40,032		74,249
Related party receivable		127,807		138,567
Intangibles, net		69,758		69,947
Goodwill		62,598		62,598
Equity investments		12,008		17,176
Investments in subsidiaries		310,852		301,715
Other assets, net		6,783		2,288
Total assets	$	704,200	$	761,192
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,389	$	38,918
Accrued payroll and related benefits		2,018		4,011
Accrued expenses and liabilities		34,535		20,114
Accrued legal settlements		—		174,752
Current portion of deferred revenue		—		1,114
Current portion of operating lease liabilities		10,607		11,506
Acquisition consideration		—		7,537
Income tax payable		12,695		2
Current portion of debt		75,000		5,585
Total current liabilities		140,244		263,539
Deferred tax liabilities, net		238		591
Deferred revenue		—		6,085
Related party payable		—		98,632
Operating lease liabilities		40,831		74,538
Contingent consideration		—		48,400
Other long-term liabilities		—		1,761
Total liabilities not subject to compromise	$	181,313	$	493,546
Liabilities subject to compromise		409,846		—
Total liabilities		591,159		493,546
Total stockholders' equity		113,041		267,646
Total liabilities and stockholders’ equity	$	704,200	$	761,192

The balance of current portion of debt as of June 30, 2023 amounting to $75.0 million represents the outstanding balance of ~~Common Stock~~the Senior DIP Facility (see Note 7).

The related party receivables relates to the Company’s intercompany receivables from non-debtor subsidiaries resulting from financing activities.

Liabilities subject to compromise include the Company’s intercompany payables to non-debtor subsidiaries amounting to $85.6 million and ~~warrants.~~

In$83.4 million as of June ~~2016,~~30, 2023 and December 31, 2022, respectively. Liabilities subject to compromise also include Scintilla’s intercompany payables to the Company amounting to $15.3 million and ~~TNK entered into~~$15.2 million as of June 30, 2023 and December 31, 2022, respectively.

CONDENSED COMBINED DEBTOR-IN-POSSESSION STATEMENTS OF OPERATIONS

(Amounts in thousands)

(Unaudited)

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	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenues:
Net product revenues	$	—		$	48		$	—		$	2,759
Service revenues		120			298			248			418
Related party revenues		—			10,955			—			22,961
Total revenues		120			11,301			248			26,138
Operating costs and expenses:
Cost of products sold		—			6,744			—			14,710
Research and development		22,016			39,796			54,726			94,091
Acquired in-process research and development		—			—			—			521
Selling, general and administrative		18,772			30,542			43,646			63,350
Intangible amortization		94			94			188			188
Loss on impairment of intangible assets		—			90,780			—			90,780
Increase (decrease) on contingent consideration		—			(64,300	)		3,800			(66,400	)
Legal settlements, net		—			—			1,797			—
Total operating costs and expenses		40,882			103,656			104,157			197,240
Loss from operations		(40,762	)		(92,355	)		(103,909	)		(171,102	)
Loss on marketable and equity investments		(1,777	)		(95,492	)		(15,460	)		(26,958	)
Loss on debt extinguishment, net		—			(471	)		(40	)		(934	)
Loss (gain) on foreign currency exchange		2			(110	)		1			(107	)
Gain on derivative assets		62			—			4,035			—
Interest (expense) income, net		(1,867	)		1,457			(2,237	)		2,019
Other loss		(23,481	)		(1,000	)		(22,071	)		(993	)
Reorganization items, net		(22,003	)		—			(42,234	)		—
Loss before income tax		(89,826	)		(187,971	)		(181,915	)		(198,075	)
Income tax expense (benefit)		924			(1,291	)		12,340			(205	)
(Loss) gain on equity method investments		—			(72	)		368			59
Net loss	$	(90,750	)	$	(186,608	)	$	(194,623	)	$	(197,929	)

Included in "Other loss" for the three and six months ended June 30, 2023 was a ~~joint venture agreement with 3SBio~~bad debt expense amounting to develop and commercialize proprietary immunotherapies, including those developed from, including or using TNK’s CAR-T technology targeting CEA positive cancers. In June 2016, 3SBio purchased $10.0$23.0 million ~~of Common Stock and warrants.~~

~~On August 15, 2017, the transactions contemplated by the Contribution Agreement closed. Dr. Henry Ji,~~related to the Company's ~~Chairman of~~trade receivables from its subsidiary, Sorrento Therapeutics Mexico S. de R.L. de C.V.

CONDENSED COMBINED DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
Operating activities	2023			2022
Net cash used for operating activities	$	(60,089	)	$	(182,010	)
Investing activities
Net cash used for investing activities		(14,054	)		(14,306	)
Financing activities
Proceeds from DIP loan		71,250			—
DIP loan issuance costs		(287	)		—
Proceeds from debt, net of issuance costs		—			43,175
Proceeds from settlement of bridge loan		899			—
Payments on intercompany payable		618			(45,808	)
Proceeds from equity offerings, net of issuance costs		21,306			268,595
Proceeds from exercise of stock options		—			37
Repayments of debt and other obligations		—			(44,134	)
Net cash provided by financing activities		93,786			221,865
Net change in cash, cash equivalents and restricted cash		19,643			25,549
Cash, cash equivalents and restricted cash at beginning of period		9,562			20,566
Cash, cash equivalents and restricted cash at end of period	$	29,205		$	46,115

The supplemental cash flow information was not repeated for the ~~Board, President and Chief Executive Officer, Jaisim Shah, a member of~~debtor only financial statements as the ~~Company’s Board of Directors and David Deming, a member of the Company’s Board of Directors, were previously appointed as members of the board of directors of Celularity.~~

On November 8, 2016, the Company entered into the Scilex Purchase Agreement, pursuant to which the Company acquired from the Scilex Stockholders approximately 72% of the outstanding capital stock of Scilex. Dr. Henry Ji, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, and George K. Ng, the Company’s Vice President, Chief Administrative Officer and Chief Legal Officer, were stockholders of Scilex prior to the acquisition transaction.

~~18. Subsequent Events~~

~~Termination of Binding Term Sheet~~amounts are consistent with ~~Semnur Pharmaceuticals, Inc.~~

~~On October 6, 2017, the Semnur Binding Term Sheet was terminated without additional consideration, effective immediately. (See Note 11).~~

~~Seventh Amendment to Loan and Security Agreement~~

Pursuant to the terms of the Seventh Amendment, (i) the Company repaid Hercules, without repayment penalty, $10.0 million of the outstanding principal and unpaid interest accrued thereon on November 6, 2017, and (ii) Hercules agreed to reduce the minimum amount of unrestricted cash that the Company must maintain under the Loan Agreement from $20.0 million to $8.0 million.

~~Termination of License Agreement with Les Laboratoires Servier~~

Effective November 6, 2017, the Servier License Agreement was terminated based on mutually agreed upon terms pursuant to the Servier License Agreement. As a result, the remaining unrecognized revenue of approximately $16.7 million associated with license fees under the Servier License Agreement will be recognized and reflectedthose disclosed in the ~~Company’s fourth quarter 2017 results. (See Note 11).~~consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~

Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as “assumes,” “plans,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” or “will,” and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (the “SEC”). Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview

Sorrento Therapeutics, Inc. (together with its subsidiaries, “Sorrento,” the “Company,” “we,” “us,” and “our”) is a clinical and commercial stage biopharmaceutical company developing a portfolio of next-generation treatments for three major therapeutic areas: cancer, infectious disease and pain. We are ~~a clinical stage biotechnology company~~ focused on ~~delivering clinically meaningful therapies to patients and their families, globally.~~transforming science into Saving Life Medicines™ by advancing innovative product programs into focused commercial entities, like Scilex Holding Company (Nasdaq: SCLX) (“Scilex Holding”).

Cancer. Our primary focus is to transform cancer into a treatable or chronically manageable disease. We also have programs assessing the use of our technologies and products in auto-immune, inflammatory, neurodegenerative and infectious diseases and pain indications with high unmet medical needs.

~~At our core, we are an antibody-centric company and leverage our~~ proprietary fully human G-MAB™ antibody library and ~~targeted delivery modalities to generate~~ACEA small molecule library are the ~~next generation~~engines driving an innovative pipeline 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 withnew solutions for cancer. These molecular entities are then enhanced by leveraging our extensive proprietary ~~targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary antibody drug~~immuno-oncology platforms such as immuno-cellular therapies (“DAR-T™”), antibody-drug conjugates (“ADCs”), ~~bispecific~~oncolytic virus (“Seprehvec™”) and lymphatic drug delivery (“Sofusa™”).

Infectious Disease. We are focused on preventing, detecting and treating in the fight against COVID-19 today, and aim to be positioned to address the pandemic threats of tomorrow. We have applied our antibody and small molecule capability to develop highly sensitive and rapid diagnostics, and multi-modal treatments for the SARS-CoV-2 virus and its variants. Our diagnostics platforms include the COVIMARK™ lateral flow antigen test (launched as COVISTIX™ in Mexico and Brazil) and the VIREX™ platform, which leverages existing worldwide manufacturing infrastructure for glucometers and glucose strip tests to provide affordable and highly scalable, next-generation diagnostic solutions for infectious diseases, liver cancer and other biomarkers. Therapeutic solutions include a next-generation mRNA Omicron vaccine (STI-1557), a next-generation protease inhibitor antiviral pill (STI-1558) as a stand-alone treatment (not requiring the Ritonavir booster) and a variant agnostic mesenchymal stromal cell therapy for people with “long” COVID. We also continue to evaluate neutralizing antibody approaches ~~as well as TCR-like antibodies. With LA Cell, Inc. (“LA Cell”), our joint venture~~effective against emerging variants of concern.

Pain. In November 2022, we announced the Nasdaq debut of Scilex Holding following the completion of its business combination with ~~City of Hope, our objective~~Vickers Vantage Corp. I, a special purpose acquisition company. Scilex Holding, with two commercial products and a robust pipeline, is ~~to become~~focused on becoming the global pain management leader committed to social, environmental, economic and ethical principles to responsibly develop pharmaceutical products to maximize quality of life. Scilex Holding is an innovative revenue-generating company with its flagship product, ZTlido®, launched in October 2018 as a prescription lidocaine topical product, which has demonstrated superior adhesion and bioavailability compared to current lidocaine patches. In 2022, Scilex Holding also entered into an exclusive agreement with Romeg Therapeutics, LLC to market and distribute U.S. Food and Drug Administration (the “FDA”)-approved Gloperba® in the ~~development~~U.S. for painful gout flares. Scilex Holding has built a commercial organization focused on neurologists and pain specialists and intends to leverage this capability for the potential launch of ~~antibodies against intracellular targets such as STAT3, mutant KRAS, MYC, p53 and TAU. Additionally, we have acquired and~~next-generation products that are ~~assessing the regulatory and strategic path forward for our portfolio~~currently in development. The first of ~~late stage biosimilar/biobetter antibodies based on Erbitux~~®~~, Remicade~~®~~, Xolair~~®~~, and Simulect~~® as these ~~may represent nearer term commercial opportunities.~~

~~Although we intend to retain ownership and control of~~ product candidates, ~~by advancing their development, we regularly also consider, (i) partnerships with pharmaceutical or biopharmaceutical companies and (ii) license or sale~~SEMDEXA™, is an injectable viscous gel formulation of ~~certain products in each case, in order~~a widely used corticosteroid designed to ~~balance~~address the ~~risks and costs~~limitations associated with off label corticosteroid epidural injections. SEMDEXA™ has completed its pivotal study and Scilex Holding is preparing for its new drug ~~discovery, development~~application submission.

We are also developing Resiniferatoxin (“RTX”), a naturally occurring non-opioid ultra-potent transient receptor potential vanilloid-1 agonist. When injected peripherally, a sustained desensitization occurs, resulting in reduction of noxious chronic pain symptoms that can last for months. RTX has the potential to be a multi-indication franchise asset and ~~commercialization~~is nearing pivotal studies in intractable pain associated with ~~efforts~~cancer and moderate to ~~maximize~~severe knee osteoarthritis pain.

Voluntary Filing Under Chapter 11

As previously reported in our ~~stockholders’ returns. Our partnering objectives include generating revenue through license fees, milestone-related development fees~~Current Report on Form 8-K filed with the SEC on February 13, 2023, on February 13, 2023 (the “Petition Date”), we and ~~royalties as well as profit shares or joint ventures to generate potential returns from~~ our ~~product candidates and technologies.~~

~~Recent Developments~~

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

~~On August 15, 2016, our~~wholly owned direct subsidiary, Scintilla Pharmaceuticals, Inc. (together with us, the “Debtors”), commenced voluntary proceedings under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United

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States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings are jointly administered by the Bankruptcy Court under the caption In re Sorrento Therapeutics, Inc., et al. (the “Chapter 11 Cases”). We continue to operate our business in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

On February 28, 2023, the Office of the United States Trustee (the “U.S. Trustee”) appointed an Official Committee of Unsecured Creditors, which was reconstituted on March 28, 2023, June 7, 2023, and July 28, 2023. The purpose of the Official Committee of Unsecured Creditors is to represent the interests of our unsecured creditors. On April 10, 2023, the U.S. Trustee appointed an Official Committee of Equity Security Holders, which was reconstituted on April 14, 2023. The purpose of the Official Committee of Equity Security Holders is to represent the interests of our equity security holders.

Additional information about the Chapter 11 Cases, including access to documents filed with the Bankruptcy Court (the “Bankruptcy Docket”), is available online at https://cases.stretto.com/sorrento, a website administered by Stretto, a third-party bankruptcy claims and noticing agent. The information on that website is not incorporated by reference into, and does not constitute part of, this Quarterly Report on Form 10-Q. For a full description of the Chapter 11 Cases and the proceedings therein, you may review the Bankruptcy Docket.

Nant Arbitration / Mediation

Prior to commencing the Chapter 11 Cases, we had engaged in arbitration before the American Arbitration Association against NantPharma, LLC (“~~Scintilla”~~NantPharma”) relating to breaches of the May 14, 2015 Stock Sale and Purchase Agreement entered into between us and NantPharma related to the development of the cancer drug Cynviloq™ (the “Cynviloq Arbitration”). In April 2019, we filed an action in the Los Angeles Superior Court (the “Court”) derivatively on behalf of Immunotherapy NANTibody LLC (“NANTibody”) against NantCell, Inc. (“NantCell”) and ~~Semnur Pharmaceuticals, Inc. (“Semnur”)~~Patrick Soon-Shiong, among others, related to alleged breaches of the June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between us and NantCell (the “Derivative Action”). The suit alleges breaches of fiduciary duties and seeks, among other things, a ~~binding term sheet~~declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring our equity method investment in NANTibody to our invested amount as of June 30, 2017 of $40.0 million.

Additionally, in 2020, we filed a legal action against Patrick Soon-Shiong in the Court, asserting claims for fraudulent inducement and common law fraud alleging that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq for the purpose of halting its progression to the market. This action is pending.

We had also engaged in arbitration before the American Arbitration Association against NantCell and NANTibody relating to alleged breaches of the April 21, 2015 Exclusive License Agreement entered into between us and NantCell and the June 11, 2015 Exclusive License Agreement entered into between us and NANTibody (the ~~“Semnur Binding~~“NantCell/NANTibody Arbitration”).

On December 2, 2022, the arbitrator in the NantCell/NANTibody Arbitration issued an award granting contractual damages and pre-award interest in the amounts of $156,829,562 to NantCell and $16,681,521 to NANTibody, exclusive of post-award, prejudgment interest, which will accrue at 9% per annum (the “Nant Award”). On December 20, 2022, the arbitrator in the Cynviloq Arbitration issued an award granting contractual damages of $125 million to us, reflecting the value of lost milestone payments for the approval of Cynviloq for the treatment of breast and lung cancers (the “Cynviloq Award”).

On February 7, 2023, the Court confirmed the Nant Award and issued a 70-day stay of enforcement of the judgment beyond $50 million (i.e., the difference between the amount of the Nant Award and amount of the Cynviloq Award).
Following such confirmation, we believed that NantCell and NANTibody, in an attempt to satisfy the unstayed $50 million portion of the Nant Award, would imminently take steps to levy our assets, which would cause significant disruption and harm to our business, including our ability to continue developing life-saving and cutting-edge drugs. To protect our business and maximize its value, on February 13, 2023, we commenced the Chapter 11 Cases.

On March 16, 2023, the Court granted our motion to confirm the award in the Cynviloq Arbitration over NantPharma’s opposition. On April 7, 2023, the Court entered final judgment (“Final Judgment”) upon the confirmed award in our favor in the amount of $127,686,210, which includes arbitration costs and accrued interest on the award since December 20, 2022. The Final Judgment is accruing interest at the rate of 10 percent per annum, from March 16, 2023.

Following mediation in the Chapter 11 Cases, we reached a settlement with NantPharma, NantCell, and NANTibody (along with their related parties) (collectively, the “Nant Parties”) regarding the Nant Award, the Cynviloq Award, and other legal causes of action (the “Nant Settlement”)—subject to Bankruptcy Court approval. Under the settlement, either (i) we will pay NantCell and NANTIbody in full in cash by August 31, 2023 to satisfy the Nant Award (the “Nant Settlement Payment”) and we and the Nant Parties will retain all their other respective claims and causes of action, joint venture interests, and royalty rights and obligations, or (ii) if we do not make the Nant Settlement Payments, then we and the Nant Parties will mutually release each other from any and all claims and causes of action, we will transfer our joint venture interests (and rights related thereto) in certain Nant Parties to the Nant

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Parties, and we will receive $1.5 million from the Nant Parties in exchange for a release of our royalty rights to PD-L1 (and address certain rights and obligations related thereto). In the interim, we and the Nant Parties have agreed to stay all litigation matters until August 31, 2023. A hearing for the Bankruptcy Court to consider approval of the settlement is currently scheduled for August 14, 2023.

Sale Procedures

As previously disclosed in our Current Report on Form 8-K filed with the SEC on April 20, 2023, on April 14, 2023, the Bankruptcy Court entered an order approving procedures for the Debtors to conduct a dual-track (i) financing process for the potential raising of debt, equity, or hybrid financing or consummation of a restructuring transaction through a Chapter 11 plan of reorganization and (ii) marketing process for the sale or disposition of all or any portion of the Debtors’ assets under section 363 of the Bankruptcy Code, including (x) the Debtors’ equity interests in its non-debtor subsidiaries, including, but not limited to, Scilex Holding, and (y) the Debtors’ other assets. The sale and financing process remains ongoing.

