(In thousands, except for share amounts; unaudited)

ASSETS	June 30, 2020			December 31, 2019
Current assets:
Cash and cash equivalents	$	24,388		$	22,521
Restricted cash		—			13,098
Accounts receivables, net		13,801			14,454
Inventory		2,447			3,362
Prepaid expenses and other		14,365			14,153
Total current assets		55,001			67,588
Property and equipment, net		27,523			29,888
Operating lease right-of-use assets		45,070			46,384
Intangibles, net		61,324			63,308
Goodwill		38,298			38,298
Cost method investments		237,008			237,008
Equity method investments		19,978			25,233
Restricted cash		45,000			45,150
Other, net		3,866			4,775
Total assets	$	533,068		$	557,632
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,605		$	27,630
Accrued payroll and related benefits		17,909			15,914
Accrued expenses		19,711			18,728
Current portion of deferred revenue		4,107			3,643
Acquisition consideration payable		398			908
Current portion of derivative liabilities		—			8,800
Current portion of debt		19,151			36,261
Current portion of operating lease liabilities		3,460			3,322
Total current liabilities		91,341			115,206
Long-term debt, net of discount		147,027			199,088
Deferred tax liabilities, net		7,055			9,043
Deferred revenue		113,781			114,389
Derivative liabilities		41,900			35,000
Operating lease liabilities		51,200			52,111
Other long-term liabilities		549			39
Total liabilities	$	452,853		$	524,876
Commitments and contingencies (See Note 10)
Equity:
Sorrento Therapeutics, Inc. equity
Preferred stock, $0.0001 par value; 100,000,000 shares authorized and 0 shares issued or outstanding		—			—
Common stock, $0.0001 par value 750,000,000 shares authorized and 231,846,901 and 167,798,120 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		25			18
Additional paid-in capital		989,702			788,122
Accumulated other comprehensive loss		(225	)		(270	)
Accumulated deficit		(802,753	)		(659,818	)
Treasury stock, 7,568,182 shares at cost at June 30, 2020, and December 31, 2019		(49,464	)		(49,464	)
Total Sorrento Therapeutics, Inc. stockholders’ equity		137,285			78,588
Noncontrolling interests		(57,070	)		(45,832	)
Total equity		80,215			32,756
Total liabilities and stockholders’ equity	$	533,068		$	557,632

ASSETS September 30,
2019 December 31,
2018
Current assets:
Cash and cash equivalents $ 34,649 $ 158,738
Restricted cash 9,592 9,592
Marketable securities 94 297
Accounts receivables, net 11,560 3,833
Inventory 4,335 2,898
Income tax receivable 216 526
Prepaid expenses and other 7,122 3,680
Total current assets 67,568 179,564
Property and equipment, net 30,338 24,384
Operating lease right-of-use assets 47,799 —
Intangibles, net 64,299 66,283
Goodwill 38,298 38,298
Cost method investments 237,008 237,008
Equity method investments 25,240 27,980
Restricted cash 45,150 45,000
Other, net 5,175 5,570
Total assets $ 560,875 $ 624,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 26,750 $ 13,817
Accrued payroll and related benefits 14,665 10,236
Accrued expenses 18,478 13,403
Current portion of deferred revenue 3,613 2,703
Acquisition consideration payable 11,312 11,312
Current portion of derivative liabilities 9,000 —
Current portion of debt 25,877 10,150
Current portion of operating lease liabilities 3,018 —
Total current liabilities 112,713 61,621
Long-term debt, net of discount 234,370 223,136
Deferred tax liabilities, net 8,634 9,416
Deferred revenue 114,783 116,274
Derivative liabilities 29,500 —
Operating lease liabilities 53,378 —
Deferred rent and other 828 6,140
Total liabilities $ 554,206 $ 416,587
Commitments and contingencies (See Note 13)
Equity:
Sorrento Therapeutics, Inc. equity
Preferred stock, $0.0001 par value; 100,000,000 shares authorized and 0 shares issued or outstanding — —

Common stock, $0.0001 par value 750,000,000 shares authorized and 131,001,293 and 122,280,092 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively 13 13
Additional paid-in capital 692,473 626,658
Accumulated other comprehensive (loss) income (129) 15
Accumulated deficit (596,998) (367,750)
Treasury stock, 7,568,182 shares at cost at September 30, 2019, and December 31, 2018 (49,464) (49,464)
Total Sorrento Therapeutics, Inc. stockholders’ equity 45,895 209,472
Noncontrolling interests (39,226) (1,972)
Total equity 6,669 207,500
Total liabilities and stockholders’ equity $ 560,875 $ 624,087

See accompanying notes to unaudited consolidated financial statements

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share amounts; unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues:
Net product revenues	$	5,794		$	4,699		$	11,042		$	8,058
Service revenues		3,213			1,778			5,686			4,562
Total revenues		9,007			6,477			16,728			12,620
Operating costs and expenses:
Cost of products sold		699			589			1,247			1,029
Cost of services		1,550			2,692			3,441			4,560
Research and development		24,150			24,793			45,304			50,409
Acquired in-process research and development		4,881			—			4,881			75,301
Selling, general and administrative		24,463			27,772			50,762			52,894
Intangible amortization		992			992			1,984			1,958
Total operating costs and expenses		56,735			56,838			107,619			186,151
Loss from operations		(47,728	)		(50,361	)		(90,891	)		(173,531	)
(Loss) gain on trading securities		—			(76	)		(59	)		18
Loss on debt extinguishment		(28,294	)		—			(51,939	)		—
Gain (loss) on derivative liabilities		1,980			(10,591	)		6,900			(25,092	)
(Loss) gain on foreign currency exchange		124			(411	)		(23	)		(98	)
Interest expense		(8,297	)		(9,520	)		(15,122	)		(18,600	)
Interest income		2			305			21			839
Loss before income tax		(82,213	)		(70,654	)		(151,113	)		(216,464	)
Income tax benefit		(1,919	)		(383	)		(2,195	)		(561	)
Loss on equity method investments		(4,699	)		(1,574	)		(5,255	)		(2,471	)
Net loss		(84,993	)		(71,845	)		(154,173	)		(218,374	)
Net loss attributable to noncontrolling interests		(7,253	)		(15,083	)		(11,238	)		(53,541	)
Net loss attributable to Sorrento	$	(77,740	)	$	(56,762	)	$	(142,935	)	$	(164,833	)
Net loss per share - basic per share attributable to Sorrento	$	(0.36	)	$	(0.46	)	$	(0.72	)	$	(1.35	)
Net loss per share - diluted per share attributable to Sorrento	$	(0.36	)	$	(0.47	)	$	(0.72	)	$	(1.51	)
Weighted-average shares used during period - basic per share attributable to Sorrento		216,956			122,549			199,782			122,415
Weighted-average shares used during period - diluted per share attributable to Sorrento		216,956			132,459			199,782			128,132

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018

Revenues:
Net product revenues $ 3,810 $ 1,121 $ 11,868 $ 1,982
Service revenues 1,968 2,984 6,530 12,282
Total revenues 5,778 4,105 18,398 14,264
Operating costs and expenses:
Cost of products sold 2,839 662 3,868 663
Cost of services 2,387 1,515 6,947 4,052
Research and development 27,573 19,567 77,916 52,124
Acquired in-process research and development — 9,478 75,301 9,478
Selling, general and administrative 25,234 20,102 78,128 41,102
Intangible amortization 991 655 2,949 1,974
Loss on contingent liabilities and acquisition consideration payable 37 33 103 13,696
Total operating costs and expenses 59,061 52,012 245,212 123,089
Loss from operations (53,283) (47,907) (226,814) (108,825)
Loss on trading securities (221) (26) (203) (144)
Loss on derivative liabilities (10,700) — (35,792) —
(Loss) gain on foreign currency exchange (521) 18 (619) (551)
Interest expense (9,459) (2,684) (28,059) (48,744)
Interest income 182 219 1,021 229
Loss before income tax (74,002) (50,380) (290,466) (158,035)
Income tax benefit (221) (826) (782) (3,152)
Loss on equity method investments (1,431) (900) (3,902) (3,926)
Net loss (75,212) (50,454) (293,586) (158,809)
Net loss attributable to noncontrolling interests (10,797) (3,126) (64,338) (5,045)
Net loss attributable to Sorrento $ (64,415) $ (47,328) $ (229,248) $ (153,764)
Net loss per share - basic per share attributable to Sorrento $ (0.49) $ (0.40) $ (1.83) $ (1.52)
Net loss per share - diluted per share attributable to Sorrento $ (0.50) $ (0.40) $ (2.00) $ (1.52)
Weighted-average shares used during period - basic per share attributable to Sorrento 130,800 117,021 125,240 100,959
Weighted-average shares used during period - diluted per share attributable to Sorrento 140,445 117,021 132,265 100,959

See accompanying notes to unaudited consolidated financial statements

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands; unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net loss	$	(84,993	)	$	(71,845	)	$	(154,173	)	$	(218,374	)
Other comprehensive loss (gain):
Foreign currency translation adjustments		(10	)		(52	)		45			33
Total other comprehensive loss (gain)		(10	)		(52	)		45			33
Comprehensive loss		(85,003	)		(71,897	)		(154,128	)		(218,341	)
Comprehensive loss attributable to noncontrolling interests		(7,253	)		(15,083	)		(11,238	)		(53,541	)
Comprehensive loss attributable to Sorrento	$	(77,750	)	$	(56,814	)	$	(142,890	)	$	(164,800	)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net loss $ (75,212) $ (50,454) $ (293,586) $ (158,809)
Other comprehensive gain (loss):
Foreign currency translation adjustments (177) (74) (144) (163)
Total other comprehensive loss (177) (74) (144) (163)
Comprehensive loss (75,389) (50,528) (293,730) (158,972)
Comprehensive loss attributable to noncontrolling interests (10,797) (3,126) (64,338) (5,045)
Comprehensive loss attributable to Sorrento $ (64,592) $ (47,402) $ (229,392) $ (153,927)

See accompanying notes to unaudited consolidated financial statements

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except for share amounts; unaudited)

	Six Months Ended June 30, 2020
	Common Stock				Treasury Stock							Accumulated
	Shares		Amount		Shares		Amount			Additional Paid-in Capital		Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2019		167,798,120	$	18		7,568,182	$	(49,464	)	$	788,122	$	(270	)	$	(659,818	)	$	(45,832	)	$	32,756
Exercise of stock options, net		925,945									3,896											3,896
Issuance of common stock upon exercise of warrants		13,124,042		1		—		—			38,860		—			—			—			38,861
Issuance of common stock for equity offerings		49,998,794		6		—		—			151,807		—			—			—			151,813
Stock-based compensation		—		—		—		—			7,017		—			—			—			7,017
Foreign currency translation adjustment		—		—		—		—			—		45						—			45
Net loss		—		—		—		—			—		—			(142,935	)		(11,238	)		(154,173	)
Balance, June 30, 2020		231,846,901	$	25		7,568,182	$	(49,464	)	$	989,702	$	(225	)	$	(802,753	)	$	(57,070	)	$	80,215

Nine Months Ended September 30, 2019
Common Stock Treasury Stock Additional
Paid-in Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Noncontrolling
Interest
Shares Amount Shares Amount Total
Balance, December 31, 2018 122,280,092 $ 13 7,568,182 $ (49,464) $ 626,658 $ 15 $ (367,750) $ (1,972) $ 207,500
Issuance of common stock upon exercise of stock options 158,699 — — — 289 — — — 289
Issuance of common stock for public placement, net 229,168 — — — 947 — — — 947
Equity contribution related to Semnur acquisition — — — — 27,991 — — 26,600 54,591
Stock-based compensation — — — — 8,978 — — — 8,978
Issuance of 2019 Warrants — — — — 4,288 — — — 4,288
2019 Public Offering of common stock and warrants, net of issuance costs 8,333,334 — — — 23,322 — — — 23,322
Adjustment to noncontrolling interest — — — — — — — 484 484
Foreign currency translation adjustment — — — — — (144) — (144)
Net loss — — — — — — (229,248) (64,338) (293,586)
Balance, September 30, 2019 131,001,293 $ 13 7,568,182 $ (49,464) $ 692,473 $ (129) $ (596,998) $ (39,226) $ 6,669

	Three Months Ended June 30, 2020
	Common Stock				Treasury Stock							Accumulated
	Shares		Amount		Shares		Amount			Additional Paid-in Capital		Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interest			Total
Balance, March 31, 2020		204,566,004	$	23		7,568,182	$	(49,464	)	$	875,712	$	(215	)	$	(725,013	)	$	(49,817	)	$	51,226
Exercise of stock options, net		876,752									3,797											3,797
Issuance of common stock upon exercise of warrants		8,115,433		1		—		—			25,326		—			—			—			25,327
Issuance of common stock for equity offerings		18,288,712		1		—		—			81,532		—			—			—			81,533
Stock-based compensation		—		—		—		—			3,335		—			—			—			3,335
Foreign currency translation adjustment		—		—		—		—			—		(10	)					—			(10	)
Net loss		—		—		—		—			—		—			(77,740	)		(7,253	)		(84,993	)
Balance, June 30, 2020		231,846,901	$	25		7,568,182	$	(49,464	)	$	989,702	$	(225	)	$	(802,753	)	$	(57,070	)	$	80,215

	Six Months Ended June 30, 2019
	Common Stock				Treasury Stock							Accumulated
	Shares		Amount		Shares		Amount			Additional Paid-in Capital		Other Comprehensive Income (Loss)		Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2018		122,280,092	$	13		7,568,182	$	(49,464	)	$	626,658	$	15	$	(367,750	)	$	(1,972	)	$	207,500
Issuance of common stock upon exercise of stock options		365,242		—		—		—			1,206		—		—			—			1,206
Equity contribution related to Semnur acquisition		—		—		—		—			28,400		—		—			26,600			55,000
Stock-based compensation		—		—		—		—			4,963		—		—			—			4,963
Issuance of 2019 Warrants											4,288										4,288
Foreign currency translation adjustment		—		—		—		—			—		33		—			—			33
Net loss		—		—		—		—			—		—		(164,833	)		(53,541	)		(218,374	)
Balance, June 30, 2019		122,645,334	$	13		7,568,182	$	(49,464	)	$	665,515	$	48	$	(532,583	)	$	(28,913	)	$	54,616

																							Three Months Ended June 30, 2019
		Three Months Ended September 30, 2019																																													Common Stock	Treasury Stock	Accumulated
																							Shares			Amount		Shares		Amount			Additional Paid-in Capital		Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interest			Total
		Common Stock				Treasury Stock						Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit					Noncontrolling Interest
		Shares	Amount		Shares	Amount																						Total
Balance, June 30, 2019		122,645,334	$	13	7,568,182	$	(49,464)	$	665,515	$	48			$	(532,583)			$	(28,913)			$	54,616
Balance, March 31, 2019																								122,311,917		$	13		7,568,182	$	(49,464	)	$	657,115	$	100		$	(475,821	)	$	(13,830	)	$	118,113
Issuance of common stock upon exercise of stock options	Issuance of common stock upon exercise of stock options	22,625	—		—	—		30		—		—				—				30				333,417			—		—		—			1,125		—			—			—			1,125
Equity contribution related to Semnur acquisition		—	—		—	—		(409)		—		—				—				(409)

Stock-based compensation	Stock-based compensation	—	—		—	—		4,015		—		—				—				4,015				—			—		—		—			2,987		—			—			—			2,987
Issuance of 2019 Warrants	Issuance of 2019 Warrants	—	—		—	—		—		—		—				—				—				—			—		—		—			4,288		—			—			—			4,288
2019 Public Offering of common stock and warrants, net of issuance costs		8,333,334	—		—	—		23,322		—		—				—				23,322
Adjustment to noncontrolling interest		—	—		—	—		—		—		—				484				484
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—		(177)		—				—				(177)				—			—		—		—			—		(52	)		—			—			(52	)
Net loss	Net loss	—	—		—	—		—		—		(64,415)				(10,797)				(75,212)				—			—		—		—			—		—			(56,762	)		(15,083	)		(71,845	)
Balance, September 30, 2019		131,001,293	$	13	7,568,182	$	(49,464)	$	692,473	$	(129)	$	(596,998)			$	(39,226)			$	6,669
Balance, June 30, 2019																								122,645,334		$	13		7,568,182	$	(49,464	)	$	665,515	$	48		$	(532,583	)	$	(28,913	)	$	54,616

Nine Months Ended September 30, 2018
Common Stock Treasury Stock Additional
Paid-in Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Noncontrolling
Interest
Shares Amount Shares Amount Total
Balance, December 31, 2017 82,903,567 $ 9 7,568,182 $ (49,464) $ 413,901 $ 242 $ (165,120) $ 7,042 $ 206,610
Adoption impact of ASC 606 — — — — — — 910 — 910
Issuance of common stock upon exercise of stock options 42,565 — — — 302 — — — 302
Issuance of common stock for BDL settlement 309,916 — — — 2,340 — — — 2,340
Issuance of common stock for Scilex settlement 1,381,346 — — — 13,744 — — — 13,744
Issuance of common stock for public placement and investments, net 10,396,489 2 — — 71,475 — — — 71,477
Issuance of common stock for Virttu settlement 1,795,011 — — — 11,308 — — — 11,308
Issuance of common stock related to conversion of notes payable 22,038,565 2 — — 49,998 — — — 50,000
Beneficial conversion feature recorded on convertible notes — — — — 12,006 — — — 12,006
Warrants issued in connection with convertible notes — — — — 9,646 — — — 9,646
Stock-based compensation — — — — 4,218 — — (29) 4,189
Foreign currency translation adjustment — — — — — (163) — — (163)
Net loss — — — — — — (153,764) (5,045) (158,809)
Balance, September 30, 2018 118,867,459 $ 13 7,568,182 $ (49,464) $ 588,938 $ 79 $ (317,974) $ 1,968 $ 223,560

Three Months Ended September 30, 2018
Common Stock Treasury Stock Additional
Paid-in Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Noncontrolling
Interest
Shares Amount Shares Amount Total
Balance, June 30, 2018 116,240,963 $ 12 7,568,182 $ (49,464) $ 574,316 $ 153 $ (270,646) $ 5,094 $ 259,465
Issuance of common stock upon exercise of stock options 16,750 — — — 141 — — — 141
Issuance of common stock for public placement and investments, net 2,609,746 1 — — 13,204 — — — 13,205
Issuance of common stock for Virttu settlement — — — — — — — — —
Issuance of common stock related to conversion of notes payable — — — — — — — — —
Beneficial conversion feature recorded on convertible notes — — — — — — — — —
Warrants issued in connection with convertible notes — — — — — — — — —
Stock-based compensation — — — — 1,277 — — — 1,277
Foreign currency translation adjustment — — — — — (74) — — (74)
Net loss — — — — — — (47,328) (3,126) (50,454)
Balance, September 30, 2018 118,867,459 $ 13 7,568,182 $ (49,464) $ 588,938 $ 79 $ (317,974) $ 1,968 $ 223,560

See accompanying notes to unaudited consolidated financial statements

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

	Six Months Ended June 30,
Operating activities	2020			2019
Net loss	$	(154,173	)	$	(218,374	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		5,653			5,934
Non-cash operating lease cost		1,689			2,217
Non-cash interest expense and amortization of debt issuance costs		7,955			12,341
Acquired in-process research and development		4,881			75,301
Stock-based compensation		7,017			4,963
Loss on debt extinguishment		51,939			—
(Gain) Loss on derivative liabilities		(6,900	)		25,092
Loss on equity method investments		5,255			2,471
Deferred tax provision		(1,989	)		(493	)
Changes in operating assets and liabilities, excluding effect of acquisitions:
Accounts receivable		655			(5,952	)
Accrued payroll		1,995			2,264
Prepaid expenses, deposits and other assets		1,612			(4,480	)
Accounts payable		(1,241	)		5,655
Accrued expenses and other liabilities		73			2,451
Deferred revenue		(144	)		(435	)
Other		(352	)		(98	)
Net cash used for operating activities		(76,075	)		(91,143	)
Investing activities
Purchases of property and equipment		(970	)		(7,488	)
Purchase of assets related to Semnur, net of cash acquired		—			(17,040	)
Other acquisitions and investments		(2,312	)		—
Net cash used for investing activities		(3,282	)		(24,528	)
Financing activities
Proceeds from equity offerings, net of issuance costs		149,243			—
Proceeds from short-term debt, net of issuance costs		7,815			18,858
Proceeds from exercise of stock options and warrants		42,757			1,206
Repayments of debt and other obligations		(131,853	)		(1,658	)
Net cash provided by (used for) financing activities		67,962			18,406
Net change in cash, cash equivalents and restricted cash		(11,395	)		(97,265	)
Net effect of exchange rate changes on cash		14			62
Cash, cash equivalents and restricted cash at beginning of period		80,769			213,330
Cash, cash equivalents and restricted cash at end of period	$	69,388		$	116,127
Supplemental disclosures:
Cash paid during the period for:
Interest		3,148			6,178
Supplemental disclosures of non-cash investing and financing activities:
Semnur acquisition consideration paid in equity		—			55,000
Semnur acquisition costs incurred but not paid		—			601
Other acquisitions and investments paid in equity		2,569			—
Property and equipment costs incurred but not paid		217			2,671
Reconciliation of cash, cash equivalents and restricted cash within the Company’s consolidated balance sheets:
Cash and cash equivalents		24,388			61,385
Restricted cash		45,000			54,742
Cash, cash equivalents, and restricted cash	$	69,388		$	116,127

Nine Months Ended September 30,
Operating activities 2019 2018
Net loss $ (293,586) $ (158,809)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 8,248 6,192
Non-cash operating lease cost 3,069 —
Non-cash interest expense 15,964 44,272
Acquisition-related IPR&D 75,301 9,478
Amortization of debt issuance costs 1,590 2,634
Loss on trading securities 203 144
Stock-based compensation 8,978 4,188
Loss on derivative liabilities 35,792 —
Loss on equity method investments 3,902 3,926
Loss on contingent liabilities and acquisition consideration payable 103 13,696
Deferred tax provision (782) (3,062)
Changes in operating assets and liabilities, excluding effect of acquisitions:
Accounts receivable (7,727) (67)
Accrued payroll 4,429 3,683
Prepaid expenses and other (3,699) (99)
Accounts payable 8,782 7,233
Deferred revenue (581) (3,482)
Other (97) (359)
Acquisition consideration payable for Scilex — (2,020)
Accrued expenses and other liabilities 3,137 5,663
Net cash used in operating activities (136,974) (66,789)
Investing activities
Purchases of property and equipment (9,582) (5,748)
Purchase of assets related to Semnur, net of cash acquired (17,040) —
Purchase of assets related to Sofusa — (10,000)
Contributions to joint venture (1,162) —
Net cash used in investing activities (27,784) (15,748)
Financing activities
Proceeds from public offering, net of issuance costs 23,322 —
Proceeds from Early Conditional Loan, net of issuance costs 18,858 —
Proceeds from bridge loan for Scilex regulatory milestone — 20,000
Repayment of bridge loan for Scilex regulatory milestone — (20,000)
Proceeds from loan agreement — 1,586
Short-term bridge loan, net of issuance costs — 19,675
Short-term loan repayment (740) —
Scilex consideration for regulatory milestone — (22,466)
Payment on Scilex Notes (1,701) —
Proceeds from issuance of common stock, net 947 71,481
Proceeds from issuance of Scilex notes, net of issuance costs — 134,275
Proceeds from issuance of convertible notes — 37,849
Proceeds from exercise of stock options 289 303

Net cash provided by financing activities 40,975 242,703
Net change in cash, cash equivalents and restricted cash (123,783) 160,166
Net effect of exchange rate changes on cash (156) (154)
Cash, cash equivalents and restricted cash at beginning of period 213,330 20,429
Cash, cash equivalents and restricted cash at end of period $ 89,391 $ 180,441
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 13 $ 15
Interest paid $ 10,046 $ 1,453
Supplemental disclosures of non-cash investing and financing activities:
Semnur acquisition consideration paid in equity $ 54,591 $ —
Semnur acquisition costs incurred but not paid $ 601 $ —
BDL non-cash consideration $ — $ 2,340
Property and equipment costs incurred but not paid $ 1,408 $ 59
Scilex non-cash consideration for regulatory milestone $ — $ 13,744
Conversion of convertible notes $ — $ 50,000
Reconciliation of cash, cash equivalents and restricted cash within the Company’s consolidated balance sheets:
Cash and cash equivalents 34,649 135,441
Restricted cash 54,742 45,000
Cash, cash equivalents, and restricted cash $ 89,391 $ 180,441

See accompanying notes to unaudited consolidated financial statements

SORRENTO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~September~~

June 30, ~~2019~~

1. ~~Nature~~2020

1. Description of ~~Operations and~~ Business ~~Activities~~

Nat~~ure of Operations~~ and Basis of Presentation

Description of Business

Sorrento Therapeutics, Inc. ~~(Nasdaq: SRNE)~~, together with its subsidiaries ~~(collectively, the~~(the “Company”), is a clinical stage and commercial ~~biopharma~~biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to patients and their families ~~globally,~~ to address unmet medical needs. The Company primarily focuses on therapeutic areas in Immuno-Oncology and Non-Opioid Pain Management. The Company also has programs assessing the use of its technologies and products in auto-immune, inflammatory and neurodegenerative diseases.

At its core, the Company is an antibody-centric ~~company~~ and leverages its proprietary G-MAB™ library and targeted delivery modalities to generate the next generation of cancer therapeutics. The Company’s fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47, c-MET, VEGFR2, CCR2 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 chimeric antigen receptor T-cell therapy (“CAR-T”), dimeric antigen receptor T-cell therapy (“DAR-T”) ~~and~~, antibody drug conjugates (“ADCs”), as well as bispecific antibody approaches. The Company ~~acquired Sofusa~~^®,also has programs assessing the use of its technologies and products in autoimmune, inflammatory, viral and neurodegenerative diseases.

Outside of immuno-oncology programs, as part of the Company`s global aim to provide a ~~revolutionary drug delivery system,~~wide range of therapeutic and diagnostic products to meet underserved markets, the Company has made investments in ~~July 2018, which delivers biologics directly into the lymphatic system to potentially achieve improved efficacy~~non-opioid pain management and ~~fewer adverse effects than standard parenteral immunotherapy. Additionally, the Company’s majority owned subsidiary, Scilex Holding Company (“Scilex Holding”), acquired the assets~~is currently conducting preclinical development of ~~Semnur Pharmaceuticals, Inc. (“Semnur”) in March 2019. Semnur’s SEMDEXA~~^TM ~~(SP-102) compound is expected to be the first FDA-approved non-opioid corticosteroid formulated as a viscous gel injection in development~~multiple therapeutic, vaccine and diagnostic product candidates utilizing its proprietary platforms for the potential treatment, prevention and detection of ~~lumbosacral radicular pain/sciatica, containing no neurotoxic preservatives, surfactants, solvents or particulates.~~COVID-19 and SARS-CoV-2.

~~With each~~

Basis of ~~the Company’s clinical~~Presentation and ~~pre-clinical programs, it aims to tailor its therapies to treat specific stages in the evolution~~Principles 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 it 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 close to entering the clinic. These include cellular therapies, an oncolytic virus and a palliative care program targeted to treat intractable cancer pain.

~~Through September 30, 2019, the Company had devoted substantially all of its efforts to developing products, raising capital and building infrastructure.~~

The Company has reclassified historically presented revenue and cost of revenue to conform to the current period presentation. The reclassification had no impact on previously reported results of operations or financial position.

Consolidation

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

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 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, ~~2018.~~2019. Operating results for interim periods are not expected to be indicative of operating results for the Company’s ~~2019~~2020 fiscal year, or any subsequent period. The unaudited interim financial statements included herein reflect all normal and recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented.

Use of Estimates

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

Significant Accounting Policies

During the six months ended June 30, 2020, there have been no changes to the Company`s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 outside of new accounting pronouncements as described below.

Revenue Recognition

The following table shows revenue disaggregated by product and service type for the three and six months ended June 30, 2020 and 2019 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Scilex Pharmaceuticals Inc. product sales	$	5,757	$	4,660	$	10,969	$	7,519
Other product sales		37		39		73		539
Net product revenue	$	5,794	$	4,699	$	11,042	$	8,058

Concortis Biosystems Corporation	$	1,507	$	1,205	$	2,829	$	3,015
Bioserv Corporation		1,586		453		2,617		1,307
Other revenue		120		120		240		240
Service revenue	$	3,213	$	1,778	$	5,686	$	4,562

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to improve financial reporting by requiring timely 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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments in this update were adopted using a modified retrospective transition method as of January 1, 2020, which had no cumulative impact to accumulated deficit.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to improve the effectiveness of the disclosure requirements for fair value measurements. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty will be applied prospectively as of the beginning of the fiscal year of adoption with all other amendments being applied retrospectively to all periods presented upon their effective date. The adoption of the standard had no material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for interim and annual periods for the Company beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact this standard will have on its consolidated financial statements.

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 update also eliminated the qualitative assessment requirements for a reporting unit with zero or negative carrying value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted, and must be applied on a prospective basis. The adoption of the standard had no material impact on the Company’s consolidated financial statements.

2. Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has negative working capital and recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net

losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure.

The Company has plans in place to obtain sufficient additional ~~funds~~fundraising to fulfill its operating, debt servicing and capital requirements for the next 12 months. 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, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued. As a result, management has concluded that the aforementioned conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern ~~within~~for one year after the date the financial statements are issued.

As of September 30, 2019, the Company had $356.5 million of long term debt outstanding, comprised of convertible notes issued pursuant to the March 2018 Securities Purchase Agreement (as defined below), the 2018 Purchase Agreements (as defined below) and the Indenture (as defined below) for Scilex Pharmaceuticals Inc. (“Scilex Pharma”) and the Loan Agreement (as defined below) (collectively, the “Debt Arrangements”) (See Note 10).

Each of the Debt Arrangements provides that, upon the occurrence of an event of default, the Purchasers or Lenders thereof (as applicable) may, by written notice to the Company, declare all of the outstanding principal and interest under such Debt Arrangement immediately due and payable. For purposes of the Debt Arrangements, an event of default includes, among other things, (i) the failure to pay outstanding indebtedness when due, (ii) the Company’s breach of certain representations, warranties, covenants or obligations under the documents relating to the Debt Arrangements, or (iii) the occurrence of certain insolvency events involving the Company. The Company believes that it is not probable that the material adverse event clause under the Debt Arrangements will be exercised.

