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SRNE Sorrento Therapeutics

Filed: 5 May 21, 4:35pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

OR

 

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

 

For the transition period from                     to                     

Commission File Number 001-36150  

SORRENTO THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

33-0344842

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

4955 Directors Place

San Diego, California 92121

(Address of Principal Executive Offices)

 

(858) 203-4100

 

(Registrant’s Telephone Number, Including Area Code)

Securities Registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol (s)

 

Name of each exchange on which registered:

Common Stock, $0.0001 par value

 

SRNE

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  .

The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of April 30, 2021 was 286,650,738.

 


 

Sorrento Therapeutics, Inc.

Form 10-Q for the Quarter Ended March 31, 2021

Table of Contents

 

Part I

Financial Information

3

Item 1.

Consolidated Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets (Unaudited) as of March 31, 2021 and December 31, 2020

3

 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2021 and 2020

4

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2021 and 2020

5

 

Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2021 and 2020

6

 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2021 and 2020

7

 

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

Part II

Other Information

26

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

32

SIGNATURES

36

 

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.Consolidated Financial Statements.

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts; unaudited)

 

ASSETS

 

March 31,

2021

 

 

December 31,

2020

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,678

 

 

$

56,464

 

Marketable investment

 

 

194,431

 

 

 

 

Accounts receivables, net

 

 

16,309

 

 

 

15,506

 

Inventory

 

 

1,779

 

 

 

1,831

 

Prepaid expenses

 

 

7,656

 

 

 

8,712

 

Other current assets

 

 

3,848

 

 

 

3,721

 

Total current assets

 

 

265,701

 

 

 

86,234

 

Property and equipment, net

 

 

34,681

 

 

 

31,861

 

Operating lease right-of-use assets

 

 

39,011

 

 

 

42,052

 

Intangibles, net

 

 

72,640

 

 

 

73,675

 

Goodwill

 

 

43,554

 

 

 

43,554

 

Equity investments

 

 

155,979

 

 

 

256,397

 

Other assets, net

 

 

2,049

 

 

 

2,049

 

Total assets

 

$

613,615

 

 

$

535,822

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

25,060

 

 

$

24,706

 

Accrued payroll and related benefits

 

 

16,286

 

 

 

20,859

 

Accrued expenses

 

 

27,728

 

 

 

19,198

 

Current portion of deferred revenue

 

 

1,120

 

 

 

4,485

 

Current portion of operating lease liabilities

 

 

3,734

 

 

 

3,626

 

Acquisition consideration payable

 

 

398

 

 

 

398

 

Current portion of debt

 

 

21,718

 

 

 

23,208

 

Total current liabilities

 

 

96,044

 

 

 

96,480

 

Long-term debt, net of discount

 

 

79,956

 

 

 

92,258

 

Deferred tax liabilities, net

 

 

6,699

 

 

 

6,918

 

Deferred revenue

 

 

116,926

 

 

 

113,185

 

Derivative liabilities

 

 

33,200

 

 

 

35,400

 

Operating lease liabilities

 

 

49,354

 

 

 

50,301

 

Other long-term liabilities

 

 

549

 

 

 

549

 

Total liabilities

 

$

382,728

 

 

$

395,091

 

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 285,655,428 and 275,285,582 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

 

29

 

 

 

28

 

Additional paid-in capital

 

 

1,236,195

 

 

 

1,172,346

 

Accumulated other comprehensive income (loss)

 

 

445

 

 

 

520

 

Accumulated deficit

 

 

(955,769

)

 

 

(958,279

)

Treasury stock, 7,568,182 shares at cost at March 31, 2021, and December 31, 2020

 

 

(49,464

)

 

 

(49,464

)

Total Sorrento Therapeutics, Inc. stockholders’ equity

 

 

231,436

 

 

 

165,151

 

Noncontrolling interests

 

 

(549

)

 

 

(24,420

)

Total equity

 

 

230,887

 

 

 

140,731

 

Total liabilities and stockholders’ equity

 

$

613,615

 

 

$

535,822

 

 

See accompanying notes to unaudited consolidated financial statements

3


Table of Contents

SORRENTO THERAPEUTICS, INC.  