On April 27, 2023, the Bankruptcy Court entered an order providing that we may consummate one or more block sales of our shares of common stock of Scilex Holding without requiring any further approval from the Bankruptcy Court, subject to certain other conditions set forth in the order (namely, the prior approval from the Debtors’ lender in their Chapter 11 Cases, the Official Committee of Unsecured Creditors, and the Official Committee of Equity Security Holders). As of the date hereof, the Debtors have not consummated any such block sales.

On June 12, 2023, the Bankruptcy Court also entered an order approving certain sale procedures for the Debtors to sell certain “de minimis” assets (up to $10 million in the aggregate) on an expedited basis and subject to certain notice and consent requirements (as applicable depending on the type of de minimis asset or stock). As of the date hereof, the Debtors have not consummated any such de minimis asset sales.

Debtor-in-Possession Financing - Senior DIP Facility

As previously disclosed in our Current Report on Form 8-K filed with the SEC on February 22, 2023 (the “February 22 Form 8-K”), on February 19, 2023, the Debtors executed that certain Senior Debtor-In-Possession Term Loan Facility Summary of Terms and Conditions (the “Senior DIP Term Sheet”) ~~setting forth~~with JMB Capital Partners Lending, LLC (“JMB Capital” or the “Senior DIP Lender”), pursuant to which JMB Capital (or its designees or its assignees) provided the Debtors with a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $75,000,000 in term loan commitments (the “Senior DIP Facility”), subject to the terms and conditions set forth in the Senior DIP Term Sheet.

As previously disclosed in the February 22 Form 8-K, at a hearing before the Bankruptcy Court on February 21, 2023, the Bankruptcy Court entered an interim order (the “Interim Senior DIP Order”) approving the Senior DIP Facility on an interim basis and providing the Debtors with liquidity to continue to operate during the Chapter 11 process. Upon entry of the Interim Senior DIP Order and satisfaction of all applicable conditions precedent, as set forth in the Senior DIP Term Sheet, the Debtors were authorized to make a single, initial draw of $30,000,000 on the Senior DIP Facility (the “Senior Draw”). The Debtors then negotiated definitive financing documentation, including a Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “Senior DIP Credit Agreement”) and other documents evidencing the Senior DIP Facility (collectively with the Senior DIP Credit Agreement, the “Senior DIP Documents”).

As previously disclosed in our Current Report on Form 8-K filed with the SEC on March 31, 2023, after a hearing before the Bankruptcy Court on March 29, 2023, the Bankruptcy Court entered a final order (the “Final Senior DIP Order”) approving the Senior DIP Facility on a final basis and providing the Debtors with access to the remaining $45,000,000 of the Senior DIP Facility (subject to the terms, conditions, and covenants set forth in the Senior DIP Documents), through additional draws of no less than $5,000,000, each upon five business days’ written notice to the Senior DIP Lender, and the Debtors and Senior DIP Lender proceeded to enter into the Senior DIP Documents on March 30, 2023. Among other terms, the Senior DIP Facility bore interest at a per annum rate equal to 14% payable in cash on the first day of each month in arrears (and a default interest rate that shall accrue at an additional per annum rate of 3% plus the non-default interest, payable in cash on the first day of each month). The Debtors were required to pay to the Senior DIP Lender a commitment fee equal to 2.5% of the total amount of the Senior DIP Commitment (which was paid out of the Senior Draw), a funding fee equal to 2.5% of the amount of each draw and upon repayment or satisfaction of the Senior DIP Loans (in whole or in part), an exit fee equal to 7% of the total amount of the Senior DIP Commitments and other fees and charges as described in the Senior DIP Documents. The Senior DIP Facility was secured by first-priority liens on substantially all of the Debtors’ unencumbered assets, subject to certain enumerated exceptions, and second-priority liens on those assets of the Debtors that are encumbered by certain permitted liens (as set forth in the Final Senior DIP Order).

As of June 30, 2023, the total outstanding principal balance on the Senior DIP Facility was $75.0 million, which ~~Scintilla~~is included under current portion of debt in the consolidated balance sheets. We recorded certain lender fees as described above of $1.1 million and $9.0 million for the three and six months ended June 30, 2023, respectively. We also recorded $1.8 million and $2.2 million in

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interest expense relating to the per annum rate equal to 14% payable in cash during the three and six months ended June 30, 2023, respectively.

Upon the maturity of the Senior DIP Facility on July 31, 2023, we were in default under the Senior DIP Facility as a result of our failure to repay the Senior DIP Facility upon maturity. On August 9, 2023, however, we repaid the Senior DIP Facility in full from proceeds from the Replacement DIP Facility, curing such default.

Debtor-In-Possession Financing - Junior DIP Facility

As previously disclosed in our Current Report on Form 8-K filed with the SEC on July 10, 2023, after a hearing before the Bankruptcy Court, on July 5, 2023, the Bankruptcy Court entered an interim order (the “Interim Junior DIP Order”) approving the Junior DIP Facility (as defined below) on an interim basis and providing us with liquidity to continue to operate during the Chapter 11 process. Upon entry of the Interim Junior DIP Order and satisfaction of all applicable conditions precedent, as set forth in the Junior DIP Term Sheet, we were authorized to make (and did make) a single draw of the Junior DIP Facility (the “Junior Draw”), which is subject to a certain intercreditor and subordination agreement entered into by and among the Senior DIP Lender and the Junior DIP Lender (the “Subordination Agreement”). The Bankruptcy Court entered an order approving the Junior DIP Facility on a final basis (the “Final Junior DIP Order”) on July 27, 2023.

On July 5, 2023, we executed that certain Debtor-in-Possession Term Loan Facility Summary of Terms and Conditions (the “Junior DIP Term Sheet”) with its subsidiary, Scilex Holding (the “Junior DIP Lender”), pursuant to which Scilex Holding (or its designees or its assignees) has provided us with a non-amortizing super-priority junior secured term loan facility in an aggregate principal amount not to exceed the sum of (i) $20,000,000 (the “Base Amount”), plus (ii) the amount of the commitment fee and the funding fee, each equal to 1% of the Base Amount, plus (iii) the amount of the DIP Lender Holdback (as defined in the Interim Junior DIP Order) (the “Junior DIP Facility”), subject to the terms and conditions set forth in the Junior DIP Term Sheet. The Junior DIP Term Sheet grants to Scilex Holding a right of first refusal to provide any debtor-in-possession financing during the course of the Chapter 11 Cases to us occurring after the date of the Interim Junior DIP Order until the Chapter 11 Cases are concluded. In connection with the Junior DIP Term Sheet, Scilex Holding entered into the Subordination Agreement with the Senior DIP Lender, which specifies that the Junior DIP Facility is subordinated in right of payment to the Senior DIP Facility as more fully set forth therein. The Debtors negotiated and executed other definitive financing documentation, including a Junior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “Junior DIP Credit Agreement”) and other documents evidencing the Junior DIP Facility (collectively with the Junior DIP Credit Agreement, the “Junior DIP Documents”).

The Junior DIP Facility will bear interest at a per annum rate of 12.00% payable in kind on the first day of each month in arrears and on the DIP Termination Date (as defined in the Junior DIP Credit Agreement). Upon the occurrence and during the continuance of an event of default as defined in the Junior DIP Credit Agreement, the interest rate on outstanding DIP Loans (as defined in the Junior DIP Credit Agreement) would ~~through~~increase by 2.00% per annum. The commitment fee and the funding fee described above shall be payable upon the funding of the DIP Loans (as defined in the Junior DIP Credit Agreement), in each case as set forth in the Junior DIP Credit Agreement. Upon repayment or satisfaction of the DIP Loans (as defined in the Junior DIP Credit Agreement) in whole or in part, we shall pay to Scilex Holding in cash an exit fee equal to 2% of the aggregate principal amount of the Junior DIP Facility on the date of the Junior Draw.

The Junior DIP Facility matures on the earliest of: (i) September 30, 2023; (ii) the effective date of any chapter 11 plan of reorganization with respect to the Debtors; (iii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iv) the date of the acceleration of the DIP Loans and the termination of the DIP Commitments in accordance with the Junior DIP Documents (each as defined in the Junior DIP Credit Agreement); and (v) the dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code. Further, in no event shall the Junior DIP Facility mature before the maturity date of the Senior DIP Facility obligations as in effect on the date of the Interim DIP Order. Pursuant to the terms of the Subordination Agreement, the Debtors’ obligations to the Junior DIP Lender under the Junior DIP Facility are subordinated to the obligations of the Debtors to the Senior DIP Lender on the terms and conditions set forth therein.

Debtor-In-Possession Financing - Replacement DIP Facility

As previously disclosed in our Current Report on Form 8-K filed with the SEC on August 10, 2023, after a ~~subsidiary,~~hearing before the Bankruptcy Court, on August 7, 2023, the Bankruptcy Court entered a final order (the “Replacement DIP Order”) approving the Replacement DIP Facility (as defined below) on a final basis.

Oramed Pharmaceuticals Inc. (“Oramed” and, in its capacity as lender under the Replacement DIP Facility, the “Replacement DIP Lender”) has agreed to provide us with a non-amortizing super-priority debtor-in-possession term loan facility in an aggregate principal amount of $100,000,000 (the “Replacement DIP Facility”), pursuant to definitive financing documentation entered into on August 9, 2023, including a Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “Replacement DIP Credit Agreement”) and other documents evidencing the Replacement DIP Facility (collectively with the Replacement DIP Credit

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Agreement, the “Replacement DIP Documents”). Upon entry of the Replacement DIP Order and satisfaction of all applicable conditions precedent, as set forth in the Replacement DIP Documents, the Debtors were authorized to make (and did make) a single draw of the entire amount of the Replacement DIP Facility. The Debtors used the proceeds from the Replacement DIP Facility to, among other things, repay the Senior DIP Facility in full on August 9, 2023. After applying approximately $82 million of the proceeds from the Replacement DIP Facility to pay off the Senior DIP Facility in full, the remaining proceeds of the Replacement DIP Facility are expected to be used for working capital and other general corporate purposes of the Debtors, subject to the budgets contemplated in the Replacement DIP Credit Agreement, the payment of certain statutory fees and allowed professional fees of the Debtors, bankruptcy-related expenses and fees, expenses, interest and other amounts payable under the Replacement DIP Facility.

The Replacement DIP Facility bears interest at a per annum rate equal to 15%, payable in cash on the first day of each month in arrears (and a default interest rate that shall accrue at an additional per annum rate of 3% plus the non-default interest, payable in cash on the first day of each month) and other fees and charges as described in the Replacement DIP Documents. The Replacement DIP Facility is secured by first-priority liens on substantially all of the Debtors’ assets, subject to certain enumerated exceptions.

The Replacement DIP Facility matures on the earliest of: (i) October 15, 2023; (ii) the effective date of any Chapter 11 plan of reorganization with respect to the Debtors; (iii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors’ assets pursuant to section 363 of the Bankruptcy Code; (iv) the date of the acceleration of the DIP Obligations in accordance with (and as defined in) the Replacement DIP Credit Agreement; (v) the dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code; (vi) the date of termination of the Stalking Horse Stock Purchase Agreement (as defined below) or other definitive documentation related to the subject matter thereof, solely in the event such termination results from a material breach of such documentation by any Loan Party (as defined in the Replacement DIP Credit Agreement) or other seller thereunder; and (vii) the date on which a “Trigger Event” (as defined in the Restated Certificate of Incorporation of Scilex Holding) has occurred. The Replacement DIP Facility does not contain a roll-up or cross-collateralization of prepetition debt or otherwise dictate how prepetition claims will be addressed in a Chapter 11 plan.

The Replacement DIP Credit Agreement contains customary conditions, affirmative and negative covenants and events of default for similar types of agreements. The Debtors have agreed to indemnify the Replacement DIP Lender against certain liabilities arising in connection with the Replacement DIP Facility.

Stalking Horse Stock Purchase Agreement

The Replacement DIP Order also approved that certain Stock Purchase Agreement, dated August 7, 2023 (the “Stalking Horse Stock Purchase Agreement”), between us and Oramed relating to the purchase and sale of (A) 59,726,737 shares of the common stock of Scilex Holding (the “Scilex Common Stock”), (B) 29,057,096 shares of Series A preferred stock of Scilex Holding (the “Scilex Preferred Shares”), which constitutes one fewer Scilex Preferred Share (the “Remaining Preferred Share”) than all of the issued and outstanding ~~equity~~Scilex Preferred Shares; and (C) warrants exercisable for 4,490,617 shares of ~~Semnur. On October 6, 2017,~~Scilex Common Stock (“Scilex Warrants”), of which 1,386,617 Scilex Warrants are “public warrants” and 3,104,000 Scilex Warrants are “private placement” warrants issued in connection with 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~~initial public offering of the ~~several underwriters named therein~~special purpose acquisition company (“SPAC”) that merged with Scilex Holding for its initial business combination and which we acquired from the SPAC sponsor (“Sponsor”) in accordance with the terms of a warrant transfer agreement between us and the Sponsor ((A), (B) and (C) collectively, the “Scilex Purchased Securities”). The sale of the Scilex Purchased Securities would be conducted pursuant to section 363 of the Bankruptcy Code.

Pursuant to the Stalking Horse Stock Purchase Agreement, Oramed agreed to buy, and we agreed to sell (following an auction of the Scilex Purchased Securities (the ~~“Underwriters”~~“Auction”)~~, relating~~ that is scheduled to commence on August 14, 2023 (if another qualified bidder emerges) and subject to further Bankruptcy Court approval in the form of a sale order (the “Sale Order”)) the Scilex Purchased Securities for a purchase price (subject to the submission of higher or otherwise better offers in accordance with the approved procedures for the Auction) of $105 million (the “Purchase Price”) (which purchase price shall consist of a credit bid on a dollar-for-dollar basis in respect of the full amount of outstanding obligations as of the closing date under the Replacement DIP Facility, with the remaining balance to be paid in cash to us). We have also granted Oramed an ~~underwritten public offering (the “Offering”) of 23,625,084~~option in the Stalking Horse Stock Purchase Agreement to purchase up to 2,259,058 additional shares of ~~our common stock. The public offering price was $2.00 per share~~Scilex Common Stock held in abeyance for the benefit of ~~our~~

~~common stock and the Underwriters agreed~~certain holders of warrants to purchase ~~the~~ shares of our common stock ~~pursuant to the Underwriting Agreement at a price of $1.8571 per share. Under the terms of the Underwriting Agreement, we also granted to the Underwriters an~~(the “Option Shares”). Such option will be exercisable ~~in whole or in part at any time~~ for a period of 30 days after we notify Oramed that we no longer hold all or part of such Option Shares in abeyance and can freely transfer such Option Shares to Oramed. The purchase price per Option Share payable by Oramed in connection with the exercise of such option shall be $1.13 per Option Share. The sale of the Scilex Purchased Securities by us to Oramed is subject to the Auction and a further order from the Bankruptcy Court approving such sale before such purchase and sale becomes a final agreement between the parties thereto. The Stalking Horse Stock Purchase Agreement also contained certain stalking horse protections (the “Stalking Horse Protections”), consisting of (A) a break-up fee payable to Oramed of $3,412,500 and (B) reimbursement of costs and expenses of external counsel up to $1 million (to the extent not paid under the Replacement DIP Facility), in each case, payable to Oramed one business day following the closing of an Alternative Transaction (as defined in the Stalking Horse Stock Purchase Agreement, being a sale of any portion of the Scilex Purchased Securities to a party other than Oramed or its affiliate(s)) if the Stalking Horse Stock Purchase Agreement is or has been terminated in certain circumstances. Payments pursuant to the Stalking Horse Protections shall be treated as an allowed superiority

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administrative expense claim in the Debtors’ bankruptcy case pursuant to Section 503(b)(1) and 507(a)(2) of the Bankruptcy Code. The Stalking Horse Protections were approved in the Replacement DIP Order and are not subject to any further approval by the Bankruptcy Court.

Automatic Stay

Subject to certain specific exceptions under the Bankruptcy Code, the Bankruptcy Petitions automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

Executory Contracts

Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including, where applicable, a quantification of our obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights we have under the Bankruptcy Code. As of June 30, 2023, no motions were filed with the Bankruptcy Court (and none remain on the Bankruptcy Docket) to assume, amend or reject certain executory contracts; the Debtors did, however, file certain agreed stipulations to reject certain unexpired leases, which the Bankruptcy Court approved and entered on April 13, 2023 and April 24, 2023.

Claims Reconciliation

The Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Pursuant to an order of the Bankruptcy Court, certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by June 26, 2023 (the "General Bar Date"), the general claims bar date. Governmental units are required to file proofs of claim by August 12, 2023.

As of the General Bar Date, approximately 358 proofs of claim have been filed against the Debtors. This includes duplicate and amended claims. The Debtors are in the process of reviewing, investigating, and reconciling proofs of claims filed against the Debtors with the amounts reflected in their books and records. The Debtors will continue the claims reconciliation process and object, as necessary, to asserted claims, including on the basis that they have been amended or superseded by subsequently filed proofs of claims, are without merit, have already been paid, are overstated or should be adjusted or expunged for other reasons. As a result of this process, the Debtors may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. As part of its ongoing review, except to the extent otherwise disclosed, we are not aware of any claims that may require a material adjustment to the accounts and balances as reported as of June 30, 2023.

Listing

On February 13, 2023, we received written notice (the “Delisting Notice”) from the staff of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, the staff of Nasdaq had determined that our common stock would be delisted from Nasdaq, effective February 23, 2023. In the Delisting Notice, the staff of Nasdaq referenced the Chapter 11 Cases and associated public concerns raised by them, concerns regarding the residual equity interest of the existing listed securities holders and concerns about our ability to sustain compliance with all requirements for continued listing on Nasdaq. In accordance with the Delisting Notice, trading of our common stock on Nasdaq was suspended at the opening of business on February 23, 2023, and at such time, our common stock commenced trading on the Pink Open Market under the symbol “SRNEQ”.

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

Revenues.