If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. The Company may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. Furthermore, the spread of COVID-19, which has caused a broad impact globally, may materially affect the Company economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing the Company’s ability to access capital, which could in the future negatively affect its liquidity. The consolidated financial statements do not reflect any adjustments that might be necessary if the Company is unable to continue as a going concern.

~~3. Significant Accounting Policies~~

~~Use of Estimates~~

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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.

~~Fair Value of Financial Instruments~~

The Company follows accounting guidance on fair value measurements for financial instruments measured on a recurring basis, 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:

•~~Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.~~

•~~Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace.~~

•Level 3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

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 thatIf the Company ~~or holders of the instruments could realize in a current market exchange.~~

~~The carrying amounts of cash equivalents and marketable~~raises additional funds by issuing equity 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 duesubstantial dilution to ~~their liquid or short-term nature, such as cash, accounts receivable and payable, and other financial instruments in current assets or current liabilities.~~

~~Inventory~~

The Company determines inventory cost on a first-in, first-out basis. The Company reduces the carrying value of inventories to a lower of cost or net realizable value for those items that are potentially excess, obsolete or slow-moving. The Company considers the need for allowances for excess and obsolete inventory based upon historical experience, sales trends, and specific categories of inventory and age of on-hand inventory. As of September 30, 2019, the Company’s inventory is primarily comprised of finished goods, and the related allowance for excess inventory was $2.2 million.

~~Research and Development Costs~~

~~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.~~

~~Acquired In-Process Research and Development Expense~~

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 or drug delivery devices, as well as future milestone payments associated with asset acquisitions that do not meet the definition of a derivative and are deemed probable to achieve the milestones, are immediately expensed as acquired in-process research and development provided that the drug has not obtained regulatory approval for marketing and, absent obtaining such approval, have no alternative future use. The acquired in-process research and development related to the business combination of Virttu Biologics Limited (“Virttu”), 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 consolidated balance sheets. The Company commenced amortization of acquired in-process research and development related to the business combination of Scilex Pharma upon commercialization of ZTlido^® (lidocaine topical system) 1.8% in October 2018. Capitalized 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. (See Note 4 for further discussion of acquired in-process research and development expense related to the acquisition of Semnur).

~~Revenue Recognition~~

As of September 30, 2019, the future performance obligations for royalty and license revenues relate to the license agreements with ImmuneOncia Therapeutics, LLC (“ImmuneOncia”) and NantCell, Inc. (“NantCell”). The Company considers both of these entities as related parties and accounts for them as equity method and cost method investments, respectively.

The total consideration for the ImmuneOncia license performance obligation, effective September 1, 2016, represented $9.6 million. The estimated revenue expected to be recognized for future performance obligations, as of September 30, 2019, was approximately $8.1 million. The Company expects to recognize license revenue of approximately $0.5 million of the remaining performance obligation annually through the remaining term. The Company applied judgment in estimating the 20-year contract term, analogous to the expected life of the patent, over which revenue is recognized over time given the ongoing performance obligation related to the Company’s participation on a steering committee for the technologies under the agreement.

As of September 30, 2019, the NantCell license agreement, effective April 21, 2015, represented $110.0 million of contract liabilities reflected in long-term deferred revenue. See Note 9 for additional information regarding the remaining performance obligation for the agreement.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to

~~invoice for services performed. The Company applied the practical expedient in Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers~~ ~~to the revenue contracts for Concortis Biosystems Corp. (“Concortis”) sales and services and materials and supply agreements due to the general short-term length of such contracts.~~

~~The following table shows revenue disaggregated by product and services type for the three and nine months ended September 30, 2019 and 2018 (in thousands):~~

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Scilex Pharma product sales $ 3,770 $ — $ 11,289 $ —
Other product sales 40 1,121 579 1,982
Net product revenue $ 3,810 $ 1,121 $ 11,868 $ 1,982
Concortis Biosystems Corporation $ 1,607 $ 1,042 $ 4,622 $ 3,400
Bioserv Corporation 233 1,528 1,540 4,895
Joint development agreement — — — 3,333
Other revenue 128 414 368 654
Service revenue $ 1,968 $ 2,984 $ 6,530 $ 12,282

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 terms of its sales contracts, and estimates allowances for such amounts at the time of sale. The Company has not experienced any sales returns.

~~Scilex Holding~~

The Company’s revenue is generated from product sales within the United States. The Company does not have significant costs associated with costs to obtain contract with its customer. Substantially all of the Company’s revenue and accounts receivable result from a sole customer.

~~Revenue from product sales is fully comprised of sales of ZTlido~~^® ~~(lidocaine topical system) 1.8%. The Company’s performance obligation with respect to sales of ZTlido~~^® (lidocaine topical system) 1.8% is satisfied at a point in time, which transfers control upon delivery of product to the customer. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred to the customer, the customer has significant risks and rewards of ownership of the asset, andexisting stockholders would result. If the Company has a present right to payment at that time. The Company identified a single performance obligation. Invoicing typically occurs upon shipment and the length of time between invoicing and when payment is due is not significant. The aggregate dollar value of unfulfilled orders as of September 30, 2019 was not material.

For product sales, the Company records gross-to-net sales adjustments for government and managed care rebates, chargebacks, wholesaler and distributor fees, sales returns and prompt payment discounts. Such variable consideration are estimated in the period of the sale and are estimated using a most likely amount approach based primarily upon provisions included in the Company’s customer contract, customary industry practices and current government regulations. There were no significant changes in estimates of variable consideration during the nine months ended September 30, 2019.

~~ConcortisBiosystems Corporation (“Concortis”)~~

Revenues for Concortis operations are comprised of contract manufacturing associated with sales of customized reagents and relate to providing synthetic expertise to a customers’ synthesis of reagentsraises additional funds by delivering proprietary cytotoxins, linkers and linker-toxins and ADC service using industry standard toxins and antibodies provided by customers. Revenues are recognized at a point in time upon the transfer of control, which is generally upon shipment given the short contract terms which are generally three months or less.

~~Bioserv Corporation (~~“~~Bioserv~~”)

Contract manufacturing services associated with the Company’s Bioserv operations related to finish and fill activities for drug products and reagents are recognized ratably over the contract term based on a time-based measure which reflects the transfer of services to the customer because the manufactured products are highly customized and do not have an alternative use

to the Company. As of December 31, 2018 and September 30, 2019, the estimated revenue expected to be recognized for future performance obligations associated with contract manufacturing services was approximately $1.6 million and $1.2 million, respectively.

The following table includes Bioserv sales and services revenue expected to be recognized in the future related to performance obligations that are undelivered or partially delivered at the end of the reporting period and do not include contracts with original durations of one year or less (in thousands):

Remainder of 2019 2020 2021 and thereafter
Contract manufacturing services $403 $701 $109

~~Joint Development Agreement~~

On September 26, 2017, the Company entered into a joint development agreement with Celularity Inc. (“Celularity”) whereby the Company agreed to provide research services to Celularity through June 30, 2018 in exchange for an upfront payment of $5.0 million. The revenue related to the joint development agreement of $5.0 million was recognized over the length of the service agreement as services were performed. The Company recorded sales and services revenues under the joint development agreement of $3.3 million during the nine months ended September 30, 2018. The Company recorded 0 sales and services revenues under the joint development agreement during the nine months ended September 30, 2019 as such arrangement is complete.

~~Reorganization of Segments~~

~~Starting on January 1, 2019, the Company re-segmented its business into 2 new operating segments: the Sorrento Therapeutics segment and the Scilex segment.~~

~~Recent Accounting Pronouncements~~

~~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. 2016-2 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-11, which allows for an optional transition method to adopt the lease standard by recognizing a cumulative-effect adjustment to the opening balance sheet of retained earnings in the period of adoption, with no adjustment to prior comparative periods. In March 2019, the FASB issued ASU No. 2019-01, which clarifies that entities are not subject to the transition disclosure requirements in Accounting Standards Codification (“ASC”) Topic 250-10-50-3 related to the effect of an accounting change on certain interim period financial information. ASU No. 2016-02 and all subsequent amendments (collectively, “ASC 842”) were effective for public entities for annual reporting periods beginning after December 15, 2018, including interim periods therein. The Company adopted ASC 842 during the first quarter of 2019 and elected to apply the cumulative-effect adjustment to the opening balance sheet and optional transition method to not present comparable prior periods as allowed under ASU No. 2018-11. The Company made the following practical expedients elections: (1) elected the short-term lease exception, (2) did not elect hindsight, and (3) elected to not separate its non-lease components from lease components. The Company adopted the transitional practical expedients, which allowed the Company to carry forward its historical assessment of whether existing agreements contained a lease and the classification of the Company’s existing operating leases, and also allowed the Company to not reassess initial direct costs. The adoption of ASC 842 resulted in the recording of $44.9 million in operating lease right-of-use (“ROU”) assets and $2.6 million and $47.8 million in current portion of operating lease liabilities and non-current operating lease liabilities, respectively. Deferred rent, recorded in other current liabilities and other non-current liabilities, was derecognized. There were no adjustments to retained earnings. The Company reports financial information for fiscal years ending on or before December 31, 2018 under the previous lease accounting standard.

~~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 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 the Company’s consolidated financial position, results of operations or cash flows.~~

~~In July 2019, the FASB issued ASU No. 2019-07,~~ Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update) (“ASU 2019-07”). ASU 2019-07 aligns the guidance in various sections of the ASC with the requirements of certain final rules of the Securities and Exchange Commission. ASU 2019-07 was effective immediately. The adoption of ASU 2019-07 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

~~4. Acquisitions~~

~~Acquisition of Semnur Pharmaceuticals, Inc.~~

On March 18, 2019, the Company, for limited purposes, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Semnur, Scilex Holding, Sigma Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Scilex Holding (“Merger Sub”), and Fortis Advisors LLC, solely as representative of the holders of Semnur equity (the “Equityholders’ Representative”). Pursuant to the Merger Agreement, Merger Sub merged with and into Semnur (the “Merger”), with Semnur surviving as a wholly owned subsidiary of Scilex Holding.

Concurrently with the execution of the Merger Agreement, the Company and each of the other holders of outstanding shares of capital stock of Scilex Pharma, the Company’s majority-owned subsidiary, contributed each share of Scilex Pharma capital stock that the Company or it owned to Scilex Holding in exchange for one share of Scilex Holding common stock (the “Contribution”). In connection with the Contribution, the Company provided Scilex Holding with a loan with an initial principal amount of $16.5 million in the form of a note payable, which loan was used to fund the acquisition of Semnur. As a result of the Contribution, and prior to the consummation of the Merger, Scilex Pharma became a wholly-owned subsidiary of Scilex Holding and the Company became the owner of approximately 77% of Scilex Holding’s issued and outstanding capital stock.

At the closing of the Semnur acquisition, Scilex Holding issued to the holders of Semnur’s capital stock and options to purchase Semnur’s common stock (collectively, the “Semnur Equityholders”) upfront consideration with a value of approximately $70.0 million. The upfront consideration was comprised of the following: (a) a cash payment of approximately $15.0 million, and (b) $55.0 million of shares of Scilex Holding common stock (47,039,315 shares issued and 352,972 shares issuable, valued at $1.16 per share) (the “Stock Consideration”).

~~On August 7, 2019, Scilex Holding entered into an amendment to the Merger Agreement to provide that, following the consummation of Scilex Holding’s first bona fide equity~~incurring debt financing, with one or more third-party financing sources on an arms’ length basis with gross proceeds to Scilex Holding of at least $40.0 million, certain of the former Semnur Equityholders will be paid cash in lieu of: (a) the 352,972 shares of the Company’s common stock otherwise issuable to such Semnur Equityholders pursuant to the Merger Agreement, and (b) any shares that would otherwise be issued to such Semnur Equityholders upon release of shares held in escrow pursuant to the Merger Agreement, with such shares in each case valued at $1.16 per share. The amendment resulted in a reclassification of $0.4 million from additional paid-in capital to accrued liabilities.

A portion of the cash consideration otherwise payable to the Semnur Equityholders was set aside for expenses incurred by the Equityholders’ Representative, and 4,749,095 shares of Scilex Holding common stock otherwise issuable to Semnur Equityholders were placed in escrow with a third party as security for the indemnification obligations of the Semnur Equityholders under the Merger Agreement, including in respect of breaches of representations and warranties of Semnur included in the Merger Agreement. The Semnur Equityholders that receive the Stock Consideration were required to sign an exchange and registration rights agreement with the Company (the “Exchange Agreement”), which is further described below.

Following the issuance of the Stock Consideration, the Company’s ownership in Scilex Holding was diluted to approximately 58% of Scilex Holding’s issued and outstanding capital stock. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions contained therein, Scilex Holding also agreed to pay the Semnur Equityholders up to $280.0 million in aggregate contingent cash consideration based on the achievement of certain milestones, which is comprised of a $40.0 million payment that will be due upon obtaining the first approval of a New Drug Application of a Semnur product by the U.S. Food and Drug Administration (the “FDA”) and additional payments that will be due upon the achievement of certain amounts of net sales of Semnur products as follows: (a) a $20.0 million payment upon the achievement of $100.0 million in cumulative net sales of a Semnur product, (b) a $20.0 million payment upon the achievement of $250.0 million in cumulative net sales of a Semnur product, (c) a $50.0 million payment upon the achievement of $500.0 million in cumulative net sales of a

~~Semnur product, and (d) a $150.0 million payment upon the achievement of $750.0 million in cumulative net sales of a Semnur product.~~

Pursuant to the Exchange Agreement, and upon the terms and subject to the conditions contained therein, if within 18 months following the closing of the Merger (the “Merger Closing”), 100% of the outstanding equity of Scilex Holding has not been acquired by a third party and Scilex Holding has not entered into a definitive agreement with respect to, or otherwise consummated, a firmly underwritten offering of Scilex Holding capital stock on a major stock exchange that meets certain requirements and includes the Stock Consideration, then holders of the Stock Consideration may collectively elect to exchange, during the 60-day period commencing the date that is the 18 month anniversary of the Merger Closing (the “Share Exchange”), the Stock Consideration for shares of the Company’s common stock with a value of $55.0 million based on a price per share of the Company’s common stock equal to the greater of (a) the 30-day trailing volume weighted average price of one share of the Company’s common stock as reported on The Nasdaq Stock Market LLC as of the consummation of the Share Exchange and (b) $5.55 (subject to adjustment for any stock dividend, stock split, stock combination, reclassification or similar transaction).

~~Pursuant to~~ the terms of the ~~Exchange Agreement,~~debt may involve significant cash payment obligations as well as covenants and subject to the limitations contained therein, within 30 days following consummation of the Share Exchange (if it occurs at all), the Company agreed to prepare and file with the SEC a registration statement to enable the public resale on a delayed or continuous basis of the shares ofspecific financial ratios that may restrict the Company’s ~~common stock issued in the Share Exchange (the “Registration Statement”) and use~~ability to operate its commercially reasonable efforts to maintain the effectiveness of such Registration Statement for up to three years thereafter. In the Exchange Agreement, the Company has also agreed to indemnify the applicable Semnur Equityholders and their affiliates for certain liabilities related to such Registration Statement, including certain liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Jaisim Shah, a member of the Company’s Board of Directors, was Semnur’s Chief Executive Officer, a member of its Board of Directors and a stockholder of Semnur prior to the acquisition transaction.

The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. Under the Merger Agreement, Scilex Holding acquired the Semnur SEMDEXAbusiness.^TM (SP-102) technology for consideration valued at approximately $70.0 million, excluding contingent consideration, transaction costs of $3.1 million and liabilities assumed of $4.2 million, which was allocated based on the relative fair value of the assets acquired. The $70.0 million of consideration consisted of $15.0 million in cash and shares of Scilex Holding valued at $55.0 million. No contingent consideration was recorded as of September 30, 2019 since the related regulatory approval milestones are not deemed probable until they actually occur. As a result, approximately $75.3 million was expensed as a component of acquired in-process research and development.

3. Fair Value Measurements

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements at June 30, 2020
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	24,388	$	24,388	$	—	$	—
Restricted cash		45,000		45,000		—		—
Total assets	$	69,388	$	69,388	$	—	$	—
Liabilities:
Derivative liabilities - non-current	$	41,900	$	—	$	—	$	41,900
Acquisition consideration payable		398		—		—		398
Acquisition consideration payable - non-current		549		—		—		549
Total liabilities	$	42,847	$	—	$	—	$	42,847


		Fair Value Measurements at September 30, 2019																Fair Value Measurements at December 31, 2019
		Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:	Assets:
Cash and cash equivalents	Cash and cash equivalents	$	34,649	$	34,649	$	—	$	—	$	22,521	$	22,521	$	—	$	—
Restricted cash	Restricted cash	54,742		54,742		—		—			58,248		58,248		—		—
Marketable securities		94		81		—		13
Total assets	Total assets	$	89,485	$	89,472	$	—	$	13	$	80,769	$	80,769	$	—	$	—
Liabilities:	Liabilities:
Derivative liabilities	Derivative liabilities	$	9,000	$	—	$	—	$	9,000	$	8,800	$	—	$	—	$	8,800
Derivative liabilities - Non-current		29,500		—		—		29,500
Derivative liabilities - non-current											35,000		—		—		35,000
Acquisition consideration payable	Acquisition consideration payable	11,312		—		—		11,312			908		—		—		908
Acquisition consideration payable - Non-current		828		—		—		828
Acquisition consideration payable - non-current											39		—		—		39
Total liabilities	Total liabilities	$	50,640	$	—	$	—	$	50,640	$	44,747	$	—	$	—	$	44,747

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

The Company’s financial assets and liabilities carried at fair value are comprised of cash, cash equivalents, restricted cash, ~~marketable securities~~derivative liabilities and acquisition consideration payable. Cash and cash equivalents consist of money market accounts and bank deposits which are highly liquid and readily tradable. These investments are valued using inputs observable in active markets for identical securities. ~~Marketable securities are valued using inputs observable in active markets for identical securities.~~ The fair value of the ~~contingent~~acquisition consideration payable is measured on a recurring basis using significant unobservable inputs (Level 3). ~~Contingent~~Acquisition consideration payable is measured using the income approach and discounting to present value the contingent payments expected to be made based on assessment of the probability that the ~~Company~~company would be required to make such future payment.

~~The following table includes a summary of the Company’s contingent consideration liabilities and~~ There were no changes to acquisition consideration ~~payables associated with acquisitions.~~


~~(in thousands)~~	~~Fair Value~~
~~Beginning balance at December 31, 2018~~	$	~~12,037~~


~~Re-measurement of Fair Value~~	~~103~~

~~Ending balance at September 30, 2019~~	$	~~12,140~~

~~As of September~~payable during the six months ended June 30, ~~2019, $9.9 million of the Virttu contingent liability remains to be paid in cash.~~

~~The principal significant unobservable inputs used in the valuations of the contingent considerations are the discount rates, and probabilities assigned to scenario outcomes.~~

2020.

Derivative liabilities

The Company recorded a ~~loss~~gain on derivative liabilities of ~~$9.6~~$2.0 million and ~~$29.5~~$6.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, which ~~was primarily attributed to revised probabilities~~ related to the ~~timing~~compound derivative liabilities associated with the Term Loans (as defined in Note 7) and the Scilex Notes (as defined in Note 7). The compound derivative liabilities consist of ~~marketing approval~~the fair value of various embedded features. Significant, Level 3 inputs and assumptions for ~~ZTlido~~the Term Loans consisted of the estimated probability of restructuring debt arrangements during the first half of 2020 and estimated probabilities of satisfying certain commercial and financial milestones estimated using a with and without discounted cash flow approach. As explained further in ^®~~(lidocaine topical system) 5.4% (“SP-103”)~~Note 7, ~~revised sales forecasts and tax indemnification obligations with respect to foreign note holders. The~~the Term Loans were paid in full as of June 30, 2020.

As of June 30, 2020, the fair value of the derivative liabilities isassociated with the Scilex Notes was estimated using the discounted cash flow method under the income approach combined with a Monte Carlo simulation ~~model, which~~model. This involves significant Level 3 inputs and assumptions. The key assumptions ~~including~~for the Scilex Notes include a ~~discount rate of approximately 19.6%,~~6.7% risk adjusted net sales ~~forecasts and~~forecast, an effective debt yield of 21%, estimated probabilities of ~~55%~~55% and ~~95%~~100% of not obtaining marketing approval before ~~predetermined dates as~~July 1, 2023 and March 31, 2021, respectively, and an estimated probability of ~~September 30, 2019.~~

~~The~~an initial public offering by Scilex Holding Company ~~determined~~(“Scilex Holding”) that ~~the contingent acceleration feature of the Early Conditional Loan (as defined in Note 10) represents an embedded derivative liability that met the criteria for bifurcation under ASU No. 2017-12,~~ ~~Derivatives~~satisfies certain valuation thresholds and ~~hedging~~timing considerations.. The fair value of the derivative liability involved significant Level 3 inputs and assumptions, including estimated probabilities of satisfying certain commercial and financial milestones between August 7, 2019 and November 7, 2019 and is estimated using a with and without discounted cash flow approach. The Company recorded a debt discount for the fair value of the derivative liability of $7.0 million on the issuance date. The debt discount attributed to the derivative liability is being amortized over the remaining term of the Term Loans (as defined in Note 10) and is recorded as interest expense in the consolidated statement of operations. The Company performs a mark-to-market assessment for the derivative liability related to the contingent acceleration feature of the Early Conditional Loan each reporting period and recorded a loss on derivative liabilities of $1.1 million and $2.0 million for the three and nine months ended September 30, 2019, respectively. The Company also recorded a loss on derivative liabilities associated with the 2019 Warrants (as defined in Note 10) of $4.3 million on the issuance date, as the Conditional Warrants were issued with the Amendment (See Note 10). Further, the derivative liability associated with the 2019 Warrants was reclassified to additional-paid-in-capital upon issuance of the 2019 Warrants.

The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the ~~nine~~six months ended ~~September~~June 30, ~~2019:~~2020:

(in thousands)	Fair Value
Beginning Balance at December 31, 2019	$	43,800
Additions		8,800
Re-measurement of Fair Value		(10,700	)
Ending Balance at June 30, 2020	$	41,900


~~(in thousands)~~	~~Fair Value~~
~~Beginning Balance at December 31, 2018~~	$	—
~~Additions~~	~~6,996~~
~~Re-measurement of Fair Value~~	~~31,504~~
~~Ending Balance at September 30, 2019~~	$	~~38,500~~

~~Non-financial assets and liabilities measured on a nonrecurring basis~~

~~Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow~~

4. Investments

The Company’s equity method ~~or cost method, on a nonrecurring basis in accordance with authoritative guidance. These~~investments primarily include items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.

~~6. Property and Equipment~~

~~Property and equipment consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):~~

September 30, 2019 December 31, 2018
Furniture and fixtures $ 1,240 $ 1,127
Office equipment 659 632
Machinery and lab equipment 30,675 27,690
Leasehold improvements 9,716 9,001
Construction in progress 8,654 1,221
50,944 39,671
Less accumulated depreciation (20,606) (15,287)
$ 30,338 $ 24,384

Depreciation expense for the three months ended September 30, 2019 and 2018 was $1.3 million and $1.5 million, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $5.3 million and $4.1 million, respectively.

~~7. Investments~~

~~As of September 30, 2019 and December 31, 2018, 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,~~Immunotherapy NANTibody, LLC (“NANTibody”) and NantCancerStemCell, LLC (“NantStem”). The Company’s other equity investments primarily include an ownership interest in ImmunityBio, Inc., NantBioScience, Inc. (“NantBioScience”)~~, Globavir Biosciences,~~ and Celularity Inc.~~, Brink Biologics, Inc., Coneksis, Inc.,~~

During each of the three and ~~Celularity. NaN impairment losses were recorded during the nine~~six months ended ~~September~~June 30, ~~2019.~~

2020, the Company recorded an impairment loss of approximately $3.8 million related to an equity method investment for which the Company determined the investment’s value is no longer supportable. The loss is included within loss on equity method investments in the Company’s consolidated statement of operations.

NANTibody

In 2013, the Company acquired IgDraSol Inc. (“IgDraSol”), a private company focused on the development of oncologic agents for the treatment of cancer, from a third party unrelated to the NantWorks, LLC (“NantWorks”) affiliated entities for 3.0 million shares of the Company’s common stock and $380,000 of cash for a total purchase price of $29.1 million. This transaction included the acquisition of IgDraSol’s lead compound, ~~CynviloqTM,~~Cynviloq^TM, a micellar diblock copolymeric paclitaxel formulation drug product.

In May 2015, the Company entered into an agreement with NantPharma, LLC (“NantPharma”), a NantWorks company, pursuant to which the Company sold to NantPharma all of its equity interests in IgDraSol, which continued to hold the rights to ~~CynviloqTM.~~Cynviloq^TM. Pursuant to the agreement, NantPharma paid the Company an upfront fee of $90.1 million, of which $60.0 million was required to be used by the Company to fund 2 joint ventures, as described below.

In April 2015, the Company and NantCell, Inc. (which subsequently changed its name to ImmunityBio, Inc.) (“NantCell”), a subsidiary of NantWorks, LLC (“NantWorks”), a private company owned by Dr. Patrick Soon-Shiong, established a new entity called Immunotherapy NANTibody, LLC (“NANTibody”) as a stand-alone biotechnology company with $100.0 million initial joint funding. NantCell owns 60% of the equity interest of NANTibody and agreed to contribute $60.0 million to NANTibody. The Company owns 40% of NANTibody and in July 2015, the Company had NantPharma contribute its portion of the initial joint funding of $40.0 million to NANTibody from the proceeds of the sale of IgDraSol. Additionally, the Company and NantCell were allowed to appoint 2 ~~and 3~~and3 representatives, respectively, to NANTibody’s 5-member Board of Directors. NANTibody ~~will focus~~focuses on accelerating the development of multiple immuno-oncology mAbs for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4mAbs and other immune-check point antibodies as well as ADCs and bispecific antibodies.

NANTibody had been formed to advance pre-clinical and clinical immunology assets contributed by the Company and NantCell. The Company continues to hold 40% of the outstanding equity of NANTibody and NantCell holds the remaining 60%. Until July 2, 2017, NANTibody held approximately $100.0 million of cash and cash equivalents, and the Company recorded its investment in NANTibody at approximately $40.0 million. As an equity method investment, the Company’s ratable portion of 40% of money expended for the development of intellectual property assets held by NANTibody would be reflected within income (loss) on equity method investments in its statement of operations. As a result of limited spending at NANTibody, the cash on hand at NANTibody remained at approximately $100.0 million since the inception of the NANTibody joint venture until July 2, 2017. Further, the Company’s equity method investment in NANTibody remained at approximately $40.0 million until July 2, 2017.

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

In February 2018, NANTibody notified the Company that on July 2, 2017, NANTibody acquired all of the outstanding equity of IgDraSol in exchange for $90.1 million in cash. NANTibody purchased IgDraSol from NantPharma, which is controlled by NantWorks, an entity with a controlling interest in NantCell and NantPharma.

Although the Company has had a designee serving on the Board of Directors of NANTibody since the formation of NANTibody in April 2015, and although the Company has held 40% of the outstanding equity of NANTibody since NANTibody’s formation, neither the Company nor its director designee was given any advance notice of NANTibody’s purchase of IgDraSol or of any board meeting or action to approve such purchase. As such, the Company’s designee on NANTibody’s Board of Directors was not given an opportunity to consider or vote on the transaction as a director and the Company was not given an opportunity to consider or vote on the transaction in its position as a significant (40%) equity holder of NANTibody.

As a result of the July 2, 2017 purchase of IgDraSol, NANTibody’s cash and cash equivalents were reduced from $99.6 million as of June 30, 2017 to $9.5 million as of September 30, 2017, and NANTibody’s contributed capital was reduced from $100.0 million as of June 30, 2017 to $10.0 million as of September 30, 2017, to effect the transfer of IgDraSol from NantPharma to NANTibody. No additional information was provided to the Company to explain why NANTibody’s total assets as of September 30, 2017 were reduced by approximately $90.1 million. The Company requested, but did not receive, additional information from NANTibody for purposes of supporting the value of IgDraSol, including any information regarding clinical advancements in the entity since the sale of IgDraSol by the Company in May 2015.

Prior to the communication of the transfer of IgDraSol from NantPharma to NANTibody, the Company relied on the cash and cash equivalents of NANTibody for purposes of determining the value of its investment in NANTibody, which capital was expended by NANTibody to acquire IgDraSol on July 2, 2017. As a result of the transfer of IgDraSol, the Company reassessed the recoverability of its equity method investment in NANTibody as of July 2, 2017. In doing so, the Company considered the expected outcomes for the intellectual property assets held by NANTibody as of July 2, 2017. As a result of the lack of evidence of any development activity associated with any of the assets held in NANTibody, given the passage of time since the formation of the joint venture, many competitive products from other drug developers worldwide have advanced and/or commercialized for the targeted disease indications of the assets held in NANTibody, and given the Company’s minority interest in NANTibody (the investee), the Company concluded that it does not have the ability to recover the carrying amount of the investment and an other-than-temporary decline in the value of the investment had occurred. Accordingly, an impairment was recorded to the Company’s equity method investment in NANTibody for the three and nine months ended September 30, 2017. The fair value of the Company’s investment in NANTibody was measured at fair value on July 2, 2017 using significant unobservable inputs (Level 3) due to the determination of fair value requiring significant judgment, including the potential outcomes of the intellectual property assets held by NANTibody. For these reasons, fair value was determined by applying the Company’s 40% equity interest in NANTibody to the remaining cash and cash equivalents, which resulted in an impairment of $36.0 million. The impairment resulted in a revised carrying value of the Company’s investment in NANTibody of $3.7 million which approximated its ratable 40% ownership of the cash maintained by NANTibody expected to be used for future research and development. As of ~~September~~June 30, 2020 and 2019, the carrying value of the Company’s investment in NANTibody was approximately ~~$2.5 million. As of September 30, 2018, the carrying value of the Company’s investment in NANTibody was approximately $3.4 million.~~

$1.2 million and $3.2 million, respectively.