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

Net product revenues

 

$

7,023

 

 

$

5,248

 

Service revenues

 

 

7,232

 

 

 

2,473

 

Total revenues

 

 

14,255

 

 

 

7,721

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of products sold

 

 

852

 

 

 

548

 

Cost of services

 

 

2,534

 

 

 

1,891

 

Research and development

 

 

43,833

 

 

 

21,154

 

Acquired in-process research and development

 

 

7,512

 

 

 

 

Selling, general and administrative

 

 

43,394

 

 

 

26,299

 

Intangible amortization

 

 

1,035

 

 

 

992

 

Total operating costs and expenses

 

 

99,160

 

 

 

50,884

 

Loss from operations

 

 

(84,905

)

 

 

(43,163

)

Gain on derivative liabilities

 

 

2,200

 

 

 

4,920

 

Loss on foreign currency exchange

 

 

(540

)

 

 

(147

)

Interest expense, net

 

 

(2,366

)

 

 

(6,806

)

Gain on marketable investment

 

 

94,431

 

 

 

 

Loss on equity method investments

 

 

(419

)

 

 

(556

)

Loss on debt extinguishment, net

 

 

(6,111

)

 

 

(23,645

)

Other loss

 

 

(78

)

 

 

(59

)

Income (loss) before income tax

 

 

2,212

 

 

 

(69,456

)

Income tax benefit

 

 

(206

)

 

 

(276

)

Net income (loss)

 

 

2,418

 

 

 

(69,180

)

Net loss attributable to noncontrolling interests

 

 

(92

)

 

 

(3,985

)

Net income (loss) attributable to Sorrento

 

$

2,510

 

 

$

(65,195

)

Net income (loss) per share - basic per share attributable to Sorrento

 

$

0.01

 

 

$

(0.36

)

Net income (loss) per share - diluted per share attributable to Sorrento

 

$

0.01

 

 

$

(0.36

)

Weighted-average shares used during period - basic per share attributable to Sorrento

 

 

280,604

 

 

 

182,609

 

Weighted-average shares used during period - diluted per share attributable to Sorrento

 

 

297,909

 

 

 

182,609

 

 

See accompanying notes to unaudited consolidated financial statements

4


Table of Contents

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands; unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Net income (loss)

 

$

2,418

 

 

$

(69,180

)

Other comprehensive loss (gain):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(75

)

 

 

55

 

Total other comprehensive loss (gain)

 

 

(75

)

 

 

55

 

Comprehensive income (loss)

 

 

2,343

 

 

 

(69,125

)

Comprehensive loss attributable to noncontrolling interests

 

 

(92

)

 

 

(3,985

)

Comprehensive income (loss) attributable to Sorrento

 

$

2,435

 

 

$

(65,140

)

 

See accompanying notes to unaudited consolidated financial statements

5


Table of Contents

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands; unaudited)

 

 

 

Three Months Ended March 31, 2021

 

 

 

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, 2020

 

 

275,286

 

 

$

28

 

 

 

7,568

 

 

$

(49,464

)

 

$

1,172,346

 

 

$

520

 

 

$

(958,279

)

 

$

(24,420

)

 

$

140,731

 

Issuance of common stock under equity compensation plans

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

5,394

 

 

 

 

 

 

 

 

 

 

 

 

5,394

 

Issuance of common stock upon exercise of warrants

 

 

2,550

 

 

 

 

 

 

 

 

 

 

 

 

9,050

 

 

 

 

 

 

 

 

 

 

 

 

9,050

 

Issuance of common stock for equity offerings

 

 

3,901

 

 

 

1

 

 

 

 

 

 

 

 

 

42,208

 

 

 

 

 

 

 

 

 

 

 

 

42,209

 

Other acquisitions, license agreements and investments paid in equity

 

 

851

 

 

 

 

 

 

 

 

 

 

 

 

7,500

 

 

 

 

 

 

 

 

 

 