	Three Months Ended June 30,				Increase (decrease)
Dollars in thousands	2023		2022		$			%
Sorrento Therapeutics segment
Product revenues	$	23	$	665	$	(642	)	(97%)
Service revenues		2,420		2,870		(450	)	(16%)
Total revenues	$	2,443	$	3,535	$	(1,092	)	(31%)
Scilex segment
Product revenues	$	12,582	$	7,926	$	4,656		59%
Total revenues	$	15,025	$	11,461	$	3,564		31%


Dollars in thousands	Six Months Ended June 30,				Increase (decrease)
Sorrento Therapeutics segment	2023		2022		$			%
Product revenues	$	38	$	3,844	$	(3,806	)	(99%)
Service revenues		8,074		11,263		(3,189	)	(28%)
Total revenues	$	8,112	$	15,107	$	(6,995	)	(46%)
Scilex segment
Product revenues	$	23,164	$	14,738	$	8,426		57%
Total revenues	$	31,276	$	29,845	$	1,431		5%

The decrease in revenues in our Sorrento Therapeutics segment for the three and six months ended June 30, 2023, was attributed to lower COVISTIX™ product sales, lower contract manufacturing service revenues and lower other service revenues compared to the same periods of the prior year.

The increase in revenues in our Scilex segment for the three and six months ended June 30, 2023, was driven by an increase in gross product sales of ZTlido® by approximately 81% and 66%, respectively, and the launch of ELYXYB in April 2023, offset by an increase in rebates.

Cost of Revenues.


	Three Months Ended June 30,				Increase
Dollars in thousands	2023		2022		$		%
Sorrento Therapeutics segment	$	4,276	$	4,175	$	101	2%
Scilex segment		4,177		1,529		2,648	173%
Total cost of revenues	$	8,453	$	5,704	$	2,749	48%


	Six Months Ended June 30,				Increase (decrease)
Dollars in thousands	2023		2022		$			%
Sorrento Therapeutics segment	$	5,870	$	8,788	$	(2,918	)	(33%)
Scilex segment		7,768		2,673		5,095		191%
Total cost of revenues	$	13,638	$	11,461	$	2,177		19%

Cost of revenues relate to product sales, the sale of customized reagents and providing contract manufacturing services. These costs generally include employee-related expenses, including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Costs of revenues in our Sorrento Therapeutics segment was relatively flat for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

For the six months ended June 30, 2023, the decrease in cost of revenues in our Sorrento Therapeutics segment was consistent with the decrease in revenues for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

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For the three and six months ended June 30, 2023, the increase in cost of revenues in our Scilex segment was primarily due to an increase in gross revenue of approximately 59% and 57%, respectively, compared to the three and six months ended June 30, 2022 and a royalty expense of $2.3 million in each of the three and six months ended June 30, 2023 that started to accrue in the second quarter of 2022.

Research and Development (“R&D”) Expenses.


	Three Months Ended June 30,				Increase (decrease)
Dollars in thousands	2023		2022		$			%
Sorrento Therapeutics segment	$	30,066	$	45,876	$	(15,810	)	(34%)
Scilex segment		3,205		2,591		614		24%
Total research and development expenses	$	33,271	$	48,467	$	(15,196	)	(31%)


	Six Months Ended June 30,				Increase (decrease)
Dollars in thousands	2023		2022		$			%
Sorrento Therapeutics segment	$	71,135	$	106,971	$	(35,836	)	(34%)
Scilex segment		5,941		5,222		719		14%
Total research and development expenses	$	77,076	$	112,193	$	(35,117	)	(31%)

R&D expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our FUJOVEE (Abivertinib), OVYDSO, SP-102, SP-103, RTX, oncolytic virus, ADC and oncology programs, among others. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses. We track external development costs by program; however, we do not allocate laboratory supplies, R&D materials, personnel costs, share-based payments, facilities costs or other internal costs to specific development programs.

Due to the ever-changing SARS-CoV-2 virus evading antibody-mediated immunity and the reduced severity of the COVID pandemic worldwide, we re-prioritized our R&D efforts and reduced expenditures on our COVID-related diagnostics, vaccine and antibody-based therapeutics, as well as our earlier stage immuno-oncology pre-clinical and clinical programs. We utilized the R&D expense reduction to focus on late-stage clinical product candidate development.

The following table summarizes our R&D expenses by program for the three months ended June 30, 2023 and 2022:


Dollars in thousands	Three Months Ended June 30,				Increase (decrease)
Type of expense	2023		2022		$			%
Third party clinical and pre-clinical R&D expenses by program
Abivertinib	$	2,504	$	2,169	$	335			15	%
Resiniferatoxin (“RTX”)		2,773		612		2,161			353	%
COVID-19 therapies and diagnostics, excluding Abivertinib		2,754		4,715		(1,961	)		(42	%)
Immuno-oncology and other programs		922		5,183		(4,261	)		(82	%)
Total third party clinical and pre-clinical R&D expenses by program		8,953		12,679		(3,726	)		(29	%)
Laboratory supplies and R&D materials expenses		614		2,751		(2,137	)		(78	%)
Salary, consulting and other personnel costs		8,862		16,140		(7,278	)		(45	%)
Non-cash share-based compensation expenses		1,117		2,947		(1,830	)		(62	%)
Facility, depreciation and other expenses		10,519		11,359		(840	)		(7	%)
Total research and development expenses - Sorrento Therapeutics segment		30,066		45,876		(15,810	)		(34	%)
Total research and development expenses - Scilex segment		3,205		2,591		614			24	%
Total research and development expenses	$	33,271	$	48,467	$	(15,196	)		(31	%)

The following table summarizes our R&D expenses by program for the six months ended June 30, 2023 and 2022:

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	Six Months Ended June 30,				Increase (decrease)
Type of expense	2023		2022		$			%
Third party clinical and pre-clinical R&D expenses by program
Abivertinib	$	5,510	$	4,382	$	1,128			26	%
Resiniferatoxin (“RTX”)		4,239		2,132		2,107			99	%
COVID-19 therapies and diagnostics, excluding Abivertinib		6,220		14,041		(7,821	)		(56	%)
Immuno-oncology and other programs		3,046		14,575		(11,529	)		(79	%)
Total third party clinical and pre-clinical R&D expenses by program		19,015		35,130		(16,115	)		(46	%)
Laboratory supplies and R&D materials expenses		5,395		12,280		(6,885	)		(56	%)
Salary, consulting and other personnel costs		23,464		30,821		(7,357	)		(24	%)
Non-cash share-based compensation expenses		3,577		6,136		(2,559	)		(42	%)
Facility, depreciation and other expenses		19,683		22,604		(2,921	)		(13	%)
Total research and development expenses - Sorrento Therapeutics segment		71,135		106,971		(35,836	)		(34	%)
Total research and development expenses - Scilex segment		5,941		5,222		719			14	%
Total research and development expenses	$	77,076	$	112,193	$	(35,117	)		(31	%)

Acquired In-process Research and Development Expenses.

There were no acquired in-process research and development expenses during each of the three and six months ended June 30, 2023 and the three months ended June 30, 2022. Acquired in-process research and development expenses during the six months ended June 30, 2022 totaled $12.3 million, which included $11.7 million related to our acquisition of Virex Health, Inc.

Selling, General and Administrative (“SG&A”)Expenses.


	Three Months Ended June 30,				Increase (decrease)
Dollars in thousands	2023		2022		$			%
Sorrento Therapeutics segment	$	21,952	$	33,078	$	(11,126	)	(34%)
Scilex segment		26,989		15,058		11,931		79%
Total sales, general and administrative expenses	$	48,941	$	48,136	$	805		2%


	Six Months Ended June 30,				Increase (decrease)
Dollars in thousands	2023		2022		$			%
Sorrento Therapeutics segment	$	49,627	$	66,747	$	(17,120	)	(26%)
Scilex segment		54,293		25,967		28,326		109%
Total sales, general and administrative expenses	$	103,920	$	92,714	$	11,206		12%

SG&A expenses relate to salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.

For the three months ended June 30, 2023, the decrease of $11.1 million in SG&A expenses in our Sorrento Therapeutics segment was attributed to lower professional fees, including a decrease in legal and consulting costs of $2.6 million, lower stock-based compensation expenses of $3.5 million and lower personnel costs of $2.3 million. Infrastructure-related and other expenses decreased by $2.7 million compared to the prior year.

For the six months ended June 30, 2023, the decrease of $17.1 million in SG&A expenses in our Sorrento Therapeutics segment was attributed to lower professional fees, including a decrease in legal and consulting costs of $5.8 million, lower stock-based compensation expenses of $7.6 million and lower personnel costs of $3.1 million. Infrastructure-related and other expenses decreased by $0.6 million compared to the prior year.

For the three months ended June 30, 2023, the increase in SG&A expenses in our Scilex segment was attributed to increases of $2.8 million in legal expenses, $3.3 million in personnel and stock-based compensation, $2.0 million in consulting expenses, $1.8 million in contracted services, $1.0 million in marketing expense, and $1.0 million in other expenses.

For the six months ended June 30, 2023, the increase in SG&A expenses in our Scilex segment was attributed to increases of $8.0 million in legal expenses, $7.5 million in personnel and stock-based compensation, $5.3 million in consulting expenses, $3.5 million in contracted services, $2.0 million in marketing expense, and $2.0 million in other expenses.

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Increase (decrease) on contingent consideration. We recorded no gain or loss on contingent consideration for the three months ended June 30, 2023 and a gain on contingent consideration of $64.3 million during the three months ended June 30, 2022, which was attributed to the change in fair value of the Earn-Out Consideration associated with the acquisition of ACEA.

We recorded a loss for the six months ended June 30, 2023 of $3.8 million and a gain of $66.4 million on contingent consideration for the six months ended June 30, 2022, and each was attributed to the change in fair value of the contingent consideration associated with our acquisition of ACEA.

Reorganization items, net. For the three and six months ended June 30, 2023, the increase in reorganization items, net was $22.0 million and $42.2 million, respectively and was related to our Chapter 11 Cases. The costs are primarily related to legal and professional fees and financing costs incurred relating to the DIP Facility.

Loss on impairment of intangible assets. Loss on impairment of intangible assets for the three and six months ended June 30, 2023 was $0.5 million and $12.4 million attributed to the impairment of in-process research and development assets acquired from Shanghai Medical Technologies and SmartPharm Therapeutics, Inc.

Loss (gain) on Derivative Liabilities. Loss on derivative liabilities was immaterial for the three months ended June 30, 2023 and was $1.3 million for the six months ended June 30, 2023, which was attributed to the private placement warrants assumed by Scilex Holding, which are revalued at each subsequent balance sheet date, with fair value changes recognized in the consolidated statements of operations.

Loss on derivative liabilities for the three months ended June 30, 2022 was $2.7 million and gain on derivative liabilities for the six months ended June 30, 2022 was $4.8 million, and each was attributed to the change in fair value of the derivatives ascribed to the Scilex Notes as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Loss on Marketable Investments. Loss on marketable investments reflects $1.8 million and $15.5 million for the three and six months ended June 30, 2023 of unrealized losses related to the change in fair value of our shares of Celularity Inc. (Nasdaq: CELU) (“Celularity”), respectively.

Loss on marketable investments for the three and six months ended June 30, 2022 reflects $95.5 million and $27.0 million of unrealized losses related to the change in fair value of our shares of Celularity, respectively.

Loss on debt extinguishment. Loss of debt extinguishment during the six months ended June 30, 2023 was attributed to repayments made on the September Bridge Loan (as defined below) and there was no loss in the three months ended June 30, 2023. During the three and six months ended June 30, 2022, we recorded a loss on debt extinguishment of $0.5 million and $4.8 million, respectively, in connection with repurchases of outstanding principal on the Scilex Notes.

Interest Expense, net. Interest expense, net for the three months ended June 30, 2023 and 2022 was $2.7 million and $2.3 million, respectively. Interest expense for the six months ended June 30, 2023 and 2022 was $3.8 million and $5.6 million, respectively. The decrease was attributed to the repayment of the Scilex Pharma Notes in September 2022.

Income Tax Expense (benefit). Income tax expense for the three months ended June 30, 2023 was $0.7 million and the income tax benefit for the three months ended June 30, 2022 was $1.1 million. The increase in income tax expense was primarily attributable to gain recognized on distribution of Scilex Common Stock, offset by changes in valuation allowance.

Income tax expense for the six months ended June 30, 2023 and 2022 was $12.1 million and $0.4 million, respectively. The increase in income tax expense was primarily attributable to gain recognized on distribution of Scilex Common Stock, offset by changes in valuation allowance.

Net Loss. Net loss for the three months ended June 30, 2023 and 2022 was $108.5 million and $219.5 million, respectively. Net loss for the six months ended June 30, 2023 and 2022 was $263.1 million and $260.0 million, respectively.

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Liquidity and Capital Resources

Voluntary Filing Under Chapter 11

We expect to continue operations in the normal course for the duration of the Chapter 11 Cases. However, for the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business plan, our financial condition, our liquidity and our continuation as a going concern are subject to a high degree of risk and uncertainty associated with our Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court. For a discussion of our ongoing bankruptcy proceedings, see Note 1 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

The Failure of Silicon Valley Bank

On March 10, 2023, we became aware that the Federal Deposit Insurance Corporation (“FDIC”) issued a press release stating that Silicon Valley Bank, Santa Clara, California (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the Treasury Department announced that depositors of SVB will have access to all of their money starting March 13, 2023. We had approximately $2.8 million cash deposited with SVB as of each of December 31, 2022, February 13, 2023 when the Debtors commenced voluntary proceedings under Chapter 11, and March 10, 2023. On March 14, 2023, we regained access to the full amount of our cash that was deposited with SVB.

As of June 30, 2023, we had $69.7 million in cash and cash equivalents attributable in part to proceeds from the following arrangements and agreements.

Debt Financings

Senior DIP Facility

As of June 30, 2023, the total outstanding principal balance on the Senior DIP Facility was $75.0 million. Subsequent to June 30, 2023, we received a draw from the Junior DIP Facility of $20.0 million and a draw from the Replacement DIP Facility of $100.0 million. See Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

Scilex Holding Convertible Debentures

As of June 30, 2023, Scilex Holding had $18.4 million of convertible debentures (“Scilex Convertible Debentures”) outstanding pursuant to securities purchase agreement (the “Securities Purchase Agreement”) with YA II PN, Ltd. ("Yorkville") (see Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information).

Scilex Pharma Revolving Facility

On June 27, 2023, Scilex Pharma entered into a Credit and Security Agreement (the "Credit Agreement") with eCapital Healthcare Corp (the "Lender") pursuant to which the Lender shall make available loans (the "Revolving Facility") in an aggregate principal amount of up to $30.0 million (the "Facility Cap"). The Facility Cap may, at the request of Scilex Pharma and with the consent of the Lender, be increased in increments of $250,000 at such time as the outstanding principal balance under the Credit Agreement equals or exceeds 95% of the then-existing Facility Cap. The amount available to Scilex Pharma under the Revolving Facility at any one time is the lesser of the Facility Cap and 85% of the “Net Collectible Value” of “Eligible Receivables” (in each case, as defined in the Credit Agreement) minus the amount of any reserves or adjustments against receivables required by the Lender, in its discretion. Under the terms of the Credit Agreement, interest will accrue daily on the principal amount outstanding at a rate per annum equal to the Wall Street Journal Prime Rate plus 1.5% and which shall be payable by Scilex Pharma monthly in arrears, commencing July 1, 2023. The Credit Agreement provides for an early termination fee of 0.5% of the Facility Cap if Scilex Pharma voluntarily prepays and terminates in full the Revolving Facility prior to the first anniversary of the closing of the ~~Offering, to purchase up to an additional 3,543,763 shares of our common stock at the public offering price.~~

~~On April 19, 2017, the Offering was completed~~Revolving Facility. All indebtedness incurred and resulted in net proceeds of approximately $43.5 million (excluding any sale of shares of common stock pursuant to the option granted to the Underwriters), 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 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”), 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~~Credit 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 will be due and payable in full on July 1, 2026, unless the Credit Agreement is earlier terminated. The Credit Agreement contains a financial covenant requiring Scilex Pharma to maintain cash on hand at least $1.0 million at all times. As of ~~November 1, 2017 and the occurrence~~June 30, 2023, Scilex Pharma has an outstanding balance of ~~an event of default~~$15.9 million under the ~~Celularity Note (the “Maturity Date”). In~~Revolving Facility, which is classified as current liabilities in the ~~event~~unaudited condensed consolidated balance sheet.

ACEA Significant Debt Arrangements

The outstanding principal amount under ACEA significant debt arrangements assumed in connection with our 2021 acquisition of ACEA was $25.4 million as of June 30, 2023. The ACEA significant debt arrangements are comprised of a series of loans with maturity dates that ~~Celularity meets certain minimum financing conditions prior~~range from range from December 31, 2024 to December 31, 2028. Each loan is interest free for the ~~Maturity Date, all outstanding amounts under~~first five years, after which time the ~~Celularity Note shall be forgiven and converted to equity.~~ interest rate is 5.39% per annum.

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September Bridge Loan

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.

~~On June 12, 2017,~~September 30, 2022, we entered into a ~~Contribution Agreement (the “Contribution Agreement”) with TNK and Celularity,~~bridge loan pursuant to which ~~among other things,~~ we ~~and TNK agreed to contribute certain intellectual property rights related to our proprietary chimeric antigen receptor (“CAR”~~borrowed $41.6 million (the “September Bridge Loan”) ~~constructs and related CARs to Celularity~~. We repaid $36.0 million of the September Bridge Loan during the fourth quarter of 2022. We repaid the remaining balance of $5.7 million in ~~exchange for~~January 2023.

Marketable Investments

As of June 30, 2023, we owned 20,422,124 shares of ~~Celularity’s Series~~Class A ~~Preferred~~Common Stock ~~equal~~of Celularity (Nasdaq: CELU).

Equity Financings

Yorkville Standby Equity Purchase Agreements

On February 8, 2023, Scilex Holding entered into the amended and restated standby equity purchase agreement (the “A&R Yorkville Purchase Agreement”) with Yorkville, pursuant to ~~25%~~which Scilex Holding has the right, but not the obligation, to sell to Yorkville up to $500.0 million of ~~Celularity’s outstanding~~ shares of ~~capital~~its common stock ~~calculated~~at its request during the 36 months following the date on ~~a fully-diluted basis (the "Celularity Shares").~~

~~On August 15, 2017,~~which the ~~transactions contemplated~~initial registration statement filed with respect to the shares of common stock issuable pursuant thereto was declared effective by the ~~Contribution~~SEC, subject to the terms therein. The registration statement filed with the SEC in connection with the Standby Equity Purchase Agreement ~~closed~~with Yorkville, dated as of November 17, 2022, was initially declared effective by the SEC on December 9, 2022 and ~~on such date, among other things, (a) Celularity issued~~Scilex Holding is now able to offer and sell shares of its common stock under that agreement, subject to the ~~Celularity Shares to TNK, and (b) we, TNK and Celularity~~limitations set forth therein.