NANTibody recorded a net loss of $1.7 million and ~~$66 thousand~~$0.3 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The Company recorded its portion of loss from NANTibody in loss on equity method investments on its consolidated statements of operations for the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. As of ~~June 30, 2019,~~March 31, 2020, NANTibody had ~~$7.7~~$6.4 million in current assets, ~~and $1.2~~$3.2 million in current liabilities, $0.2 million in noncurrent assets and 0 noncurrent ~~assets or noncurrent~~ liabilities. ~~As of June 30, 2018, NANTibody had $9.6 million in current assets, $1.6 million in current liabilities and 0 noncurrent assets or noncurrent liabilities.~~

NantStem

In July 2015, the Company and NantBioScience 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. ~~NaN~~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 of the initial joint funding 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, 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, L.P. (“Cambridge”), a related party to NantBioScience.

A loss related to other-than-temporary impairment of $0.5 million was recognized for the equity investment in NantStem for the ~~nine months~~year ended ~~September 30, 2018, and no loss related to other-than-temporary impairment recognized for the equity investment in NantStem for the three months ended September 30,~~December 31, 2018. ~~There were 0 losses related to other-than-temporary impairment recognized for the equity investment in NantStem for the three and nine months ended September 30, 2019.~~

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 consolidated balance sheets and its share of NantStem’s loss is recorded in loss on equity method investments on its consolidated statement of operations. As of ~~September~~each of the periods ended June 30, 2020 and 2019,

the carrying value of the Company’s investment in NantStem was approximately $17.8 million. ~~As of September 30, 2018, the carrying value of the Company’s investment in NantStem was approximately $18.0 million.~~

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.

NantStem recorded a net loss of ~~$289 thousand~~$0.4 million and ~~$621 thousand~~$0.1 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The Company recorded its portion of ~~loss~~income from NantStem in income (loss) on equity method investments on its consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018. As of June 30, 2019, NantStem had $74.7 million in current assets, $187 thousand in current liabilities, $5.4 million in noncurrent assets and 0 noncurrent liabilities. As of June 30, 2018, NantStem had $74.0 million in current assets and $119 thousand in current liabilities, $7.8 million in noncurrent assets and 0 noncurrent liabilities.

~~The Company records its portion of losses from other equity method investments~~ in loss on equity method investments on its consolidated statements of operations for the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~

8.2019. As of March 31, 2020, NantStem had $76.4 million in current assets, $13.0 thousand in current liabilities, $3.8 million in noncurrent assets and 0 noncurrent liabilities.

5. Goodwill and Intangible Assets

At ~~each of September~~both June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had recorded goodwill of $38.3 million.

Starting on January 1, 2019, the Company re-segmented its business into 2 new operating segments: the Sorrento Therapeutics segment and the Scilex segment. These segments are the Company’s reporting units, and are the level at which the Company conducts its goodwill impairment evaluations. Goodwill was allocated to the Sorrento Therapeutics and the Scilex operating segments on a relative fair value basis. Goodwill for the Sorrento Therapeutics segment and Scilex segment was $31.6 million and $6.7 million, respectively, as of ~~September~~June 30, ~~2019.~~

~~Amortization for the intangible~~2020.The Company’s Scilex reporting unit had a negative carrying value of net assets ~~that have finite useful lives is generally recorded on a straight-line basis over their useful lives.~~ and there were 0 indicators of impairment of goodwill identified.

Intangible assets with indefinite useful lives totaling $14.4 million are included in acquired in-process research and development in the table below. A summary of the Company’s identifiable intangible assets as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is as follows (in thousands, inexcept for years):

June 30, 2020	Weighted Average Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization		Intangibles, Net
Customer relationships		6	$	1,585	$	1,413	$	172
Acquired developed technology		19		3,410		1,148		2,262
Acquired in-process research and development		—		14,360		—		14,360
Technology placed in service		15		21,940		2,560		19,380
Patent rights		15		32,720		8,012		24,708
Assembled workforce		5	605		163			442
Total intangible assets			$	74,620	$	13,296	$	61,324

December 31, 2019	Weighted Average Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization		Intangibles, Net
Customer relationships		6	$	1,585	$	1,401	$	184
Acquired developed technology		19		3,410		1,060		2,350
Acquired in-process research and development		—		14,360		—		14,360
Technology placed in service		15		21,940		1,828		20,112
Patent rights		15		32,720		6,922		25,798
Assembled workforce		5		605		101		504
Total intangible assets			$	74,620	$	11,312	$	63,308

September 30, 2019 Weighted Average Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Intangibles, Net
Customer relationships 6 $ 1,585 $ 1,394 $ 191
Acquired technology 19 3,410 1,016 2,394
Acquired in-process research and development 15 36,299 1,463 34,836
Patent rights 15 32,720 6,376 26,344
Assembled workforce 5 $ 605 $ 71 $ 534
Total intangible assets $ 74,619 $ 10,320 $ 64,299

December 31, 2018 Weighted Average Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Intangibles, Net
Customer relationships 6 $ 1,585 $ 1,373 $ 212
Acquired technology 19 3,410 885 2,525
Acquired in-process research and development 15 35,834 366 35,468
Patent rights 15 32,720 4,742 27,978
Assembled workforce 5 105 5 100
Total intangible assets $ 73,654 $ 7,371 $ 66,283

~~As of September 30, 2019, the weighted average amortization period for identifiable intangible assets is 14.9 years.~~

Aggregate amortization expense was $1.0 million ~~and $0.7 million~~ for each of the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019. Aggregate amortization expense was ~~$2.9 million and~~ $2.0 million for each of the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~

2019. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at ~~September~~June 30, ~~2019~~2020 is as follows (in thousands):

Years Ending December 31,	Amount
2020 (Remaining six months)	$	1,984
2021		3,966
2022		3,966
2023		3,961
2024		3,870
2025		3,845
Thereafter		25,373
Total expected future amortization	$	46,965

Years Ending December 31, Amount
2019 (Remaining three months) $ 992
2020 3,966
2021 5,020
2022 5,020
2023 5,015
2024 4,924
Thereafter 39,362
Total expected future amortization $ 64,299

6. Significant Agreements and Contracts

2019 Acquisitions

Acquisition of Semnur Pharmaceuticals, Inc.

In March 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Semnur Pharmaceuticals, Inc. (“Semnur”) and Scilex Holding, whereby Semnur became a wholly-owned subsidiary of Scilex Holding (the “Merger”), and thereby Scilex Holding acquired Semnur’s SEMDEXA^TM (SP-102) technology for consideration valued at approximately $70.0 million, excluding contingent consideration, transaction costs of $3.1 million and liabilities assumed of $4.2 million, which was allocated based on the relative fair value of the assets acquired. The $70.0 million of consideration consisted of approximately $15.0 million in cash and shares of Scilex Holding valued at approximately $55.0 million (the “Stock Consideration”).

Pursuant to the Merger Agreement, Scilex Holding also agreed to pay the holders of Semnur’s capital stock and options up to $280.0 million in aggregate contingent cash consideration based on the achievement of certain milestones, which is comprised of a $40.0 million payment that will be due upon obtaining the first approval of a New Drug Application of a Semnur product by the U.S. Food and Drug Administration (the “FDA”) and additional payments that will be due upon the achievement of certain amounts of net sales of Semnur products as follows: (a) a $20.0 million payment upon the achievement of $100.0 million in cumulative net sales of a Semnur product, (b) a $20.0 million payment upon the achievement of $250.0 million in cumulative net sales of a Semnur product, (c) a $50.0 million payment upon the achievement of $500.0 million in cumulative net sales of a Semnur product, and (d) a $150.0 million payment upon the achievement of $750.0 million in cumulative net sales of a Semnur product.

In March 2019, the Company also entered into an Exchange and Registration Rights Agreement (the “Exchange Agreement”) with the stockholders and stock option holders of Semnur. Pursuant to the Exchange Agreement, if within 18 months of the closing of the Merger, 100% of the outstanding equity of Scilex Holding has not been acquired by a third party or Scilex Holding has not entered into a definitive agreement with respect to, or otherwise consummated, a firmly underwritten offering of Scilex Holding’s capital stock that meets certain requirements and includes the Stock Consideration, then the holders of the Stock Consideration may collectively elect to exchange, during the 60-day period commencing the date that is the 18 month anniversary of the closing of the Merger, the Stock Consideration for shares of the Company’s common stock with a value of $55.0 million (the “Semnur Share Exchange”) based on a price per share of the Company’s common stock equal to the greater of (a) the 30-day trailing volume weighted average price of one share of the Company’s common stock as reported on the Nasdaq Capital Market as of the consummation of the Semnur Share Exchange and (b) $5.55 (subject to adjustment for any stock dividend, stock split, stock combination, reclassification or similar transaction).

The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. NaN contingent consideration was recorded as of December 31, 2019 or June 30, 2020 since the related regulatory approval milestones are not deemed probable until they actually occur. Approximately $75.3 million was expensed as acquired in-process research and development during the three months ended March 31, 2019.

License Agreement with NantCell

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 2two 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 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~~June 30, ~~2019,~~2020, the Company had not yet provided all of the items noted in the agreement, including research services for and on behalf of NantCell, and therefore has recorded the entire upfront payment and value of the equity interest received as deferred revenue. Specifically, only a portion of the materials associated with the licensed assets have been delivered while the majority of the licensed assets remain undelivered and the related research activities are still to be performed. The Company will recognize the upfront payment and the value of the equity interest received over the period beginning with the commencement of the ~~last item delivered.~~research services. 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, less impairment, plus or minus changes resulting from observable price changes in ~~the consolidated balance sheets and evaluated~~orderly transactions for ~~other-than-temporary impairment on a quarterly basis.~~

~~10.~~identical or similar investments of NantCell.

7. Debt

~~2018 Securities Purchase Agreement in Private Placement and Amendment to Warrants~~

On March 26, 2018, the Company entered into a Securities Purchase Agreement (the “March 2018 Securities Purchase Agreement”) with certain accredited investors (the “March 2018 Purchasers”). Pursuant to the March 2018 Securities Purchase Agreement, the Company agreed to issue and sell to the March 2018 Purchasers, in a Private Placement (the “March 2018 Private Placement”), (1) convertible promissory notes in an aggregate principal amount of $120,500,000 (the “Notes”), and (2) warrants to purchase 8,591,794 shares of the common stock of the Company (the “Warrants”). On June 13, 2018, the Company entered into an amendment (the “June 2018 Amendment”) to the March 2018 Securities Purchase Agreement. Under the terms of the June 2018 Amendment, the Company and the March 2018 Purchasers agreed that the aggregate principal amount of the Notes was reduced to $37,848,750 and that the aggregate number of shares of Common Stock issuable upon exercise of the Warrants was reduced to 2,698,662, and also agreed to certain other adjustments to the threshold principal amount of the Notes required to remain outstanding in order for certain rights and obligations to apply to the Notes.

On June 13, 2018, the Company issued and sold to the March 2018 Purchasers (1) Notes in an aggregate principal amount of $37,848,750, and (2) Warrants to purchase an aggregate of 2,698,662 shares of Common Stock. The Notes accrue interest at a rate equal to 5.0% per annum and mature upon the earlier to occur of June 13, 2023 and the date of the closing of a change of control (the “Maturity Date”). In connection with the issuance of the Notes and the Warrants, the Company recorded a debt discount of approximately $21.6 million based on an allocation of proceeds to the Warrants of approximately $9.6 million and a beneficial conversion feature of approximately $12.0 million, before issuance costs.

On November 7, 2018, the Company entered into an Agreement and Consent (the “Agreement and Consent”) with the March 2018 Purchasers and agreed to amend the Warrants to reduce the exercise price per share of its common stock thereunder from $8.77 to $3.28. The amendment of the Warrants resulted in a loss on debt extinguishment of $1.9 million

~~representing the incremental fair value of the modified Warrants along with the difference between the fair value and carrying value of the Notes at the modification date of November 7, 2018.~~

The Company determined that the amendment of the Warrants resulted in an extinguishment at the modification date. As a result, the Company recorded a loss on debt extinguishment for the difference between the fair value of $23.1 million and the carrying value of $17.0 million, or $6.1 million. The Company recorded the loss as of the date of modification, or November 7, 2018. As of September 30, 2019, the estimated Level 3 fair value of the Notes was approximately $17.6 million, compared to the carrying value of $25.2 million. The fair value of the Notes was estimated using a lattice model with Level 3 inputs including the historical stock price volatility, risk-free interest rate and debt yield.

~~Borrowings under the Notes consisted of the following (in thousands):~~

September 30, 2019 December 31, 2018
Face value of loan $ 37,849 $ 37,849
Unamortized debt discount (14,288) (14,804)
Accretion of debt discount 1,684 515
Ending balance $ 25,245 $ 23,560

Interest expense recognized for stated interest on the Notes for the three and nine months ended September 30, 2019 totaled $0.5 million and $1.4 million, respectively. The amount of debt discount and debt issuance costs included in interest expense for the three and nine months ended September 30, 2019 was approximately $0.6 million and $1.7 million, respectively.

The Company identified a number of embedded derivatives that require bifurcation from the Notes and separate accounting as a single compound derivative. The current fair value attributed to the bifurcated compound derivative is immaterial. The Company will re-evaluate this assessment each reporting period.

2018 Purchase Agreements and Indenture for Scilex

On September 7, 2018, Scilex ~~Pharma~~Pharmaceuticals Inc. (“Scilex Pharma”) entered into Purchase Agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and the Company. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma ~~among other things,~~ issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of $224.0 million (the “Scilex Notes”) for an aggregate purchase price of $140.0 million (the “Scilex Notes Offering”). In connection with the Scilex Notes Offering, Scilex Pharma also entered into an Indenture (the ~~“Indenture��~~“Indenture”) governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee ~~(the “Trustee”)~~ and collateral agent, ~~(the “Collateral Agent”),~~ and the Company. Pursuant to the Indenture, the Company agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.

~~The net proceeds of~~

To estimate the Scilex Notes Offering were approximately $89.3 million, after deducting the Scilex Notes Offering expenses payable by Scilex Pharma and funding a segregated reserve account with $20.0 million (the “Reserve Account”) and a segregated collateral account with $25.0 million (the “Collateral Account”) pursuant to the terms of the Indenture. Funds in the Reserve Account will be released to Scilex Pharma upon receipt by the Trustee of an officer’s certificate under the Indenture from Scilex Pharma confirming receipt of a marketing approval letter from the FDA with respect to SP-103 (the “Marketing Approval Letter”) on or prior to July 1, 2023. Funds in the Collateral Account will be released upon receipt of a written consent authorizing such release from the holders of a majority in principal amount of the Scilex Notes issued, upon the occurrence and during the continuance of an event of default at the direction of the holders of a majority in principal amount of the Scilex Notes issued or upon the repayment in full of all amounts owed under the Scilex Notes.

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

The aggregate principal amount due under the Scilex Notes shall be increased by $28,000,000 on February 15, 2022 if actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% from the issue date of the Scilex Notes through December 31, 2021 do not equal or exceed 95% of a predetermined target sales threshold for such period. If actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% for the period from October 1, 2022 through September 30, 2023 do not equal or exceed 80% of a predetermined target sales threshold for such period, the aggregate principal amount shall also be increased on November 15, 2023 by an amount equal to an amount to be determined by reference to the amount of such deficiency.

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

Pursuant to the terms of the Indenture, the Company issued an irrevocable standby letter of credit to Scilex Pharma (the “Letter of Credit”), which provides that, in the event that (1) Scilex Pharma does not hold at least $35,000,000 in unrestricted cash as of the end of any calendar month during the term of the Scilex Notes, (2) actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% from the issue date of the Scilex Notes through December 31, 2021 are less than a specified sales threshold for such period, or (3) actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% for any calendar year during the term of the Scilex Notes, beginning with the 2022 calendar year, are less than a specified sales threshold for such calendar year, Scilex Pharma, as beneficiary of the Letter of Credit, will draw, and the Company will pay to Scilex Pharma, $35,000,000 in a single lump-sum amount as a subordinated loan, and upon receipt by Scilex Pharma of the subordinated loan, the holders of the Scilex Notes shall have the one-time right to require the Company to purchase up to an aggregate of $25,000,000 of the Scilex Notes then outstanding. The Letter of Credit will terminate upon the earliest to occur of: (a) the repayment of the Scilex Notes in full, (b) the actual net sales of ZTlido® (lidocaine topical system) 1.8% for any calendar year during the term of the Scilex Notes exceeding a certain threshold, (c) the consummation of an initial public offering on a major international stock exchange by Scilex Pharma that satisfies certain valuation thresholds, and (d) the replacement of the Letter of Credit with another letter of credit in form and substance, including as to the identity and creditworthiness of issuer, reasonably acceptable to the holders of at least 80% in principal amount of outstanding Scilex Notes.

On October 1, 2019, Scilex Pharma, the Company, the Trustee and the Agent, and the beneficial owners of the Scilex Notes and the holders of such Scilex Notes listed on the signature pages thereto (the “Holders”) entered into an omnibus amendment (the “Omnibus Amendment”) to: (i) the Indenture, and (ii) that certain Irrevocable Standby Letter of Credit issued by the Company to Scilex Pharma as further described in Note 18.

~~As of September 30, 2019, the estimated~~ fair value of the Scilex Notes, ~~was approximately $144.4 million compared to~~ the ~~carrying value of $151.4 million. The~~ Company uses the discounted cash flow method under the income approach, which involves significant Level 3 inputs and assumptions, combined with a Monte Carlo simulation as appropriate. The value of the debt instrument is based on the present value of future principal payments and the discounted rate of return reflective of the Company’s credit risk.

Borrowings of the ~~2018 Purchase Agreements and Indenture~~Scilex Notes consisted of the following (in thousands):

	June 30, 2020			December 31, 2019
Principal	$	219,153		$	221,666
Unamortized debt discount		(62,465	)		(67,839	)
Unamortized debt issuance costs		(4,015	)		(4,360	)
Carrying value	$	152,673		$	149,467
Estimated fair value	$	153,500		$	150,800

September 30, 2019 December 31, 2018
Face value of loan $ 224,000 $ 224,000
Unamortized debt discount (77,624) (84,000)
Capitalized debt issuance costs (5,313) (5,748)
Accretion of debt discount 11,266 6,376
Amortization of debt issuance cost 773 435
Payments (1,701) —
Ending balance $ 151,401 $ 141,063

Future minimum payments under the Scilex Notes, based on a percentage of projected net sales of ZTlido^® ~~(lidocaine topical system) 1.8%~~ are estimated as follows (in thousands):

Year Ending December 31,
2020 (Remaining six months)	$	2,070
2021		9,910
2022		16,094
2023		20,636
2024		22,247
2025		23,287
Thereafter		124,909
Total future minimum payments		219,153
Unamortized debt discount		(62,465	)
Unamortized capitalized debt issuance costs		(4,015	)
Total Scilex Notes		152,673
Current portion		(5,646	)
Long-term portion of Scilex Notes	$	147,027

Year Ending December 31,
2019 (Remaining three months) $ 633
2020 6,788
2021 15,996
2022 27,130
2023 31,433
2024 43,058
Thereafter 97,261
Total future minimum payments 222,299
Unamortized debt discount (66,358)
Unamortized capitalized debt issuance costs (4,540)
Total Scilex Notes 151,401
Current portion (5,177)
Long-term portion of Scilex Notes $ 146,224

~~Debt discount~~

The Company made principal payments of $2.5 million and ~~debt issuance costs,~~$0.9 million during the six months ended June 30, 2020 and 2019, respectively, which are presented as a direct reduction of the Scilex Notes in the consolidated balance sheets, are amortized as interest expense using the effective interest method. As principal repayments on the Scilex Notes arewere based on a percentage of net sales of ~~ZTlido~~^® (lidocaine topical system) 1.8% and SP-103, if a marketing approval letter from the FDA with respect to SP-103 is received, the Company has elected to account for changes in estimated cash flows from future net sales prospectively. Specifically, a new effective interest rate will be determined based on revised estimates of remaining cash flows and changes in expected cash flows will be recognized prospectively.ZTlido. The imputed effective interest rate at ~~September~~June 30, ~~2019~~2020 was ~~8.49%~~7.5%. The amount of debt discount and debt issuance costs included in interest expense for the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019 was approximately ~~$3.2~~$2.9 million and ~~$12.0~~$4.2 million, respectively.

During the six months ended June 30, 2020 and 2019, the amount of debt discount and debt issuance costs included in interest expense was $5.7 million and $8.9 million, respectively.

The Company identified a number of embedded derivatives that require bifurcation from the Scilex Notes and ~~separate accounting~~that were separately accounted for in the consolidated financial statements as ~~a compound derivative.~~derivative liabilities. Certain of these embedded features include default interest provisions, contingent rate increases, contingent put options, optional and automatic acceleration provisions and ~~indemnified taxes.~~tax indemnification obligations. The ~~Company recorded this~~fair value of the derivative ~~within its consolidated financial statements~~liabilities associated with the Scilex Notes was estimated using the discounted cash flow method under the income approach combined with a Monte Carlo simulation model. This involves significant Level 3 inputs and assumptions, including a risk adjusted net sales forecast, an effective debt yield, estimated marketing approval probabilities for SP-103 and an estimated probability of an initial public offering by Scilex Holding that satisfies certain valuation thresholds and timing considerations (See Note 5)3). The Company re-evaluates this assessment each reporting period.

The 2018 Purchase Agreements and Indenture, as amended, provide that, upon the occurrence of an event of default, the lenders thereunder may, by written notice to the Company, declare all of the outstanding principal and interest under the Indenture immediately due and payable. For purposes of the Indenture, an event of default includes, among other things, (i) a failure to pay any amounts when due under the Indenture, (ii) a breach or other failure to comply with the covenants (including financial, notice and reporting covenants) under the Indenture, (iii) a failure to make any payment on, or other event triggering an acceleration under, other material indebtedness of the Company, and (iv) the occurrence of certain insolvency or bankruptcy events (both voluntary and involuntary) involving the Company or certain of its subsidiaries. The Company is subject to certain customary default clauses under the Indenture and is in compliance with event of default clauses under the Indenture.

2018 Oaktree Term Loan Agreement

In November 7, 2018, the Company ~~and certain of its domestic subsidiaries (the “Guarantors”)~~ entered into a Term Loan Agreement (the “Loan Agreement”) with certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the “Lenders”) and Oaktree Fund Administration, LLC, as administrative and collateral agent, ~~(the “Agent”),~~ for an initial term loan of $100.0 million (the “Initial Loan”) and a second tranche of $50.0 million, subject to the achievement of certain commercial and financial milestones between August 7, 2019 and November 7, 2019 and the satisfaction of certain customary conditions (the “Conditional Loan”). The Initial Loan matures on November 7, 2023 (the “Maturity Date”) and bears interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus the applicable margin, or 7%. The net proceeds of the Initial Loan were approximately $91.3 million, after deducting estimated loan costs, commissions, fees and expenses and funding a debt service reserve account with approximately $9.6 million (the “Debt Service Reserve Account”), and will be used for general corporate purposes. In connection with the Loan Agreement, the Company and the Guarantors entered into a Collateral Agreement with the Agent (the “Collateral Agreement”). The Collateral Agreement provides that the Initial Loan and the Conditional Loan are secured by substantially all of the Company’s and the Guarantors’ assets and a pledge of 100% of the equity interests in other entities that each of the Company and the Guarantors holds (subject to certain exceptions and other than equity interests held by the Company or a Guarantor in certain foreign subsidiaries, which is limited to 65% of such voting equity interests). In connection with the Loan Agreement, on November 7, 2018, the Company issued to the Lenders warrants to purchase 6,288,985 shares of the Company’s common stock (the “Initial Warrants”). The Initial Warrants have an exercise price per share of $3.28, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable from May 7, 2019 through May 7, 2029 and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Initial Warrants (the “Initial Warrant Shares”), in which case the Initial Warrants shall also be exercisable on a cashless exercise basis. In connection with the Loan Agreement, on November 7, 2018, the Company and the Lenders entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, the Company agreed to file one or more registration

statements with the SEC for the purpose of registering for resale the Initial Warrant Shares and the shares of common stock issuable upon exercise of warrants that may be issued in connection with the Conditional Loan (the “Conditional Warrants”). Under the Registration Rights Agreement, the Company agreed to file a registration statement with the SEC registering all of the Initial Warrant Shares and the shares of common stock issuable upon exercise of the Conditional Warrants for resale by no later than the 45th day following the issuance of the Initial Warrants and the Conditional Warrants, respectively.

~~On May 3,~~ 2019, the Company ~~the Guarantors and the Lenders and the Agent~~ entered into an amendment ~~(the “Amendment”)~~ to the Loan ~~Agreement. Under the~~Agreement, under which terms ~~of the Amendment, among other things,~~ the Lenders agreed to make available to the Company $20.0 million of the Conditional Loan, notwithstanding that the commercial and financial milestones had not occurred (the “Early Conditional Loan”). The Lenders also agreed to loan the Company the remaining $30.0 million of the Conditional Loan upon the satisfaction of the commercial and financial milestones between August 7, 2019 and November 7, 2019 (the “Remaining Conditional Loan” and, together(collectively, with the Initial ~~Loan and the Early Conditional~~ Loan, the “Term Loans”). ~~The Term Loans, other than~~During the Early Conditional Loan, will mature on November 7, 2023. The Early Conditional Loan will mature on May 3, 2020; however, if the commercial and financial milestones have occurred on or prior to such date, the Early Conditional Loan will mature on November 7, 2023. The Term Loans may be prepaid by the Company, in whole or in part at any time, subject to a prepayment fee. Upon any prepayment or repayment of all or a portion of the Term Loans (including the Early Conditional Loan and the Remaining Conditional Loan), the Company has agreed to pay the Lenders an exit fee equal to 1.25% of the principal amount paid or prepaid amounting to approximately $1.5 million. The Early Conditional Loan was funded on May 3, 2019.

The Company accounted for the Amendment as a debt modification and not a debt extinguishment under ASC Topic 470-50, as the terms of the Early Conditional Loan were not substantially different from those of the Initial Loan. The Company incurred approximately $0.8 million in fees directly related to the Amendment which were expensed as incurred during the threesix months ended June 30, ~~2019.~~

2020, the Company repaid $120.0 million of outstanding principal under the Term Loans plus approximately $9.4 million of related prepayment premium, exit fees and accrued interest thereon. In connection with the ~~Amendment, on May 3, 2019,~~repayment of outstanding principal, the Company issued to the Lenders warrants to purchase an aggregate of 1,333,304 shares of the Company’s common stock (the “2019 Warrants”). The 2019 Warrants have an exercise price per share of $3.94, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable from November 3, 2019 through November 3, 2029 and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the 2019 Warrants (the “2019 Warrant Shares”), in which case the 2019 Warrants shall also be exercisable on a cashless exercise basis. The Company recorded a loss on ~~derivative liabilities associated with the 2019 Warrants~~debt settlement of ~~$4.3 million on the issuance date, as the 2019 Warrants were issued with the Amendment.~~

The fair value of the Term Loans was estimated using a discounted cash flow model with Level 3 inputs with key inputs that include debt yield, coupon rate and maturity dates. As of September 30, 2019, the estimated fair value of the Term Loans was approximately $58.2$51.9 million. ~~Borrowings under the Initial Loan and the Early Conditional Loan consisted of the following (in thousands):~~

September 30, 2019 December 31, 2018
Face value of loan $ 120,000 $ 100,000
Debt discount - warrants (26,248) (26,659)
Debt discount - derivative (6,996) —
Capitalized debt issuance costs (7,685) (6,658)
Accretion of debt discount 3,014 411
Amortization of debt issuance costs 817 115
Ending balance $ 82,902 $ 67,209

Interest expense recognized for stated interest on the Term Loans totaled ~~$2.9~~$0.9 million and ~~$7.9~~$2.7 million for the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019 the interest expense for stated interest on the Term Loans totaled $3.0 million and $5.0 million, respectively. The amount of debt discount and debt issuance costs included in interest expense on the Term Loans for the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019 was approximately ~~$1.4~~$0.7 million and ~~$3.8~~$1.3 million, respectively.

~~The Company identified a number~~ During the six months ended June 30, 2020 and 2019, the amount of ~~embedded derivatives that require bifurcation from the Initial Loan~~debt discount and separate accounting as a compound derivative. As the current fair value attributed to the bifurcated compound derivative is immaterial, the Company has not recorded this derivative within its consolidated financial statements. The Company re-evaluates this assessment each reporting period.

~~The Company identified certain embedded derivatives that require bifurcation from the Early Conditional Loan~~debt issuance costs included in interest expense was $2.2 million and separate accounting as a compound derivative. Certain of these embedded features include a contingent accelerated repayment feature. The Company deems the contingent accelerated repayment feature derivative to be material and recorded it within its consolidated financial statements (See Note 5). The Company re-evaluates this assessment each reporting period.

~~11. Shareholder~~$2.4 million, respectively.

8. Stockholders` Equity

~~2019 Public Offering of Common Stock and Warrants~~

~~On June 28, 2019,~~

Aspire Transaction

In February 2020, the Company entered into ~~an underwriting agreement~~a Common Stock Purchase Agreement (the ~~“Underwriting~~“Aspire Purchase Agreement”) with ~~JMP Securities~~Aspire Capital Fund, LLC, ~~(the “Representative”~~(“Aspire Capital”), ~~as representative of the several underwriters named therein (the “Underwriters”), relating~~pursuant to ~~a firm commitment underwritten public offering (the “June 2019 Offering”) of 8,333,334 shares of the Company’s common stock (“Common Stock”), Series A warrants~~which Aspire Capital was committed to purchase up to an aggregate of ~~8,333,334~~$75.0 million of shares of the Company’s common stock over a 24-month term. Upon execution of the Aspire Purchase Agreement, the Company issued to Aspire Capital 897,308 shares of the Company’s common stock as a commitment fee. The Company used and is using proceeds it received under the Aspire Purchase Agreement for working capital and general corporate purposes and for the repayment of the Term Loans.