 

 

7,500

 

Changes to noncontrolling interests from increased ownership in Scilex Holding

 

 

2,567

 

 

 

 

 

 

 

 

 

 

 

 

(23,963

)

 

 

 

 

 

 

 

 

23,963

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,660

 

 

 

 

 

 

 

 

 

 

 

 

23,660

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(75

)

 

 

 

 

 

 

 

 

 

(75

)

Net Income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,510

 

 

 

(92

)

 

 

2,418

 

Balance, March 31, 2021

 

 

285,655

 

 

$

29

 

 

 

7,568

 

 

$

(49,464

)

 

$

1,236,195

 

 

$

445

 

 

$

(955,769

)

 

$

(549

)

 

$

230,887

 

 

 

 

Three Months Ended March 31, 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

 

 

$

18

 

 

 

7,568

 

 

$

(49,464

)

 

$

788,122

 

 

$

(270

)

 

$

(659,818

)

 

$

(45,832

)

 

$

32,756

 

Issuance of common stock under equity compensation plans

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

 

99

 

Issuance of common stock upon exercise of warrants

 

 

5,009

 

 

 

1

 

 

 

 

 

 

 

 

 

13,534

 

 

 

 

 

 

 

 

 

 

 

 

13,535

 

Issuance of common stock for public placement, net

 

 

2,091

 

 

 

1

 

 

 

 

 

 

 

 

 

7,325

 

 

 

 

 

 

 

 

 

 

 

 

7,326

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,682

 

 

 

 

 

 

 

 

 

 

 

 

3,682

 

Issuance of common stock from Aspire Purchase Agreement

 

 

29,619

 

 

 

3

 

 

 

 

 

 

 

 

 

62,950

 

 

 

 

 

 

 

 

 

 

 

 

62,953

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

 

55

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(65,195

)

 

 

(3,985

)

 

 

(69,180

)

Balance, March 31, 2020

 

 

204,566

 

 

$

23

 

 

 

7,568

 

 

$

(49,464

)

 

$

875,712

 

 

$

(215

)

 

$

(725,013

)

 

$

(49,817

)

 

$

51,226

 

 

See accompanying notes to unaudited consolidated financial statements

6


Table of Contents

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

 

 

Three Months Ended March 31,

 

Operating activities

 

2021

 

 

2020

 

Net income (loss)

 

$

2,418

 

 

$

(69,180

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,918

 

 

 

3,058

 

Non-cash operating lease cost

 

 

759

 

 

 

842

 

Non-cash interest expense and amortization of debt issuance costs

 

 

2,098

 

 

 

4,386

 

Payment on Scilex Notes attributed to accreted interest related to the debt discount

 

 

(4,548

)

 

 

 

Acquired in-process research and development

 

 

7,512

 

 

 

 

Stock-based compensation

 

 

23,660

 

 

 

3,682

 

Loss on debt extinguishment

 

 

6,111

 

 

 

23,645

 

Gain on derivative liabilities

 

 

(2,200

)

 

 

(4,920

)

Gain on marketable investment

 

 

(94,431

)

 

 

 

Loss on equity method investments

 

 

419

 

 

 

556

 

Deferred tax provision

 

 

(219

)

 

 

(150

)

Changes in operating assets and liabilities, excluding effect of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(803

)

 

 

4,432

 

Accrued payroll

 

 

(4,573

)

 

 

(407

)

Prepaid expenses, deposits and other assets

 

 

980

 

 

 

185

 

Accounts payable

 

 

(76

)

 

 

728

 

Accrued expenses and other liabilities

 

 

11,066

 

 

 

(4,488

)

Deferred revenue

 

 

376

 

 

 

(169

)

Other

 

 

476

 

 

 

(750

)

Net cash used for operating activities

 

 

(48,057

)

 

 

(38,550

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,994

)

 

 

(21

)

Other acquisitions and investments

 

 

(12

)

 

 

 

Net cash used for investing activities

 

 

(2,006

)

 

 

(21

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from equity offerings, net of issuance costs

 

 

42,209

 