On January 8, 2023, Scilex Holding entered into a ~~License and Transfer~~Standby Equity Purchase Agreement (the ~~"License Agreement"~~“B. Riley Purchase Agreement”)~~. Pursuant~~ with B. Riley principal Capital II, LLC (“B. Riley”) (together with A&R Yorkville Purchase Agreement, the “Standby Equity Purchase Agreements”), pursuant to which Scilex Holding has the ~~License Agreement (i) TNK~~right, but not the obligation, to sell to B. Riley up to $500.0 million of shares of its common stock at Scilex Holding’s sole and ~~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~~absolute discretion during the ~~treatment of any disease or disorder except that anti-CD38 CAR constructs and related CARs may also be used in adult cells for~~36 months following the ~~treatment of multiple myeloma unless TNK exercises its termination rights, and (2) our know-how relating to~~date on which the ~~foregoing, (ii) TNK and we granted to Celularity a limited, perpetual, transferable and sublicensable license and covenant not to sue~~initial registration statement filed with respect to ~~certain~~the shares of ~~their patents and other intellectual property rights, which license is exclusive for a subset of such patents, and (iii) Celularity agreed~~common stock issuable pursuant thereto was declared effective by the SEC, subject to ~~pay toTNK 50% of~~ the ~~first $200 million and 20% thereafter of any upfront and milestone payments that Celularity receives~~terms therein. The registration statement filed by Scilex Holding with the SEC in connection with ~~any sublicense~~the B. Riley Purchase Agreement was initially declared effective by the SEC on January 20, 2023 and Scilex Holding is now able to offer and sell shares of a~~combination~~its common stock under that agreement, subject to the limitations set forth therein and the limitations set forth in the Scilex Convertible Debentures.

Contingent Consideration

We have contingent consideration obligations in connection with certain acquisition and licensing transactions that are contingent upon achieving certain specified milestones or the occurrence of ~~anti-CD38 CAR constructs~~certain events. Upon the achievement of such milestones or the occurrence of such events, we will be obligated to make certain cash or stock payments in accordance with the terms of such acquisition and ~~either placenta-driven cells and/or cord blood–derived cells or adult cells.~~

license agreements.

Cash Flow Summary


	June 30, 2023			June 30, 2022
	(in thousands)
Net cash provided by (used for)
Operating activities	$	(105,118	)	$	(164,348	)
Investing activities	$	1,544		$	(15,392	)
Financing activities	$	150,009		$	215,140

Use of Cash

Cash Flows from Operating Activities. Net cash used reflects the cash spent on our research activities and cash spent to support the commercial launch of our products.

We expect to continue to incur substantial and increasing losses and negative net cash flows from operating activities as we seek to expand and support our clinical and preclinical development and research activities, support the commercial launch of our products and fund our joint ventures, collaborations and other third-party agreements.

Cash Flows from Investing Activities. Net cash provided by investing activities was primarily attributed to purchases of property and equipment, net, partially offset by the buyback of our 49% equity interest in Zhengzhou Fortune Bioscience Co., Ltd. for net proceeds of approximately $1.8 million for the six months ended June 30, 2023.

Cash Flows from Financing Activities. Net cash provided by financing activities reflects net proceeds from the Senior DIP Facility of $71.0 million, proceeds from equity offerings of $37.0 million, proceeds from the Scilex Convertible Debentures of $24.0 million, proceeds from the Scilex Pharma Revolving Facility of $17.2 million, proceeds from other short-term debt of $6.0 million,

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partially offset by repayments of debt and other obligations of $5.3 million and transaction costs paid relating to prior period acquisitions of $1.4 million for the six months ended June 30, 2023.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our ~~condensed~~ consolidated financial statements which are prepared in accordance with ~~GAAP.~~accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to debt, derivative liabilities, revenue recognition, leases, contingent liabilities and acquisition consideration payable, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

~~During the quarter ended September 30, 2017, there were no significant changes to the items that we disclosed as our~~ Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023, and there have been no material changes during the three and six months ended June 30, 2023.

Scilex Convertible Debentures

We elected the fair value option to account for the Scilex Convertible Debentures in an aggregate principal amount of up to $25.0 million that were issued in March and April 2023, discussed in Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The Scilex Convertible Debentures aremeasured at fair value on a recurring basis using Level 3 inputs. We use the Binomial Lattice Model valuation technique to ~~our~~measure the fair value of the Scilex Convertible Debentures with any changes in the fair value of the Scilex Convertible Debentures recorded in the unaudited condensed consolidated statements of operations.

Adoption of ASC 852

Beginning on the Petition Date, we applied Financial Accounting Standards Board (“FASB”) Codification Topic 852, Reorganizations ("ASC 852") in preparing the consolidated financial statements. ASC 852 requires the financial statements, for the periods subsequent to the Petition Date and up to and including the period of emergence from Chapter 11, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the bankruptcy proceedings, such as legal and professional fees incurred directly as a result of the bankruptcy proceeding are recorded as Reorganization items, net in the Consolidated Statements of Operations. In addition, prepetition obligations that may be impacted by the Chapter 11 process have been classified on the Consolidated Balance Sheet as of June 30, 2023 as liabilities subject to compromise. These liabilities are reported at the amounts we anticipate will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

Material Cash Requirements

As of June 30, 2023, there were no material changes outside of the ordinary course of business, other than the following, in our outstanding material contractual obligations from those disclosed under the heading “Material Cash Requirements” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 contained~~2022, filed with the SEC on March 16, 2023:

•

Short-term debt of $75.0 million related to the Senior DIP Facility as discussed in Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q; and

•

$18.4 million of Scilex Convertible Debentures outstanding as discussed in Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

•

$15.9 million outstanding under the Scilex Pharma Revolving Facility as discussed in Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

New Accounting Pronouncements

In October 2021, the FASB issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with FASB Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The adoption of the standard beginning January 1, 2023 did not have a material impact on our consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the three months ended June 30, 2023 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2016, as amended, as filed with the SEC.~~

~~Results of Operations~~

~~The following describes certain line items set forth in our condensed consolidated statements of operations.~~

~~Comparison of the Three Months Ended September 30, 2017 and 2016~~

~~Revenues~~. Revenues were $121.9 million for the three months ended September 30, 2017, as compared to $2.2 million for the three months ended September 30, 2016. The net increase of $119.7 million is primarily due to an increase in our royalty and license revenue of $117.1 million resulting primarily from our collaboration arrangements.

In June 2014, the National Institute of Allergy and Infectious Diseases (“NIAID”), a division of the National Institutes of Health, or NIH awarded us a Phase II STTR grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat ~~Staphylococcus aureus~~ (~~S. aureus~~ ~~or Staph) infections, including methicillin-resistant~~ ~~S. aureus~~ (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, which was subsequently extended by one year, with total funds available of approximately $1 million per year. During the three months ended September 30, 2017 and 2016, we recorded $11 thousand and $135 thousand of revenue, respectively, associated with the Staph Grant III award.

We expect that any revenue we generate will fluctuate from quarter to quarter 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, if any.

~~Cost of revenues~~. Cost of revenues for the three months ended September 30, 2017 and 2016 were $1.1 million and $0.4 million, respectively, and relate to the sale of customized reagents and providing contract development services. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance. The increase of $667 thousand 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 three months ended September 30, 2017 and 2016 were $16.6 million and $10.4 million, respectively. Research and~~development expenses include the costs to advance our CAR-T programs for solid tumors, our RTX program towards entering into future clinical trials, our biosimilar/biobetter antibodies development, 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 $6.2 million is primarily attributable to increased payroll expense for research and development. We expect research and development expenses to increase in absolute dollars as we: (i) advance our CAR-T programs, (ii) advance RTX into clinical trials and pursue other potential indications, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (iii) advance our biosimilar/biobetter antibodies clinical development program, (iv) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (v) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (vi) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, and (vii) invest in our JVs or other third party agreements.

~~Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the three months ended September 30, 2017 and 2016 were $902,000 and $0, respectively.~~

~~General and Administrative Expenses~~. General and administrative expenses for the three months ended September 30, 2017 and 2016 were $10.2 million and $5.3 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.

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) compliance with our public reporting obligations, (iii) increased infrastructure costs, and (iv) invest in our JVs or other third party agreements.

~~Intangible Amortization~~. Intangible amortization for the three months ended September 30, 2017 and 2016 was $656 thousand and $112 thousand, respectively. The increase in the three months ended September 30, 2017 as compared to the same period in 2016 is due to the intangible assets acquired as part of the Scilex acquisition in the fourth quarter of the prior year.

~~Gain (loss) on equity investments. Income (Loss) on equity investments for the three months ended September 30, 2017 and 2016 was $(507) thousand and $323 thousand, respectively.~~

~~Interest Expense~~. Interest expense for the three months ended September 30, 2017 and 2016 was $1.2 million and $0.2 million, respectively. The increase in interest expense resulted primarily from higher average borrowings under the amended loan and security agreement.

~~Interest Income (Expense)~~. Interest income for the three months ended September 30, 2017 and 2016 was $(265) thousand and $26 thousand, respectively. We expect that continued low interest rates will significantly limit our interest income in the near term.

~~Income tax expense (benefit)~~. Income tax for the three months ended September 30, 2017 and 2016 was expense of $57.5 million and benefit of $(195,000), respectively. The increase in income tax expense resulted mainly from the intangibles transferred to Celularity as a result of the closing of Contribution Agreement in the quarter.

~~Net Income. Net income for the three months ended September 30, 2017 and 2016 was $37.5 million and $15.7 million, respectively.~~

~~Comparison of the Nine Months Ended September 30, 2017 and 2016~~

~~Revenues~~. Revenues were $131.4 million for the nine months ended September 30, 2017, as compared to $4.1 million for the nine months ended September 30, 2016. The net increase of $127.3 million is primarily due to an increase in our royalty and license revenues of $121.9 million resulting primarily from our collaboration arrangements.

In June 2014, the National Institute of Allergy and Infectious Diseases (“NIAID”), a division of the National Institutes of Health, or NIH awarded us a Phase II STTR grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat ~~Staphylococcus aureus~~ (~~S. aureus~~ ~~or Staph) infections, including methicillin-resistant~~ ~~S. aureus~~ (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, which was subsequently extended by one year, with total funds available of approximately $1 million per year. During the nine months ended September 30, 2017 and 2016, we recorded $206 thousand and $592 thousand of revenue, respectively, associated with the Staph Grant III award.

We expect that any revenue we generate will fluctuate from quarter to quarter 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, if any.

~~Cost of revenues~~. Cost of revenues for the nine months ended September 30, 2017 and 2016 were $3.0 million and $1.1 million, respectively, and relate to the sale of customized reagents and providing contract development services. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance. The increase of $1.9 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 nine months ended September 30, 2017 and 2016 were $42.7 million and $28.9 million, respectively. Research and~~development expenses include the costs to advance our CAR-T programs for solid tumors, our RTX program towards entering into future clinical trials, our biosimilar/biobetter antibodies development, 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 $13.8 million is primarily attributable to increased payroll expense for research and development. We expect research and development expenses to increase in absolute dollars as we: (i) advance our CAR-T programs, (ii) advance RTX into clinical trials and pursue other potential indications, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (iii) advance our biosimilar/biobetter antibodies clinical development program, (iv) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (v) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (vi) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, and (vii) invest in our JVs or other third party agreements.

~~Acquired In-process Research and Development Expenses~~. Acquired in-process research and development expenses for the nine months ended September 30, 2017 and 2016 were $1.1 million and $45.0 million, respectively. The decrease is due to cost associated with the purchase price of the license rights from Mabtech Limited and the purchase price of the license rights from the City of Hope in the prior year.

~~General and Administrative Expenses~~. General and administrative expenses for the nine months ended September 30, 2017 and 2016 were $31.2 million and $14.0 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 $17.2 million is primarily attributable to higher salaries and related compensation expenses resulting from new hires and higher transaction costs.

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) compliance with our public reporting obligations, (iii) increased infrastructure costs, and (iv) invest in our JVs or other third party agreements.

~~Intangible Amortization~~. Intangible amortization for the nine months ended September 30, 2017 and 2016 was $1.9 million and $0.3 million, respectively. The increase in the nine months ended September 30, 2017 as compared to the same period in 2016 is due to the intangible assets acquired as part of the Scilex acquisition in the fourth quarter of the prior year.

~~Income (loss) on equity investments. Income (loss) on equity investments for the nine months ended September 30, 2017 and 2016 was $(2,557) thousand and $294 thousand, respectively.~~

~~Interest Expense~~. Interest expense for the nine months ended September 30, 2017 and 2016 was $4.0 million and $0.8 million, respectively. The increase in interest expense resulted primarily from higher average borrowings under the amended loan and security agreement.

~~Interest Income~~. Interest income for the nine months ended September 30, 2017 and 2016 was $192 thousand and $84 thousand, respectively. We expect that continued low interest rates will significantly limit our interest income in the near term.

~~Income tax expense (benefit)~~. Income tax expense for the nine months ended September 30, 2017 and 2016 was $54.4 million and $(195,000), respectively. The increase in income tax expense resulted mainly from the intangibles transferred to Celularity as a result of the closing of Contribution Agreement in the quarter.

~~Net Loss. Net loss for the nine months ended September 30, 2017 and 2016 was $1.1 million and $46.0 million, respectively.~~

~~Liquidity and Capital Resources~~

As of September 30, 2017, we had $38.3 million in cash and cash equivalents attributable in part to the net proceeds received under the loan and security agreement that we and certain of our domestic subsidiaries (collectively, the “Borrowers”) entered into with Hercules Capital, Inc. (“Hercules”) on November 23, 2016, as amended (as so amended, the “Loan Agreement”). As of September 30, 2017, we had $24.6 million of long term debt associated with the Loan Agreement. The Loan Agreement contains covenants requiring us (i) to achieve certain fundraising requirements by certain dates, and (ii) to maintain $20.0 million of U.S. unrestricted cash prior to achieving the corporate and fundraising milestones. The Offering (as described below) satisfied the fundraising requirements and fundraising milestone. We are currently in compliance with these covenants, and have plans in place to maintain compliance with these covenants. Effective November 6, 2017, we and Hercules entered into an amendment to the Loan Agreement that reduced the minimum amount of U.S. unrestricted cash that we must maintain under the Loan Agreement to $8.0 million (see the disclosure in Part II, Item 5 of the Quarterly Report on Form 10-Q for additional details). To the extent we are unable to execute on these plans to maintain compliance with these covenants, or we are unable to amend the Loan Agreement to maintain such compliance then we would be in default under the Loan Agreement and the outstanding loan balance may be declared immediately due and payable. If the outstanding loan balance was payable in the next 12 months and we are unable to secure additional sources of financing, we would not have enough cash to fund our operating and capital requirements for the next 12 months. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we issue additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors may demand rights, 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 Quarterly Report on Form 10-Q 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 $54.3 million for the nine months ended September 30, 2017 and is primarily attributable to our net loss of $1.1 million and $54.4 million of deferred tax provision, offset by non-cash cost method investments of $116.2 million.

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 $14.9 million for the nine months ended September 30, 2017 as compared to $5.0 million for the nine months ended September 30, 2016. The net cash used related primarily to equipment acquired for research and development activities and investment in Celularity.

~~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 $25.2 million for the nine months ended September 30, 2017 as compared to net cash provided financing of $86.6 million for the nine months ended~~

~~September 30, 2016, which was primarily due to the repayment associated with the amended loan and security agreement in the current year.~~

~~Future Liquidity Needs~~. We have principally financed our operations through underwritten public offerings and private equity financings with aggregate net proceeds of approximately $201.1 million, 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.

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, we filed a universal shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission (the “SEC”), which was declared effective by the SEC in December 2014. This Shelf Registration Statement provides us with the ability to offer up to $250 million of securities, including equity and other securities as described in the registration statement. Included in the November 2014 shelf registration is 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 may be issued and sold under a sales agreement with MLV & Co. LLC (the “ATM Facility”). During the twelve months ended December 31, 2016 and the nine months ended September 30, 2017, we sold approximately $3.6 million and $2.1 million in shares of common stock under the ATM Facility, respectively. We can offer up to $41.8 million of additional shares of common stock under the ATM Facility, subject to certain limitations. On April 19, 2017, we completed the Offering of $47.5 million shares of common stock pursuant to the shelf registration statement and received net proceeds of approximately $43.5 million.

Pursuant to this Shelf Registration Statement, we may offer additional 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 be2022, filed with the SEC ~~at the time of any offering.~~

On April 3, 2016, we entered into a Securities Purchase Agreement (the “ABG Purchase Agreement”) with ABG SRNE Limited and Ally Bridge LB Healthcare Master Fund Limited (collectively, “Ally Bridge”), pursuant to which, among other things, we agreed to issue and sell to Ally Bridge and other purchasers that may be designated by Ally Bridge (collectively, the “ABG Purchasers”), in a private placement transaction (the “ABG Private Placement”), up to $50.0 million in shares of our common stock (“Common Stock”) and warrants to purchase shares of Common Stock. Upon the closing of the ABG Private Placement, we issued to the ABG Purchasers (1) an aggregate of 9,009,005 shares (the “ABG Shares”) of Common Stock,and (2) warrants to purchase an aggregate of 2,702,700 shares of Common Stock (each, an “ABG Warrant”). Each ABG Warrant had an exercise price of $8.50 per share, was immediately exercisable upon issuance, had a term of three years and was exercisable on ~~a cash or cashless exercise basis.~~

Under the terms of the ABG Purchase Agreement, we were obligated to prepare and file with the SEC, within 30 days of the closing date of the ABG Private Placement, a registration statement to register for resale the ABG Shares and the shares of Common Stock issuable upon exercise of each ABG Warrant (the “ABG Warrant Shares”), and may be required to effect certain registrations to register for resale the ABG Shares and the ABG Warrant Shares in connection with certain “piggy-back” registration rights granted to the ABG Purchasers.