During the six months ended June 30, 2020, the Company issued and sold an aggregate of 33,825,010 shares of the Company’s common stock to Aspire Capital for aggregate net proceeds to the Company of $75.0 million. On April 24, 2020, the Aspire Purchase Agreement terminated effective immediately in accordance with its terms as the Company issued and sold, as of such date, the full $75.0 million of shares available for issuance thereunder.

Equity Distribution Agreement

On April 27, 2020, the Company voluntarily terminated the Equity Distribution Agreement, dated October 1, 2019 (the “Distribution Agreement”), that the Company entered into with JMP Securities LLC (“JMP Sales Agent”), effective immediately.Pursuant to the Distribution Agreement, the Company could offer and sell, from time to time, through the JMP Sales Agent, shares of the Company’s common stock having an aggregate offering price of up to $75,000,000. During the term of the Distribution Agreement, the Company sold an aggregate of 2,120,149 shares of its common stock thereunder for aggregate gross proceeds to the Company of approximately $7.4 million. The Distribution Agreement was terminable at will by the Company with no penalty.

Sales Agreement

On April 27, 2020, the Company entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Sales Agent”), pursuant to which the Company may offer and sell through or to the Sales Agent (the “Offering”) up to $250.0 million in shares of its common stock (the “Shares”). Any Shares offered and sold in the Offering will be issued pursuant to the Company’s universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”) and the prospectus supplement relating to the Offering filed with the Securities and Exchange Commission (the “SEC”) on April 27, 2020. The Offering will terminate upon (a) the election of the Sales Agent upon the occurrence of certain adverse events, (b) three business days’ advance notice from one party to the other, or (c) the sale of all of the Shares. Under the terms of the Sales Agreement, the Sales Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the Sales Agreement. During the six months ended June 30, 2020, the Company sold an aggregate of 11,262,597 shares of its common stock pursuant to the Sales Agreement for aggregate net proceeds to the Company of approximately $62.7 million. Subsequent to June 30, 2020 and through August 4, 2020, the Company sold an aggregate of 5,361,218 shares of its common stock pursuant to the Sales Agreement for aggregate net proceeds to the Company of approximately $47.1 million.

Common Stock Purchase Agreement

On April 27, 2020, the Company entered into a Common Stock Purchase Agreement (the ~~“Series A Warrants”~~“Purchase Agreement”) with Arnaki Ltd. (the “Purchaser”), ~~Series B warrants~~pursuant to which the Purchaser is committed to purchase up to an aggregate of ~~8,333,334~~$250.0 million of shares of ~~Common Stock (the “Series B Warrants”)~~the Company’s common stock over the 36-month term of the Purchase Agreement on the terms set forth therein. Any Shares offered and ~~Series C warrants~~sold to the Purchaser will be issued pursuant to the Shelf Registration Statement and the prospectus supplement relating to offering of shares pursuant to the Purchase Agreement filed with the SEC on April 27, 2020.

On any business day over the term of the Purchase Agreement (each, a “Purchase Date”), the Company has the right, in its sole discretion, to present the Purchaser with a purchase notice directing the Purchaser to purchase up to an aggregate of 8,333,334 shares of Common Stock (the “Series C Warrants” and, together with the Series A Warrants and the Series B Warrants, the “Offering Warrants”). The public offering price was $3.00 per share of Common Stock and accompanying Offering Warrants and the Underwriters purchased the Common Stock and accompanying Offering Warrants at a price of $2.82 per share and accompanying Offering Warrants. The Series A Warrants will be exercisable six months from the date of issuance, will expire on the 10-year anniversary of the date of issuance and will have an exercise price of $3.75. The Series B warrants were immediately exercisable upon issuance, will expire on the date that is nine months from the date of issuance and will have an exercise price of $3.00 per share. The Series C Warrants will be exercisable six months from the date of issuance and only to the extent and in proportion to a holder of the Series C Warrants exercising its Series B Warrants, will expire on the 10-year anniversary of the date of issuance and will have an exercise price of $3.75 per share.

Under the terms of the Underwriting Agreement, the Company 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 Underwriting Agreement, to purchase up to an additional 1,250,000 shares of Common Stock (“Additional Shares”) and/or 1,250,000 combinations of Offering Warrants (comprised of an aggregate of 1,250,000 Series A Warrants, 1,250,000 Series B Warrants and 1,250,000 Series C Warrants) (“Warrant Combinations”), at the public offering price of $2.99 per Additional Share and the public offering price per Warrant Combination of $0.01, less underwriting discounts and commissions.

The net proceeds from the June 2019 Offering were approximately $23.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses, and were received in July 2019.

~~As of the firm commitment date of June 28, 2019, the Company entered into a forward contract to issue and sell a fixed number of~~650,000 shares of common stock per business day. The Company and ~~warrants~~the Purchaser also may mutually agree to increase the number of shares that may be sold to as much as an additional 3,600,000 shares per Purchase Date. The Company also has the right, in ~~exchange for a stated purchase price payable on July 2, 2019, issued options~~its sole discretion, to grant the Purchaser an option to purchase ~~a fixed number of~~additional shares of common stock, ~~for~~subject to a ~~fixed~~maximum number of shares determined by the Company on each Purchase Date. The aggregate purchase price ~~(subject to certain adjustments for dividends~~paid by the Purchaser shall not exceed $5.0 million per Purchase Date, unless mutually agreed upon by the Company and ~~similar distributions), and issued options to~~the Purchaser. The purchase ~~additional warrants in exchange for a stated purchase price. Management determined that these instruments were freestanding financial instruments and qualified for equity classification as~~price of the ~~firm commitment date.~~

~~12.~~common stock pursuant to the Purchase Agreement will generally be equal to 97.5% of the daily volume weighted average purchase price of the common stock on the Purchase Date. During the six months ended June 30, 2020, the Company sold an aggregate of 923,077 shares of its common stock pursuant to the Purchase Agreement for aggregate net proceeds of $4.3 million. Subsequent to June 30, 2020 and through July 31, 2020, the Company sold an aggregate of 500,000 shares of its common stock pursuant to the Purchase Agreement for aggregate net proceeds to the Company of approximately $3.7 million.

9. Stock Based Compensation

2019 Stock Incentive ~~Plans~~

Plan

A summary of stock option activity under the Sorrento Therapeutics, Inc. 2009 Stock ~~Option Activity~~

~~In September 2019, the Company’s stockholders approved~~Incentive Plan and the Sorrento Therapeutics, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). The 2019 Plan replaced and superseded the Company’s Amended and Restated 2009 Stock Incentive Plan (the “2009 Plan”) and no further awards will be granted under the 2009 Plan. The following table summarizes stock option activity as of September 30, 2019 under the 2019 Plan, the 2009 Plan and the Company’s Non-Employee Director Plan, and the changes for the ~~period then~~six months ended ~~(dollar values in~~June 30, 2020 is as follows (in thousands, ~~other than weighted-average exercise price)~~except price data):

	Options Outstanding			Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding at December 31, 2019		14,586,661		$	4.36	$	5,136
Options Granted		5,359,500		$	4.69
Options Canceled		(2,163,493	)	$	4.23
Options Exercised		(925,945	)	$	4.17
Outstanding at June 30, 2020		16,856,723		$	4.50	$	34,748

Options
Outstanding Weighted-
Average
Exercise Price Aggregate
Intrinsic
Value
Outstanding at December 31, 2018 10,523,075 $ 4.91 $ 1,723
Options Granted 2,666,800 $ 3.84
Options Canceled (708,325) $ 1.85
Options Exercised (158,699) $ 5.15
Outstanding at September 30, 2019 12,322,851 $ 4.70 $ 896

The ~~Company uses the Black-Scholes valuation model to calculate the~~estimated fair value of each stock ~~options. The fair value of employee and director stock options~~option grant was ~~estimated at~~determined on the grant date using the Black-Scholes valuation model with the following ~~assumptions:~~weighted-average assumptions.

	Six Months Ended June 30,
	2020			2019
Weighted-average grant date fair value	$	3.69		$	3.05
Dividend yield		—	%		—	%
Volatility		103	%		100	%
Risk-free interest rate		0.46	%		1.87	%
Expected life of options (years)	5.7			6.1

Nine Months Ended September 30,
2019 2018
Weighted-average grant date fair value $ 3.05 $ 3.79
Dividend yield — % — %
Volatility 100 % 81 %
Risk-free interest rate 1.87 % 2.93 %
Expected life of options 6.1 years 6.1 years

~~The total employee and director~~

Total stock-based compensation expense under the Sorrento Therapeutics, Inc. 2019 Stock Incentive Plan was recorded as operating ~~expenses was $2.0~~expense of $2.1 million ~~and $1.2 million~~ for each of the three months ended ~~September~~June 30, 2020 and 2019, and ~~2018, respectively, and $5.5~~$4.1 million and ~~$3.4~~$3.7 million for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively.

The total unrecognized compensation cost related to unvested ~~employee and director~~ stock option grants as of ~~September~~June 30, ~~2019~~2020 was ~~$17.5~~$34.0 million and the weighted average period over which these grants are expected to vest is ~~1.5~~3.1 years.

~~Stock-based~~

Scilex Holding Company

Total stock-based compensation expense ~~related to non-employee consultants~~ recorded as operating ~~expenses~~expense was ~~$0.4~~$1.3 million and ~~$0.1~~$0.8 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$0.6~~$2.9 million and ~~$0.3~~$0.9 million for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively.

~~Common Stock Reserved for Future Issuance~~

~~Common~~ The total unrecognized compensation cost related to unvested stock ~~reserved for future issuance consists~~option grants as of ~~the following at September~~June 30, ~~2019:~~


~~Common stock warrants outstanding under the loan and security agreements~~			~~7,688,181~~
~~Common stock warrants outstanding under the Hercules securities agreement~~			~~306,748~~
~~Common stock warrants outstanding under the convertible notes~~			~~14,819,872~~
~~Common stock warrants outstanding under the 2019 Public Offering of Common Stock and Warrants~~			~~25,000,002~~
~~Common stock options outstanding under the Non-Employee Director Plan~~			~~3,200~~
~~Authorized for future grant or issuance under the 2019 Stock Incentive Plan~~			~~10,000,000~~
~~Shares issuable upon the conversion of the 2018 Notes~~			~~5,397,325~~
~~Sorrento common stock issuable upon Share Exchange to Semnur Equityholders~~			~~9,836,136~~
~~Issuable under assignment agreement based upon achievement of certain milestones~~			~~80,000~~
			~~73,131,464~~

~~Scilex Pharmaceuticals Inc. 2017 Equity Incentive Plan~~

In June 2017, the Company’s subsidiary, Scilex Pharma, adopted the Scilex Pharmaceuticals Inc. 2017 Equity Incentive Plan (the “Scilex Pharma 2017 Plan”). The Scilex Pharma 2017 Plan reserved 24.0 million shares of Scilex Pharma common stock. Stock options granted under the Scilex Pharma 2017 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. The Scilex Pharma 2017 Plan2020 was ~~amended and restated on July 5, 2018.~~

Upon the Merger Closing, the Scilex Pharma 2017 Equity Incentive Plan was terminated, and each option to purchase Scilex Pharma’s common stock outstanding and unexercised immediately prior to the Merger Closing were cancelled and substituted for that number of options to acquire common stock of Scilex Holding, as further described in Note 4.

~~Total employee and director stock-based compensation expense recorded as operating expenses was $1.0~~$12.9 million and ~~$1.4 million for~~ the three and nine months ended September 30, 2019, respectively. Total employee and director stock-based compensation expense recorded as operating expenses was $0.1 million for the nine months ended September 30, 2018 and was immaterial for the three months ended September 30, 2018.

~~Stock-based compensation expense related~~weighted average period over which these grants are expected to non-employee consultants recorded as operating expenses was $0.6 million and $1.2 million for the three and nine months ended September 30, 2019, respectively. Stock-based compensation expense related to non-employee consultants was immaterial for the three and nine months ended September 30, 2018.

~~Scilex Holding Company 2019 Stock Option Plan~~

The board of directors of Scilex Holding adopted the Scilex Holding Company 2019 Stock Option Plan (the “2019 Stock Option Plan”) on May 28, 2019. The 2019 Stock Option Plan was approved by the stockholders of Scilex Holding on June 7, 2019. 30.0 million ~~shares of common stock of Scilex Holding were reserved for issuance pursuant to the 2019 Stock Option Plan.~~

~~As of September 30, 2019, options to purchase 25,078,260 shares of the common stock of Scilex Holding were outstanding, which~~vest is comprised of options to purchase 20,738,260 shares of common stock that were outstanding under the 2019 Stock Option Plan and options to purchase 4,340,000 shares of common stock that were outstanding pursuant to options previously granted under the Scilex Pharma ~~2017~~ ~~Plan. As of September 30, 2019, 9,261,740 shares were reserved for awards available for future issuance under the 2019 Stock Option Plan.~~

~~13.~~2.7 years.

10. Commitments and Contingencies

Litigation

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

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

•

An arbitration demand with the American Arbitration Association in Los Angeles, California against NantPharma, LLC and 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, LLC and the Company, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with SEC on August 7, 2015. On May 24, 2019, NantCell, Inc., Dr. Soon-Shiong and Immunotherapy NANTibody LLC (“NANTibody”) General Counsel Charles Kim filed a motion in the Los Angeles Superior Court to stay or dismiss the Company’s arbitration demand. On October 9, 2019, the Los Angeles Superior Court denied the motion to stay or dismiss the arbitration demand, and the arbitration is ongoing against NantPharma. On March 5, 2020, the Company filed a legal action against Dr. Soon-Shiong in Los Angeles Superior Court, asserting claims for fraudulent inducement and common law fraud, arising out of Dr. Soon-Shiong’s purchase of the 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 the market. In connection with filing this civil action in the Los Angeles Superior Court, where the Company will have the right to a jury trial against Dr. Soon-Shiong, the Company has dismissed Dr. Soon-Shiong from the related, ongoing arbitration against NantPharma, LLC; and

•

An action in the Los Angeles Superior Court derivatively on behalf of 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 June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between the Company and NantCell, Inc. The suit also alleges breaches of fiduciary duties and seeks, inter alia, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma, LLC 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. 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 tortious interference with contract. On May 24, 2019, NANTibody and NantPharma, LLC filed a new complaint in the action against the Company and Dr. 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 tortious interference with contract. On July 8, 2019, the Company and Dr. Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Los Angeles Superior Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, LLC, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc., and NantPharma, LLC have re-filed their claims in arbitration with the American Arbitration Association. On May 4, 2020, the Company filed counterclaims against NANTibody and NantPharma related to breaches of the April 21, 2015 and June 11, 2015 Exclusive License Agreements. With the counterclaims, the Company is seeking money damages in an amount yet to be determined. The claims against Dr. Soon-Shiong have been stayed pending resolution of the claims filed in arbitration. The original derivative action is no longer stayed, and the parties are currently engaged in discovery in the suit.

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, its President, Chief Executive Officer ~~Patrick Soon-Shiong, seeking damages in excess of $1.0 billion, as well as additional punitive damages, related to alleged fraud~~ and ~~breaches~~Chairman of the ~~Stock Sale~~Board of Directors, Henry Ji, Ph.D., and ~~Purchase Agreement, dated May 14, 2015, entered into between NantPharma, LLC and~~its SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D. The action alleges that the Company, ~~included as Exhibit 10.2~~Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the ~~Company’s Quarterly Report on Form 10-Q filed~~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 ~~Securities~~plaintiffs’ reasonable costs and ~~Exchange Commission (the “SEC”) on August 7, 2015.~~expenses incurred in the lawsuit, including counsel fees and expert fees. On ~~May 24, 2019, NantCell, Inc., Dr. Soon-Shiong and Immunotherapy NANTibody LLC (“NANTibody”) General Counsel Charles Kim~~June 11, 2020, Jeannette Calvo filed a motion in the Los Angeles Superior Court to stay or dismiss the Company’s arbitration demand. On October 9, 2019, the Los Angeles Superior Court denied the motion to stay or dismiss the arbitration demand, and the arbitration is ongoing; and

•Ansecond putative federal securities class action in the ~~Los Angeles Superior~~U.S. District Court ~~derivatively on behalf~~for the Southern District of ~~NANTibody~~California, Case No. 3:20-cv-01066-JAH-WVG, against ~~NantCell, Inc., NANTibody Board Member~~the same defendants alleging the same claims and ~~NantCell, Inc. Chief Executive Officer Patrick Soon-Shiong, and NANTibody officer Charles Kim, related to several breaches~~seeking the same relief. It is anticipated that these cases will be consolidated as part of the ~~June 11, 2015 Limited Liability~~lead plaintiff and counsel appointment process under the Private Securities Litigation Reform Act. The Company Agreement for NANTibody entered into between the Company and NantCell, Inc. The suit also alleges breaches of fiduciary duties and seeks, inter alia, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma, LLC and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 millionintends to ~~the NANTibody capital account, thereby restoring the Company’s equity method investment in NANTibody to its invested amount as~~defend these matters vigorously.

Operating Leases

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. 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 April 21, 2015 and entered into between NantCell, Inc. and the Company), and tortious interference with contract. On May 24, 2019, NANTibody and NantPharma, LLC filed a new complaint in the action against the Company and Dr. 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 tortious interference with contract. On July 8, 2019, the Company and Dr. Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Los Angeles Superior Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, LLC, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc., and NantPharma, LLC have re-filed their claims in arbitration. The claims against Dr. Soon-Shiong have been stayed pending resolution of the claims filed in arbitration. The original derivative action is no longer stayed, and the parties are currently engaged in discovery in the suit.

~~Operating Leases~~

The Company leases administrative, research and development, sales and marketing and manufacturing facilities under various non-cancelable lease agreements. Facility leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. As of September 30, 2019,2020, the Company’s leases have remaining lease terms of approximately ~~0.7~~0.4 to ~~10.2~~9.4 years, some of which include options to extend the lease terms for up to five years, and some of which allow for early termination. In calculating the lease liability, lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Many of the Company’s leases are subject to variable lease payments. Variable lease payments are recognized in the period in which the obligation for those payments are incurred, are not included in the measurement of the ROU assets or lease liabilities and are immaterial. Additionally, certain leases may be subject to annual changes in the consumer price index (“CPI”). Changes in the CPI are treated as variable lease payments and do not result in a remeasurement of the ROU assets or lease liabilities.

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company calculates the associated lease liability and corresponding ROU asset upon lease commencement using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of September 30, 2019, the Company has no finance leases.

Operating lease costs were approximately $2.6 million and $7.4 million for the three and nine months ended September 30, 2019, respectively, and were primarily comprised of long-term operating lease costs. Short-term operating lease costs were immaterial.

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

Three months ended September 30, 2019 Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 1,712 $ 5,057
ROU assets obtained in exchange for new and amended operating lease liabilities $ 2,030 $ 6,777
Weighted average remaining lease term in years - operating leases 9.5 years 9.5 years
Weighted average discount rate - operating leases 12.2 % 12.2 %

~~During the third quarter of 2019, Scilex Holding entered a new lease in Palo Alto, CA~~thousands, except for approximately 6,000 square feet of corporate office space, which expires in November 2024. In connection with the lease, the Company executed a Guaranty of Lease, guaranteeing the performance of the Scilex Holding’s obligations under the lease.

~~During the second quarter of 2019, Scilex Holding amended its Mission Viejo, CA lease resulting in an extended term through 2024~~years and ~~approximately 4,000 square feet of additional office space.~~percentages):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Operating cash flows used for operating leases	$	2,487		$	1,867		$	4,896		$	3,399
ROU assets obtained in exchange for new and amended operating lease liabilities	$	—		$	4,447		$	795		$	4,747
Operating lease expense	$	2,533		$	2,700		$	5,072		$	5,000
Weighted average remaining lease term in years	8.9			9.9			8.9			9.9
Weighted average discount rate		12.2	%		12.2	%		12.2	%		12.2	%

During the second quarter of 2019, the Company amended its cGMP fill and finish and storage lease resulting in an extended term through 2029 and approximately 21,300 square feet of additional space expected to be added in the first quarter of 2020.

Maturities of lease liabilities were as follows (in thousands):

Years ending December 31,	Operating leases
2020 (Remaining six months)	$	4,993
2021		9,710
2022		9,764
2023		9,993
2024		10,117
2025		9,579
Thereafter		43,174
Total lease payments		97,330
Less imputed interest		(42,670	)
Total lease liabilities as of June 30, 2020	$	54,660

Years ending December 31, Operating leases
2019 (Remaining three months) $ 2,043
2020 10,233
2021 9,627
2022 9,649
2023 9,875
2024 9,921
Thereafter 47,027
Total lease payments 98,375
Less imputed interest (41,979)
Total lease liabilities as of September 30, 2019 $ 56,396

~~14.~~

11. Income Taxes

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. In addition, the CARES Act makes the Alternative Minimum Tax Credit 100% refundable for taxable years beginning in 2018 and 2019. The Company has recorded an income tax benefit of $0.1 million related to this legislation.

The Company’s income tax benefit of ~~$0.8~~ $2.2million and ~~$3.2~~$0.6 million reflect effective tax rates of ~~0.27%~~1.5% and ~~2.0%~~0.26% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company’s income tax benefit of ~~$0.2~~$1.9 million and ~~$0.8~~$0.4 million reflect effective tax rates of ~~0.30%~~2.3% and ~~1.64%~~0.54% for the three months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively.

The difference between the expected statutory federal tax ~~expense~~rate of 21% and the ~~0.27%~~1.5% effective tax ~~expense~~rate for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily attributable to the valuation allowance against most of the Company’s deferred tax assets. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, when compared to the same period in ~~2018,~~2019, the ~~decrease~~increase in the tax benefit and change in effective income tax rate was primarily attributable to the ~~increased~~impact of the Company’s valuation ~~allowance in 2019.~~

allowance.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2007 and later are subject to examination by the U.S. and state tax authorities due to the existence of the ~~NOL~~net operating loss and research credit carryforwards.

~~15.~~

12. Related Party Agreements

As further discussed in Note 4, on March 18, 2019, the Company entered into a Merger Agreement with Semnur, Scilex Holding, Merger Sub and Fortis Advisors LLC, solely as representative of the Equityholders’ Representative. Pursuant to the Merger Agreement, Merger Sub merged with and into Semnur, with Semnur surviving as a wholly owned subsidiary of Scilex Holding. Jaisim Shah, a member of the Company’s Board of Directors, was Semnur’s Chief Executive Officer, a member of its Board of Directors and a stockholder of Semnur prior to the acquisition transaction. Following the issuance of the Stock Consideration as discussed in Note 4, the Company is the owner of approximately 58% of Scilex Holding’s issued and outstanding capital stock.

Semnur is party to an Assignment Agreement with Shah Investor LP, pursuant to which Shah Investor LP assigned certain intellectual property to Semnur and Semnur agreed to pay Shah Investor LP a contingent quarterly royalty in the low-single digits based on quarterly net sales of any pharmaceutical formulations for local delivery of steroids by injection developed using such intellectual property, which would include SEMDEXA. Mahendra Shah, Ph.D., who has served on the board of directors of Scilex Holding since March 2019, is the managing partner of Shah Investor LP.

As of ~~September~~June 30, ~~2019,~~2020, approximately ~~15%~~14.7% of the outstanding capital stock of Scilex Holding represents a noncontrolling interest and continues to be held by ITOCHU CHEMICAL FRONTIER Corporation. Scilex Pharma has entered into a product development agreement with ITOCHU CHEMICAL FRONTIER Corporation, which serves as the sole manufacturer and supplier to Scilex Pharma for the ZTlido^®product. ~~During the three and nine months ended September 30, 2019,~~ Scilex Pharma purchased approximately ~~$1.7~~$0.7 million ~~and $7.1 million, respectively,~~ of inventory from ITOCHU CHEMICAL FRONTIER ~~Corporation.~~

~~16.~~Corporation during the six months ended June 30, 2020.

13. Loss Per Share

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted ~~loss~~earnings per share of common ~~share~~stock is calculated to give effect to all dilutive securities, using the treasury stock ~~method.~~method and the if-converted method for potentially dilutive shares of common stock issuable upon the Semnur Share Exchange.

The following table sets forth the reconciliation of basic and diluted loss per share for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (in ~~thousands)~~thousands except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Numerator
Net loss attributable to Sorrento	$	(77,740	)	$	(56,762	)	$	(142,935	)	$	(164,833	)
Net loss attributable to Semnur holders of Scilex Holding		—			(6,093	)		—			(28,824	)
Net loss used for diluted earnings per share	$	(77,740	)	$	(62,855	)	$	(142,935	)	$	(193,657	)

Denominator for Basic Loss Per Share		216,956			122,549			199,782			122,415
Potentially dilutive shares of Sorrento common stock issuable upon Semnur Share Exchange		—			9,910			—			5,717
Denominator for Diluted Loss Per Share		216,956			132,459			199,782			128,132
Basic Loss Per Share	$	(0.36	)	$	(0.46	)	$	(0.72	)	$	(1.35	)
Diluted Loss Per Share	$	(0.36	)	$	(0.47	)	$	(0.72	)	$	(1.51	)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Numerator
Net loss attributable to Sorrento $ (64,415) $ (47,328) $ (229,248) $ (153,764)
Net loss attributable to Semnur holders of Scilex Holding (6,205) — (34,819) —
Net loss used for diluted earnings per share $ (70,620) $ (47,328) $ (264,067) $ (153,764)
Denominator for Basic Loss Per Share 130,800 117,021 125,240 100,959
Potentially dilutive shares of Sorrento common stock issuable upon Share Exchange 9,645 — 7,025 —
Denominator for Diluted Loss Per Share 140,445 117,021 132,265 100,959
Basic Loss Per Share $ (0.49) $ (0.40) $ (1.83) $ (1.52)
Diluted Loss Per Share $ (0.50) $ (0.40) $ (2.00) $ (1.52)

The potentially dilutive stock options that would have been excluded because the effect would have been anti-dilutive for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~9.7~~11.5 million and ~~3.6~~9.7 million, respectively. The potentially dilutive warrants that would have been excluded because the effect would have been anti-dilutive for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~47.8~~41.1 million and ~~5.6~~10.7 million, respectively.

~~17.~~ For each of the three and six months ended June 30, 2020, the Company excluded approximately 9.8 million potentially dilutive shares related to the Semnur Exchange because the effect would have been anti-dilutive.

14. Segment Information

~~During the quarter ended March 31, 2019, the~~

The Company ~~realigned its businesses into~~operates in 2 operating and reportable segments, Sorrento Therapeutics and Scilex. ~~The Company reports segment information based on~~With the ~~management approach. The management approach designates~~exception of unrestricted cash balances, the ~~internal reporting used by the~~Company’s Chief Operating Decision Maker (“CODM”), which is the Company’s Chief Executive Officer, for making decisions and assessing performance as the source of the Company’s reportable segments. The CODM allocates resources and assesses the performance of each operating segment based on licensing, sales and services revenue, operating expenses, and operating income (loss) before interest and taxes. The Company has determined its reportable segments to be Sorrento Therapeutics and Scilex based on the information used by the CODM.

~~Sorrento Therapeutics~~. The Sorrento Therapeutics segment is organized around the Company’s Immuno-Oncology therapeutic area, leveraging its proprietary G-MAB™ antibody library and targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary CAR-T, DAR-T, ADCs as well as bispecific antibody approaches. Additionally, this segment also includes Sofusa^®, a revolutionary drug delivery system that delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and fewer adverse effects than standard parenteral immunotherapy, and resiniferatoxin (“RTX”), which is a non-opioid-based neurotoxin and is currently in clinical trials for late stage cancer pain and osteoarthritis.

~~Scilex~~. The Scilex segment is largely organized around the Company’s non-opioid pain management operations. As of September 30, 2019, revenues from the Scilex segment are exclusively derived from the sale of ZTlido^® ~~(lidocaine topical system) 1.8%.~~

•~~In October 2018, Scilex Pharma commercially launched its ZTlido~~^® ~~(lidocaine topical system) 1.8% product and began recognizing revenue in the fourth quarter of 2018.~~

•~~Semnur’s SEMDEXA~~^TM (SP-102) compound is the first non-opioid corticosteroid formulated as a viscous gel injection in development for the treatment of lumbosacral radicular pain/sciatica, containing no neurotoxic preservatives, surfactants, solvents or particulates. SEMDEXA^TM~~has been awarded fast track status by the FDA. See Note 4 for further detail on the Semnur acquisition.~~

~~The Company manages its assets on a company basis, not by segments, as many of its assets are shared or commingled. The Company’s CODM~~ does not regularly review asset information by reportable segment and, therefore, it does not report asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.

The following table presents information about the Company’s reportable segments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):

	Three Months Ended June 30,
	2020									2019
(in thousands)	Sorrento Therapeutics			Scilex			Total			Sorrento Therapeutics			Scilex			Total
External revenues	$	3,258		$	5,749		$	9,007		$	1,817		$	4,660		$	6,477
Operating expenses		41,443			15,292			56,735			36,299			20,539			56,838
Operating loss		(38,185	)		(9,543	)		(47,728	)		(34,482	)		(15,879	)		(50,361	)
Unrestricted cash		17,251			7,137			24,388			31,986			29,399			61,385


		Three Months Ended September 30,																										Six Months Ended June 30,
		2019										2018											2020									2019
(in thousands)	(in thousands)	Sorrento Therapeutics		Scilex		Total		Sorrento Therapeutics		Scilex		Total		Sorrento Therapeutics			Scilex			Total			Sorrento Therapeutics			Scilex			Total
External revenues	External revenues	$	2,007	$	3,771	$	5,778	$	4,105	$	—	$	4,105	$	5,767		$	10,961		$	16,728		$	5,101		$	7,519		$	12,620
Operating expenses	Operating expenses	34,480		24,581		59,061		41,641		10,371		52,012			74,691			32,928			107,619			71,431			114,720		$	186,151
Operating loss	Operating loss	(32,473)		(20,810)		(53,283)		(37,536)		(10,371)		(47,907)			(68,924	)		(21,967	)		(90,891	)		(66,330	)		(107,201	)		(173,531	)
Unrestricted cash															17,251			7,137			24,388			31,986			29,399			61,385

Nine Months Ended September 30,
2019 2018
(in thousands) Sorrento Therapeutics Scilex Total Sorrento Therapeutics Scilex Total
External revenues $ 7,109 $ 11,289 $ 18,398 $ 14,264 $ — $ 14,264
Operating expenses 105,912 139,300 245,212 105,419 17,670 123,089
Operating loss (98,803) (128,011) (226,814) (91,155) (17,670) (108,825)

~~18.~~

15. Subsequent Events

~~2019 Registered Direct Offering~~

~~On October 9, 2019,~~

License Agreement with ACEA Therapeutics, Inc.