 

 

69,896

 

Proceeds from short-term debt, net of issuance costs

 

 

11,769

 

 

 

725

 

Proceeds from exercise of stock options and warrants

 

 

10,597

 

 

 

13,634

 

Repayments of debt and other obligations

 

 

(29,218

)

 

 

(59,533

)

Net cash provided by financing activities

 

 

35,357

 

 

 

24,722

 

Net change in cash, cash equivalents and restricted cash

 

 

(14,706

)

 

 

(13,849

)

Net effect of exchange rate changes on cash

 

 

(80

)

 

 

27

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

56,464

 

 

 

80,769

 

Cash, cash equivalents and restricted cash at end of period

 

$

41,678

 

 

$

66,947

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

 

83

 

 

 

1,569

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Changes to noncontrolling interests from increased ownership in Scilex Holding

 

 

23,963

 

 

 

 

Other acquisitions, license agreements and investments paid in equity

 

 

7,500

 

 

 

 

Property and equipment costs incurred but not paid

 

 

1,031

 

 

 

628

 

Non-cash additions related to leasehold improvements

 

 

2,279

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash within the Company’s

   consolidated balance sheets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

41,678

 

 

 

21,897

 

Restricted cash

 

 

-

 

 

 

45,050

 

Cash, cash equivalents, and restricted cash

 

$

41,678

 

 

$

66,947

 

 

See accompanying notes to unaudited consolidated financial statements

7


Table of Contents

SORRENTO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

1. Description of Business and Basis of Presentation

Description of Business

Sorrento Therapeutics, Inc. (the “Company”) is a clinical stage, antibody-centric, biopharmaceutical company developing new therapies to treat cancers and COVID-19. The Company’s multimodal, multipronged approach to fighting cancer is made possible by its extensive immuno-oncology platforms, including key assets such as fully human antibodies (“G-MAB™ library”), clinical stage immuno-cellular therapies (“CAR-T”, “DAR-T™”), antibody-drug conjugates (“ADCs”) and clinical stage oncolytic virus (Seprehvir™). The Company is also developing potential antiviral therapies and vaccines against coronaviruses, including COVIGUARD™, COVI-AMG™, COVISHIELD™, Gene-MAb™, COVI-MSC™ and COVIDROPS™; and diagnostic test solutions, including COVITRACK™, COVISTIX™ and COVITRACE™. 

The Company’s commitment to life-enhancing therapies for patients is also demonstrated by its effort to advance a first-in-class (TRPV1 agonist) non-opioid pain management small molecule, resiniferatoxin (“RTX”), and SP-102 (10 mg, dexamethasone sodium phosphate viscous gel) (SEMDEXA™), a novel, viscous gel formulation of a widely used corticosteroid for epidural injections to treat lumbosacral radicular pain, or sciatica, and through the commercialization of ZTlido® (lidocaine topical system) 1.8% for the treatment of post-herpetic neuralgia.

Basis of Presentation and Principles of 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.

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, 2020. Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2021 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 three months ended March 31, 2021, 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, 2020 outside of new accounting pronouncements as described below.

Revenue Recognition

The following table shows revenue disaggregated by product and service type for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Scilex Pharmaceuticals Inc. product sales

 

$

6,986

 

 

$

5,211

 

Other product revenue

 

 

37

 

 

 

37

 

Net product revenue

 

$

7,023

 

 

$

5,248

 

Concortis Biosystems Corporation

 

$

5,462

 

 

$

1,321

 

Bioserv Corporation

 

 

1,199

 

 

 

1,032

 

Other service revenue

 

 

571

 

 

 

120

 

Service revenue

 

$

7,232

 

 

$

2,473

 

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Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 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. The Company adopted the standard on January 1, 2021. 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 recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure.

The Company has plans in place to obtain sufficient additional fundraising to fulfill its operating, debt servicing and capital requirements for the next 12 months. The Company’s plans include continuing to fund its operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued. As a result, management has concluded that the aforementioned conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are issued.