On April 3, 2016, we also entered into a Securities Purchase Agreement (collectively, the “Additional Purchase Agreements”) with each of Beijing Shijilongxin Investment Co., Ltd. ( “Beijing Shijilongxin”), FREJOY Investment Management Co., Ltd. (“Frejoy”) and Yuhan, pursuant to which, among other things, we agreed to issue and sell, in separate private placement transactions: (1) to Beijing Shijilongxin, 8,108,108 shares of Common Stock, and a warrant to purchase 1,176,471 shares of Common Stock, for an aggregate purchase price of $45.0 million; (2) to Frejoy, 8,108,108 shares of Common Stock, and a warrant to purchase 1,176,471 shares of Common Stock, for an aggregate purchase price of $45.0

million; and (3) to Yuhan, 1,801,802 shares of Common Stock, and a warrant to purchase 235,294 shares of Common Stock, for an aggregate purchase price of $10.0 million. The warrants to be issued pursuant to each of the Additional Purchase Agreements (collectively, the “Additional Warrants” and, together with each ABG Warrant, the “Warrants”) had an exercise price of $8.50 per share, were immediately exercisable upon issuance, had a term of three years and were exercisable on a cash or cashless exercise basis.

Under the terms of the Additional Purchase Agreements, each of Beijing Shijilongxin, Frejoy and Yuhan had the right to demand, at any time beginning six months after the closing of the transactions contemplated by the applicable Additional Purchase Agreement, that we prepare and file with the SEC a registration statement to register for resale such investor’s shares of Common Stock purchased pursuant to the applicable Additional Purchase Agreement and the shares of Common Stock issuable upon exercise of such investor’s Additional Warrant. In addition, we may be required to effect certain registrations to register for resale such shares in connection with certain “piggy-back” registration rights granted to Beijing Shijilongxin, Frejoy and Yuhan.

On May 2, 2016, we closed our private placement of common stock and warrants with Yuhan for gross proceeds of $10.0 million. Yuhan purchased 1,801,802 shares of common stock at $5.55 per share and a warrant to purchase 235,294 shares of common stock. The warrant was exercisable for three years at an exercise price of $8.50 per share.

Between May 31, 2016 and June 7, 2016, we closed on the remainder of the $150.0 million financing. The ABG Purchasers led the financing and, together with Beijing Shijilongxin and Frejoy, collectively purchased 25,225,221 shares of common stock at $5.55 per share, and warrants to purchase 5,055,642 shares of common stock for total consideration of $140.0 million.

On November 23, 2016, we and the other Borrowers entered into the Loan Agreement with Hercules. The Loan Agreement provides for a term loan of up to $75.0 million, subject to funding in multiple tranches (the “Term Loan”). The proceeds of the Term Loan will be used for general corporate purposes and coincided with the repayment of the outstanding debt financing arrangement with Oxford Finance LLC and Silicon Valley Bank.

~~The first tranche of $50.0 million of the Term Loan was funded upon execution of the Loan Agreement on November 23, 2016. Under the terms of the Loan Agreement, as most recently amended in~~ March 2017, the Borrowers may, but are not obligated to, request additional funds of up to $25.0 million which are available until June 30, 2018, subject to approval by Hercules’ Investment Committee. The Term Loan will mature on December 1, 2020.

On December 31, 2016, we entered into Warrant and Note Cancellation and Share Forfeiture Agreements (the “Cancellation and Forfeiture Agreements”) with certain investors (the “Investors”) that held an aggregate of 7,838,259 shares of Common Stock and certain of the Warrants granting the right to purchase an aggregate of 1,137,316 shares of Common Stock. The Investors had also issued to us secured promissory notes (the “Notes”) in an aggregate principal amount of $53.5 million, of which $43.5 million was then outstanding. Pursuant to the Cancellation and Forfeiture Agreements, effective December 31, 2016, the Warrants held by the Investors and the Notes were cancelled and the shares of Common Stock held by the Investors were forfeited and returned to us.

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. Under the terms of the Underwriting Agreement, we also granted to the Underwriters an option, exercisable in whole or in part at any time for a period of 30 days from the date of the closing of the Offering, to purchase up to an additional 3,543,763 shares of our common stock at the public offering price.

On April 19, 2017, the Offering was completed and resulted in net proceeds of approximately $43.5 million (excluding any sale of shares of common stock pursuant to the option granted to the Underwriters), after deducting underwriting discounts and commissions and estimated Offering expenses payable by us.

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.

~~Off-Balance Sheet Arrangements~~

~~Since our inception through September 30, 2017, we have not engaged in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.~~

~~New Accounting Pronouncements~~

~~Refer to Note 1, “Nature of Operations and Business Activities,” in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.~~

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk.~~

~~Interest Rate Risk.~~ Our exposure to market risk is confined to our cash and cash equivalents. 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. The interest rate under our loan and security agreement with Hercules Capital, Inc. is calculated at a prime-based variable rate, currently at 10.0%. We do not believe that we have any material exposure to interest rate risk arising from our investments.

~~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.

16, 2023.

Item 4. Controls and Procedures.

~~We maintain disclosure controls~~

Evaluation of 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 principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the 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, underProcedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, ~~of the effectiveness of the design and operation~~we conducted an evaluation of our disclosure controls and procedures, as such terms are defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the ~~end~~desired control objectives and in reaching a reasonable level of assurance. As a result, management was required to apply its judgment in evaluating the ~~period covered by this Quarterly Report on Form 10-Q.~~cost-benefit relationship of possible controls and procedures. Based on ~~the foregoing, our principal executive officer and principal financial officer~~that evaluation, management has concluded that as of June 30, 2023, our disclosure controls and procedures were not effective asat the reasonable assurance level. However, we believe the consolidated financial statements included in this Form 10-Q for the three and six months ended June 30, 2023 fairly present, in all material respects, our financial position, results of operations, comprehensive loss and cash flows for the ~~end~~periods presented in conformity with U.S. generally accepted accounting principles.

As described in Item 9A of ~~the period covered by this Quarterly~~our Annual Report on Form ~~10-Q~~10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023, as a result of ~~the material weakness described below.~~

~~In March 2017,~~our former Chief Financial Officer`s passing in ~~connection~~early 2022 as well as other considerations, management concluded that we did not employ sufficient accounting resources with ~~the preparation of our 2016 financial statements,~~appropriate experience and technical expertise to effectively execute controls over certain judgmental accounting areas. As a result, we identified certain ~~purchase agreements which contained terms for contingent consideration that~~of our control activities 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 payabledeficient and the ~~related adjustments~~combination of the aforementioned deficiencies were deemed to ~~earnings.~~

~~Based on these findings and the criteria discussed above, our management identified~~represent a material weakness in our ~~review controls~~internal control over ~~unusual or non-recurring~~financial reporting as of December 31, 2021. While we have taken actions to remediate this material weakness, including (i) recruiting and ~~significant transactions. Specifically,~~employing personnel with appropriate experience and technical expertise to enhance management’s assessment of judgmental and technical accounting areas, (ii) conducting additional training for staff involved in judgmental and technical accounting areas, and (iii) engaging additional independent third-party technical consultants to assist in performing accounting analyses of complex transactions, completion of our ~~controls were~~remediation efforts is ongoing. As such, our management concluded the aforementioned material weakness had not ~~properly designed~~been remediated as of December 31, 2022. As a result, certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities, intangibles and contingent consideration did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represented a material weakness in our internal control over financial reporting as of December 31, 2022.

During the quarter ended June 30, 2023, we continued to evaluate, and for the remainder of the fiscal year ending December 31, 2023, we will continue evaluating, our remediation measures as described above to determine if such measures have been effectively implemented and will provide reasonable assurance ~~that we (1) timely identify~~regarding the reliability of financial reporting and ~~assess~~the preparation of our financial statements for external purposes in accordance with the accounting ~~implications of terms in unusual or non-recurring agreements and (2) reassess the valuation of associated assets or liabilities at the end of each reporting period.~~

As a result of the material weakness, we have initiated and will continue to implement remediation measures including, but not limited to, improving centralized documentation control, improving the internal communication procedures between senior executive management, accounting personnel, and related business owners, leveraging external accounting experts as appropriate, and strengthening policies and procedures related to the transferring of responsibilities and the handoff of personnel duties. We believe that our remediation measures will ensure that we timely identify terms in agreements that could have material accounting implications, assesses the accounting and disclosures implications of the terms, and accounts for such itemsprinciples generally accepted in the ~~financial statements appropriately.~~United States. Any failure to implement these improvements to our internal control over financial reporting ~~may render~~would result in a continued material weakness in our ~~future assertions as ineffective~~internal control and ~~potentially~~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~~over Financial ~~Reporting~~

~~There has been no change~~Reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter ~~ended September 30, 2017~~covered by this Quarterly Report on Form 10-Q. Except for the controls and procedures being implemented and evaluated as described above, there has been no change to our internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that ~~has~~our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As ~~identified~~disclosed above, a material weakness was identified in our internal control over financial reporting as of ~~September 30, 2017.~~December 31, 2022. Our plans for remediating such material weakness, ~~which would~~enumerated above, will continue to constitute changes in our internal control over financial reporting, prospectively, when such remediation plans are ~~also enumerated above.~~

effectively implemented.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

To

The information under the ~~best of our knowledge, we (the “Company”) are not a party to any legal proceedings that, individually or~~caption “Litigation” set forth in Note 10 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 April 25, 2016, Wildcat Liquid Alpha, LLC (“WLA”) filed a complaint in the Court of Chancery of the State of Delaware seeking an order compelling the Company to provide WLA with certain documents, books and records for inspection and copying pursuant to an April 11, 2016 demand made by WLA (the “Inspection Demand Action”). On May 13, 2016, WLA filed a derivative action in the Court of Chancery of the State of Delaware (the “WLA Action” and, together with the Inspection Demand Action, the “Actions”) against each of the members of the Company’s board of directors at the time, Henry Ji, William S. Marth, Kim D. Janda, Jaisim Shah, David H. Deming, and Douglas Ebersole (the “Prior Board”) and against the Company as nominal defendant. After the members of the Prior Board and the Company moved to dismiss, on August 12, 2016, WLA filed an amended complaint containing both direct and derivative claims against each of the members of the Prior Board and against the Company as nominal defendant, alleging, among other things: (1) breach of fiduciary duty with respectaccompanying notes 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 (the “Subsidiary Options Claim”); (2) breach of fiduciary duty with respect to the Company’s prior announcement that it had entered into a voting agreement with Yuhan Corporation (“Yuhan”)consolidated financial statements in connection with a transaction through which it purchased $10 million of shares of the Company’s common stock and warrants (the “Yuhan Agreement Claim”); (3) waste of corporate assets regarding the foregoing; (4) unjust enrichment regarding the foregoing; and (5) violation of 8 Del. C. § 160 based on the Yuhan voting agreement.

On March 17, 2017, the Company, the members of the Prior Board and WLA entered into a confidential settlement agreement and release (the “Settlement Agreement”) pursuant to which, among other things, each party agreed to forever release and not to sue the other party with respect to the claims asserted in the Actions and WLA agreed to take all actions to seek to dismiss the Actions without prejudice within ten business days following the execution of the Settlement Agreement. As part of the Settlement Agreement, the Company also agreed (1) to terminate all options and warrants currently outstanding in Company subsidiaries that have been granted to Dr. Ji and any other director of the Company no later than 60 days after the Company’s next annual meeting of stockholders, (2) to grant WLA the right to designate a representative to attend all meetings of the Company’s board of directors in a nonvoting observer capacity, (3) to act in good faith to attempt to add two additional independent directors to the Company’s board of directors, and (4) to pay $400,000 as reimbursement for WLA’s out of pocket fees and expenses. In addition, WLA agreed to comply with a two-year standstill period, during which WLA is prohibited from engaging in certain actions relating to controlling or influencing the management of the Company. On August 29, 2017, the options and warrants were canceled in accordance with the terms of the Settlement Agreement.

On May 31, 2017, the Court of Chancery of the State of Delaware entered an order providing for dismissal of the Actions without prejudice pursuant to the terms of the Settlement Agreement, to be effective upon the Company submitting to the Court of Chancery of the State of Delaware a notice of the filing of a Current Report on Form 8-K with the Securities and Exchange Commission, which was filed on JunePart I, Item 1 ~~2017.~~

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 against each of the members of 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 Subsidiary Options Claim; and (2) breach of fiduciary duty with respect to the Yuhan Agreement Claim (the “Williams Action”). The Company is unable to determine whether any loss will occur with respect to the Williams 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 Quarterly Report on Form ~~10-Q. Furthermore, there~~10-Q is ~~no guarantee that the Company will prevail in this suit or receive any relief if it does prevail.~~

~~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”) against the Board of Directors of Roger Williams Medical Center, 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 and The Office of the Board of Advisors of Tufts University School of Medicine as defendants. Roger Williams Medical Center 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, TNK Therapeutics, Inc. (“TNK”), BDL Products, Inc. (“BDL”), and CARgenix Holdings LLC (“CARgenix”) as defendants. TNK is a subsidiary of the Company and purchased BDL and CARgenix in August 2015. The Third Amended Complaint includes, among other things, allegations against the Company, TNK, BDL and CARgenix regarding (1) conversion; (2) tortious interference; and (3) unjust enrichment. On December 2, 2016, the Company, TNK, BDL, and CARgenix filed a motion to dismiss Immunomedics’s complaint against them for lack of personal jurisdiction. On January 25, 2017, the District of New Jersey granted this motion, and the Company, TNK, BDL and CARgenix were dismissed as defendants from the case. The Immunomedics Action remains pending in the District of New Jersey against defendants Roger Williams Medical Center, Dr. Junghans, and Dr. Katz. A trial date has not yet been set. The Company believes that 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, certain patent rights optioned, owned and/or licensedincorporated herein 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 Quarterly Report on Form 10-Q.

reference.

Item 1A. Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2022, filed with the SEC on March 16, 2023, in Part I –Item 1A, Risk Factors, describes important risk factors that could cause our business, financial condition, results of operations and growth prospects to differ materially from those indicated or suggested by forward-looking statements made in this Quarterly Report on Form 10-Q or presented elsewhere by management from time to time. Except as set forth below, there have been no material changes in our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2022, filed with the SEC on March 16, 2023. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.

Risks Related to ~~Our Business and Industry~~

our Bankruptcy

We are ~~heavily dependent~~in the process of Chapter 11 reorganization cases under the United States Bankruptcy Code, which may cause our common stock to decrease in value and may eventually render our common stock worthless. For a full description of the terms and conditions of the DIP Facilities, you should refer to the Bankruptcy Docket.

As previously disclosed, on February 13, 2023, we and our wholly owned direct subsidiary, Scintilla Pharmaceuticals, Inc. (together, the ~~success~~“Debtors”), filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings are jointly administered under the caption In re Sorrento Therapeutics, Inc., et al. (Case No. 23-90085) (the “Chapter 11 Cases”).

Any trading in our securities during the pendency of our ~~technologies~~Chapter 11 Cases is highly speculative and ~~product candidates, and we cannot give any assurance that any~~poses substantial risks to purchasers of our ~~product candidates will receive regulatory approval, which is necessary before they can be commercialized.~~

~~To date, we have invested a significant portion~~securities, as the price of our ~~efforts and financial resources~~securities may decrease in value or become worthless. Recoveries in the ~~acquisition and development~~Chapter 11 Cases for holders of ~~our product candidates. We have not demonstrated~~securities, if any, will depend upon, among other things, our ability to ~~perform~~confirm and consummate a plan of reorganization with respect to the ~~functions necessary~~Chapter 11 Cases and the value of our assets. Although we cannot predict how our securities will be treated under a plan, we expect that holders of all or some of our securities would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness, are paid in full. Consequently, there is a risk that the holders of our securities will receive no recovery under the Chapter 11 Cases and that our securities will be worthless.

Equity securities in a debtor are subject to a high risk of being cancelled through a Chapter 11 plan of reorganization without receiving any consideration or otherwise receiving any value. The reason for this high risk of cancellation is because equity securities in a debtor generally sit last in line of priority in bankruptcy. This is referred to as the ~~successful acquisition, development~~“absolute priority rule.” Under the absolute priority rule, unless holders of more senior claims otherwise agree, holders of equity securities are generally precluded from receiving

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any value unless and until holders of allowed claims or ~~commercialization~~interests senior to them are paid in full; there are, however, circumstances where this is not the case.

We are subject to other risks and uncertainties associated with our Chapter 11 Cases.

Our operations and ability to develop and execute our business plan, our financial condition, our liquidity and our continuation as a going concern are subject to the risks and uncertainties associated with our Chapter 11 Cases. These risks include the following:

• our ability to confirm and consummate a plan of reorganization with respect to the Chapter 11 Cases;

• the high costs of bankruptcy cases and related fees;

• our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence;

• our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;

• our ability to maintain contracts that are critical to our operations;

• our ability to execute competitive contracts with third parties;

• our ability to attract, motivate and retain key employees;

• the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;

• our ability to retain our current management team;

• the ability of third parties to seek and obtain court approval to convert the Chapter 11 Cases to a Chapter 7 proceeding; and

• the actions and decisions of our stockholders, creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

Delays in our Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.

These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with our Chapter 11 Cases could adversely affect our relationships with our suppliers, service providers, customers, employees and other third parties, which in turn could adversely affect our operations and financial condition. Also, pursuant to the Bankruptcy Code, we need the prior approval of the ~~technologies we are seeking to develop. As an early stage company, we have limited experience and have not yet demonstrated an~~Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to ~~successfully overcome many~~respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties ~~frequently encountered by companies in new and rapidly evolving fields, particularly in~~associated with our Chapter 11 Cases, we cannot accurately predict or quantify the ~~biopharmaceutical area. Our future success is substantially dependent~~ultimate impact that events that occur during our Chapter 11 Cases will have on our ~~ability~~business, financial condition and results of operations, and there is no certainty as to successfully develop, obtain regulatory approval for, and then successfully commercialize such product candidates. Our product candidates are currently in preclinical development or in clinical trials. Our business depends entirely on the successful development and commercialization of our product candidates, which may never occur. We currently generate no revenues from sales of any drugs, and we may never be able to develop or commercialize a marketable drug.

~~The successful development, and any commercialization, of our technologies and any product candidates would require us to successfully perform a variety of functions, including:~~

~~developing our technology platform;~~

~~seeking and obtaining intellectual property and/or proprietary rights to our technology and/or the technology of others;~~

~~identifying, developing, manufacturing and commercializing product candidates;~~

~~entering into successful licensing and other arrangements with product development partners;~~

~~participating in regulatory approval processes;~~

~~formulating and manufacturing products; and~~

~~conducting sales and marketing activities.~~

Our operations have been limited to organizing our company, acquiring, developing and securing our proprietary technology and identifying and obtaining early preclinical data or clinical data for various product candidates. These operations provide a limited basis for you to assess our ability to continue as a going concern.