In July 2020, the Company ~~announced~~entered into a License Agreement (the “License Agreement”) with ACEA Therapeutics, Inc. (“ACEA”). Pursuant to the ~~closing~~License Agreement, among other things, ACEA granted the Company an exclusive license and right under certain patents and certain know-how and other intellectual property (“Licensed Know-How”) to fully utilize, exploit and commercialize (i) the Licensed Know-How, (ii) Abivertinib (AC0010), a selective, orally available irreversible small molecule tyrosine kinase inhibitor to Bruton’s tyrosine kinase and mutant epidermal growth factor receptor, including any improvements thereto, and (iii) (a) any composition, product, or component part thereof, and (b) any and all services offered in connection or associated therewith, in all fields of use, including the diagnosis, treatment and/or cure of any human disease or disorder worldwide, other than the People’s Republic of China.

As consideration for the license under the License Agreement, the Company has agreed to pay ACEA an up-front licensee fee of $15.0 million, of which $5.0 million is payable within ten business days of the date of the License Agreement and $10.0 million of which is payable within thirty calendar days of the date of the License Agreement. The Company also agreed to pay ACEA (i) certain milestone payments upon the receipt of certain regulatory approvals, and (ii) certain milestone payments upon the Company’s or its ~~previously announced registered direct offering~~affiliates’ achievement of ~~10,869,566 shares~~certain commercial sales milestones. The upfront payments and the milestone payments may be comprised of ~~its~~cash or any combination of cash and common stock ~~and warrants to purchase up to 10,869,566 shares~~ of ~~its~~the Company, in any case as determined by the Company so long as no more than 50% of any upfront payment or milestone payment is comprised of common stock ~~at a combined purchase price~~ of ~~$2.30 per share and related warrant. The net proceeds from this offering were approximately $23.4 million, after deducting~~ the ~~placement agent’s fees and other estimated offering expenses, and were received in October 2019.~~Company. The Company ~~currently intends~~will also pay certain royalties in the mid-single digit to ~~use~~low-double digit percentages of annual net sales by the ~~net proceeds from~~Company.

License Agreement with The Trustees of Columbia University in the ~~offering for the continued clinical development~~City of ~~its RTX and CD38 CAR-T programs and general research and development, working capital and general corporate purposes.~~

~~2019 Equity Distribution Agreement~~

New York

In ~~October 2019,~~July 2020, the Company entered into an ~~Equity Distribution~~Exclusive License Agreement (the ~~“Distribution~~“Columbia License Agreement”) with JMP Securities LLC, as sales agent (the “Sales Agent”), pursuant to which the Company may offer and sell, from time to time, through or to the Sales Agent, as sales agent or principal (the “Offering”), up to $75.0 million in sharesThe Trustees of ~~its common stock (the “Shares”). Any Shares offered and sold~~Columbia University in the Offering will be issued pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-221443) filed with the SEC on November 9, 2017, as amended on December 1, 2017 and declared effective on December 6, 2017 (the “Form S-3”), the base prospectus dated December 6, 2017 included in the Form S-3 and the prospectus supplement relating to the Offering filed with the SEC on October 1, 2019.

~~Under the terms~~City of the Distribution Agreement, the Sales Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of Shares under the Distribution Agreement. The Company will also reimburse the Sales Agent for certain expenses incurred in connection with the Distribution Agreement, and agreed to provide indemnification and contribution to the Sales Agent with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended. The Company currently intends to use any net proceeds from the Offering for working capital and general corporate purposes.

~~Omnibus Amendment No. 1 to Indenture and Letter of Credit~~

On October 1, 2019, Scilex Pharma, the Company, U.S. Bank National Association, as trustee (the “Trustee”) and collateral agent (the “Agent”), and the beneficial owners of the Scilex Notes and the holders of such Scilex Notes listed on the signature pages thereto (the “Holders”) entered into an omnibus amendment (the “Omnibus Amendment”) to: (i) the Indenture, and (ii) that certain Irrevocable Standby Letter of Credit issued by the Company to Scilex Pharma in the maximum aggregate amount of $35.0 million, with a date of issuance of September 7, 2018 (the “Letter of Credit”).

Under the terms of the Omnibus Amendment, among other things, the defined term “Change of Control” was revised to include, in addition to certain events described in the Indenture, (i) prior to the consummation of an initial public offering by Scilex Holding (the “Scilex Holding IPO”), the Company ceasing to own, directly or indirectly, a majority of the total voting and economic power of the issued and outstanding capital stock that is entitled to vote in the election of the Board of Directors (the “Voting Stock”) of Scilex Pharma, (ii) at any time following the consummation of the Scilex Holding IPO, Scilex Pharma becoming aware of the acquisition by any person or group acquiring, in a single or in a related series of transactions, by way of merger, amalgamation, consolidation or other business combination or purchase of beneficial ownership of a majority of the total voting power of the issued and outstanding Voting Stock of Scilex Pharma or Scilex Holding, and (iii) Scilex Holding failing at any time to own 100% of the capital stock of Scilex Pharma. The Omnibus Amendment also provides that Scilex Pharma will agree not to engage in or enter into any business other than the research, development, manufacture, sale, distribution, marketing, detailing, promotion, selling and securing of reimbursement of ZTlido^® (lidocaine topical system) 1.8% and any future iterations, improvements or modifications thereof (the “Product”), on a worldwide basis (exclusive of Japan), and activities that are necessary for, or otherwise relevant to, the same, subject to certain exceptions. The Omnibus Amendment further provides that, if Scilex Holding fails to contribute $25.0 million of the proceeds of any Scilex Holding IPO to Scilex Pharma within three business days following the closing of the issuance and sale of Scilex Holding’s capital stock in the Scilex Holding IPO, such failure shall constitute an “Event of Default” under the Indenture.

In connection with the Omnibus Amendment, in the event of consummation of a Scilex Holding IPO that satisfies certain valuation thresholds, Scilex Pharma agreed to repurchase, from each holder of Scilex Notes, Scilex Notes in a principal amount equal to (i) $20.0 millionmultiplied by (ii) a fraction the numerator of which will be the then outstanding principal amount of the Scilex Notes held by such holder and the denominator of which will be the then outstanding principal amount of all of the outstanding Scilex Notes, at a purchase price in cash equal to 100% of the principal amount thereof (such repurchase, the “Effective Date Repurchase”New York (“Columbia”). Pursuant to the ~~Omnibus Amendment,~~Columbia License Agreement, among other things, Columbia granted the ~~Holders agreed~~Company (i) an exclusive license under certain patents, other intellectual property and materials to ~~release~~discover, develop, commercialize and exploit certain products and services (“Products”) in all diagnostic applications of high-performance loop-mediated isothermal amplification (“HP-LAMP”) for coronaviruses and influenza viruses (the “Field”) worldwide, subject to certain reservations and limitations. Pursuant to the ~~funds in~~Columbia License Agreement, Columbia also granted to the ~~reserve~~

~~account~~Company an option, exercisable for twelve months from the ~~purpose of consummating the Effective Date Repurchase and the remaining funds in the reserve account after the consummation~~effective date of the ~~Effective Date Repurchase will be released~~Columbia License Agreement and subject to Scilex Pharma by the Trustee and Agent. After the consummation of the Effective Date Repurchase, the right of the holders of the Scilex Notes to require Scilex Pharma to repurchase $20.0 million principal amount upon failure to receive a marketing approval letter from the FDA with respect to SP-103 by July 1, 2023 shall have no further force and effect and the Reserve Account shall be closed.

The Omnibus Amendment also modifies the Letter of Credit to provide that one of the conditions that will terminate the Letter of Credit will be the consummation of a Scilex Holding IPO that satisfies certain valuation thresholds. The Omnibus Amendment will be effective upon the satisfaction of certain ~~terms~~conditions, to acquire an exclusive worldwide license to such patents, other intellectual property and ~~conditions, including the consummation~~materials for additional diagnostic application(s) of ~~the Effective Date Repurchase. The Omnibus Amendment will terminate if the Omnibus Amendment does not become effective on or prior~~HP-LAMP (other than for coronaviruses and influenza viruses), subject to ~~October 1, 2020.~~

~~Note Conversion Agreement~~

On November 8, 2019, the Company entered into a note conversion agreement (the “Conversion Agreement”) with the holders (the “Convertible Noteholders”) of convertible promissory notes issued by the Company on June 13, 2018 (the “Convertible Notes”) pursuant to the March 2018 Securities Purchase Agreement. The Convertible Notes accrued simple interest at a rate equal to 5.0% per annumcertain reservations and would mature upon the earlier to occur of (a) June 13, 2023, and (b) the date of the closing of a change in control of the Company (the “Maturity Date”). Pursuant to the terms of the Convertible Notes, at any time and from time to time before the Maturity Date, each March 2018 Purchaser had the option to convert any portion of the outstanding principal amount of such March 2018 Purchaser’s Convertible Note into shares of the Company’s common stock at a price per share equal to $7.0125. Upon conversion of any of the principal amount of a Convertible Note, all accrued and unpaid interest on such portion of the principal amount would become due and payable in cash.

~~Pursuant to the Conversion Agreement, the Convertible Notes were amended to provide that (a) the conversion price~~limitations.

As consideration for the Convertible Notes was reduced from $7.0125 per share to $1.70 per share, and (b) upon the conversion of any portion of the outstanding principal amount of a Convertible Note, all accrued but unpaid interest on such portion of the principal amount being converted shall also be converted into shares of the Company’s common stock at $1.70 per share (collectively, the “Amendment”). In connection with the Amendment, each of the Convertible Noteholders further agreed to convert the full principal amount, plus all accrued but unpaid interest, under such Convertible Noteholder’s Convertible Note, as amended by the Amendment, into shares of the Company’s common stock on November 8, 2019. As of November 8, 2019, the aggregate outstanding principal amount of the Convertible Notes was $37,848,750 (the “Principal Amount”) and the aggregate accrued interestlicense under the ~~Convertible Notes was $674,018.84 (the “Accrued Interest”).~~

Pursuant to the Conversion Agreement, on November 8, 2019, 22,660,449 shares of the Company’s common stock were issued to the Convertible Noteholders upon the conversion of the full Principal Amount and the Accrued Interest (the “Conversion Shares”). None of the Conversion Shares were registered under the Securities Act of 1933, as amended (the “Securities Act”).

In connection with the March 2018 Securities Purchase Agreement, the Company previously registered 5,397,325 of the Conversion Shares for resale under the Securities Act pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-229609) filed with the SEC on February 11, 2019, as amended by Amendment No. 1 thereto filed with the SEC on May 3, 2019, and declared effective on May 7, 2019 (the “Prior Registration Statement”). Pursuant to the ConversionColumbia License Agreement, the Company agreed to ~~prepare~~pay Columbia (i) an up-front license fee of $5.0 million within ten business days of the execution of the Columbia License Agreement, (ii) an earned royalty on the net sales of Products in the Field worldwide, and ~~file by~~(iii) minimum annual royalty payments of $1.0 million no later than ~~December 9, 2019~~ten days following the first bona fide commercial sale of a ~~registration statement with~~Product to a third-party customer and on an annual basis thereafter. In addition, the ~~SEC~~Company agreed to pay Columbia a percentage of certain non-royalty sublicense revenue and other payments received by the Company from its sublicensees as consideration for the ~~purpose~~grant of ~~registering~~any sublicense, option or similar rights. Pursuant to the Columbia License Agreement, the Company also agreed to pay certain one-time, development milestone payments to Columbia upon the receipt of certain regulatory approvals or the first commercial sale of certain Products for ~~resale~~diagnostic applications within the ~~remaining 17,263,124 Conversion Shares that were not covered under the Prior Registration Statement.~~Field.

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

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

Overview

Sorrento Therapeutics, Inc. ~~(Nasdaq: SRNE)~~, together with its subsidiaries (collectively, the “Company”, “we”, “us”, and “our”) is a clinical stage and commercial ~~biopharma~~biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to patients and their families ~~globally,~~ to address unmet medical needs. We primarily focus on therapeutic areas in Immuno-Oncology and Non-Opioid Pain Management. We also have programs assessing the use of our technologies and products in autoimmune, inflammatory and neurodegenerative diseases.

At our core, we are an antibody-centric ~~company~~ and leverage our proprietary G-MAB™ library and targeted delivery modalities to generate the next generation of cancer therapeutics. Our fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47, CTLA-4, c-MET, VEGFR2, CCR2 and CD137 among others.

We also have programs assessing the use of our technologies and products in autoimmune, inflammatory, viral and neurodegenerative diseases.

Our vision is to leverage these antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy (“CAR-T”), dimeric antigen receptor T-cell therapy (“DAR-T”), antibody drug conjugates (“ADCs”) as well as bispecific antibody approaches. ~~Additionally, we~~We acquired Sofusa^®, a revolutionary drug delivery ~~system,~~technology, in July 2018, which delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and fewer adverse effects than standard parenteral immunotherapy.

Additionally, our majority-owned subsidiary, Scilex Holding Company (“Scilex Holding”), acquired the assets of Semnur Pharmaceuticals, Inc. (“Semnur”) in March 2019. Semnur’s SEMDEXA^TM (“SP-102”) compound has the potential to become the first FDA-approved epidural steroid product for the treatment of sciatica. In response to the global COVID-19 pandemic, we are developing potential coronavirus antiviral therapies and vaccines, including ACE-MAB^TM, COVIDTRAP^TM, COVI-MAB^TM, COVI-GUARD^TM, COVI- SHIELD^TMand T-VIVA-19^TM.

With each of our clinical and pre-clinical programs, we aim to tailor our therapies to treat specific stages in the evolution of cancer, from elimination, to equilibrium and escape. In addition, our objective is to focus on tumors that are resistant to current treatments and where we can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. We have several immuno-oncology programs that are in or ~~close~~near to entering the clinic. These include cellular therapies, an oncolytic ~~virus~~viruses (Seprehvir^TM, Seprehvec^TM) and a palliative care program targeted to treat intractable cancer pain. Our cellular therapy programs focus on CAR-T and DAR-T for adoptive cellular immunotherapy to treat both solid and liquid tumors. We have reported early data from Phase I trials of our carcinoembryonic antigen (“CEA”)-directed CAR-T program. We have treated five patients with stage 4, unresectable adenocarcinoma (four with pancreatic and one with colorectal cancer) and CEA-positive liver metastases with anti-CEA ~~CAR-T and are currently expanding this study.~~CAR-T. We successfully submitted an Investigational New Drug application (“(“IND”) for anti-CD38 CAR-T ~~(autologous)~~ for the treatment of refractory or relapsed multiple myeloma (“RRMM”) and obtained ~~approval~~clearance from the U.S. Food and Drug Administration (the ~~“FDA”~~“FDA”) ~~to commence~~and commenced a human clinical trial for this indication in early 2018. We have dosed five patients ~~for the Phase I clinical trial~~ and are continuing the enrollment of additional patients. The data-readout for this Phase I clinical trial is expected during the fourth quarter of 2019 or first quarter of 2020. We expect to file an IND for CD38 ADC in the second half of 2019, an IND for CD38 DAR-T (allogenic) in the second half of 2019 and an IND for CD38/CD3 bispecific antibody (“BsAb”) in the second half of 2020.

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

Outside of immuno-oncology programs, as part of our global aim to provide a wide range of therapeutic products to meet underserved markets, we have made investments in non-opioid pain management. These include resiniferatoxin (“RTX”), which is a non-opioid-based ~~neurotoxin~~toxin that specifically ablates nerves that conduct chronic and inflammatory pain signals while leaving other nerve functions intact and is being studied for chronic pain treatment. RTX has been granted orphan drug status for the treatment of intractable pain with end-stage ~~cancer. A~~cancer and two Phase I ~~trial with the National Institutes of Health (“NIH”) for intrathecal administration~~trials (intrathecal and ~~a Phase I trial for~~ epidural ~~administration~~routes) in that indication are ~~both expected to conclude in 2019.~~concluding. A Phase Ib trial studying tolerance and efficacy of RTX for the control of osteoarthritis knee pain was initiated in late 2018 and ~~preliminary~~intermediate results have shown ~~strong~~ efficacy with no ~~significant adverse effects.~~dose limiting toxicities. The ~~Phase Ib~~osteoarthritis trial ~~is expected to conclude in 2019, and two Phase III pivotal trials in~~enrolled the ~~U.S. and Asia-Pacific are expected to commence~~last patient in the first quarter of ~~2020. We~~2020 and we expect to ~~file an IND for RTX for~~release clinical data by the ~~delay/prevention~~end of ~~total knee arthroplasty~~2020. Knee arthritis registrational trials are planned to start later in 2020 with a pivotal trial, pending meeting with the ~~fourth quarter of 2019 or first quarter of 2020, which may be eligible for breakthrough therapy designation from the FDA.~~FDA and receiving clearance to proceed.

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

Additionally, we are currently conducting preclinical development of multiple therapeutic, vaccine and diagnostic candidates for the potential treatment, prevention and detection of COVID-19 across our proprietary platforms, including natural killer cell therapies, neutralizing antibodies (COVI-GUARD^TM and COVI-SHIELD^TM) and soluble recombinant fusion protein traps (COVIDTRAP^TM) to potentially inhibit the binding of SARS-CoV-2’s spike protein with host ACE2 receptors, thereby potentially preventing viral cell entry. We ~~expect~~are also developing COVID-19 diagnostic products, including COVI-TRACK^TM, for detecting the presence of antibodies against SARS-CoV-2 in patient blood samples, and COVI-TRACE^TM, for detecting the presence of SARS-CoV-2 in patient saliva samples. SARS-CoV-2 is the virus that causes COVID-19.

Impact of COVID-19 on Our Business

We are closely monitoring the COVID-19 pandemic and its potential impact on our business. We are an Essential Critical Infrastructure Provider, as our operations are critical to ~~commence a Phase II~~the continued operations of the healthcare infrastructure of the United States, as set forth by the U.S. Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency. In an effort to protect the health and safety of our employees, we took proactive action from the earliest signs of the outbreak including implementing social distancing policies at our facilities, facilitating remote working arrangements and imposing employee travel restrictions.

The COVID-19 pandemic has created uncertainties in the expected timelines for clinical stage biopharmaceutical companies such as ours, including possible delays in clinical trials and disruptions in the supply chain for raw materials used in clinical trial ~~for ZTlido® (lidocaine topical system) 5.4% (“SP-103”) for chronic low back pain~~work. Such delays could materially impact our business in future periods. Furthermore, the spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the ~~first half of 2020.~~

~~Scilex Holding’s other lead compound, SP-102, has been awarded fast track designation by~~future negatively affect our liquidity. Policymakers around the ~~FDA. It is~~globe have responded with fiscal policy actions to support the ~~first non-opioid corticosteroid formulated~~healthcare industry and economy as a ~~viscous gel injection~~whole. The magnitude and overall effectiveness of these actions remain uncertain. Accordingly, the extent to which the COVID-19 global pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in ~~development~~global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, “Risk Factors” herein.

Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

Revenues. Revenues were $9.0 million for the treatment of lumbar radicular pain/sciatica, containing no neurotoxic preservatives, surfactants, solvents or particulates. The FDA’s fast track program was implemented to expedite the development and regulatory review of therapeutic programs that seek to address significant unmet medical needs. SP-102 is currently in a pivotal trial, “Corticosteroid Lumbar Epidural Analgesia for Radiculopathy (C.L.E.A.R.).” The CLEAR trial is a randomized, double-blind, placebo-controlled Phase III trial that is expected to enroll 400 patients with lumbar radicular pain at 40+ sites across the U.S. The primary endpoint is mean change in the Numerical Pain Rating Scale for leg pain in patients receiving SP-102three months ended June 30, 2020, as compared to ~~intramuscular injection~~$6.5 million for the three months ended June 30, 2019.

Revenues in our Sorrento Therapeutics segment increased from $1.8 million to $3.2 million for the three months ended June 30, 2020 compared to the same quarter of ~~placebo over four weeks.~~the prior year and were primarily attributed to higher contract manufacturing service revenues.

Revenues in our Scilex segment increased from $4.7 million to $5.8 million for the three months ended June 30, 2020 compared to the same quarter of the prior year and were attributed to increased product sales of ZTlido.

Cost of revenues. Cost of revenues for the three months ended June 30, 2020 and 2019 were $2.2 million and $3.3 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. The ~~secondary endpoints~~costs generally include ~~other measures~~employee-related expenses, including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Cost of ~~pain at 4~~revenues for our Sorrento Therapeutics segment decreased by $1.1 million and ~~12 weeks~~was primarily attributable to process efficiencies realized during 2020.

Cost of revenues for our Scilex segment increased by $0.1 million and was attributed to higher sales volumes of ZTlido.

Research and Development (“R&D”) Expenses. Research and development expenses for the three months ended June 30, 2020 and 2019 were $24.2 million and $24.8 million, respectively. Research and development expenses include expenses associated with SP-102, costs related to our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as ~~time to repeat injection~~advancing our ADC preclinical drug candidates and preclinical testing expenses. Such expenses consist primarily of ~~SP-102, safety~~salaries and ~~function. The trial includes an open-label extension to build the safety database of patients treated with SP-102. Topline pivotal data~~personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation, and other expenses.

R&D expenses for ~~the Phase III trial is expected during the second half of 2020.~~

~~Recent Developments~~

~~Re-segmentation~~

~~Beginning in the quarter ended March 31, 2019, we re-segmented~~ our ~~business into two new operating segments: the~~ Sorrento Therapeutics segment decreased by $1.1 million as compared to the same quarter of the prior year and were primarily driven by reduced expenditures on lab supplies and lower pre-clinical spend compared to the prior year.

R&D expenses for our Scilex ~~segment.~~

~~Acquisition~~segment increased by $0.5 million as compared to the same quarter of the prior year and were primarily driven by costs associated with our SP-102 product pipeline.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses during the three months ended June 30, 2020 totaled $4.9 million. These expenses primarily relate to various investments in new technologies and preclinical programs. There were no individually significant transactions during the three months ended June 30, 2020. Acquired in-process research and development expenses for the three months ended June 30, 2019 totaled $75.3 million and were associated with the acquisition of Semnur ~~Pharmaceuticals, Inc.~~

Onin March ~~18,~~2019.

Selling, General and Administrative (“SG&A”)Expenses. SG&A expenses for the three months ended June 30, 2020 and 2019 ~~we,~~were $24.5 million and $27.8 million, respectively, and consisted primarily of salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.

SG&A expenses for ~~limited purposes, entered into an Agreement~~our Sorrento Therapeutics segment increased by approximately $2.5 million and Plan of Merger (the “Merger Agreement”) with Semnur Pharmaceuticals, Inc., a Delaware corporation (“Semnur”), Scilex Holding Company, a Delaware corporation (“Scilex Holding”), Sigma Merger Sub, Inc., a Delaware corporationwere primarily attributed to increased legal and ~~wholly owned subsidiary of Scilex Holding (“Merger Sub”), and Fortis Advisors LLC, solely as representative~~professional fees compared to the same quarter of the ~~holders~~prior year.

SG&A expenses for our Scilex segment decreased by approximately $5.9 million and were primarily attributed to cost savings resulting from a shift to more favorable marketing programs for ZTlido and optimizing the sales force.

Gain on Derivative Liabilities. Gain on derivative liabilities for the three months ended June 30, 2020 was $2.0 million compared to a loss of ~~Semnur equity (the “Equityholders’ Representative”). Pursuant~~$10.6 million in the same quarter in 2019.

Gain on derivative liabilities for our Sorrento Therapeutics segment totaled $6.9 million and was primarily attributed to the Merger Agreement, Merger Sub merged with and into Semnur (the “Merger”), with Semnur surviving as a wholly owned subsidiary of Scilex Holding. Semnur is included under the Scilex operating segment.

~~At the closing~~full repayment of the ~~Semnur acquisition, Scilex Holding issued to the holders~~Term Loans as of Semnur’s capital stock and options to purchase Semnur’s common stock (collectively, the “Semnur Equityholders”) upfront consideration with a value of approximately $70.0 million. The upfront consideration was comprised of the following: (a) a cash payment of approximately $15.0 million, and (b) $55.0 million of shares of Scilex Holding common stock (47,039,315 shares issued and 352,972 shares issuable, valued at $1.16 per share) (the “Stock Consideration”).

On August 7, 2019, Scilex Holding entered into an amendment to the Merger Agreement to provide that, following the consummation of Scilex Holding’s first bona fide equity financing with one or more third-party financing sources on an arms’ length basis with gross proceeds to Scilex Holding of at least $40.0 million, certain of the former Semnur Equityholders will be

paid cash in lieu of: (a) the 352,972 shares of our common stock otherwise issuable to such Semnur Equityholders pursuant to the Merger Agreement, and (b) any shares that would otherwise be issued to such Semnur Equityholders upon release of shares held in escrow pursuant to the Merger Agreement, with such shares in each case valued at $1.16 per share. The amendment resulted in a reclassification of $0.4 million from additional paid-in capital to accrued liabilities.

~~The Semnur Equityholders that receive the Stock Consideration are required to sign an exchange and registration rights agreement with us (the “Exchange Agreement”), which is~~June 30, 2020 as further described in Note 47 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Loss on derivative liabilities for our Scilex segment was $4.9 million and was primarily attributed to revised probabilities and revised sales forecasts as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Loss on Debt Extinguishment. Loss on debt extinguishment for the three months ended June 30, 2020 was $28.3 million and was attributed to the repayments of outstanding principal on the Term Loans.

Interest Expense. Interest expense for the three months ended June 30, 2020 and 2019 was $8.3 million and $9.5 million, respectively. The decrease resulted primarily from a decrease in interest expense associated with the Term Loans.

Income Tax Benefit. Income tax benefit for the three months ended June 30, 2020 and 2019 was $1.9 million and $0.4 million, respectively. The increase in income tax benefit was attributed to the impact of our valuation allowance.

Net Loss. Net loss for the three months ended June 30, 2020 and 2019 was $85.0 million and $71.8 million, respectively.

Comparison of the Six Months Ended June 30, 2020 and 2019

Revenues. Revenues were $16.7 million for the six months ended June 30, 2020, as compared to $12.6 million for the six months ended June 30, 2019.

Revenues in our Sorrento Therapeutics segment increased from $5.1 million to $5.7 million for the six months ended June 30, 2020, compared to the same period of the prior year and were primarily attributed to higher contract manufacturing service revenues.

Revenues in our Scilex segment increased from $7.5 million to $11.0 million for the six months ended June 30, 2020 compared to the same period of the prior year and were attributed to increased product sales of ZTlido.

Cost of revenues. Cost of revenues for the six months ended June 30, 2020 and 2019 were $4.7 million and $5.6 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing 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.

Cost of revenues for our Sorrento Therapeutics segment decreased by $1.2 million and was primarily attributable to process efficiencies realized during 2020.

Cost of revenues for our Scilex segment increased by $0.3 million as compared to the same period of the prior year and was attributed to higher sales volumes of ZTlido.

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2020 and 2019 were $45.3 million and $50.4 million, respectively. Research and development expenses include expenses associated with SP-102, costs related to our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates and preclinical testing expenses. 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.

R&D expenses for our Sorrento Therapeutics segment decreased by $6.8 million as compared to the same period of the prior fiscal year and were primarily driven by reduced expenditures on lab supplies and lower pre-clinical spend compared to the prior year.

R&D expenses for our Scilex segment increased by $1.7 million as compared to the same period of the prior fiscal year and were primarily driven by costs associated with our SP-102 product pipeline.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the six months ended June 30, 2020 totaled $4.9 million.These expenses primarily relate to various investments in new technologies and preclinical programs. There were no individually significant transactions during the six months ended June 30, 2020. Acquired in-process research and development expenses for the six months ended June 30, 2019 totaled $75.3 million and were associated with the acquisition of Semnur in March 2019.

Selling, General and Administrative Expenses. SG&A expenses for the six months ended June 30, 2020 and 2019 were $50.8 million and $52.9 million, respectively, and consisted primarily of salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.

SG&A expenses for our Sorrento Therapeutics segment increased by approximately $6.5 million and were primarily attributed to increased legal and professional fees compared to the same period of the prior year.

SG&A expenses for our Scilex segment decreased by approximately $8.6 million and were primarily attributed to cost savings resulting from a shift to more favorable marketing programs for ZTlido and optimizing the sales force.

Gain on Derivative Liabilities. Gain on derivative liabilities for the six months ended June 30, 2020 was $6.9 million compared to a loss of $25.1 million in the same period in 2019.

Gain on derivative liabilities for our Sorrento Therapeutics segment totaled $5.9 million and was primarily attributed to the full repayment of the Term Loans as of June 30, 2020.

Gain on derivative liabilities for our Scilex segment was $1.0 million and was primarily attributed to revised probabilities and revised sales forecasts as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Loss on Debt Extinguishment. Loss on debt extinguishment for the six months ended June 30, 2020 was $51.9 million and was attributed to the repayments of outstanding principal on the Term Loans as further described in Note 7of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Interest Expense. Interest expense for the six months ended June 30, 2020 and 2019 was $15.1 million and $18.6 million, respectively. The decrease resulted primarily from a decrease in interest expense associated with the Term Loans.

Income Tax (Benefit) Expense. Income tax benefit and income tax expense for the six months ended June 30, 2020 and 2019 was $2.2 million and $0.6 million, respectively. The increase in income tax benefit was attributed to the impact of our valuation allowance.

Net Loss. Net loss for the six months ended June 30, 2020 and 2019 was $154.2 million and $218.4 million, respectively.