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

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

3. Fair Value Measurements

The following 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 March 31, 2021

 

 

 

Balance

 

 

Quoted Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,678

 

 

$

41,678

 

 

$

0

 

 

$

0

 

Marketable investment

 

 

194,431

 

 

 

194,431

 

 

 

0

 

 

 

0

 

Total assets

 

$

236,109

 

 

$

236,109

 

 

$

0

 

 

$

0

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities - non-current

 

$

33,200

 

 

$

0

 

 

$

0

 

 

$

33,200

 

Acquisition consideration payable

 

 

398

 

 

 

0

 

 

 

0

 

 

 

398

 

Acquisition consideration payable - non-current

 

 

549

 

 

 

0

 

 

 

0

 

 

 

549

 

Total liabilities

 

$

34,147

 

 

$

0

 

 

$

0

 

 

$

34,147

 

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Fair Value Measurements at December 31, 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

 

$

56,464

 

 

$

56,464

 

 

$

0

 

 

$

0

 

Total assets

 

$

56,464

 

 

$

56,464

 

 

$

0

 

 

$

0

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities - non-current

 

 

35,400

 

 

 

0

 

 

 

0

 

 

 

35,400

 

Acquisition consideration payable

 

 

398

 

 

 

0

 

 

 

0

 

 

 

398

 

Acquisition consideration payable - non-current

 

 

549

 

 

 

0

 

 

 

0

 

 

 

549

 

Total liabilities

 

$

36,347

 

 

$

0

 

 

$

0

 

 

$

36,347

 

 

Derivative liabilities

The Company recorded a gain on derivative liabilities of $2.2 million for the three months ended March 31, 2021, which related to the compound derivative liabilities associated with the Scilex Notes (as defined in Note 7). 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 7% risk adjusted net sales forecast, an effective debt yield of 15% and an estimated probability of 100% of not obtaining marketing approval before March 31, 2021.

The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the three months ended March 31, 2021:

 

(in thousands)

 

Fair Value

 

Beginning Balance at December 31, 2020

 

$

35,400

 

Re-measurement of Fair Value

 

 

(2,200

)

Ending Balance at March 31, 2021

 

$

33,200

 

 

4. Investments

The Company’s equity method investments include an ownership interest in Immunotherapy NANTibody, LLC (“NANTibody”), NantCancerStemCell, LLC (“NantStem”) and ImmuneOncia Therapeutics, LLC, among others. The Company’s other equity investments include an ownership interest in NantBioScience, Inc. (“NantBioScience”) and Celularity Inc. The Company`s marketable investment includes an ownership interest in ImmunityBio, Inc. (“ImmunityBio”).

On March 9, 2021, NantKwest, Inc. and ImmunityBio completed their previously announced 100% stock-for-stock merger (the “Merger”). The combined company operates under the name ImmunityBio, Inc. and its shares of common stock commenced trading on the Nasdaq Global Select Market on March 10, 2021 under the new ticker, “IBRX”. The former stockholders of ImmunityBio were entitled to receive 0.8190 shares of common stock of the combined company for each outstanding share of ImmunityBio common stock held immediately prior to the Merger. Prior to the closing of the Merger, the Company owned 10,000,000 shares of common stock of ImmunityBio, and the Company therefore received 8,190,000 shares of common stock of the post-merger company in the Merger.

The Company’s investment in ImmunityBio has historically been included as an equity investment in its consolidated balance sheets and accounted for as an equity security without a readily determinable fair value. As of the completion of the Merger, the Company accounts for its investment in ImmunityBio as an equity investment with a readily determinable fair value and has reclassified its investment in ImmunityBio to marketable investment within its consolidated balance sheets. The investment in ImmunityBio is classified as a current asset because the investment can be liquidated to finance the Company’s current operations. In connection with the change in fair value of its investment in ImmunityBio, the Company recorded a gain on marketable investment of $94.4 million during the three months ended March 31, 2021.