We are required to ~~develop our technology, identify product candidates, develop~~pay the fees and ~~commercialize any product candidates we are able to identify and enter into successful collaborative arrangements with other companies, as well as for you to assess~~expenses of estate professionals retained in the ~~advisability of investing in our securities. Each of these requirements will require substantial time, effort~~Chapter 11 Cases, which includes the legal and financial ~~resources.~~

~~Each~~advisors to us, the Official Committee of ~~our product candidates will require additional preclinical or clinical development, management~~Unsecured Creditors, and the Official Committee of preclinical, clinical and manufacturing activities, regulatory approval in multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization, and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the U.S. Food and Drug Administration (the “FDA”), the United Kingdom’s Medicines and Healthcare Products Regulatory Agency (the “MHRA”), the European Medicines Agency (“EMA”) or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates. In addition, our product development programs contemplate the development of companion diagnostics by our third-party collaborators. Companion diagnostics areEquity Security Holders, subject to ~~regulation as medical devices~~certain budget restrictions under the DIP Facilities (the “DIP Budget”), other agreements, and ~~must themselves be approved for marketing~~approval by the ~~FDA, the MHRA, the EMA or certain other foreign regulatory agencies before we may commercialize our product candidates.~~

~~The regulatory approval processes of the FDA, the MHRA, the EMA~~Bankruptcy Court. Our current DIP Budget includes approximately $35.0 million in fees and ~~comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval~~expenses for ~~our product candidates, our business will be substantially harmed.~~

~~The time required to obtain approval~~Chapter 11 professionals, from ~~the FDA, the MHRA, the EMA and comparable foreign authorities is unpredictable but typically takes many years following~~ the commencement of ~~clinical trials~~the Chapter 11 Cases (February 13, 2023) through July 29, 2023, of which there were $32.0 million in fees and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. expenses budgeted through July 14, 2023.

We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

~~We may fail to receive regulatory approval for our product candidates for many reasons, including the following:~~

~~the FDA, the MHRA, the EMA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;~~

we may be unable to demonstrate to the satisfaction of the FDA, the MHRA, the EMA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;

~~the results of clinical trials may not meet the level of statistical significance required for approval by the FDA, the MHRA, the EMA or comparable foreign regulatory authorities;~~

~~the FDA, the MHRA, the EMA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;~~

~~the data collected from clinical trials of our product candidates~~ may not be ~~sufficient to support the submission of an NDA, a marketing authorization application (“MAA”) or other submission or~~able to obtain ~~regulatory approval in the U.S., the United Kingdom, the European Union or elsewhere;~~

~~the FDA, the MHRA, the EMA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities~~confirmation of ~~third-party manufacturers~~a Chapter 11 plan of reorganization.

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To emerge successfully from chapter 11 protection as a viable entity, we must meet certain statutory requirements with ~~which we contract for clinical and commercial supplies;~~

~~the FDA, the MHRA, the EMA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing with partners; and~~

the approval policies or regulations of the FDA, the MHRA, the EMA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.

In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

~~Other than a new drug application submitted by Scilex for Scilex’s lead product candidate, ZTlido~~^TM~~, we have not previously submitted a BLA or an NDA~~respect to the ~~FDA, an MAA~~adequacy of disclosure with respect to a Chapter 11 plan of reorganization, solicit and obtain the ~~MHRA or the EMA or similar drug approval filings to comparable foreign authorities,~~requisite acceptances of such a reorganization plan and fulfill other statutory conditions for ~~any product candidate, and we cannot be certain that any~~confirmation of ~~our product candidates~~such a plan.

Even if a Chapter 11 plan of reorganization is consummated, it will be ~~successful~~based in ~~clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if our clinical trials are successful.~~large part upon assumptions and analyses developed by us. If ~~we do not receive regulatory approvals for our product candidates,~~these assumptions and analyses prove to be incorrect, we may not be able to achieve our stated goals and continue as a going concern.

Any plan of reorganization may affect both our ~~operations. Even if~~capital structure and the ownership, structure and operation of our business and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we ~~successfully obtain regulatory approvals~~consider appropriate under the circumstances. In addition, a plan of reorganization will rely upon financial projections developed by us with the assistance of our financial advisor/investment banker, including with respect to ~~market~~fees, revenues, debt service, and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of ~~our product candidates, our revenues~~the assumptions and estimates that are the basis of these financial forecasts may not be accurate. Whether actual future results and developments will be ~~dependent, in some instances, upon~~consistent with our ~~collaborators’~~expectations and assumptions depends on a number of factors, including but not limited to (1) our ability to substantially change our capital structure, (2) our ability to obtain ~~regulatory approval~~adequate liquidity and financing sources, (3) our ability to maintain clients’, investors’ and strategic partners’ confidence in our viability as a continuing enterprise and to attract and retain sufficient business from and partnership endeavors with them, (4) our ability to retain key employees and (5) the overall strength and stability of general economic conditions. The failure of any of these factors could materially adversely affect the companion diagnostics to be used with our product candidates, as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets for patients that we are targeting for our product candidates are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.

We plan to seek regulatory approval to commercialize our product candidates in the U.S., the United Kingdom, the European Union and in additional foreign countries. While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in many other countries we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distributionsuccessful reorganization of our ~~product candidates,~~business. Consequently, there can be no assurance that the results or developments that may be contemplated by a plan of reorganization, even if confirmed by the Bankruptcy Court and ~~we cannot predict success in these jurisdictions. Further,~~implemented by us, will occur or, even if they do occur, that they will have the ~~United Kingdom has voted~~anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to ~~withdraw from~~materialize as anticipated could materially adversely affect the ~~European Union. We cannot predict what consequences the withdrawal~~successful execution of ~~the United Kingdom from the European Union might have on the regulatory frameworks~~any plan of ~~the United Kingdom or the European Union, or on our future operations,~~reorganization.

Even if ~~any, in these jurisdictions.~~

~~We rely on third parties to conduct our preclinical and clinical trials. If these third parties do not successfully perform their contractual legal and regulatory duties or meet expected deadlines,~~a plan of reorganization is consummated, we may not be able to ~~obtain regulatory approval~~achieve our stated goals and continue as a going concern.

Even if a plan of reorganization is consummated, we may continue to face a number of risks that are beyond our control, such as changes in economic conditions, changes in the financial markets, changes in investment values or the industry in general, changes in demand for our products and increasing expenses. Some of these risks typically become more acute when a case under the Bankruptcy Code continues for a protracted period of time without indication of how or ~~commercialize~~when the transactions under a Chapter 11 plan of reorganization will close. As a result of these and other risks, we cannot guarantee that any plan of reorganization would achieve our ~~product candidates and~~stated goals. Furthermore, even if our debts were reduced or discharged through any plan of reorganization, we may need to raise additional funds through one or more public or private debt or equity financings or other means to fund our business ~~could be substantially harmed.~~

We have relied upon and plan to continue to rely upon third-party CROs to monitor and manage data for our ongoing preclinical and clinical programs. We rely on these parties for execution of our preclinical and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance withafter the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with current good clinical practices (“cGCP”), which are regulations and guidelines enforced by the FDA, the Competent Authoritiescompletion of the ~~Member States of the European Economic Area, and comparable foreign regulatory authorities for all of our product candidates in clinical development.~~

~~Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail~~Chapter 11 Cases. Our access to ~~comply with applicable cGCPs, the clinical data generated in our clinical trials~~additional capital may be ~~deemed unreliable and the FDA, the MHRA, the EMA or comparable foreign regulatory authorities~~limited, if it is available at all. Therefore, adequate funds may ~~require us to perform additional clinical trials before approving our marketing applications~~not be available when needed or may not ~~approve our marketing applications. We~~be available on favorable terms. As a result, any plan of reorganization may not become effective and, thus, we cannot assure you ~~that upon inspection by a given regulatory authority, such regulatory authority will determine that any~~ of our ~~clinical trials comply with cGCP regulations. In addition, our clinical trials must be conducted with product produced under current good manufacturing practices (“cGMP”) regulations. Our failure~~ability to ~~comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.~~

~~If any~~continue as a going concern, even if a plan of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees,reorganization is confirmed.

We have substantial liquidity needs and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for

~~other reasons, our clinical trials may be extended, delayed or terminated and we~~ may not be able to obtain ~~regulatory approval for or successfully commercialize~~sufficient liquidity to confirm a plan of reorganization and exit bankruptcy.

Although we have lowered our ~~product candidates. As a result,~~capital budget and plan to reduce the scale of our ~~results of~~ operations, ~~and the commercial prospects for~~ our ~~product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.~~

~~Switching or adding additional CROs involves additional cost and requires management time and focus.~~business remains capital intensive. In addition ~~there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability~~ to ~~meet our desired clinical development timelines. Though~~the cash requirements necessary to fund ongoing operations, we ~~carefully manage our relationships~~have incurred significant professional fees and other costs in connection with our ~~CROs, there~~Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 Cases. There are no assurances that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases, allow us to proceed with the confirmation of a Chapter 11 plan of reorganization and allow us to emerge from bankruptcy. We can beprovide no assurance that we will ~~not encounter similar challenges~~be able to secure additional postpetition financing or ~~delays in~~exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms.

The DIP Facilities have substantial restrictions and financial covenants and if we are unable to comply with the ~~future or that these delays or challenges will not~~covenant requirements under the DIP Facilities, it could have a material adverse impact on our ~~business,~~ financial condition, operating results and ~~prospects.~~

~~If we cannot compete successfully against other biotechnology~~cash flows.

In connection with the Chapter 11 Cases and ~~pharmaceutical companies, we may not be successful in developing and commercializing our technology and our business will suffer.~~

The biotechnology and pharmaceutical industries are characterized by intense competition and rapid technological advances, both in the U.S. and internationally. In addition, the competition in the oncology and pain management markets, and other relevant markets, is intense. Even if we are able to develop our product candidates, proprietary platform technology and/or additional antibody libraries, each will compete with a number of existing and future technologies and product candidates developed, manufactured and marketed by others. Specifically, we will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have validated technologies with products already FDA-approved or in various stages of development. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:

~~developing product candidates and technologies generally;~~

~~undertaking preclinical testing and clinical trials;~~

~~obtaining FDA and other regulatory approvals of product candidates;~~

~~formulating and manufacturing product candidates; and~~

~~launching, marketing and selling product candidates.~~

Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage companies or generic or biosimilar pharmaceutical manufacturers may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products that are more effective or less costly than any drug candidate that we are currently developing or that we may develop. If approved, our product candidates will face competition from commercially available drugs as well as drugs that are in the development pipelines of our competitors and later enter the market.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to ~~overcome price competition~~provide additional required liquidity during the Chapter 11 process, on July 5, 2023, the Debtors executed that Junior DIP Term Sheet with its subsidiary Scilex Holding, pursuant to which Scilex Holding (or its designees or its assignees) is providing us with a non-amortizing super-priority junior secured term loan facility in an aggregate principal amount not to exceed the sum of (i) the $20,000,000 Base Amount, plus (ii) the amount of the commitment fee and the funding fee, each equal to ~~be commercially successful. Accordingly, our competitors may succeed~~1% of the Base Amount, plus (iii) the amount of the DIP Lender Holdback (as defined in ~~obtaining patent protection, receiving FDA,~~ the ~~MHRA,~~Interim Junior DIP Order), subject to the ~~EMA or~~terms and conditions set forth in the Junior DIP Term Sheet. In connection with the Junior DIP Term Sheet, Scilex Holding entered into a subordination agreement with the Senior DIP Lender, which specified that the Junior DIP Facility is subordinated in right of payment to the Senior DIP Facility as more fully set forth therein. After a hearing before the Bankruptcy

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Court on July 5, 2023, the Bankruptcy Court entered the Interim Junior DIP Order approving the Junior DIP Facility on an interim basis. The Bankruptcy Court entered an order on July 27, 2023 approving the Junior DIP Facility on a final basis.

Further, in order to provide additional required liquidity during the Chapter 11 process, on August 9, 2023, Oramed agreed to provide us with the Replacement DIP Facility, a non-amortizing super-priority debtor-in-possession term loan facility in an aggregate principal amount of $100,000,000, pursuant to definitive financing documentation entered into on August 9, 2023, including the Replacement DIP Credit Agreement and other ~~regulatory approval or discovering, developing~~Replacement DIP Documents. Upon entry of the Replacement DIP Order and ~~commercializing medicines before we do, which would~~satisfaction of all applicable conditions precedent, as set forth in the Replacement DIP Documents, the Debtors were authorized to make (and did make) a single draw of the entire amount of the Replacement DIP Facility. The Debtors used the proceeds from the Replacement DIP Facility to, among other things, repay the Senior DIP Facility in full on August 9, 2023. The Replacement DIP Credit Agreement contains customary conditions, affirmative and negative covenants and events of default for similar types of agreements.

In addition to customary affirmative and negative covenant obligations, the DIP Facilities require the Debtors to comply with a weekly operating budget, subject to certain permitted variances.

If the Debtors are unable to comply with the covenant requirements under the DIP Facilities, it could have a material adverse impact on our ~~business. If our technologies fail~~financial condition, operating results and cash flows.

In certain limited instances, a Chapter 11 case may be converted to ~~compete effectively against third party technologies,~~a case under Chapter 7 of the Bankruptcy Code and the debtor liquidated.

Upon a showing of cause, the Bankruptcy Court may convert a Chapter 11 bankruptcy case to a case under Chapter 7 of the Bankruptcy Code (“Chapter 7”). In such event, our business operations would generally cease and a Chapter 7 trustee would be appointed to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. Holders of our common stock would lose their entire investment in a Chapter 7 bankruptcy.

As a result of the Chapter 11 Cases, our historical financial information may not be indicative of our future performance.

During the Chapter 11 Cases, we expect our financial results to continue to fluctuate as restructuring activities and expenses impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the filing of the Chapter 11 Cases. If a plan of reorganization is approved and implemented, our existing capital structure may be fundamentally altered. If we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements. In connection with the Chapter 11 Cases, it is also possible that additional restructuring and related charges may be identified and recorded in future periods. Such charges could be material to our consolidated financial position, liquidity and results of operations.

We may be subject to claims that will not be ~~adversely impacted.~~

discharged in the Chapter 11 Cases, which could have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from, among other things, substantially all debts arising prior to consummation of a plan of reorganization. Thus, while generally all claims against us that arose prior to the filing of the Chapter 11 Cases or before consummation of a plan of reorganization (i) would be subject to compromise and/or treatment under a plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of a plan of reorganization, certain exceptions may arise. Subject to the terms of a plan of reorganization and orders of the Bankruptcy Court, any claims not ultimately discharged pursuant to a plan of reorganization could be asserted against us and may have an adverse effect on our business, cash flows, liquidity, financial condition and results of operations on a post-reorganization basis. At this time, we do not believe we have any liability under any such pending litigation (aside from the Nant Award, which has already been reduced to judgment).

We ~~expect~~may also have litigation that we have brought against other parties that is still pending at the time of the consummation of a plan of reorganization. If we successfully reorganize through a Chapter 11 plan of reorganization, pending litigation brought by us would generally continue after the Chapter 11 Cases, unless specifically released by us (including, for example, the potential release in the Nant Settlement of our claims against the Nant Parties).

If we operate under the Bankruptcy Court’s protection for a long period of time, or for a longer period of time than expected, our business may be harmed.

Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. Our being subject to a long period of operations under the Bankruptcy Court’s protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the proceedings related to the Chapter 11 Cases continue, our senior management may be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under the Bankruptcy Court’s protection also may make it

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more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the proceedings related to the Chapter 11 Cases continue, the more likely it is that our clients, investors, strategic partners and service providers will lose confidence in our ability to ~~compete effectively~~reorganize our businesses successfully and seek to establish alternative advisory and/or other commercial relationships, as applicable. Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases. We cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to any plan of reorganization. As of the date hereof, the Debtors have not filed a Chapter 11 plan of reorganization or liquidation, as the Debtors are continuing to evaluate and formulate the potential terms of such a plan. On July 6, 2023, the Bankruptcy Court entered an order extending the period in which the Debtors have the exclusive right to file a Chapter 11 plan through August 11, 2023, subject to further extensions thereof. We can give no assurances as to the ultimate duration of the Chapter 11 Cases or the timing of a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from Chapter 11 protection.

Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our businesses.

Adverse publicity or news coverage relating to us, including, but not limited to, publicity or news coverage in connection with the Chapter 11 Cases, may negatively impact our efforts to establish and promote a positive image after emergence from the Chapter 11 Cases.

The Chapter 11 Cases limit the flexibility of our management team in running our business.

While we operate our business as debtor-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with the various other parties-in-interest and one or more hearings. Other parties-in-interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events. In addition, constraints on our activities as debtor-in-possession may place limitations and restrictions on our business activities and resources. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.

We may experience employee attrition as a result of the Chapter 11 Cases.

As a result of the Chapter 11 Cases, we may experience employee attrition, and our employees may face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by certain restrictions on the implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our business strategies and implement operational initiatives, which may have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.

Our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on existing and future debt and security holders, including holders of our common stock.

Our post-bankruptcy capital structure has yet to be determined and will be set pursuant to a plan that requires Bankruptcy Court approval. The reorganization of our capital structure may include exchanges of new debt or equity securities for our existing debt, equity securities, and claims against us. Such new debt may be issued at different interest rates, payment schedules and maturities than our existing debt securities. Existing equity securities are subject to a high risk of being cancelled. The success of a reorganization through any such exchanges or modifications will depend ~~upon~~on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification, subject to the provisions of the Bankruptcy Code, and there can be no guarantee of success. If such exchanges or modifications are successful, holders of our debt or of claims against us may find their holdings no longer have any value or are materially reduced in value, or they may be converted to equity and be diluted or may be modified or replaced by debt with a principal amount that is less than the outstanding principal amount, longer maturities and reduced interest rates. Holders of our common stock may also find that their holdings no longer have any value and face highly uncertain or no recoveries under a plan. There can be no assurance that any new debt or equity securities will maintain their value at the time of issuance. If existing debt or equity holders are adversely affected by a reorganization, it may adversely affect our ability ~~to:~~

~~successfully~~to issue new debt or equity in the future. Although we cannot predict how the claims and ~~efficiently complete~~interests of stakeholders in the Chapter 11 Cases, including holders of common stock, will ultimately be resolved, we expect that common stock holders will not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness, are paid in full.