Liquidity and Capital Resources

As of June 30, 2020, we had $24.4 million in cash and cash equivalents attributable in part to the following financing arrangements:

Debt Financings

2018 Oaktree Term Loan Agreement

In November 2018, we entered into a Term Loan Agreement (the “Loan Agreement”) with certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the “Lenders”) and Oaktree Fund Administration, LLC, as administrative and collateral agent, for an initial term loan of $100.0 million (the “Initial Loan”). In May 2019, we entered into an amendment to the Loan Agreement, under which terms the Lenders agreed to make available to us $20.0 million (collectively, with the Initial Loan, the “Term Loans”). During the six months ended June 30, 2020, we repaid $120.0 million of the outstanding principal under the Term Loans plus approximately $9.4 million of related prepayment premium, exit fees and accrued interest thereon.

Scilex Notes

Scilex Pharmaceuticals Inc. (“Scilex Pharma”) entered into purchase agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and us. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of $224.0 million (the “Scilex Notes”) for an aggregate purchase price of $140.0 million (the “Scilex Notes Offering”). In connection with the Scilex Notes Offering, Scilex Pharma also entered into an Indenture (the “Indenture”) governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee and collateral agent, and us. Pursuant to the Indenture, we agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.

We identified a number of embedded derivatives that require bifurcation from the Scilex Notes and were separately accounted for in the consolidated financial statements as derivative liabilities. Certain of these embedded features include default interest provisions, contingent rate increases, contingent put options, optional and automatic acceleration provisions and tax indemnification obligations. The fair value of the derivative liabilities associated with the Scilex Notes was estimated using the discounted cash flow method under the income approach combined with a Monte Carlo simulation model. This involves significant Level 3 inputs and assumptions, including a risk adjusted net sales forecast, an effective debt yield, estimated marketing approval probabilities for SP-103 and an estimated probability of an initial public offering by Scilex Holding that satisfies certain valuation thresholds and timing considerations (See Note 3). We re-evaluate this assessment each reporting period.

The 2018 Purchase Agreements and Indenture for Scilex provide that, upon the occurrence of an event of default, the lenders thereunder may, by written notice to us, declare all of the outstanding principal and interest under the Indenture immediately due and payable. For purposes of the Indenture, an event of default includes, among other things, (i) a failure to pay any amounts when due under the Indenture, (ii) a breach or other failure to comply with the covenants (including financial, notice and reporting covenants) under the Indenture, (iii) a failure to make any payment on, or other event triggering an acceleration under, other material indebtedness of us, and (iv) the occurrence of certain insolvency or bankruptcy events (both voluntary and involuntary) involving us or certain of our subsidiaries. We are subject to certain customary default clauses under the Indenture and are in compliance with the event of default clauses under the Indenture.

Equity Financings

Universal Shelf Registration Statement

In March 2020, we filed a universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”) with the SEC, which was declared effective by the SEC on March 20, 2020. The Shelf Registration Statement provides us with the ability to offer up to $1.0 billion of securities, including equity and other securities as described in the registration statement. Pursuant to the Shelf Registration Statement, we may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at the time of any offering. As of May 7, 2020, approximately $500.0 million of securities remain available and unallocated for offerings of securities under the Shelf Registration Statement.

Common Stock Purchase Agreement

On April 27, 2020, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Arnaki Ltd. (the “Purchaser”), pursuant to which the Purchaser is committed to purchase up to an aggregate of $250.0 million of shares of our common stock over the 36-month term of the Purchase Agreement on the terms set forth therein. Any Shares offered and sold to the Purchaser will be issued pursuant to the Shelf Registration Statement and the prospectus supplement relating to offering of shares pursuant to the Purchase Agreement filed with the SEC on April 27, 2020.

On any business day over the term of the Purchase Agreement (each, a “Purchase Date”), we have the right, in our sole discretion, to present the Purchaser with a purchase notice directing the Purchaser to purchase up to 650,000 shares of our common stock per business day. We and the Purchaser also may mutually agree to increase the number of shares that may be sold to as much as an additional 3,600,000 shares per Purchase Date. We also have the right, in our sole discretion, to grant the Purchaser an option to purchase additional shares of common stock, subject to a maximum number of shares determined by us on each Purchase Date. The aggregate purchase price paid by the Purchaser shall not exceed $5.0 million per Purchase Date, unless mutually agreed upon by us and the Purchaser. The purchase price of our common stock pursuant to the Purchase Agreement will generally be equal to 97.5% of the daily volume weighted average purchase price of our common stock on the Purchase Date. During the six months ended June 30, 2020, we sold an aggregate of 923,077 shares of our common stock pursuant to the Purchase Agreement for aggregate net proceeds of $4.3 million. Subsequent to June 30, 2020 and through July 31, 2020, we sold an aggregate of 500,000 shares of our common stock pursuant to the Purchase Agreement for aggregate net proceeds of approximately $3.7 million.

Sales Agreement

On April 27, 2020, we entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Sales Agent”), pursuant to which we may offer and sell through or to the Sales Agent (the “Offering”) up to $250.0 million in shares of our common stock (the “Shares”). Any Shares offered and sold in the Offering will be issued pursuant to the Shelf Registration Statement and the prospectus supplement relating to the Offering filed with the SEC on April 27, 2020. The Offering will terminate upon (a) the election of the Sales Agent upon the occurrence of certain adverse events, (b) three business days’ advance notice from one party to the other, or (c) the sale of all of the Shares. Under the terms of the Sales Agreement, the Sales Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the Sales Agreement. During the six months ended June 30, 2020, we sold an aggregate of 11,262,597 shares of our common stock pursuant to the Sales Agreement for aggregate net proceeds of approximately $62.7 million. Subsequent to June 30, 2020 and through August 4, 2020, we sold an aggregate of 5,361,218 shares of our common stock pursuant to the Sales Agreement for aggregate net proceeds of approximately $47.1 million.

Purchase Agreement with Aspire Capital

In February 2020, we entered into a Common Stock Purchase Agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), pursuant to which Aspire Capital was committed to purchase up to an aggregate of $75.0 million of shares of our common stock over a 24-month term. Upon execution of the Aspire Purchase Agreement, we issued to Aspire Capital 897,308 shares of our common stock as a commitment fee. We have used the proceeds we receive under the Aspire Purchase Agreement for working capital and general corporate purposes and for the repayment of debt. The Aspire Purchase Agreement was terminable by us at any time without any liability to us. Generally, Aspire Capital could terminate the Aspire Purchase Agreement at any time that an event of default existed. During the six months ended June 30, 2020, we issued and sold an aggregate of 38,825,010 shares of our common stock to Aspire Capital under the Aspire Purchase Agreement for aggregate net proceeds of approximately $75.0 million. On April 24, 2020, the Aspire Purchase Agreement terminated effective immediately in accordance with its terms as we issued and sold, as of such date, the full $75.0 million of shares available for issuance thereunder.

2019 Registered Direct Offering

In October 2019, we announced the closing of our previously announced registered direct offering of 10,869,566 shares of our common stock and warrants to purchase up to 10,869,566 shares of our common stock, at a combined purchase price of $2.30 per share and related warrant. The net proceeds from this offering were approximately $23.4 million, after deducting the placement agent’s fees and other estimated offering expenses and were received in October 2019.

Equity Distribution Agreement

In October 2019, we entered into an Equity Distribution Agreement (the “Distribution Agreement”) with JMP Securities LLC, as sales agent (the “JMP Sales Agent”), pursuant to which we could offer and sell, from time to time, through or to the JMP Sales Agent, as sales agent or principal, up to $75.0 million in shares of our common stock. Effective February 10, 2020, we voluntarily suspended our continuous offering and sale of shares under the Distribution Agreement. On April 27, 2020, we voluntarily terminated the Distribution Agreement. The Distribution Agreement was terminable at will by us with no penalty. During the term of the Distribution Agreement, we sold an aggregate of 2,120,149 shares of our common stock thereunder for aggregate gross proceeds of approximately $7.4 million.

2019 Public Offering of Common Stock and Warrants

In June 2019, we entered into an underwriting agreement with JMP Securities LLC, as representative of the several underwriters named therein, relating to a firm commitment underwritten public offering. The net proceeds from this offering were approximately $23.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses and were received in July 2019.

Contingent Consideration

Semnur Pharmaceuticals Acquisition Contingent Consideration

In March 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Semnur, Scilex Holding, Sigma Merger Sub, Inc., the prior wholly-owned subsidiary of Scilex Holding, and Fortis Advisors LLC, solely as representative of the holders of Semnur equity (the “Semnur Equityholders”). Pursuant to the Merger Agreement, Scilex Holding agreed to pay the Semnur Equityholders up to $280.0 million in aggregate contingent cash consideration based on the achievement of certain milestones, including obtaining the first approval of a New Drug Application of a Semnur product by the FDA and the achievement of certain amounts of net sales of Semnur products.

Sofusa Contingent Consideration

In July 2018, we acquired Kimberly-Clark’s Sofusa® micro-needle drug delivery system platform (the “Sofusa Acquisition”). At the closing of the Sofusa Acquisition, we paid $10.0 million and agreed to pay additional consideration to Kimberly-Clark upon the achievement of certain regulatory and net sales milestones, as well as a percentage in the low double-digits of any non-royalty amounts received by us in connection with any license, sale or other grant of rights by us to develop or commercialize the Sofusa Assets (the “Sofusa Contingent Consideration”). The aggregate amount of the Sofusa Contingent Consideration payable by us will not exceed $300.0 million.

Use of Cash

Cash Flows from Operating Activities. Net cash used for operating activities was $76.1 million for the six months ended June 30, 2020 as compared to $91.1 million for the six months ended June 30, 2019. 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 pre-clinical development and research activities, support the commercial launch of our products and fund our joint ventures, collaborations and other third party agreements.

Cash Flows from Investing Activities. Net cash used by investing activities was $3.3 million for the six months ended June 30, 2020. We invested approximately $2.3 million related to various investments in new technologies and preclinical programs and spent approximately $1.0 million on equipment and building improvements. During the six months ended June 30, 2019, net cash used by investing activities was $24.5 million and was attributed to $17.0 million associated with the Semnur acquisition and $7.5 million for equipment and building improvements.

Cash Flows from Financing Activities. Net cash provided by financing activities was $68.0 million for the six months ended June 30, 2020 as compared to net cash provided by financing of $18.4 million for the six months ended June 30, 2019. During the six months ended June 30, 2020, we received $149.4 million from equity offerings, proceeds from short-term debt of $7.8 million and proceeds of $42.7 million from common stock issuances and warrant exercises. During the six months ended June 30, 2020, we repaid $120.0 million of outstanding principal under the Term Loans, paid $6.3 million of related exit and prepayment fees thereon, made payments of $2.5 million on the Scilex Notes and repaid $3.0 million in short-term debt. During the same period in prior year, cash provided by financing activities was primarily driven by $18.9 million in debt financing, net of issuance costs, from the Term Loans.

Future Liquidity Needs. We have principally financed our operations through underwritten public offerings and private debt and equity financings, as we have not generated any significant product related revenue from our principal operations to date, and do not expect to generate significant revenue for several years, if ever. We will need to raise additional capital before we exhaust our current cash resources in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally. We will seek to raise additional funds through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.

preferences or privileges senior to those of existing holders of common stock. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. We may also seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available.

We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) advance our product pipeline and other product candidates into clinical trials, (ii) continue our development of, and seek regulatory approvals for, our product candidates in clinical trials, (iii) expand our corporate infrastructure, and (iv) incur our share of joint venture and collaboration costs for our products and technologies.

Uses of Cash. As further described in Note 15 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q, we have and plan to expand our business and intellectual property portfolio through the acquisition of new businesses and technologies as well as entering into licensing arrangements.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with ~~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 with detachable warrants, derivative liabilities, revenue recognition, leases, 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, 2019, there were no significant changes to the items that we disclosed as our~~ Our critical accounting policies and estimates ~~in Note 4 to our consolidated financial statements for the year ended December 31, 2018 contained~~are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018, as amended, as filed with the SEC, except as described below.~~

~~Leases~~

We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and is reduced by lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

~~Results of Operations~~

~~Comparison of the Three Months Ended September 30,~~ 2019, and ~~2018~~

~~Revenues. Revenues were $5.8 million for the three months ended September 30, 2019, as compared to $4.1 million for the three months ended September 30, 2018.~~

Revenue in our Sorrento Therapeutics segment decreased from $4.1 million to $2.0 million for the three months ended September 30, 2019, compared to the prior fiscal year. The decrease of $2.1 million is primarily attributable to lower contract manufacturing and service revenues compared to the prior year.

~~Our Scilex segment recognized revenues of $3.8 million for the three months ended September 30, 2019. The Scilex segment recognized~~there have been no ~~revenues for the three months ended September 30, 2018, as sales of ZTlido~~^® ~~(lidocaine topical system) 1.8% did not commence until October 2018.~~

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

~~Cost of revenues~~. Cost of revenues for the three months ended September 30, 2019 and 2018 were $5.2 million and $2.2 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. The costs generally include employee-related expenses including salary and benefits, direct materials, purchased finished goods and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

~~Cost of revenues for our Sorrento Therapeutics segment remained relatively consistent with the same quarter of the prior year.~~

~~Cost of revenues for our Scilex segment increased by $2.8 million as compared to the same quarter of the prior year as sales of ZTlido~~^® ~~(lidocaine topical system) 1.8% did not commence until October 2018.~~

~~Research and Development Expenses~~. Research and development expenses for the three months ended September 30, 2019 and 2018 were $27.6 million and $19.6 million, respectively. Research and development expenses include expenses associated with the ramp up of ZTlido^® (lidocaine topical system) 1.8% as well as the costs related to our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates and preclinical testing expenses. 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.

R&D expense for our Sorrento Therapeutics segment increased by $4.3 million as compared to the same quarter of the prior year and was primarily attributable to increased clinical activities related to consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX and CAR-T into clinical trials.

R&D expense for our Scilex segment increased by $3.7 million as compared to the same quarter of the prior year and was primarily driven by activities associated with our product pipeline and was partially offset by lower clinical trial costs associated with ZTlido^® ~~(lidocaine topical system) 1.8%, which obtained FDA approval in February 2018.~~

~~Acquired In-process Research and Development Expenses. We did not have acquired in-process research and development expenses~~material changes during the three months ended ~~September~~June 30, 2019. We recognized $9.5 million of expense related to acquired in-process research and development associated with the Sofusa Purchase Agreement (as defined below) for the three months ended September 30, 2018.2020.

~~Selling, General and Administrative Expenses (“SG&A”)~~ General and administrative expenses for the three months ended September 30, 2019 and 2018 were $25.2 million and $20.1 million, respectively, or an increase of $5.1 million and consisted 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.

SG&A expense for our Sorrento Therapeutics segment decreased by approximately $2.1 million and was primarily attributed to lower legal and corporate expenses compared to the same period of the prior year.

~~SG&A expense for our Scilex segment increased by approximately $7.2 million year over year primarily due to increased sales activities associated with the commercialization of ZTlido~~^® ~~(lidocaine topical system) 1.8%.~~

~~Intangible Amortization. Intangible amortization for the three months ended September 30, 2019 and 2018 was $1.0 million and $0.7 million, respectively.~~

~~Amortization expense for our Sorrento Therapeutics segment remained relatively consistent with the prior year.~~

~~Amortization expense for our Scilex segment increased by approximately $0.4 million due to the amortization of acquired in-process research and development upon commercialization of ZTlido~~^®~~(lidocaine topical system) 1.8% that occurred in the fourth quarter of 2018.~~

~~Loss on Derivative Liabilities. Loss on derivative liabilities for the three months ended September 30, 2019 was $10.7 million compared to no loss on derivative liabilities in the same period in 2018.~~

~~Loss on derivative liabilities for our Sorrento Therapeutics segment totaled $9.2 million. $8.1 million of the increase was driven by revised sales forecasts of ZTlido~~^®(lidocaine topical system) 1.8%. $1.1 million of the increase was attributed to the contingent acceleration feature of the Early Conditional Loan (as defined below) as further described in Note 5 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Loss on derivative liabilities for our Scilex segment was $1.5 million and was primarily attributed to revised probabilities related to timing of marketing approval for SP-103 and revised sales forecasts as further described in Note 5 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

~~Interest Expense~~. Interest expense for the three months ended September 30, 2019 and 2018 was $9.5 million and $2.7 million, respectively. The increase in interest expense of $6.8 million as compared to the same period in 2018 resulted primarily from interest expense associated with the loan agreement entered into during the fourth quarter of 2018 with certain funds and accounts managed by Oaktree Capital Management, L.P. and Oaktree Fund Administration, LLC, as administrative and collateral agent as well as the senior secured notes due 2026 in an aggregate principal amount of $224.0 million entered into in September 2018.

~~Income Tax Expense (Benefit)~~. Income tax benefit for the three months ended September 30, 2019 and September 30, 2018 was $(0.2) million and $(0.8) million, respectively. The decrease in income tax benefit was primarily attributed to the increased valuation allowance in 2019.

~~Net Loss. Net loss for the three months ended September 30, 2019 and 2018 was $75.2 million and $50.5 million, respectively.~~

~~Comparison of the Nine Months Ended September 30, 2019 and 2018~~

~~Revenues. Revenues were $18.4 million for the nine months ended September 30, 2019, as compared to $14.3 million for the nine months ended September 30, 2018.~~

Revenue in our Sorrento Therapeutics segment decreased from $14.3 million to $7.1 million for the nine months ended September 30, 2019, compared to the prior fiscal year. The decrease of $7.2 million is primarily attributable to higher revenues from the joint development agreement with Celularity in the prior year as well as lower contract manufacturing and service revenues compared to the prior year.

Our Scilex segment recognized revenues of $11.3 million for the nine months ended September 30, 2019. The Scilex segment recognized no revenues for the nine months ended September 30, 2018, as sales of ZTlido^® ~~(lidocaine topical system) 1.8% did not commence until October 2018.~~

~~Cost of revenues~~. Cost of revenues for the nine months ended September 30, 2019 and 2018 were $10.8 million and $4.7 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing 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.

Cost of revenues for our Sorrento Therapeutics segment increased by $2.4 million and is primarily attributable to indirect costs associated with our investments in contract manufacturing capacity expansion.

~~Cost of revenues for our Scilex segment increased by $3.7 million as compared to the same period quarter of the prior year as sales of ZTlido~~^® ~~(lidocaine topical system) 1.8% did not commence until October 2018.~~

~~Research and Development Expenses~~. Research and development expenses for the nine months ended September 30, 2019 and 2018 were $77.9 million and $52.1 million, respectively. Research and development expenses include expenses associated with the ramp up of ZTlido^® (lidocaine topical system) 1.8% as well as the costs related to our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates and preclinical testing expenses. 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.

R&D expense for our Sorrento Therapeutics segment increased by $21.8 million as compared to the same period of the prior fiscal year and was primarily attributed to increased clinical activities related to consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX and CAR-T into clinical trials.

R&D expense for our Scilex segment increased by $4.0 million as compared to the same period of the prior fiscal year and was primarily driven by activities totaling $5.4 million associated with our product pipeline and was partially offset by lower clinical trial costs associated with ZTlido^® ~~(lidocaine topical system) 1.8%, which obtained FDA approval in February 2018.~~

~~Acquired In-process Research and Development Expenses~~. Acquired in-process research and development expenses for the nine months ended September 30, 2019 were $75.3 million were due to acquired in-process research and development expenses associated with the acquisition of Semnur in March 2019. We recognized $9.5 million of expense related to acquired in-process research and development associated with the Sofusa Purchase Agreement for the nine months ended September 30, 2018.

~~Selling, General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2019 and 2018 were $78.1 million and $41.1 million, respectively, or an increase of $37.0 million.~~

SG&A expense for our Sorrento Therapeutics segment decreased by approximately $0.4 million as compared to the same period of the prior fiscal year and consisted 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.

SG&A expense for our Scilex segment increased by approximately $37.4 million as compared to the same period of the prior fiscal year, and was primarily due to increased sales activities associated with the commercialization of ZTlido^® ~~(lidocaine topical system) 1.8%.~~

~~Intangible Amortization. Intangible amortization for the nine months ended September 30, 2019 and 2018 was $2.9 million and $2.0 million, respectively.~~

~~Amortization expense for our Sorrento Therapeutics segment remained relatively consistent with the prior year.~~

Amortization expense for our Scilex segment increased by approximately $1.1 million as compared to the same period of the prior fiscal year, and was primarily due to the amortization of acquired in-process research and development upon commercialization of ZTlido^®~~(lidocaine topical system) 1.8% that occurred in the fourth quarter of 2018.~~

~~Loss on Derivative Liabilities. Loss on derivative liabilities for the nine months ended September 30, 2019 was $35.8 million compared to no loss on derivative liability in the same period in 2018.~~

~~Loss on derivative liabilities for our Sorrento Therapeutics segment totaled $14.4 million. $8.1 million of the increase was driven by revised sales forecasts of ZTlido~~^®(lidocaine topical system) 1.8%. $6.3 million of the increase was attributed to the warrants to purchase an aggregate of 1,333,304 shares of our common stock issued to certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the “Lenders”) as further described in Note 10 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Loss on derivative liabilities for our Scilex segment was $21.4 million and was primarily attributed to revised probabilities related to timing of marketing approval for SP-103 and revised sales forecasts as further described in Note 5 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

~~Contingent Liabilities and Acquisition Consideration Payable.~~ ~~Changes in acquisition consideration payable for the nine months ended September 30, 2019 and 2018 resulted in a loss of approximately $0.1 million and $13.7 million, respectively.~~

The loss resulting from the change in acquisition consideration payable for the nine months ended September 30, 2018 relates primarily to changes in the fair value of contingent consideration from the Scilex Pharma and Virttu acquisitions of $6.0 million and $6.4 million, respectively.

~~Interest Expense~~. Interest expense for the nine months ended September 30, 2019 and 2018 was $28.1 million and $48.7 million, respectively. The decrease in interest expense of $20.7 million as compared to the same period in 2018 resulted primarily from the conversion of the convertible notes issued in December 2017 that occurred in the second quarter of 2018.

The decrease in interest expense compared to the same period in prior year was partially offset by interest expense associated with the loan agreement entered into with the Lenders and Oaktree Fund Administration, LLC, as administrative and collateral agent (the “Agent”), and the Scilex Notes entered into in the second half of fiscal year 2018.

~~Income Tax (Benefit) Expense~~. Income tax benefit for the nine months ended September 30, 2019 and 2018 was $(0.8) million and $(3.2) million, respectively. The decrease in income tax benefit was primarily attributed to the increased valuation allowance in 2019.

~~Loss on Equity Method Investments~~. Loss on equity method investments for the nine months ended September 30, 2019 and 2018 was $3.9 million and $3.9 million, respectively. (See Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional information.)

~~Net Loss. Net loss for the nine months ended September 30, 2019 and 2018 was $293.6 million and $158.8 million, respectively.~~

~~Liquidity and Capital Resources~~

As of September 30, 2019, we had $34.6 million in cash and cash equivalents attributable in part to the following financing arrangements (See Notes 10 and 11 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional information):

On July 2, 2018, we entered into an Asset Purchase Agreement (the “Sofusa Purchase Agreement”) with Kimberly-Clark Corporation (“KCC”), Kimberly-Clark Global Sales, LLC (“KCCGS”), and Kimberly-Clark Worldwide, Inc. (“KCCW” and together with KCC and KCCGS, “Kimberly-Clark”) pursuant to which, among other things, we acquired certain of Kimberly-Clark’s assets related to micro-needle drug delivery system, including the Sofusa^® platform (the “Sofusa Assets”) and related fixed assets, and assumed certain of Kimberly-Clark’s liabilities related to the Sofusa Assets (the “Sofusa Acquisition”). The closing of the Sofusa Acquisition (the “Sofusa Closing”) occurred on July 2, 2018. At the Sofusa Closing, we paid $10 million and agreed to pay additional consideration to Kimberly-Clark upon the achievement of certain regulatory and net sales milestones, as well as a percentage in the low double-digits of any non-royalty amounts received by us in connection with any license, sale or other grant of rights by us to develop or commercialize the Sofusa Assets (all such additional consideration, the “Sofusa Contingent Consideration”). Under the Sofusa Purchase Agreement, the aggregate amount of the Sofusa Contingent Consideration payable by us will not exceed $300.0 million. We also agreed to pay Kimberly-Clark a low single-digit royalty on all net sales with respect to the first five products developed by us or our licensees that utilizes intellectual property included in the Sofusa Assets.

On September 7, 2018, Scilex Pharma entered into purchase agreements (the “2018 Purchase Agreements”) with the certain investors (the “Purchasers”) and us. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma, among other things, issued and sold to the Purchasers the Scilex Notes with an aggregate principal of $224.0 million for an aggregate purchase price of $140.0 million (the “Offering”). The net proceeds of the Offering were approximately $89.3 million, after deducting the Offering expenses payable by Scilex Pharma and funding a segregated reserve account ($20.0 million) and a segregated collateral account ($25.0 million) pursuant to the terms of an indenture governing the Scilex Notes (the “Indenture”). The net proceeds of the Offering will be used by Scilex Pharma to support the commercialization of ZTlido® (lidocaine topical system) 1.8%, for working capital and general corporate purposes in respect of the commercialization of ZTlido® (lidocaine topical system) 1.8%. In connection with the Offering, Scilex Pharma also entered into the Indenture governing the Scilex Notes with U.S. Bank National Association, as trustee (the “Trustee”) and collateral agent (the “Agent”), and us. Pursuant to the Indenture, we agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.

Pursuant to the terms of the Indenture, we issued an irrevocable standby letter of credit to Scilex Pharma (the “Letter of Credit”), which provides that, in the event that (1) Scilex Pharma does not hold at least $35,000,000 in unrestricted cash as of the end of any calendar month during the term of the Scilex Notes, (2) actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% from the issue date of the Scilex Notes through December 31, 2021 are less than a specified sales threshold for such period, or (3) actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% for any calendar year during the term of the Scilex Notes, beginning with the 2022 calendar year, are less than a specified sales threshold for such calendar year, Scilex Pharma, as beneficiary of the Letter of Credit, will draw, and we will pay to Scilex Pharma, $35,000,000 in a single lump-sum amount as a subordinated loan, and upon receipt by Scilex Pharma of the subordinated loan, the holders of the Scilex Notes shall have the one-time right to require us to purchase up to an aggregate of $25,000,000 of the Scilex Notes then outstanding. The Letter of Credit will terminate upon the earliest to occur of: (a) the repayment of the Scilex Notes in full, (b) the actual net sales of ZTlido® (lidocaine topical system) 1.8% for any calendar year during the term of the Scilex Notes exceeding a certain threshold, (c) the consummation of an initial public offering on a major international stock exchange by Scilex that satisfies certain valuation thresholds, and (d) the replacement of the Letter of Credit with another letter of credit in form and substance, including as to the identity and creditworthiness of issuer, reasonably acceptable to the holders of at least 80% in principal amount of outstanding Scilex Notes.

The holders of the Scilex Notes will be entitled to receive quarterly payments of principal of the Scilex Notes equal to a percentage, in the range of 10% to 20% of the net sales of ZTlido® (lidocaine topical system) 1.8% for the prior fiscal quarter, beginning on February 15, 2019. If Scilex Pharma has not received a marketing approval letter from the FDA with respect to ZTlido® (lidocaine topical system) 5.4% or a similar product with a concentration of not less than 5% by March 31, 2021, the percentage of net sales payable shall be increased to be in the range of 15% to 25%. If actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% from October 1, 2022 through September 30, 2023 are less than 60% of a predetermined target sales threshold for such period, then Scilex Pharma will be obligated to pay an additional installment of principal of the Scilex

Notes each quarter in an amount equal to an amount to be determined by reference to the amount of such deficiency. The aggregate principal amount due under the Scilex Notes shall be increased by $28,000,000 on February 15, 2022 if actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% from the issue date of the Scilex Notes through December 31, 2021 do not equal or exceed 95% of a predetermined target sales threshold for such period. If actual cumulative net sales of ZTlido® (lidocaine topical system) 1.8% for the period from October 1, 2022 through September 30, 2023 do not equal or exceed 80% of a predetermined target sales threshold for such period, the aggregate principal amount shall also be increased on November 15, 2023 by an amount equal to an amount to be determined by reference to the amount of such deficiency.

On October 1, 2019, Scilex Pharma, us, the Trustee, the Agent and the beneficial owners of the Scilex Notes and the holders of such Scilex Notes listed on the signature pages thereto (the “Holders”) entered into an omnibus amendment (the “Omnibus Amendment”) to: (i) the Indenture, and (ii) that certain Irrevocable Standby Letter of Credit issued by us to Scilex Pharma in the maximum aggregate amount of $35.0 million, with a date of issuance of September 7, 2018 (the “Letter of Credit”).

In connection with the Omnibus Amendment, in the event of consummation of a Scilex Holding IPO that satisfies certain valuation thresholds, Scilex Pharma agreed to repurchase, from each holder of Scilex Notes, Scilex Notes in a principal amount equal to (i) $20.0 million multiplied by (ii) a fraction the numerator of which will be the then outstanding principal amount of the Scilex Notes held by such holder and the denominator of which will be the then outstanding principal amount of all of the outstanding Scilex Notes, at a purchase price in cash equal to 100% of the principal amount thereof (such repurchase, the “Effective Date Repurchase”). Pursuant to the Omnibus Amendment, the Holders agreed to release the funds in the reserve account for the purpose of consummating the Effective Date Repurchase and the remaining funds in the reserve account after the consummation of the Effective Date Repurchase will be released to Scilex Pharma by the Trustee and Agent.

On November 7, 2018, we and certain of our domestic subsidiaries (the “Guarantors”) entered into the Loan Agreement with the Lenders and the Agent, for an initial term loan of $100.0 million (the “Initial Loan”) and a second tranche of $50.0 million, subject to the achievement of certain commercial and financial milestones between August 7, 2019 and November 7, 2019, and the satisfaction of certain customary conditions (the “Conditional Loan”). The Initial Loan was funded on November 7, 2018. The net proceeds of the Initial Loan were approximately $91.3 million, after deducting estimated loan costs, commissions, fees and expenses.

On May 3, 2019, we, the Guarantors and the Lenders and the Agent entered into an amendment (the “Amendment”) to the Loan Agreement. Under the terms of the Amendment, among other things, the Lenders agreed to make available to us $20.0 million of the Conditional Loan with a probable maturity of May 3, 2020 absent the occurrence of certain qualifying events, notwithstanding that the commercial and financial milestones had not occurred (the “Early Conditional Loan”). The net proceeds of the Early Conditional Loan were approximately $18.9 million, after deducting estimated loan costs, commission, fees and expenses.

On March 18, 2019, we, for limited purposes, entered into the Merger Agreement with Semnur, Scilex Holding, Merger Sub, and the Equityholders’ Representative. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions contained therein, Scilex Holding agreed to pay the Semnur Equityholders up to $280.0 million in aggregate contingent cash consideration based on the achievement of certain milestones, including obtaining the first approval of a New Drug Application of a Semnur product by the FDA and the achievement of certain amounts of net sales of Semnur products.

On June 28, 2019, we entered into an underwriting agreement (the “Underwriting Agreement”) with JMP Securities LLC, as representative of the several underwriters named therein (the “Underwriters”), relating to a firm commitment underwritten public offering. The net proceeds from this offering were approximately $23.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses, and were received in July 2019.

In October 2019, we entered into an Equity Distribution Agreement (the “Distribution Agreement”) with JMP Securities LLC, as sales agent (the “Sales Agent”), pursuant to which we may offer and sell, from time to time, through or to the Sales Agent, as sales agent or principal (the “Offering”), up to $75.0 million in shares of our common stock (the “Shares”). Any Shares offered and sold in the Offering will be issued pursuant to our Registration Statement on Form S-3 (File No. 333-221443) filed with the SEC on November 9, 2017, as amended on December 1, 2017 and declared effective on December

~~6, 2017 (the “Form S-3”), the base prospectus dated December 6, 2017 included in the Form S-3 and the prospectus supplement relating to the Offering filed with the SEC on October 1, 2019.~~

Under the terms of the Distribution Agreement, the Sales Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of Shares under the Distribution Agreement. We will also reimburse the Agent for certain expenses incurred in connection with the Distribution Agreement, and agreed to provide indemnification and contribution to the Sales Agent with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended. We currently intend to use any net proceeds from the Offering for working capital and general corporate purposes.

~~Cash Flows from Operating Activities~~. Net cash used for operating activities was $137.0 million for the nine months ended September 30, 2019 as compared to $66.8 million for the nine months ended September 30, 2018. Net cash used reflects a net loss of $293.6 million, which was partially offset by charges related to acquired in-process research and development of $75.3 million, as well as other non-cash reconciling items totaling approximately $77.1 million, primarily related to non-cash interest expense, depreciation and amortization, stock-based compensation and a loss on derivative liabilities.

~~Cash Flows from Investing Activities~~. Net cash used for investing activities was $27.8 million for the nine months ended September 30, 2019 as compared to $15.7 million for the nine months ended September 30, 2018. Our investing activities used $9.6 million to acquire equipment and building improvements, $1.2 million in capital contributions to joint ventures and approximately $17.0 million associated with the acquisition of Semnur-related in-process research and development and related assets during the nine months ended September 30, 2019. Cash used for investing activities included $10.0 million cash associated with the Sofusa Purchase Agreement during the same period in the prior year.

~~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 $41.0 million for the nine months ended September 30, 2019 as compared to net cash provided by financing of $242.7 million for the nine months ended September 30, 2018. The decrease compared to the same period in prior year is primarily attributed to lower proceeds from the issuance of common stock as well as proceeds from the issuance of the convertible notes and the Scilex Notes in the prior year.

~~Future Liquidity Needs~~. We have principally financed our operations through underwritten public offerings and private debt and equity financings, as we have not generated any significant product related revenue from our principal operations to date, and do not expect to generate significant revenue for several years, if ever. We will need to raise additional capital before we exhaust our current cash resources in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we issue additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors may demand rights, 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 consolidated 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.

We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) advance our product pipeline and other product candidates into clinical trials, (ii) continue our development of, and seek regulatory approvals for, our product candidates in clinical trials, (iii) continue our development of, and seek regulatory approvals for, our product candidates, (iv) expand our corporate infrastructure, 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.

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

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

Contractual Obligations and Commitments

As of ~~September~~June 30, ~~2019,~~2020, there were no material changes outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed 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, ~~2018.~~

2019.

Off-Balance Sheet Arrangements

Since our inception through ~~September~~June 30, ~~2019,~~2020, other than off balance sheet arrangements already disclosed, 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 3,1, “Significant Accounting ~~Policies,”~~Policies” and “Recent Accounting Pronouncements” in the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q for a discussion of recent accounting pronouncements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

As of June 30, 2020, there has been no material change in our assessment of our sensitivity to market risk , including interest rate, capital market and concentration risks, since our presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market ~~Risk.~~

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

The fair market value of our Loan Agreement is subject to interest rate risk as a portion of the interest rate fluctuates based on the LIBOR. Generally, the fair market value of the debt will vary as interest rates increase or decrease. We have determined that there was no material market risk exposure from such instruments to our consolidated financial position, results of operations or cash flows as of September 30, 2019. We are not subject to interest rate risk on the notes issued in 2018 in connection with the securities purchase agreement entered into in March 2018 (the “Notes”) as the Notes have a fixed rate of 5.00%. We are not subject to interest rate risk on the Scilex Notes associated with our 2018 Purchase Agreements as repayment of the Scilex Notes is determined by projected net sales as further discussed in Note 10 in the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form ~~10-Q. For both the Notes and Scilex Notes, changes in interest rates will generally affect the fair value of the debt instrument, but not our earnings or cash flows.~~

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

~~Concentration Risk.~~ ~~During~~10-K for the fiscal year ended December 31, ~~2018 and the nine months ended September 30, 2019, sales of ZTlido~~^® (lidocaine topical system) 1.8% to our sole customer and third-party logistics distribution provider, Cardinal Health, represented 100% of the net revenue of our Scilex segment. This exposes us to concentration of customer risk. We monitor the financial condition of the sole customer of our Scilex segment, limit our credit exposure by setting credit limits, and have not experienced any credit losses for the year ended December 31, 2018 and the nine months ended September 30, 2019. ~~As we continue to expand the commercialization of ZTlido~~^® (lidocaine topical system) 1.8%, we are not limited to the current customer and have the option of expanding our distribution network with additional distributors through establishing our own affiliates, by acquiring existing third-party business or product rights or by partnering with additional third parties.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s regulations, rules and forms and that such information is accumulated and communicated to our management, including our 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, under 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 the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance. As a result, management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation performed, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. ~~Based on~~

Changes in Internal Control over Financial Reporting. Under the ~~foregoing,~~supervision and with the participation of our management, including our principal executive officer and principal financial officer, ~~concluded that our disclosure controls and procedures were not effective as~~we carried out an evaluation of ~~the end of the period covered by this Quarterly Report on Form 10-Q as a result of the material weaknesses described below.~~

In March 2018, in connection with the preparation of our 2017 financial statements, we identified that the accounting implications of terms in certain unusual or non-recurring and significant agreements were not identified and assessed on a timely basis. Further, valuation of certain associated assets or liabilities were not properly reassessed at the end of each reporting period. The material weakness did not result in a restatement of previously issued annual consolidated financial statements or condensed interim consolidated financial statements.

During 2018, we undertook remediation measures, including designing new controls and enhancing existing internal controls which, if effectively implemented, would provide reasonable assurance that we timely and precisely (1) identify and assess the accounting implications of terms in unusual or non-recurring and significant agreements and (2) reassess the valuation of associated assets or liabilities at the end of each reporting period. These included measures designed to improve centralized documentation control, improve the internal communication procedures between senior executive management, accounting personnel and related business owners, leverage external accounting experts as appropriate to perform the necessary reviews and strengthen policies and procedures related to the transferring of responsibilities and the handoff of personnel duties. However, in connection with the preparation of our consolidated financial statements for the year ended December 31, 2018 there were multiple errors identified related to management’s review of significant agreements. We believe the errors identified are due to deficiencies in our internal control environment resulting from insufficient competent accounting resources, including the lack of a Chief Accounting Officer, to effectively operate internal controls over financial reporting in a timely manner.

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

As a result of the material weaknesses, we hired a new Chief Accounting Officer and we are in the process of implementing remediation measures including, but not limited to, performing a comprehensive assessment of accounting and finance resource requirements and hiring other personnel with sufficient accounting expertise to improve the operating effectiveness of our review controls and monitoring activities and utilizing external accounting experts as appropriate. In addition, we are in the process of implementing systems and processes to streamline business processes and improve the overall control environment. We believe that our remediation measures, if effectively implemented, will provide reasonable assurance that we timely identify terms in agreements that could have material accounting implications, assess the accounting and disclosure implications of the terms and account for such items in the financial statements appropriately. Any failure to implement these improvements to our internal control over financial reporting would result in continued material weaknesses in our internal control and could impact our ability to produce reliable financial reports, effectively manage our company or prevent fraud and could potentially harm our business and our performance.

~~Changes in Internal Control Over Financial Reporting~~

~~There has been no change~~any potential changes in our internal control over financial reporting during the fiscal quarter ~~ended September 30, 2019~~covered by this Quarterly Report on Form 10-Q. There has been no change to our internal control over financial reporting 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. Our plans for remediating our material weaknesses, as identified above, are still in progress and would constitute changes in our internal control over financial reporting prospectively once implemented.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings.

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

In the normal course of business, we may be named as a defendant in one or more lawsuits. WeOther than as set forth below, 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.

~~On April 3, 2019, we filed two~~

Information regarding reportable 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 usproceedings is contained in ~~May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™~~Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the ~~purpose of halting its progression to the market. Specifically, we have filed:~~

•~~An arbitration demand with the American Arbitration Association~~year ended December 31, 2019 and Part II, “Item 1. Legal Proceedings” in Los Angeles, California against NantPharma, LLC and Chief Executive Officer Patrick Soon-Shiong, seeking damages in excess of $1 billion, as well as additional punitive damages, related to alleged fraud and breaches of the Stock Sale and Purchase Agreement, dated May 14, 2015, entered into between NantPharma LLC and us, included as Exhibit 10.2 to our Quarterly Report on Form 10-Q ~~filed with~~for the ~~Securities and Exchange Commission (the “SEC”) on August 7, 2015.~~ quarter ended March 31, 2020.

On May ~~24, 2019, NantCell, Inc., Dr. Soon-Shiong and Immunotherapy NANTibody LLC (“NANTibody”) General Counsel Charles Kim~~26, 2020, Wasa Medical Holdings filed a motion in the Los Angeles Superior Court to stay or dismiss our arbitration demand. On October 9, 2019, the Los Angeles Superior Court denied the motion to stay or dismiss the arbitration demand, and the arbitration is ongoing; and

•Anputative federal securities class action in the ~~Los Angeles Superior~~U.S. District Court ~~derivatively on behalf~~for the Southern District of ~~NANTibody~~California, Case No. 3:20-cv-00966-AJB-DEB, against ~~NantCell, Inc., NANTibody Board Member and NantCell, Inc.~~us, our President, Chief Executive Officer ~~Patrick Soon-Shiong,~~ and ~~NANTibody officer Charles Kim, related to several breaches~~Chairman of the Board of Directors, Henry Ji, Ph.D., and our SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D. The action alleges that we, 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, ~~2015 Limited Liability Company Agreement~~2020, Jeannette Calvo filed a second putative federal securities class action in the U.S. District Court for ~~NANTibody entered into between us~~the Southern District of California, Case No. 3:20-cv-01066-JAH-WVG, against the same defendants alleging the same claims and ~~NantCell, Inc. The suit also alleges breaches of fiduciary duties and seeks, inter alia, a declaration~~seeking the same relief. It is anticipated that ~~the Assignment Agreement entered into on July 2, 2017, between NantPharma, LLC and NANTibody is void and an equitable unwinding~~these cases will be consolidated as part of the ~~Assignment Agreement. The suit calls for~~lead plaintiff and counsel appointment process under the ~~restoration of $90.05 million~~Private Securities Litigation Reform Act. We intend to the NANTibody capital account, thereby restoring our equity method investment in NANTibody to its invested amount as of June 30, 2017 of $40 million. On May 24, 2019, NantCell, Inc. and Dr. Soon-Shiong filed a cross-complaint against us and Dr. 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 April 21, 2015 and entered into between NantCell, Inc. and us), and tortious interference with contract. On May 24, 2019, NANTibody and NantPharma, LLC filed a new complaint in the action against us and Dr. 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 us), and tortious interference with contract. On July 8, 2019, we and Dr. Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Los Angeles Superior Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, LLC, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc. and NantPharma, LLC have re-filed their claims in arbitration. The claims against Dr. Soon-Shiong have been stayed pending resolution of the claims filed in arbitration. The original derivative action is no longer stayed, and the parties are currently engaged in discovery in the suit.defend these matters vigorously.

Item 1A.Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, 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, ~~2018.~~2019. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.

Risks Related to Our Financial Position and Capital Requirements

We are a clinical stage company subject to significant risks and uncertainties, including the risk that we or our partners may never develop, obtain regulatory approval or market any of our product candidates or generate product related revenues.

We are primarily a clinical stage biotechnology company that began operating and commenced research and development activities in 2009. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. There is no assurance that our libraries of fully-human mAbs or any of our other product candidates in development will be suitable for diagnostic or therapeutic use, or that we will be able to identify and isolate ~~therapeutics~~therapeutic product candidates, or develop, market and commercialize these candidates. We do not expect any of our product candidates in development, including, but not limited to, our fully-human mAbs, biosimilars/biobetters, fully human anti-PD-L1 and anti-PD-1 checkpoint inhibitors derived from our proprietary G-MAB™ library platform, antibody drug conjugates (“ADCs”), ~~ZTlido~~^® ~~(lidocaine topical system) 5.4% (“SP-103”),~~ bispecific antibodies (“BsAbs”), as well as Chimeric Antigen ~~Receptor-T Cell~~Receptor T Cells (“CAR-T”) and Dimeric Antigen Receptor T Cells (“DAR-T”) for adoptive cellular immunotherapy, resiniferatoxin (“RTX”), higher strength lidocaine topical system (SP-103) and non-opioid corticosteroid formulated as a viscous gel injection (SP-102) (“SEMDEXA^TM”) to be commercially available for a few years, if at all. Additionally, our COVID-19 related product candidates, including STI-1499 (COVI-GUARD^TM), STI-4398 (COVIDTRAP^TM), targeted virus vaccine (T-VIVA-19^TM), serological IgM/IgG antibody diagnostic test (COVI-TRACK^TM) and saliva-based diagnostic test for SARS-CoV-2 (COVI-TRACE^TM), are subject to uncertainties relating to product development, regulatory approval and commercialization, and further risks based on the constantly evolving situation affecting the United States and the international community. Even if we are able to commercialize our product candidates, there is no assurance that these candidates would generate revenues or that any revenues generated would be sufficient for us to become profitable or thereafter maintain profitability.

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

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had an accumulated deficit of ~~$597.0~~$802.8 million and ~~$367.8~~$659.8 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, SP-103, SEMDEXA^TM and our other product candidates into further clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) conduct preclinical studies for our COVID-19 related product candidates, including STI-1499 (COVI-GUARD^TM), STI-4398 (COVIDTRAP^TM) and targeted virus vaccine (T-VIVA-19^TM), to advance to clinical trials and seek regulatory approval; (iii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, ~~(iii)~~(iv) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, ~~(iv)~~(v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, ~~(v)~~(vi) invest in our joint ventures, collaborations or other third party agreements, ~~(vi)~~(vii) incur expenses in conjunction with defending and enforcing our rights in various litigation matters, ~~(vii)~~(viii) expand our corporate, development and manufacturing infrastructure, and ~~(viii)~~(ix) support our subsidiaries, ~~such as~~including Scilex ~~Pharmaceuticals Inc. (“Scilex Pharma”) and Semnur Pharmaceuticals, Inc. (“Semnur”),~~Holding Company, 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.

We will require substantial additional funding, which may not be available to us on acceptable terms, or at all. If we fail to raise the necessary additional capital, we may be unable to complete the development and commercialization of our product candidates or continue our development programs.

Our operations have consumed substantial amounts of cash since inception. We expect to significantly increase our spending to advance the preclinical and clinical development of our product candidates and launch and commercialize any product candidates for which we receive regulatory approval, including building our own commercial organization to address certain markets. We will require additional capital for the further development and commercialization of our product candidates, as well as to fund our other operating expenses and capital expenditures.

As a result of our recurring losses from operations, recurring negative cash flows from operations and substantial cumulative losses, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt about our ability to continue as a going concern. If we are unsuccessful in our efforts to raise outside financing, we may be required to significantly reduce or cease operations. The report of our independent registered public accounting firm on our audited financial statements for the year ended December 31, ~~2018~~2019 included a “going concern” explanatory paragraph indicating that our recurring losses from operations, negative working capital, recurring negative cash flows from operations and substantial cumulative net losses raise substantial doubt about our ability to continue as a going concern.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we 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. Any of these events could significantly harm our business, financial condition and prospects.

Our future capital requirements will depend on many factors, including:

•

the progress of the development of our fully-human mAbs, including biosimilars/biobetters, fully human anti-PD-L1 and anti-PD-1 checkpoint inhibitors derived from our proprietary G-MAB™ library platform, ADCs, BsAbs, CAR-T and DAR-T for adoptive cellular immunotherapy, RTX, SP-103 and SEMDEXA^TM, and our COVID-19 product candidates;

•the progress of the development of our fully-human mAbs, including biosimilars/biobetters, fully human anti-PD-L1 and anti-PD-1 checkpoint inhibitors derived from our proprietary G-MAB™ library platform, ADCs, BsAbs, as well as CAR-T for adoptive cellular immunotherapy, RTX, SP-103 and SEMDEXA^TM;

the number of product candidates we pursue;

•~~the number of product candidates we pursue;~~

the time and costs involved in obtaining regulatory approvals;

•~~the time and costs involved in obtaining regulatory approvals;~~

the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;

•~~the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;~~

our plans to establish sales, marketing and/or manufacturing capabilities;

•~~our plans to establish sales, marketing and/or manufacturing capabilities;~~

the effect of competing technological and market developments;

•~~the effect of competing technological and market developments;~~

the terms and timing of any collaborative, licensing and other arrangements that we may establish;

•~~the terms and timing of any collaborative, licensing and other arrangements that we may establish;~~

general market conditions for offerings from biopharmaceutical companies;

•~~general market conditions for offerings from biopharmaceutical companies;~~

our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;

•~~our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;~~

our obligations under our debt arrangements;

•~~our obligations under our debt arrangements;~~

•

the effect of the COVID-19 pandemic; and

•~~our revenues, if any, from successful development and commercialization of our product candidates, including~~ ~~ZTlido~~^®~~(lidocaine topical system) 1.8%.~~

our revenues, if any, from successful development and commercialization of our product candidates, including ZTlido.

In order to carry out our business plan and implement our strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through strategic collaborations, licensing arrangements, joint ventures, public or private equity or debt financing, bank lines of credit, asset sales, government grants or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us, or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders, and debt or equity financing, if available, may subject us to restrictive covenants and significant interest costs. If we obtain funding through a strategic collaboration or licensing arrangement, we may be required to relinquish our rights to certain of our product candidates or marketing territories.

~~Further, there is uncertainty related~~

In addition, as discussed in the risk factor under the heading “The terms of our outstanding debt place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to ~~future National Institutes~~operate our business” below, the Scilex Indenture includes negative covenants that place limitations on the following: the incurrence of ~~Health (“NIH”) grant funding,~~debt, the payment of dividends by Scilex, the repurchase of shares and, under certain conditions, making certain other restricted payments, the prepayment, redemption or repurchase of subordinated debt, a merger, amalgamation or consolidation involving Scilex Pharma, engaging in certain transactions with affiliates; and the ~~NIH’s plans for new grants or cooperative agreements may be re-scoped, delayed, or canceled depending on~~making of investments other than those permitted by the nature of the work and the availability of resources. As a result, we cannot assure you that we will receive any additional funding under our existing NIH grants, and we may not be successful in securing additional grants from the NIH in the future.

Scilex Indenture.

Our inability to raise capital when needed would harm our business, financial condition and results of operations, and could cause our stock price to decline or require that we wind down our operations altogether.

Risks Related to Our Business and Industry

~~A fast track product designation~~

We face potential business disruptions and related risks resulting from the recent outbreak of the novel coronavirus, which could have a material adverse effect on our business, financial condition and results of operations.

In December 2019, a novel strain of coronavirus, or SARS-CoV-2, was reported to have surfaced in Wuhan, China. SARS-CoV-2 is the virus that causes COVID-19. The COVID-19 outbreak has grown into a global pandemic that has impacted Asia, United States, Europe and other ~~designation~~countries throughout the world. Financial markets have been experiencing extreme fluctuations that may cause a contraction in available liquidity globally as important segments of the credit markets react to ~~facilitate product candidate development~~the development. The pandemic may ~~not~~ lead to ~~faster~~a decline in business and consumer confidence. The global outbreak of COVID-19 continues to rapidly evolve. As a result, businesses have closed and limits have been placed on travel. The extent to which COVID-19 may impact our business, clinical trials and sales of ZTlido® (lidocaine topical system 1.8%) (“ZTlido”) will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

We are monitoring the potential impact of the COVID-19 outbreak, and if COVID-19 continues to spread globally, including in the United States, we may experience disruptions that could severely impact the development ~~or regulatory review or approval process, and it does not increase the likelihood that~~of our product candidates, ~~will receive marketing approval.~~including:

•

delays or difficulties in enrolling patients in our clinical trials as patients may be reluctant, or unable, to visit clinical sites;

~~A product sponsor~~

•

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators, clinical site staff and potential closure of clinical facilities;

•

decreases in patients seeking treatment for chronic pain;

•

delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;

•

delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;

•

changes in local regulations as part of a response to the COVID-19 outbreak, which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;

•

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

•

risk that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events;

•

delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees; and

•

interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others.

Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party suppliers in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities. For example, we obtain our commercial supply of ZTlido and our clinical supply of SP-103 exclusively from Oishi and Itochu in Japan. The COVID-19 pandemic may ~~apply for fast track designation~~result in delays in the procurement and shipping of ZTlido, which may have an adverse impact on our operating results.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the ~~U.S. Food~~spread of COVID-19 could materially affect our business and ~~Drug Administration (“FDA”) if~~the value of our common stock.

In addition, the continued spread of COVID-19 globally could materially and adversely impact our operations, including without limitation, our sales and marketing efforts, sales of ZTlido, travel, employee health and availability, which may have a ~~product is intended for the treatment of a serious or life-threatening~~material and adverse effect on our business, financial condition and ~~preclinical~~results of operations.

Management is actively monitoring the global situation on our financial condition, liquidity, operations, suppliers, industry and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 outbreak on our results of operations, financial condition or ~~clinical data demonstrate the potential to address an unmet medical need~~liquidity for ~~this condition (“Fast Track Designation”). The FDA has broad discretion~~

fiscal year 2020.

~~whether or not to grant this designation. We have received Fast Track Designation for SEMDEXA~~^TM~~, which is in development for the treatment of lumbosacral radicular pain. Even though SEMDEXA~~^TM has received Fast Track Designation, we may not experience a faster process, review or approval compared to conventional FDA procedures. Fast Track Designation does not accelerate clinical trials, mean that regulatory requirements are less stringent or provide assurance of ultimate marketing approval by the FDA. Instead, Fast Track Designation provides opportunities for frequent interactions with FDA review staff, as well as eligibility for priority review, if relevant criteria are met, and rolling review. The FDA may rescind the fast track designation if it believes that the designation is no longer supported by data from our clinical development program. The FDA may also withdraw any fast track designation at any time.

Drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is risky and uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. It is not uncommon for companies in the pharmaceutical industry to suffer significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be successful.

This drug candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates are developed through preclinical to early and late stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve these intended objectives.

Other than with respect to ZTlido,^® ~~(lidocaine topical system) 1.8%,~~ we have not completed a corporate-sponsored clinical trial. Phase I trials are ongoing for RTX for knee osteoarthritis, RTX for cancer-related pain, anti-CD38 CAR-T for multiple myeloma and anti-CEA CAR-T for intrahepatic CEA positive metastases and for intraperitoneal tumor implantation (malignant ascites) and a Phase III trial is ongoing for SEMDEXA^TM for the treatment of lumbosacral radicular pain. Non-clinical studies are ongoing and a Phase II trial is planned to start in the ~~fourth quarter~~first half of ~~2019~~2021 with higher strength SP-103. Despite this, we may not have the necessary capabilities, including adequate staffing, to successfully manage the execution and completion of any clinical trials we initiate, including our planned clinical trials of RTX, clinical trials of SP-103, clinical trials of SEMDEXA^TM, clinical trials of CAR-T, including targeting CD38 using a CAR-T cell therapy, our biosimilar/biobetters antibodies and other product candidates, in a way that leads to our obtaining marketing approval for our product candidates in a timely manner, or at all.

In the event we are able to conduct a pivotal clinical trial of a product candidate, the results of such trial may not be adequate to support marketing approval. Because our product candidates are intended for use in life-threatening diseases, in some cases we ultimately intend to seek marketing approval for each product candidate based on the results of a single pivotal clinical trial. As a result, these trials may receive enhanced scrutiny from the FDA. For any such pivotal trial, if the FDA disagrees with our choice of primary endpoint or the results for the primary endpoint are not robust or significant relative to control, are subject to confounding factors, or are not adequately supported by other study endpoints, including possibly overall survival or complete response rate, the FDA may refuse to approve a New Drug Application, Biologics License Application or other application for marketing based on such pivotal trial. The FDA may require additional clinical trials as a condition for approving our product candidates.

There can be no assurance that the product candidates we are developing for the detection and treatment of COVID-19 will be granted an Emergency Use Authorization by the FDA. If no Emergency Use Authorization is granted or, once granted, it is terminated, we will be unable to sell our product candidates in the near future and will be required to pursue the drug approval process, which is lengthy and expensive.

On June 10, 2020, we announced the submission of an Emergency Use Authorization (“EUA”) to the FDA for our COVI-TRACK in vitro diagnostic test kit for the independent detection of IgG and IgM antibodies in sera of patients exposed to the SARS-CoV-2 virus.

An EUA would allow us to market and sell COVI-TRACK without the need to pursue the lengthy and expensive drug approval process. The FDA may issue an EUA during a public health emergency if it determines that the potential benefits of a product outweigh the potential risks and if other regulatory criteria are met. If an EUA is granted for COVI-TRACK, we will rely on the FDA policies and guidance in connection with the marketing and sale of COVI-TRACK. If these policies and guidance change unexpectedly and/or materially or if we misinterpret them, potential sales of COVI-TRACK could be adversely impacted. In addition, the FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization. If granted, we cannot predict how long an EUA for COVI-TRACK will remain in place. The termination of an EUA for COVI-TRACK, if granted, could adversely impact our business, financial condition and results of operations.

We may also seek additional EUAs from the FDA for our other product candidates for the detection and/or treatment of COVID-19 and the SARS-CoV-2 virus. If granted, the additional EUAs would allow us to market and sell additional product candidates without the need to pursue the lengthy and expensive drug approval process. There is no guarantee that we will be able to obtain any additional EUAs. Failure to obtain additional EUAs or the termination of such EUAs, if obtained, could adversely impact our business, financial condition and results of operations.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, cybersecurity attacks or hacking, natural disasters, terrorism, war and telecommunication and electrical failures. In addition, as a result of the COVID-19 pandemic, we may face increased cybersecurity risks due to our reliance, and the reliance of our CROs, contractors and consultants reliance, on internet technology and the number of our employees, and employees of our CROs, contractors and consultants, who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, damage to our reputation, suffer loss or harm to our intellectual property rights and thefurther research, development and commercial efforts of our products and product candidates could be delayed. If we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, whether arising out of cybersecurity matters, or from some other matter, that claim could have a material adverse effect on our results of operations.

Further, a cybersecurity attack, data breach or privacy violation that leads to disclosure or modification of, or prevents access to, patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal data, resulting in increased costs or loss of revenue. Our ability to effectively manage and maintain our internal business information, and to ship products to customers and invoice them on a timely basis, depends significantly on our enterprise resource planning system and other information systems. Portions of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. Cybersecurity attacks in particular are evolving and include, but are not limited to, threats, malicious software, ransom ware, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of confidential or otherwise protected information and corruption of data. If we are unable to prevent such cybersecurity attacks, data security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information, including sensitive patient data. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above.

The terms of our outstanding debt place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

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

The Scilex Indenture governing the Scilex Notes contains customary events of default with respect to the Scilex Notes (including a failure to make any payment of principal on the Scilex Notes when due and payable), and, upon certain events of default occurring and continuing, the Trustee by notice to Scilex Pharma, or the holders of at least 25% in principal amount of the outstanding Scilex Notes by notice to Scilex Pharma and the Trustee, may (subject to the provisions of the Scilex Indenture) declare 100% of the then-outstanding principal amount of the Scilex Notes to be due and payable. Upon such a declaration of acceleration, such principal will be due and payable immediately. In the case of certain events, including bankruptcy, insolvency or reorganization involving us or Scilex Pharma, the Scilex Notes will automatically become due and payable.

Pursuant to the Scilex Indenture, we and Scilex Pharma must also comply with certain covenants with respect to the commercialization of ZTlido,^® ~~(lidocaine topical system) 1.8%,~~ as well as customary additional affirmative covenants, such as furnishing financial statements to the holders of the Scilex Notes, minimum cash requirements and net sales reports, and negative covenants, including limitations on the following: the incurrence of debt, the payment of dividends by Scilex Pharma, the repurchase of shares and, under certain conditions, making certain other restricted payments, the prepayment, redemption or repurchase of subordinated debt, a merger, amalgamation or consolidation involving Scilex Pharma, engaging in certain transactions with affiliates; and the making of investments other than those permitted by the Scilex Indenture.