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Consequently, there is a significant risk that the holders of our common stock would receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.

Risks Related to Our Financial Position and Capital Requirements

We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of June 30, 2023 and December 31, 2022, we had an accumulated deficit of $2,194.3 million and $1,959.4 million, respectively. We continue to incur significant research and development and other expenses related to our ongoing operations. We have incurred operating losses since our inception, expect to continue to incur significant operating losses for the foreseeable future, and we expect these losses to increase as we: (i) advance RTX, STI-6129 (anti-CD38 ADC), STI-1492 (anti-CD38 DAR-T), STI-6643 (anti-CD47 antibody), SP-103, SEMDEXATM and our other product candidates, including our COVID-19-related product candidates, STI-2099 (COVIDROPS), STI-9167 (COVISHIELD), STI-1558 (SARS-CoV-2 Oral Mpro inhibitor), and STI-8282 (COVI-MSC), into further clinical trials and ~~submit~~pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) conduct further studies for our preclinical COVID-19 related product candidates to advance to clinical trials and ~~obtain~~seek regulatory approval; (iii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iv) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all ~~requisite regulatory approvals~~of our programs, (vi) invest in our joint ventures, collaborations or other third party agreements, (vii) incur expenses in conjunction with defending and enforcing our rights in various litigation matters, (viii) expand our corporate, development and manufacturing infrastructure, and (ix) support our subsidiaries, including Bioserv Corporation, Levena Biopharma US Inc., and SmartPharm Therapeutics, Inc., in their clinical trial, development and commercialization efforts. As such, we are subject to all risks incidental to the development of new biopharmaceutical products and related companion diagnostics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

Since our common stock is currently quoted on the Pink Open Market our stockholders may face significant restrictions on the resale of our common stock due to state “blue sky” laws and the sale of common stock in this offering is subject to state “blue sky” laws.

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a ~~cost-effective manner;~~

~~obtain and maintain~~state, there must be a ~~proprietary position~~registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must also be registered in that state. Since our common stock is currently quoted on the Pink Open Market, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our ~~products~~common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and ~~manufacturing processes~~on purchasers to buy, our common stock and warrants. You should therefore consider the resale market for our common stock and warrants to be limited, as you may be unable to resell your common stock without the significant expense of state registration or qualification.

Risks Related to Our Business and Industry

We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.

We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. For example, on April 3, 2019, we filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from our company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. On December 20, 2022, the arbitrator in the arbitration related ~~product technology;~~

~~attract~~to breaches of the May 14, 2015 Stock Sale and ~~retain key personnel;~~

~~develop relationships~~Purchase Agreement entered into between us and NantPharma, LLC, related to the development of the cancer drug Cynviloq™ issued an award (the “Cynviloq Award”) granting contractual damages of $125 million to us, reflecting the value of lost milestone payments for the approval of Cynviloq for the treatment of breast and lung cancers. On December 2, 2022, the arbitrator in the arbitration before the American Arbitration Association against NantCell, Inc. (“NantCell”) and Immunotherapy NANTibody LLC (“NANTibody”) relating to alleged breaches of the April 21, 2015 Exclusive License Agreement entered into between us NantCell and the June 11, 2015 Exclusive License Agreement entered into between us and NANTibody, issued an award (the “Antibody Award”) granting contractual damages and pre-award interest in the amounts of $156,829,562 to NantCell and $16,681,521 to NANTibody, exclusive of post-award, prejudgment interest, which will accrue at 9%

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per annum (the “Award”). On December 21, 2022, the Los Angeles Superior Court entered judgment upon the Antibody Award and ordered us to pay to the Nant Entities the amounts awarded in the Antibody Award. On February 8, 2023, the Los Angeles Superior Court stayed enforcement of the Antibody Award judgment for 70 days only to the extent that the Antibody Award judgment exceeds the approximately $50.0 million difference between the amount of the Antibody Award and the amount of the Cynviloq Award. On March 16, 2023, the Los Angeles Superior Court granted our motion to confirm the Cynviloq Award. As an additional example, on May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action against us, our President, Chief Executive Officer and Chairman of the Board of Directors, Henry Ji, Ph.D., and our SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D., alleging that we, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection (the “Wasa Matter”). A second putative federal securities class action was filed in the U.S. District Court for the Southern District of California against the same defendants alleging the same claims and seeking the same relief, which matter was consolidated by the U.S. District Court for the Southern District of California with ~~physicians prescribing these products;~~the Wasa Matter (the “Consolidated Matter”). On June 3, 2022, judgment was entered in the favor of defendants in the Consolidated Matter. Plaintiff in the Consolidated Matter appealed the judgment in late June 2022 and

~~build an adequate sales~~ filed its opening appellate brief in October 2022. The defendants in the Consolidated Matter, as appellees, filed their answering brief in December 2022, and ~~marketing infrastructure for our product candidates.~~

~~Because we will be competing~~the appellant filed a response in January 2023. The Consolidated Matter is still pending. In general, claims made by or against ~~significantly larger companies with established track records, we will have to demonstrate that, based on experience, clinical data, side-effect profiles~~us in disputes and other legal or regulatory proceedings can be expensive and time consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. While we intend to pursue any claims made by us, or defend against any claims brought against us, vigorously, we cannot predict the outcomes of such claims. Any failure to prevail in any claims made by us or any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations.

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 3, 2022 to December 30, 2022, our closing stock price ranged from $0.73 to $4.84 per share and from January 3, 2023 to August 8, 2023, our closing stock price ranged from $0.17 to $1.19. 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, are competitive with~~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 ~~products.~~

~~Our global operations are exposed~~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;

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• 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 ~~risks, commercial volatility~~conditions;

• effects of natural or man-made catastrophic events;

• effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic; and

• other events or factors, many of which are beyond our ~~control~~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 ~~countries in~~price of our common stock, which ~~we operate, some of which may be enhanced by our recent acquisition of Virttu Biologics Limited.~~

~~On April 27, 2017, we acquired Virttu Biologics Limited, which is based~~could cause a decline in the ~~United Kingdom. In addition~~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.

Additionally, as previously disclosed, on February 13, 2023, we, along with Scintilla Pharmaceuticals, Inc., filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, thereby commencing the Chapter 11 Cases. The price of our common stock has been volatile following the commencement of the Chapter 11 Cases and our common stock may decrease in value or become worthless. Accordingly, any trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks to ~~challenges specific to~~purchasers of our common stock. As discussed below, recoveries in the ~~United States, our operations,~~Chapter 11 Cases for holders of common stock, if any, will depend upon several factors, including, but not limited to, our ~~operations outside~~ability to negotiate and confirm a plan, the terms of such plan and the value of our assets. Although we cannot predict how our common stock will be treated under a plan, we expect that common stockholders would not receive a recovery through any plan unless the holders of more senior claims and

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interests, such as secured indebtedness, are paid in full. Consequently, there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.

Moreover, on February 13, 2023, we received written notice (the “Delisting Notice”) from the staff of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, as a result of the ~~United States,~~Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, the staff of Nasdaq had determined that our common stock would be delisted from Nasdaq, effective February 23, 2023. In the Delisting Notice, the staff of Nasdaq referenced the Chapter 11 Cases and associated public concerns raised by them, concerns regarding the residual equity interest of the existing listed securities holders and concerns about our ability to sustain compliance with all requirements for continued listing on Nasdaq. In accordance with the Delisting Notice, trading of our common stock on Nasdaq was suspended at the opening of business on February 23, 2023, and at such time, our common stock commenced trading on the Pink Open Market under the symbol “SRNEQ”. We can provide no assurance that our common stock will continue to trade on the Pink Open Market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our common stock. Furthermore, because of the limited market and generally low volume of trading in our common stock, the price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, changes in the markets’ perception of our securities, and announcements made by us or third parties with interests in the Chapter 11 Cases.

The market price of Scilex Holding’s common stock and warrants may fluctuate significantly, and we may lose all or part of our 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. From November 11, 2022, the first day Scilex Holding’s common stock and warrants were listed on the Nasdaq Capital Market, to July 24, 2023, the closing price of Scilex Holding’s common stock ranged from $2.87 to $14.80 and the closing price of Scilex Holding’s warrants ranged from $0.16 to $3.51. The market price of Scilex Holding’s common stock and warrants may fluctuate significantly in response to numerous factors, many of which are beyond our and Scilex Holding’s control, and may include those described in the risk factor above under the heading “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.” Price volatility of Scilex Holding’s common stock and warrants may affect the value of our investment in Scilex Holding, which could have a material adverse effect on our stock price and our business, prospects, operating results, and financial condition.

As explained above, we have entered into the Stalking Horse Stock Purchase Agreement for the sale of the Scilex Purchased Securities, subject to an Auction and a ~~variety~~further order from the Bankruptcy Court approving the sale.

We have identified a material weakness in our internal control over financial reporting, and our financial controls and procedures may not in the future be sufficient to ensure timely and reliable reporting of ~~political and economic risks, including risks arising from:~~

~~unexpected changes in international or domestic legal, regulatory or governmental requirements or regulations, including related to intellectual property or the biopharmaceutical industry;~~

~~unexpected increases in taxes or tariffs;~~

~~trade protection measures or import or export licensing requirements;~~

~~the inability to obtain necessary foreign regulatory or pricing approvals of products~~financial information, which could, if not remediated, result in a material misstatement in our financial statements and could adversely affect our future results of operations, our stock price, and our ability to raise capital.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely ~~manner;~~

~~fluctuations~~basis.

As previously disclosed in ~~foreign currency exchange rates;~~

~~difficulties in staffing and managing international operations;~~

~~less favorable intellectual property or other applicable laws;~~

~~the effects~~Item 9A of ~~the implementation of the United Kingdom’s decision to voluntarily depart from the European Union;~~

~~currency controls that restrict or prohibit the payment of funds or the repatriation of earnings to the United States;~~

~~increased costs of compliance with general business and tax regulations in these countries or regions;~~

~~divergent legal systems and regulatory frameworks; and~~

~~political and economic instability or corruption.~~

~~These risks and others as described in~~ our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~

~~may have~~2021 filed with the Securities and Exchange Commission on March 11, 2022, as a result of our former Chief Financial Officer`s passing in early January 2022 as well as other considerations, management concluded that we did not employ sufficient accounting resources with appropriate experience and technical expertise to effectively execute controls over certain judgmental and technical accounting areas. As a result, we identified certain of our control activities were deficient and the combination of the aforementioned deficiencies were deemed to represent a material ~~adverse effect on~~weakness in our ~~global operations~~internal control over financial reporting as of December 31, 2021. While we have taken actions to remediate this material weakness, including (i) recruiting and onemploying personnel with appropriate experience and technical expertise to enhance management’s assessment of judgmental and technical accounting areas, (ii) conducting additional training for staff involved in judgmental and technical accounting areas, and (iii) engaging additional independent third-party technical consultants to assist in performing accounting analyses of complex transactions, completion of our remediation efforts is ongoing. As such management has concluded the aforementioned material weakness has not been remediated as of December 31, 2022. As a result, certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities, intangibles and contingent consideration did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represented a material weakness in our internal control over financial reporting as of December 31, 2022. The material

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weakness did not result in a restatement of previously issued annual consolidated financial statements or condensed interim consolidated financial statements.

During the fiscal year ending 2023, we will continue evaluating our remediation measures as described above to determine if such measures have been effectively implemented and will provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States. We cannot assure you that the measures we have taken to date or any measures we may take in response to the material weakness in the future will be sufficient to remediate such material weakness or to avoid potential future material weaknesses. Any failure to implement these improvements to our internal control over financial reporting would result in a continued material weakness in our internal control and could impact our ability to produce reliable financial reports, effectively manage the company or prevent fraud, and could potentially harm our business and our performance. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate. If we experience future material weaknesses or deficiencies in internal controls and we are unable to correct them in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC, will be adversely affected. Any such failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

Item 5.~~Other Information.~~

~~Seventh Amendment to Loan~~2.Unregistered Sales of Equity Securities and ~~Security Agreement~~

~~On November 6, 2017,~~Use of Proceeds.

None.

Item 3.Defaults Upon Senior Securities.

None, other than otherwise disclosed in the ~~Borrowers and Hercules (as defined below) entered into an amendment (the “Amendment”)~~accompanying notes to the ~~Loan Agreement. Pursuant to the terms~~consolidated financial statements in Part I, Item 1 of the Amendment, (1) we repaid Hercules, without repayment penalty, $10.0 million of the outstanding principal and unpaid interest accrued thereon on November 6, 2017, and (2) Hercules agreed to reduce the minimum amount of unrestricted cash that we must maintain under the Loan Agreement from $20.0 million to $8.0 million.

~~The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment, which is filed as Exhibit 10.3 to~~ this Quarterly Report on Form ~~10-Q and incorporated herein by reference. Certain terms~~10-Q.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5.Other Information.

During the fiscal quarter ended June 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the ~~Amendment have been omitted from this Quarterly Report on Form 10-Q and~~purchase or sale of our securities that was intended to satisfy the ~~version~~affirmative defense conditions of ~~the Amendment filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q pursuant to a Confidential Treatment Request submitted to the SEC.~~

~~Termination of License Agreement with Les Laboratoires Servier~~

Effective November 6, 2017, our license and collaboration agreement, dated July 6, 2016 (the "Servier License 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, was terminated based on mutually agreed upon terms pursuant to the Servier License Agreement.

Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

Item 6. Exhibits.

EXHIBIT INDEX



10.1* Exhibit No.		Description

3.1		~~License~~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 ~~Transfer~~Restated Bylaws of Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 15, 2019).

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		Voting Agreement, dated ~~August 15,~~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).

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4.3		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.~~, TNK Therapeutics, Inc.~~ and ~~Celularity, Inc.~~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).

~~10.2~~ 4.4		~~Amendment No. 2~~Form of Common Stock Purchase Warrant issued to ~~Contribution~~investors pursuant to the Securities Purchase Agreement, dated as of ~~August 10, 2017,~~June 13, 2018, by and among Sorrento Therapeutics, Inc.~~, TNK~~ 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).

4.5		Registration Rights Agreement, dated June 13, 2018, by and among Sorrento Therapeutics, Inc. and ~~Celularity, Inc.~~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).

10.3* 4.6		~~Seventh Amendment~~Form of Warrant, dated November 7, 2018, issued by Sorrento Therapeutics, Inc. (incorporated by reference to ~~Loan and Security~~Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

4.7		Registration Rights Agreement, dated November ~~6, 2017,~~7, 2018, by and among Sorrento Therapeutics, Inc.~~, certain of its domestic subsidiaries,~~ and ~~Hercules Capital, Inc.~~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).

~~31.1~~ 4.8		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 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

4.9		Form of Warrant, dated May 3, 2019, issued by Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 3, 2019).

4.10		Amendment No. 1 to the Registration Rights Agreement, dated as of May 3, 2019, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 3, 2019).

4.11		Form of Series A Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2019).

4.12		Form of Series C Warrant (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2019).

4.13		Form of Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 8, 2019).

4.14		Amendment No. 2 to the Registration Rights Agreement, dated as of December 6, 2019, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 9, 2019).

4.15		Registration Rights Agreement, dated as of March 4, 2021, by and between Sorrento Therapeutics, Inc. and the Icahn School of Medicine at Mount Sinai (incorporated by reference to Exhibit 4.19 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on April 9, 2021).

10.1		Debtor-in-Possession Term Loan Facility Summary of Terms and Conditions, dated as of July 5, 2023, between Sorrento Therapeutics, Inc., Scintilla Pharmaceuticals, Inc. and Scilex Holding Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 10, 2023).

10.2		Intercreditor and Subordination Agreement, dated as of July 5, 2023, by and among JMB Capital Partners Lending, LLC and Scilex Holding Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 10, 2023).

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,~~Elizabeth Czerepak, 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,~~Elizabeth Czerepak, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH
~~101.SCH~~		Inline XBRL Taxonomy Extension Schema Document

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101.CAL
~~101.CAL~~		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
~~101.DEF~~		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
~~101.LAB~~		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
~~101.PRE~~		Inline XBRL Taxonomy Extension Presentation Linkbase Document


* 104	~~The Registrant has requested confidential treatment with respect to certain portions of~~	Cover Page Interactive Data File, formatted in Inline Extensible Business Reporting Language (iXBRL) (embedded within the ~~exhibit. Omitted portions have been filed separately with the SEC.~~Inline XBRL document)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Sorrento Therapeutics, Inc.

Date:	~~November 9, 2017~~ August 11, 2023	By:	/s/ Henry Ji, Ph.D.
			Henry Ji, Ph.D.
			Chairman of the Board of Directors, Chief Executive Officer & President
			(Principal Executive Officer)



~~Date:~~	~~November 9, 2017~~	~~By:~~	~~/s/ Dean Ferrigno~~
Date:	August 11, 2023	By:	~~Dean Ferrigno~~ /s/ Elizabeth Czerepak
			~~Chief Accounting Officer~~ Elizabeth Czerepak
			Executive Vice President & Chief Financial Officer
			(Principal Financial ~~and Accounting~~ Officer)

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Delaware		33-0344842
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)


Title of each class:	Trading Symbol (s)	Name of each exchange on which registered:
~~(858) 203-4100~~ ~~(Registrant’s Telephone Number, Including Area Code)~~ Common Stock, $0.0001 par value	SRNEQ	None



Large accelerated filer	☐ ☒	Accelerated filer	☒ ☐

Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐

Emerging growth company	☐



	September 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	38,323		$	82,398
Marketable securities	888			1,106
Grants and accounts receivables, net	1,693			1,696
Income tax receivable	1,525			1,289
Prepaid expenses and other, net	2,279			3,165
Total current assets	44,708			89,654
Property and equipment, net	18,969			12,707
Intangibles, net	71,675			64,766
Goodwill	38,298			41,548
Cost method investments	237,008			112,008
Equity method investments	70,686			76,994
Other, net	3,440			3,909
Total assets	$	484,784		$	401,586
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	12,984		$	8,282
Accrued payroll and related benefits	4,158			3,565
Current portion of deferred compensation	—			1,012
Accrued expenses	4,441			4,741
Current portion of deferred revenue	14,666			9,666
Current portion of deferred rent	13			248
Acquisition consideration payable	44,682			48,362
Current portion of debt	2,407			209
Total current liabilities	83,351			76,085
Long-term debt	24,575			47,107
Deferred tax liabilities	105,659			53,238
Deferred revenue	127,133			134,376
Deferred rent and other	5,757			4,278
Total liabilities	346,475			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 78,521,438 and 50,882,856 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	9			6
Additional paid-in capital	357,898			303,865
Accumulated other comprehensive income (loss)	123			(118		)
Accumulated deficit	(177,545		)	(174,252		)
Treasury stock, 7,568,182 shares at cost at September 30, 2017, and December 31, 2016, respectively	(49,464		)	(49,464		)
Total Sorrento Therapeutics, Inc. stockholders' equity	131,021			80,037
Noncontrolling interests	7,288			6,465
Total equity	138,309			86,502
Total liabilities and stockholders' equity	$	484,784		$	401,586


ASSETS	June 30, 2023			December 31, 2022
Current assets:
Cash and cash equivalents	$	69,749		$	23,634
Marketable investments		10,886			26,344
Accounts receivables, net		32,725			24,469
Inventory		9,651			9,976
Prepaid expenses		5,222			8,807
Other current assets		4,878			3,143
Total current assets		133,111			96,373
Property and equipment, net		53,237			51,971
Operating lease right-of-use assets		53,408			86,464
Intangibles, net		122,283			136,902
Goodwill		80,269			80,269
Equity investments		12,008			17,176
Other assets, net		2,376			3,685
Total assets		456,692			472,840
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	18,554		$	47,515
Accrued payroll and related benefits		6,964			7,884
Accrued expenses and other current liabilities		91,924			58,456
Accrued legal settlements		—			174,752
Current portion of deferred revenue		256			652
Current portion of operating lease liabilities		13,051			13,880
Current portion of contingent consideration		397			397
Acquisition consideration		515			7,800
Income tax payable		12,926			300
Current portion of debt		120,362			16,286
Total current liabilities		264,949			327,922
Long-term debt, net of discount		21,741			19,130
Deferred tax liabilities, net		238			591
Deferred revenue		896			7,098
Derivative liabilities		1,600			300
Operating lease liabilities		52,446			85,208
Contingent consideration		550			48,949
Other long-term liabilities		3,305			5,311
Total liabilities not subject to compromise		345,725			494,509
Liabilities subject to compromise		308,923			—
Total liabilities		654,648			494,509
Commitments and contingencies (See Note 10)
Equity (Deficit):
Sorrento Therapeutics, Inc. equity (deficit)
Common stock, $0.0001 par value 750,000,000 shares authorized and 551,281,154 and 522,817,137 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		55			52
Additional paid-in capital		2,036,331			1,988,753
Accumulated other comprehensive income		2,240			1,501
Accumulated deficit		(2,194,275	)		(1,959,447	)
Treasury stock, 7,568,182 shares at cost at June 30, 2023, and December 31, 2022		(49,464	)		(49,464	)
Total Sorrento Therapeutics, Inc. stockholders’ deficit		(205,113	)		(18,605	)
Noncontrolling interests		7,157			(3,064	)
Total deficit		(197,956	)		(21,669	)
Total liabilities and stockholders’ equity (deficit)	$	456,692		$	472,840



☒	QUARTERLY 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



Part I	Financial Information	1 3
Item 1.	~~Condensed~~ Consolidated Financial Statements (Unaudited)	1 3
	~~Condensed~~ Consolidated Balance Sheets (Unaudited) as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022	1 3
	~~Condensed~~ Consolidated Statements of Operations (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	2 5
	~~Condensed~~ Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	3 6
	~~Condensed~~ Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	4 7
	~~Condensed~~ Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	5 8
	Notes to ~~Condensed~~ Consolidated Financial Statements (Unaudited)	7 10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48 46
Item 4.	Controls and Procedures	48 46

Part II	Other Information	50 47
Item 1.	Legal Proceedings	50 47
Item 1A.	Risk Factors	51 47
Item 5.2.	~~Other Information~~Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.3.	~~Exhibits~~Defaults Upon Senior Securities	56
~~Signatures~~Item 4.	57Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56
SIGNATURES		59



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenues:
Grant	$	11		$	142		$	206		$	899
Royalty and license	118,667			1,535			123,500			1,560
Sales and services	3,232			566			7,743			1,674
Total revenues	121,910			2,243			131,449			4,133
Operating costs and expenses:
Costs of revenues	1,085			418			2,965			1,072
Research and development	16,604			10,382			42,667			28,903
Acquired in-process research and development	902			—			1,102			45,000
General and administrative	10,214			5,267			31,194			13,982
Intangible amortization	656			112			1,948			334
Gain on contingent liabilities and acquisition consideration payable	(4,468		)	(1,687		)	(8,558		)	(6,184		)
Total operating costs and expenses	24,993			14,492			71,318			83,107
Income (Loss) from operations	96,917			(12,249		)	60,131			(78,974		)
Gain on sale of marketable securities	—			27,193			—			27,193
Gain (loss) on trading securities	231			491			(218		)	491
Gain (loss) on derivative liability	—			—			—			5,520
Gain (loss) on foreign currency exchange	(215		)	—			(215		)	—
Gain (loss) on equity investments	(507		)	323			(2,557		)	294
Interest expense	(1,208		)	(236		)	(4,017		)	(816		)
Interest income (expense)	(265		)	26			192			84
Income (loss) before income tax	94,953			15,548			53,316			(46,208		)
Income tax expense (benefit)	57,480			(195		)	54,386			(195		)
Net income (loss)	37,473			15,743			(1,070		)	(46,013		)

Net loss attributable to noncontrolling interests	3,514			(147		)	2,223			(2,948		)
Net income (loss) attributable to Sorrento	$	33,959		$	15,890		$	(3,293	)	$	(43,065	)
Net income (loss) per share - basic per share attributable to Sorrento	$	0.44		$	0.24		$	(0.05	)	$	(0.91	)
Net income (loss) per share - diluted per share attributable to Sorrento	$	0.44		$	0.24		$	(0.05	)	$	(0.91	)
Weighted-average shares used during period - basic per share attributable to Sorrento	76,887			66,193			66,122			47,581
Weighted-average shares used during period - diluted per share attributable to Sorrento	76,888			66,527			66,122			47,581


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net loss	$	(108,536	)	$	(219,477	)	$	(263,063	)	$	(260,017	)
Other comprehensive income:
Foreign currency translation adjustments		414			1,060			739			837
Total other comprehensive income		414			1,060			739			837
Comprehensive loss		(108,122	)		(218,417	)		(262,324	)		(259,180	)
Comprehensive loss attributable to noncontrolling interests		(13,324	)		(718	)		(28,334	)		(443	)
Comprehensive loss attributable to Sorrento	$	(94,798	)	$	(217,699	)	$	(233,990	)	$	(258,737	)



	Common Stock			Treasury Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Subscription Receivable		Accumulated Deficit			Noncontrolling Interest
	Shares	Amount		Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Subscription Receivable		Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2016	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 business combinations	1,552,011	—		—	—		3,053			—			—		—			—			3,053
Issuance of common stock for public placement and investments, net	26,082,325	3		—	—		47,641			—			—		—			—			47,644
Issuance of common stock for private placement and investments, net	4,246	—		—	—		30			—			—		—			—			30
Stock-based compensation	—	—		—	—		3,936			—			—		—			—			3,936
Foreign currency translation adjustment	—	—		—	—		—			241			—		—			—			241
Net loss	—	—		—	—		—			—			—		(3,293		)	2,223			(1,070		)
Balance, September 30, 2017	78,521,438	$	9	7,568,182	(49,464	)	$	357,898		$	123		$	—	$	(177,545	)	$	7,288		$	138,309


	Six Months Ended June 30, 2023
	Common Stock				Treasury Stock								Accumulated
	Shares		Amount		Shares		Amount			Additional Paid-in Capital			Other Comprehensive Income		Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2022		522,817	$	52		7,568	$	(49,464	)	$	1,988,753		$	1,501	$	(1,959,447	)	$	(3,064	)	$	(21,669	)
Issuance of common stock for equity offerings		28,336		3		—		—			28,366			—		—			—			28,369
Other acquisitions, license agreements and investments paid in equity		128		—		—		—			—			—		—			—			—
Stock-based compensation		—		—		—		—			18,311			—		—			—			18,311
Scilex Holding dividend		—		—		—		—			(14,282	)		—		—			14,282			—
Scilex Holding equity issuances		—		—		—		—			—			—		—			1,870			1,870
Foreign currency translation adjustment		—		—		—		—			—			325		—			—			325
Net loss		—		—		—		—			—			—		(139,616	)		(15,010	)		(154,626	)
Balance, March 31, 2023		551,281	$	55		7,568	$	(49,464	)	$	2,021,148		$	1,826	$	(2,099,063	)	$	(1,922	)	$	(127,420	)
Issuance of common stock for equity offerings		—		—		—		—			—			—		—			—			—
Other acquisitions, license agreements and investments paid in equity		—		—		—		—			—			—		—			—			—
Stock-based compensation		—		—		—		—			15,183			—		—			—			15,183
Scilex Holding equity issuances		—		—		—		—			—			—		—			22,403			22,403
Foreign currency translation adjustment		—		—		—		—			—			414		—			—			414
Net loss		—		—		—		—			—			—		(95,212	)		(13,324	)		(108,536	)
Balance, June 30, 2023		551,281	$	55		7,568	$	(49,464	)	$	2,036,331		$	2,240	$	(2,194,275	)	$	7,157		$	(197,956	)


	Six Months Ended June 30, 2022
	Common Stock					Treasury Stock							Accumulated
	Shares		Amount			Shares		Amount			Additional Paid-in Capital		Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2021		314,573	$	32			7,568	$	(49,464	)	$	1,513,758	$	1,026		$	(1,386,604	)	$	(619	)	$	78,129
Issuance of common stock under equity compensation plans		438		—			—		—			132		—			—			—			132
Issuance of common stock for equity offerings		58,875		6			—		—			164,431		—			—			—			164,437
Acquisitions consideration paid in equity		1,282		—			—		—			4,435		—			—			—			4,435
Stock-based compensation		—		—			—		—			20,854		—			—			—			20,854
Foreign currency translation adjustment		—		—			—		—			—		(1,249	)		—			—			(1,249	)
Net loss		—		—			—		—			—		—			(40,815	)		275			(40,540	)
Balance, March 31, 2022		375,168	$	38			7,568	$	(49,464	)	$	1,703,610	$	(223	)	$	(1,427,419	)	$	(344	)	$	226,198
Issuance of common stock under equity compensation plans		544		—			—		—			668		—			—			—			668
Issuance of common stock for equity offerings		60,707		6			—		—			104,163		—			—			—			104,169
Stock-based compensation		—		—			—		—			18,369		—			—			—			18,369
Changes to noncontrolling interests		—		(26	)		—		—			—		—			—			4,802			4,776
Foreign currency translation adjustment		—		—			—		—			—		1,060			—			—			1,060
Net loss		—		—			—		—			—		—			(218,759	)		(718	)		(219,477	)
Balance, June 30, 2022		436,419	$	18			7,568	$	(49,464	)	$	1,826,810	$	837		$	(1,646,178	)	$	3,740		$	135,763


	Fair Value Measurements at June 30, 2023
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable investments	$	10,886	$	10,886	$	—	$	—
Total assets	$	10,886	$	10,886	$	—	$	—
Liabilities:
Convertible Debentures	$	18,440	$	—	$	—	$	18,440
Derivative liabilities - non-current		1,600		—		—		1,600
Current portion of contingent consideration		397		—		—		397
Contingent consideration - non-current		52,749		—		—		52,749
Total liabilities	$	73,186	$	—	$	—	$	73,186


	Fair Value Measurements at December 31, 2022
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable investments	$	26,344	$	26,344	$	—	$	—
Total assets	$	26,344	$	26,344	$	—	$	—
Liabilities:
Derivative liabilities - non-current	$	300	$	—	$	—	$	300
Current portion of contingent consideration		397		—		—		397
Contingent consideration - non-current		48,949		—		—		48,949
Total liabilities	$	49,646	$	—	$	—	$	49,646


	June 30, 2023
Risk -Free Rate		5.29	%
Corporate Bond Yield		16.33	%
Coupon Interest Rate		7.0	%
Volatility		42.0	%
Dividend Yield		0.0	%
Conversion Price	$	8.00



	Fair Value Measurements at September 30, 2017
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	38,323	$	38,323	$	—	$	—
Marketable securities	$	888	$	700	$	—	$	188
Total assets	$	39,211	$	39,023	$	—	$	188
Liabilities:
Acquisition consideration payable - Current	$	44,682	$	—	$	—	$	44,682
Acquisition consideration payable - Non-current	$	1,032	$	—	$	—	$	1,032
Total liabilities	$	45,714	$	—	$	—	$	45,714

	Fair Value Measurements at December 31, 2016
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	82,398	$	82,398	$	—	$	—
Marketable securities	$	1,106	$	831	$	—	$	275
Total assets	$	83,504	$	83,229	$	—	$	275
Liabilities:
Acquisition consideration payable	$	48,362	$	—	$	—	$	48,362
Total liabilities	$	48,362	$	—	$	—	$	48,362


(in thousands)	Fair Value
Beginning Balance at December 31, 2022	$	49,346
Change in fair value measurement		3,800
Ending Balance at June 30, 2023	$	53,146



(in thousands)	Fair Value
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	(8,558		)
Payment of current year contingent consideration	(1,380		)
Ending Balance at September 30, 2017	$	45,714



(in thousands)	Fair Value Measurements at September 30, 2017		Valuation Methodology	Significant Unobservable Input	Weighted Average (range, if applicable)
BDL Contingent Consideration	$	1,057	Multiple outcome discounted cash flow	Discount Rate Percent probabilities assigned to scenarios	6.82% 10% and 90%
Virttu Contingent Consideration (Non-current)	$	1,032	Multiple outcome discounted cash flow	Discount Rate Probability of Regulatory Milestone	12.21% 16%
Virttu Contingent Consideration	$	10,104	Multiple outcome discounted cash flow	Discount Rate Percent probabilities assigned to scenarios	3.21% 30% and 70%
Scilex Contingent Consideration	$	28,900	Monte Carlo simulation method	Discount Rate Probability of Regulatory Milestones	11.39% 95%
Concortis Contingent Consideration	$	534	Multiple outcome discounted cash flow	Discount Rate Percent probabilities assigned to scenarios	19.20% 20%
Shanghai Three Contingent Consideration	$	1,635	Multiple outcome discounted cash flow	Discount Rate Percent probabilities assigned to scenarios	12.21% 50%
RWMC Contingent Consideration	$	2,452	Multiple outcome discounted cash flow	Discount Rate, Percent probabilities assigned to scenarios	12.21% 50%



	September 30, 2017
	Carrying Value		Fair Value
Debt Obligations:
Term Loan	26,982		26,982

Total Fair Value of Debt Obligations:	$	26,982	$	26,982



	December 31, 2016
	Carrying Value		Fair Value
Debt Obligations:
Term Loan	47,316		47,316

Total Fair Value of Debt Obligations:	$	47,316	$	47,316



	September 30, 2017
	Cost		Gross Unrealized Gains (Losses)		Gross Realized Gains (Losses)		Fair Value
Trading securities:
MedoveX common shares and warrants	$	750	$	138	$	—	$	888



	Total
Beginning balance at December 31, 2016	$	275
Change in fair value of warrant	(87		)
Ending balance at September 30, 2017	$	188



	September 30, 2017			December 31, 2016
Furniture and fixtures	1,089			458
Office equipment	518			326
Machinery and lab equipment	18,787			13,220
Leasehold improvements	6,833			3,625
	27,227			17,630
Less accumulated depreciation	(8,258		)	(4,922		)
	$	18,969		$	12,707



	Total
Balance at December 31, 2016	$	41,548
Scilex Acquisition Adjustment	(4,645		)
Goodwill Acquired from Virttu Acquisition	1,384
Foreign Currency Translation Adjustments	$	11
Balance at September 30, 2017	$	38,298



	September 30, 2017
	Gross Carrying Amount		Accumulated Amortization		Intangibles, net
Customer relationships	$	1,585	$	1,018	$	567
Acquired technology	3,410		665		2,745
Acquired in-process research and development	37,660		—		37,660
Patent rights	32,720		2,017		30,703
Total intangible assets	$	75,375	$	3,700	$	71,675



Face value of loan	$	50,000
Repayment principal and backend fee	(21,500		)
Fair value of warrant	(1,377		)
Capitalized debt issuance costs	(1,681		)
Accretion of debt issuance costs and other	1,182
Accretion of debt discount	358
Balance at September 30, 2017	26,982



Year Ending December 31,
2017	758
2018	8,322
2019	13,612
2020	14,935
Total future minimum payments	37,627
Unamortized interest	(7,587		)
Debt discount	(1,377		)
Capitalized debt issuance costs	(1,681		)
Total minimum payment	26,982
Current portion	(2,407		)
Long-term debt	$	24,575



	Options Outstanding		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding at December 31, 2016	4,332,876		$	7.86	$	427
Options Granted	3,110,100		$	1.82
Options Canceled	(510,676	)	$	8.26
Options Exercised	—		$	—
Outstanding at September 30, 2017	6,932,300		$	5.14	$	617



~~Common stock warrants outstanding under the underwriters agreement~~	~~182,600~~
~~Common stock warrants outstanding under the loan and security agreement~~	~~65,892~~
~~Common stock warrants outstanding under the Cambridge securities agreement~~	~~1,224,138~~
~~Common stock warrants outstanding under the Hercules securities agreement~~	~~306,748~~
~~Common stock warrants outstanding under private placements~~	~~4,153,620~~
~~Common stock options outstanding under the Non-Employee Director Plan~~	~~3,200~~
~~Authorized for future grant or issuance under the 2009 Stock Incentive Plan~~	~~3,756,796~~
~~Issuable under BDL acquisition agreement~~	~~309,916~~
~~Issuable under Scilex acquisition agreement~~	~~1,381,346~~
~~Issuable under Virttu acquisition agreement~~	~~3,603,604~~
~~Issuable under assignment agreement based upon achievement of certain milestones~~	~~80,000~~
	~~15,067,860~~



	September 30, 2017
Income tax provision at federal statutory rate	$	18,661
State tax, net of federal tax benefit	$	(176	)
Non-deductible expense and other	$	269
Impact of indefinite-lived deferred tax liabilities	$	38,962
Income tax credits	$	(828	)
Decrease in valuation allowance	$	(2,502	)
Income tax provision	$	54,386