~~On November 7, 2018, we~~

For purposes of the Scilex Indenture, an event of default includes, among other things, (i) a failure to pay any amounts when due under the Scilex Indenture, (ii) a breach or other failure to comply with the covenants (including financial, notice and reporting covenants) under the Scilex Indenture, (iii) a failure to make any payment on, or other event triggering an acceleration under, other material indebtedness of us and (iv) the occurrence of certain insolvency or bankruptcy events (both voluntary and involuntary) involving us or certain of our domestic subsidiaries (the “Guarantors”) entered into a Term Loan Agreement (the “Initial Loan Agreement”) with certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the “Lenders”) and Oaktree Fund Administration, LLC, as administrative and collateral agent (the “Agent”), for an initial term loan of $100.0 million (the “Initial Loan”) and a second tranche of $50.0 million, subject to the achievement of certain commercial and financial milestones between August 7, 2019 and November 7, 2019, and the satisfaction of certain customary conditions (the “Original Delayed Draw Term Loan”). The Initial Loan was funded on November 7, 2018. On May 3, 2019, we, the Guarantors, the Lenders and the Agent entered into an amendment to the Initial Loan Agreement (the “Amendment” and, together with the Initial Loan Agreement, the “Loan Agreement”). Under the Amendment, the Lenders funded $20.0 million of the Original Delayed Draw Term Loan on May 3, 2019. The Loan Agreement contains customary affirmative and restrictive covenants and representations and warranties, including financial reporting obligations and minimum liquidity requirements and limitations on indebtedness, liens, negative pledges, certain restricted payments, subsidiary distributions, investments, fundamental transactions, dispositions of assets and transactions with affiliates. The Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality obligations, as well as indemnification rights for the benefit of the Lenders.

subsidiaries.

If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

~~We have significantly restructured~~

Any disruption in our research and development facilities could adversely affect our business, financial condition and ~~implemented a new segment reporting structure.~~ results of operations.

Our two industry segments, designated as Sorrento Therapeutics and Scilex, have been in effect for a limited period of time and there are no assurances that we will be able to successfully operate as a restructured business.

~~We have traditionally focused on the discovery~~principal executive offices, which house our research and development programs, are in San Diego, California. Our facilities may be affected by natural or man-made disasters. Earthquakes are of ~~innovative therapies focused~~particular significance since our facilities are located in an earthquake-prone area. We are also vulnerable to damage from other types of disasters, including power loss, attacks from extremist organizations, fires, floods and similar events. If our facilities are affected by a natural or man-made disaster, we may be forced to curtail our operations and/or rely on ~~oncology~~third-parties to perform some or all of our research and development activities. Although we believe we possess adequate insurance for damage to our property and the ~~treatment~~disruption of ~~chronic cancer pain as well as immunology~~our business from casualties, such insurance may not be sufficient to cover all of our potential losses and ~~infectious diseases based~~may not continue to be available to us on acceptable terms, or at all. In the future, we may choose to expand our ~~platform technologies.~~

~~With~~operations in either our ~~previous acquisition of a majority stake~~existing facilities or in ~~Scilex Pharma, a developer of specialty pharmaceutical products for the treatment of chronic pain, and the subsequent contribution of such stake to~~new facilities. If we expand our majority-owned subsidiary Scilex Holding Company (“SHC”) in connection with SHC’s acquisition of Semnur, a pharmaceutical company developing an injectable product for the treatment of lower back pain, SHC will focus on non-opioid pain management.

~~Our strategy is based on a number of factors and assumptions, some of which are not within our control, such as the actions of third parties. There~~worldwide manufacturing locations, there can be no assurance that this expansion will occur without implementation difficulties, or at all.

Effective July 21, 2020, the health officers of San Diego County, where our principal executive offices are located, issued an updated shelter-in-place order, ordering, among other things, that all individuals living in the County of San Diego to remain in their homes or at their place of residence for an indefinite period of time (subject to certain exceptions for essential businesses and to facilitate authorized necessary activities and reopened businesses) to mitigate the impact of the COVID-19 pandemic. The order is scheduled to continue until further notice from the health officers of San Diego County. In addition, in mid-March 2020, the Governor of California and the State Public Health Officer and Director of the California Department of Public Health ordered all individuals living in the State of California to stay at their place of residence for an indefinite period of time (subject to certain exceptions to facilitate authorized necessary activities, and subject to certain variances approved by the California Department of Public Health on a county-by-county basis) to mitigate the impact of the COVID-19 pandemic. The executive order exempts certain individuals needed to maintain continuity of operations of critical infrastructure sectors as determined by the federal government. If the operations in our principal executive offices or other facilities are deemed non-essential, we ~~will~~may not be able to ~~successfully execute all or~~operate for the duration of any ~~elements of our strategy, or that our ability to successfully execute our strategy will be unaffected by external factors. If we are unsuccessful in growing~~shelter-in-place order, which could negatively impact our business, ~~as planned, our~~operating results and financial ~~performance could be adversely affected.~~

condition.

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

We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. For example, on April 3, 2019, we filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from our company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. As an additional example, on May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action against us, our President, Chief Executive Officer and Chairman of the Board of Directors, Henry Ji, Ph.D., and our SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D., alleging that we, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection. A second putative federal securities class action was filed in the U.S. District Court for the Southern District of California against the same defendants alleging the same claims and seeking the same relief. In general, claims made by or against us

in disputes and other legal or regulatory proceedings can be expensive and time consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. While we intend to pursue any claims made by us, or defend against any claims brought against us, vigorously, 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 Acquisitions~~

~~We have and plan to continue to acquire assets, businesses and technologies and may fail to realize the anticipated benefits of the acquisitions, and acquisitions can be costly and dilutive.~~

~~We have and plan to continue to expand our business and intellectual property portfolio through the acquisition of new assets, businesses and technologies.~~

For example, in November 2016, we acquired a majority of the outstanding capital stock of Scilex Pharma, which was contributed to our majority-owned subsidiary SHC in connection with the corporate reorganization of SHC and acquisition of Semnur by SHC in March 2019. These assets, together, constitute our Scilex segment. We also acquired Virttu Biologics Limited in 2017 and Sofusa^®~~assets, a revolutionary drug delivery system, in July 2018, and we are in the process of integrating this company and technology with ours.~~

The success of any acquisition depends on, among other things, our ability to combine our business with the acquired assets and businesses in a manner that does not materially disrupt existing relationships and that allows us to achieve development and operational synergies. If we are unable to achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected. In particular, the acquisition may not be accretive to our stock value or development pipeline in the near or long term.

It is possible that the integration process could result in the loss of key employees; the disruption of our ongoing business or the ongoing business of the acquired companies; or inconsistencies in standards, controls, procedures or policies that could adversely affect our ability to maintain relationships with third parties and employees or to achieve the anticipated benefits of the acquisition. Integration efforts between us and the acquired company will also divert management’s attention from our core business and other opportunities that could have been beneficial to our stockholders. An inability to realize the full extent of, or any of, the anticipated benefits of the acquisition, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of the shares of our common stock after the completion of the acquisition. If we are unable to achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected. In particular, the acquisition may not be accretive to our stock value or development pipeline in the near or long term.

We expect to incur additional costs integrating the operations of any companies we acquire, higher development and regulatory costs, and personnel, which cannot be estimated accurately at this time. If the total costs of the integration of our companies and advancement of acquired product candidates and technologies exceed the anticipated benefits of the acquisition, our financial results could be adversely affected.

In addition, we may issue shares of our common stock or other equity-linked securities in connection with future acquisitions of businesses and technologies. Any such issuances of shares of our common stock could result in material dilution to our existing stockholders.

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 ~~October~~July 1, ~~2018~~2019 to ~~September~~June 30, ~~2019,~~2020, our closing stock price ranged from ~~$1.86~~$1.45 to ~~$5.94~~$6.76 per share. The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:

•

actual or anticipated adverse results or delays in our clinical trials;

•~~actual or anticipated adverse results or delays in our clinical trials;~~

our failure to commercialize our product candidates, if approved;

•

unanticipated serious safety concerns related to the use of any of our product candidates;

•~~our failure to commercialize our product candidates, if approved;~~

adverse regulatory decisions;

•~~unanticipated serious safety concerns related to the use of any of our product candidates;~~

changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals;

•~~adverse regulatory decisions;~~

legal disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our product candidates, government investigations and the results of any proceedings or lawsuits, including, but not limited to, patent or stockholder litigation;

•~~changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals;~~

our decision to initiate a clinical trial, not initiate a clinical trial or to terminate an existing clinical trial;

•legal disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our product candidates, government investigations and the results of any proceedings or lawsuits, including, but not limited to, patent or stockholder litigation;

our dependence on third parties, including CROs;

•~~our decision to initiate a clinical trial, not initiate a clinical trial or to terminate an existing clinical trial;~~

announcements of the introduction of new products by our competitors;

•~~our dependence on third parties, including CROs;~~

market conditions in the pharmaceutical and biotechnology sectors;

•~~announcements of the introduction of new products by our competitors;~~

announcements concerning product development results or intellectual property rights of others;

•~~market conditions in the pharmaceutical and biotechnology sectors;~~

future issuances of common stock or other securities;

•~~announcements concerning product development results or intellectual property rights of others;~~

the addition or departure of key personnel;

•~~future issuances of common stock or other securities;~~

failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;

•~~the addition or departure of key personnel;~~

actual or anticipated variations in quarterly operating results;

•~~failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;~~

our failure to meet or exceed the estimates and projections of the investment community;

•~~actual or anticipated variations in quarterly operating results;~~

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;

•~~our failure to meet or exceed the estimates and projections of the investment community;~~

conditions or trends in the biotechnology and biopharmaceutical industries;

•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;

introduction of new products offered by us or our competitors;

•~~conditions or trends in the biotechnology and biopharmaceutical industries;~~

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

•~~introduction of new products offered by us or our competitors;~~

issuances of debt or equity securities;

•~~announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;~~

sales of our common stock by us or our stockholders in the future;

•~~issuances of debt or equity securities;~~

trading volume of our common stock;

•~~sales of our common stock by us or our stockholders in the future;~~

ineffectiveness of our internal controls;

•~~trading volume of our common stock;~~

publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

•~~ineffectiveness of our internal controls;~~

failure to effectively integrate the acquired companies’ operations;

•~~publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;~~

general political and economic conditions;

•~~failure to effectively integrate the acquired companies’ operations;~~

effects of natural or man-made catastrophic events

•~~general political and economic conditions;~~

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

•~~effects of natural or man-made catastrophic events; and~~

other events or factors, many of which are beyond our control.

•~~other events or factors, many of which are beyond our control.~~

Further, the equity markets in general have recently experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility of our common stock might worsen if the trading volume of our common stock is low. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our common stock.

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

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

Not applicable.

Item 5.Other Information.

On November 8, 2019, we entered into a note conversion agreement (the “Conversion Agreement”) with the holders (the “Convertible Noteholders”) of convertible promissory notes issued by us on June 13, 2018 (the “Convertible Notes”) pursuant that certain Securities Purchase Agreement, dated as of March 26, 2018, by and among us and certain accredited investors party

thereto (the “Purchasers”), as amended by that certain Amendment No. 1 to Securities Purchase Agreement, dated as of June 13, 2018, by and among us and the purchasers identified on the signature pages thereto (as amended, the “Securities Purchase Agreement”). The Convertible Notes accrued simple interest at a rate equal to 5.0% per annum and would mature upon the earlier to occur of (a) June 13, 2023, and (b) the date of the closing of a change in control of our company (the “Maturity Date”). Pursuant to the terms of the Convertible Notes, at any time and from time to time before the Maturity Date, each Purchaser had the option to convert any portion of the outstanding principal amount of such Purchaser’s Convertible Note into shares of our common stock at a price per share equal to $7.0125. Upon conversion of any of the principal amount of a Convertible Note, all accrued and unpaid interest on such portion of the principal amount would become due and payable in cash.

Pursuant to the Conversion Agreement, the Convertible Notes were amended to provide that (a) the conversion price for the Convertible Notes was reduced from $7.0125 per share to $1.70 per share, and (b) upon the conversion of any portion of the outstanding principal amount of a Convertible Note, all accrued but unpaid interest on such portion of the principal amount being converted shall also be converted into shares of our common stock at $1.70 per share (collectively, the “Amendment”). In connection with the Amendment, each of the Convertible Noteholders further agreed to convert the full principal amount, plus all accrued but unpaid interest, under such Convertible Noteholder’s Convertible Note, as amended by the Amendment, into shares of our common stock on November 8, 2019. As of November 8, 2019, the aggregate outstanding principal amount of the Convertible Notes was $37,848,750 (the “Principal Amount”) and the aggregate accrued interest under the Convertible Notes was $674,018.84 (the “Accrued Interest”).

Pursuant to the Conversion Agreement, on November 8, 2019, 22,660,449 shares of our common stock were issued to the Convertible Noteholders upon the conversion of the full Principal Amount and the Accrued Interest (the “Conversion Shares”). None of the Conversion Shares were registered under the Securities Act of 1933, as amended (the “Securities Act”).

In connection with the Securities Purchase Agreement, we previously registered 5,397,325 of the Conversion Shares for resale under the Securities Act pursuant to our Registration Statement on Form S-3 (File No. 333-229609) filed with the SEC on February 11, 2019, as amended by Amendment No. 1 thereto filed with the SEC on May 3, 2019, and declared effective on May 7, 2019 (the “Prior Registration Statement”). Pursuant to the Conversion Agreement, we agreed to prepare and file by no later than December 9, 2019 a registration statement with the SEC for the purpose of registering for resale the remaining 17,263,124 Conversion Shares that were not covered under the Prior Registration Statement.

The Conversion Agreement includes representations and warranties of the parties and other terms and conditions customary in agreements of this type. The representations, warranties and covenants contained in the Conversion Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to the Conversion Agreement, and may be subject to limitations agreed upon by the contracting parties. Accordingly, the Conversion Agreement is incorporated herein by reference only to provide investors with information regarding the terms of the Conversion Agreement, and not to provide investors with any other factual information regarding our company or our business, and should be read in conjunction with the disclosures in our periodic reports and other filings with the SEC.

The foregoing description of the Conversion Agreement does not purport to be complete and is qualified in its entirety by reference to the copy of the Conversion Agreement filed herewith as Exhibit 10.5.

The Conversion Shares were issued to the Convertible Noteholders pursuant to an exemption from registration under the Securities Act in reliance on Section 4(a)(2) thereof and Rule 506 of Regulation D thereunder. Each of the Convertible Noteholders represented that such Convertible Noteholder was an “accredited investor,” as defined in Regulation D, and was acquiring the Conversion Shares for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. 5,397,325 of the Conversion Shares were previously registered for resale under the Securities Act pursuant to the Prior Registration Statement. 17,263,124 of the Conversion Shares have not been registered for resale under the Securities Act and such Conversion Shares may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws. Neither the disclosure under this Part II, Item 5 nor Exhibit 10.5 filed herewith is an offer to sell or the solicitation of an offer to buy shares of our common stock or any of our other securities.

None.

Item 6. ~~Exhibits.~~Exhibits.

EXHIBIT INDEX

Exhibit No.			Description
~~2.1+~~
3.1	~~Agreement and Plan~~Restated Certificate of Merger, dated as of March 18, 2019, by and among Sorrento Therapeutics, Inc., Semnur Pharmaceuticals, Inc., Scilex Holding Company, Sigma Merger Sub, Inc. and Fortis Advisors LLC, solely as the Equityholders’ RepresentativeIncorporation (incorporated by reference to Exhibit ~~2.1~~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 ~~March 22, 2019)~~August 1, 2013).
3.3
~~2.2~~		~~Amendment No. 1 to Agreement and Plan of Merger, dated as of August 7, 2019, by and between Scilex Holding Company and Fortis Advisors LLC, solely as the Equityholders’ Representative.~~

~~3.1~~		Amended and 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).
~~4.1~~
4.2	Voting Agreement, dated as of April 29, 2016, by and between Sorrento Therapeutics, Inc. and Yuhan Corporation (incorporated by reference to Exhibit 4.12 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).
4.3	Registration Rights Agreement, dated November 8, 2016, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 8, 2016).
4.4	Warrant Agreement, dated November 23, 2016, issued to Hercules Capital, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 29, 2016).
4.5	Registration Rights Agreement, dated April 27, 2017, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 28, 2017).
4.6	Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of December 11, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2017).
4.7	Registration Rights Agreement, dated December 21, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2017).
4.8	Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).
4.9	Registration Rights Agreement, dated June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).
4.10	Form of Warrant, dated November 7, 2018, issued by Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).
4.11	Registration Rights Agreement, dated November 7, 2018, by and among Sorrento Therapeutics, Inc. and the parties identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).
4.12	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).

4.13	Exchange and Registration Rights Agreement, dated as of March 18, 2019, by and among Sorrento Therapeutics, Inc. and the stockholders and stock option holders of Semnur Pharmaceuticals, Inc. set forth on Schedule A thereto, (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 22, 2019).
4.14	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).
4.15
~~4.2~~			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).
4.16
~~4.3~~			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).
4.17
~~4.4~~			~~Form of Series B Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2019).~~

~~4.5~~			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).
4.18
~~4.6~~			Form of Warrant (incorporated by reference to Exhibit 4.1 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K filed with the SEC on October 8, 2019).
4.19	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 December 9, 2019).
~~10.1#~~ 4.20		Amendment No. 2 to the Registration Rights Agreement, dated as of December 6, 2019, by and among Sorrento Therapeutics, Inc. ~~2019~~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).
10.1	Sales Agreement, dated as of April 27, 2020, by and between Sorrento Therapeutics, Inc. and A.G.P./Alliance Global Partners (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 27, 2020).

10.2+	Common Stock ~~Incentive Plan~~Purchase Agreement, dated as of April 27, 2020, by and between Sorrento Therapeutics, Inc. and Arnaki Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on ~~September 23, 2019)~~April 27, 2020).
10.3#	Outside Director Compensation Policy.
~~10.2~~		Equity Distribution Agreement, dated as of October 1, 2019, by and between Sorrento Therapeutics, Inc. and JMP Securities LLC (incorporated by reference to Exhibit 1.1 to the Registrant's Current Report on Form 8-K filed with the SEC on October 1, 2019).
31.1
10.3*			Omnibus Amendment No. 1 to Indenture and Letter of Credit, dated as of October 1, 2019, by and among Scilex Pharmaceuticals, Inc.., Sorrento Therapeutics, Inc., U.S. Bank National Association, as trustee and collateral agent, and the beneficial owners of the senior secured notes due 2026 and the holders of such securities listed on the signature pages (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on October 1, 2019).

~~10.4*+~~			Form of Securities Purchase Agreement, dated October 7, 2019, by and between Sorrento Therapeutics, Inc. and the purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the S EC on O ~~ctober 8, 2019).~~

~~10.5~~			Note Conversion Agreement, dated as of November 8, 2019, by and among Sorrento Therapeutics, Inc. and the holders of convertible notes issued by Sorrento Therapeutics, Inc. as is set forth on Exhibit A thereto.

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

32.1		Certification of Henry Ji, Ph.D., Principal Executive Officer and Jiong Shao, 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
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	Cover Page Interactive Data File, formatted in Inline Extensible Business Reporting Language (iXBRL) (embedded within the Inline XBRL document)

+	Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the SEC.

#	Management contract or compensatory plan.

* Certain identified information has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by the SEC.

+ Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the SEC.

~~# Indicates management contract or compensatory plan.~~

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 8, 2019~~

August 4, 2020

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 8, 2019~~

August 4, 2020

By:

/s/ Jiong Shao

Jiong Shao

Executive Vice President & Chief Financial Officer

(Principal Financial Officer)

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

☒
☒			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				3
~~Part I~~	~~Financial Information~~
Item 1.			Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets (Unaudited) as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019	1 3
	Consolidated Statements of Operations (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	3 4
	Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	4 5
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	5 6
	Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	7
	Notes to Consolidated Financial Statements (Unaudited)	9 8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35 23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44 30
Item 4.	Controls and Procedures	45 30

Part II	Other Information	47 32
Item 1.	Legal Proceedings	47 32
Item 1A.	Risk Factors	48 33
Item 5.	Other Information	53 40
Item 6.	Exhibits	54 40
~~Signatures~~SIGNATURES			56 43


ASSETS	September 30, 2019		December 31, 2018
Current assets:
Cash and cash equivalents	$	34,649	$	158,738
Restricted cash	9,592		9,592
Marketable securities	94		297
Accounts receivables, net	11,560		3,833
Inventory	4,335		2,898
Income tax receivable	216		526
Prepaid expenses and other	7,122		3,680
Total current assets	67,568		179,564
Property and equipment, net	30,338		24,384
Operating lease right-of-use assets	47,799		—
Intangibles, net	64,299		66,283
Goodwill	38,298		38,298
Cost method investments	237,008		237,008
Equity method investments	25,240		27,980
Restricted cash	45,150		45,000
Other, net	5,175		5,570
Total assets	$	560,875	$	624,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,750	$	13,817
Accrued payroll and related benefits	14,665		10,236
Accrued expenses	18,478		13,403
Current portion of deferred revenue	3,613		2,703

Acquisition consideration payable	11,312		11,312
Current portion of derivative liabilities	9,000		—
Current portion of debt	25,877		10,150
Current portion of operating lease liabilities	3,018		—
Total current liabilities	112,713		61,621
Long-term debt, net of discount	234,370		223,136
Deferred tax liabilities, net	8,634		9,416
Deferred revenue	114,783		116,274
Derivative liabilities	29,500		—
Operating lease liabilities	53,378		—
Deferred rent and other	828		6,140
Total liabilities	$	554,206	$	416,587
Commitments and contingencies (See Note 13)
Equity:
Sorrento Therapeutics, Inc. equity
Preferred stock, $0.0001 par value; 100,000,000 shares authorized and 0 shares issued or outstanding	—		—


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018

Revenues:
Net product revenues	$	3,810	$	1,121	$	11,868	$	1,982
Service revenues	1,968		2,984		6,530		12,282
Total revenues	5,778		4,105		18,398		14,264
Operating costs and expenses:
Cost of products sold	2,839		662		3,868		663
Cost of services	2,387		1,515		6,947		4,052
Research and development	27,573		19,567		77,916		52,124
Acquired in-process research and development	—		9,478		75,301		9,478
Selling, general and administrative	25,234		20,102		78,128		41,102
Intangible amortization	991		655		2,949		1,974
Loss on contingent liabilities and acquisition consideration payable	37		33		103		13,696
Total operating costs and expenses	59,061		52,012		245,212		123,089
Loss from operations	(53,283)		(47,907)		(226,814)		(108,825)
Loss on trading securities	(221)		(26)		(203)		(144)
Loss on derivative liabilities	(10,700)		—		(35,792)		—
(Loss) gain on foreign currency exchange	(521)		18		(619)		(551)
Interest expense	(9,459)		(2,684)		(28,059)		(48,744)
Interest income	182		219		1,021		229

Loss before income tax	(74,002)		(50,380)		(290,466)		(158,035)
Income tax benefit	(221)		(826)		(782)		(3,152)
Loss on equity method investments	(1,431)		(900)		(3,902)		(3,926)
Net loss	(75,212)		(50,454)		(293,586)		(158,809)
Net loss attributable to noncontrolling interests	(10,797)		(3,126)		(64,338)		(5,045)
Net loss attributable to Sorrento	$	(64,415)	$	(47,328)	$	(229,248)	$	(153,764)
Net loss per share - basic per share attributable to Sorrento	$	(0.49)	$	(0.40)	$	(1.83)	$	(1.52)
Net loss per share - diluted per share attributable to Sorrento	$	(0.50)	$	(0.40)	$	(2.00)	$	(1.52)
Weighted-average shares used during period - basic per share attributable to Sorrento	130,800		117,021		125,240		100,959
Weighted-average shares used during period - diluted per share attributable to Sorrento	140,445		117,021		132,265		100,959


	Nine Months Ended September 30, 2019

	Common Stock				Treasury Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrolling Interest
	Shares	Amount		Shares	Amount													Total
Balance, December 31, 2018	122,280,092	$	13	7,568,182	$	(49,464)	$	626,658	$	15	$	(367,750)	$	(1,972)	$	207,500
Issuance of common stock upon exercise of stock options	158,699	—		—	—		289		—		—		—		289
Issuance of common stock for public placement, net	229,168	—		—	—		947		—		—		—		947
Equity contribution related to Semnur acquisition	—	—		—	—		27,991		—		—		26,600		54,591
Stock-based compensation	—	—		—	—		8,978		—		—		—		8,978
Issuance of 2019 Warrants	—	—		—	—		4,288		—		—		—		4,288
2019 Public Offering of common stock and warrants, net of issuance costs	8,333,334	—		—	—		23,322		—		—		—		23,322
Adjustment to noncontrolling interest	—	—		—	—		—		—		—		484		484
Foreign currency translation adjustment	—	—		—	—		—		(144)				—		(144)
Net loss	—	—		—	—		—		—		(229,248)		(64,338)		(293,586)
Balance, September 30, 2019	131,001,293	$	13	7,568,182	$	(49,464)	$	692,473	$	(129)	$	(596,998)	$	(39,226)	$	6,669


	Nine Months Ended September 30, 2018

	Common Stock				Treasury Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrolling Interest
	Shares	Amount		Shares	Amount													Total
Balance, December 31, 2017	82,903,567	$	9	7,568,182	$	(49,464)	$	413,901	$	242	$	(165,120)	$	7,042	$	206,610
Adoption impact of ASC 606	—	—		—	—		—		—		910		—		910
Issuance of common stock upon exercise of stock options	42,565	—		—	—		302		—		—		—		302
Issuance of common stock for BDL settlement	309,916	—		—	—		2,340		—		—		—		2,340
Issuance of common stock for Scilex settlement	1,381,346	—		—	—		13,744		—		—		—		13,744
Issuance of common stock for public placement and investments, net	10,396,489	2		—	—		71,475		—		—		—		71,477
Issuance of common stock for Virttu settlement	1,795,011	—		—	—		11,308		—		—		—		11,308
Issuance of common stock related to conversion of notes payable	22,038,565	2		—	—		49,998		—		—		—		50,000
Beneficial conversion feature recorded on convertible notes	—	—		—	—		12,006		—		—		—		12,006
Warrants issued in connection with convertible notes	—	—		—	—		9,646		—		—		—		9,646
Stock-based compensation	—	—		—	—		4,218		—		—		(29)		4,189
Foreign currency translation adjustment	—	—		—	—		—		(163)		—		—		(163)
Net loss	—	—		—	—		—		—		(153,764)		(5,045)		(158,809)
Balance, September 30, 2018	118,867,459	$	13	7,568,182	$	(49,464)	$	588,938	$	79	$	(317,974)	$	1,968	$	223,560


	Three Months Ended September 30, 2018

	Common Stock				Treasury Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrolling Interest
	Shares	Amount		Shares	Amount													Total
Balance, June 30, 2018	116,240,963	$	12	7,568,182	$	(49,464)	$	574,316	$	153	$	(270,646)	$	5,094	$	259,465
Issuance of common stock upon exercise of stock options	16,750	—		—	—		141		—		—		—		141
Issuance of common stock for public placement and investments, net	2,609,746	1		—	—		13,204		—		—		—		13,205
Issuance of common stock for Virttu settlement	—	—		—	—		—		—		—		—		—
Issuance of common stock related to conversion of notes payable	—	—		—	—		—		—		—		—		—
Beneficial conversion feature recorded on convertible notes	—	—		—	—		—		—		—		—		—
Warrants issued in connection with convertible notes	—	—		—	—		—		—		—		—		—
Stock-based compensation	—	—		—	—		1,277		—		—		—		1,277
Foreign currency translation adjustment	—	—		—	—		—		(74)		—		—		(74)
Net loss	—	—		—	—		—		—		(47,328)		(3,126)		(50,454)
Balance, September 30, 2018	118,867,459	$	13	7,568,182	$	(49,464)	$	588,938	$	79	$	(317,974)	$	1,968	$	223,560


Net cash provided by financing activities	40,975		242,703
Net change in cash, cash equivalents and restricted cash	(123,783)		160,166
Net effect of exchange rate changes on cash	(156)		(154)
Cash, cash equivalents and restricted cash at beginning of period	213,330		20,429
Cash, cash equivalents and restricted cash at end of period	$	89,391	$	180,441
Supplemental disclosures:
Cash paid during the period for:
Income taxes	$	13	$	15
Interest paid	$	10,046	$	1,453
Supplemental disclosures of non-cash investing and financing activities:
Semnur acquisition consideration paid in equity	$	54,591	$	—
Semnur acquisition costs incurred but not paid	$	601	$	—
BDL non-cash consideration	$	—	$	2,340
Property and equipment costs incurred but not paid	$	1,408	$	59
Scilex non-cash consideration for regulatory milestone	$	—	$	13,744

Conversion of convertible notes	$	—	$	50,000
Reconciliation of cash, cash equivalents and restricted cash within the Company’s consolidated balance sheets:
Cash and cash equivalents	34,649		135,441
Restricted cash	54,742		45,000
Cash, cash equivalents, and restricted cash	$	89,391	$	180,441


	Remainder of 2019	2020	2021 and thereafter
Contract manufacturing services	$403	$701	$109


~~(858)~~			~~203-4100~~


	September 30, 2019		December 31, 2018
Furniture and fixtures	$	1,240	$	1,127
Office equipment	659		632
Machinery and lab equipment	30,675		27,690
Leasehold improvements	9,716		9,001
Construction in progress	8,654		1,221
	50,944		39,671
Less accumulated depreciation	(20,606)		(15,287)
	$	30,338	$	24,384


September 30, 2019	Weighted Average Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization		Intangibles, Net
Customer relationships	6	$	1,585	$	1,394	$	191
Acquired technology	19	3,410		1,016		2,394
Acquired in-process research and development	15	36,299		1,463		34,836
Patent rights	15	32,720		6,376		26,344
Assembled workforce	5	$	605	$	71	$	534
Total intangible assets		$	74,619	$	10,320	$	64,299


Years Ending December 31,	Amount
2019 (Remaining three months)	$	992
2020	3,966
2021	5,020
2022	5,020
2023	5,015
2024	4,924
Thereafter	39,362
Total expected future amortization	$	64,299


	September 30, 2019		December 31, 2018
Face value of loan	$	37,849	$	37,849
Unamortized debt discount	(14,288)		(14,804)
Accretion of debt discount	1,684		515
Ending balance	$	25,245	$	23,560


	Three months ended September 30, 2019			Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,712		$	5,057

ROU assets obtained in exchange for new and amended operating lease liabilities	$	2,030		$	6,777

Weighted average remaining lease term in years - operating leases	9.5 years			9.5 years
Weighted average discount rate - operating leases	12.2		%	12.2		%