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NANTibody

 The Company’s investment in NANTibody is reported in equity method investments on its consolidated balance sheets and its share of NANTibody’s income or loss is recorded in loss on equity method investments on its consolidated statement of operations. The Company continues to hold 40% of the outstanding equity of NANTibody and NantCell, Inc. holds the remaining 60%. The Company`s investment in NANTibody had a carrying value of 0 as of March 31, 2021 due to the Company’s share of cumulative losses. As of March 31, 2020, the carrying value of the Company`s investment in NANTibody was approximately $1.9 million.

NANTibody recorded a net loss of $0.8 million and $1.4 million for the three months ended December 31, 2020 and 2019, respectively. As of December 31, 2020, NANTibody had $4.9 million in current assets, $5.5 million in current liabilities, $0.1 million in noncurrent assets and 0 noncurrent liabilities.

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

NantStem

The Company’s investment in NantStem is reported in equity method investments on its consolidated balance sheets and its share of NantStem’s income or loss is recorded in loss on equity method investments on its consolidated statement of operations. 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 carrying value of the Company’s investment in NantStem was approximately $18.2 million and $17.9 million as of March 31, 2021 and 2020, respectively.

NantStem recorded a net gain of $0.1 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively. As of December 31, 2020, NantStem had $80.9 million in current assets, $1.1 million in noncurrent assets and 0 current and noncurrent liabilities.

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

5. Goodwill and Intangible Assets

At both March 31, 2021 and December 31, 2020, the Company had goodwill of $43.6 million. Goodwill for the Sorrento Therapeutics segment and Scilex segment as defined in Note 13 was $36.9 million and $6.7 million, respectively, as of March 31, 2021.

Intangible assets with indefinite useful lives totaling $28.3 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 March 31, 2021 and December 31, 2020 is as follows (in thousands, except for years):

 

March 31, 2021

 

Weighted

Average

Amortization

Period (Years)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangibles,

Net

 

Customer relationships

 

 

6

 

 

$

1,585

 

 

$

1,433

 

 

$

152

 

Acquired technology

 

 

19

 

 

 

3,410

 

 

 

1,280

 

 

 

2,130

 

Acquired in-process research and development

 

 

 

 

 

28,260

 

 

 

 

 

 

28,260

 

Technology placed in service

 

 

15

 

 

 

21,940

 

 

 

3,657

 

 

 

18,283

 

Patent rights

 

 

15

 

 

 

32,720

 

 

 

9,648

 

 

 

23,072

 

Assembled workforce

 

 

5

 

 

 

605

 

 

252

 

 

 

353

 

Internally developed software

 

 

2

 

 

 

520

 

 

 

130

 

 

 

390

 

Total intangible assets

 

 

 

 

 

$

89,040

 

 

$

16,400

 

 

$

72,640

 

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December 31, 2020

 

Weighted

Average

Amortization

Period (Years)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangibles,

Net

 

Customer relationships

 

 

6

 

 

$

1,585

 

 

$

1,426

 

 

$

159

 

Acquired technology

 

 

19

 

 

 

3,410

 

 

 

1,236

 

 

 

2,174

 

Acquired in-process research and development

 

 

 

 

 

28,260

 

 

 

 

 

 

28,260

 

Technology placed in service

 

 

15

 

 

 

21,940

 

 

 

3,291

 

 

 

18,649

 

Patent rights

 

 

15

 

 

 

32,720

 

 

 

9,103

 

 

 

23,617

 

Assembled workforce

 

 

5

 

 

 

605

 

 

 

222

 

 

 

383

 

Internally developed software

 

 

1

 

 

 

520

 

 

 

87

 

 

 

433

 

Total intangible assets

 

 

 

 

 

$

89,040

 

 

$

15,365

 

 

$

73,675

 

 

Aggregate amortization expense was $1.0 million for each of the three months ended March 31, 2021 and 2020. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at March 31, 2021 is as follows (in thousands):

 

Years Ending December 31,

 

Amount

 

2021 (Remaining nine months)

 

$

3,105

 

2022

 

 

4,140

 

2023

 

 

4,048

 

2024

 

 

3,870

 

2025

 

 

3,845

 

Thereafter

 

 

25,373

 

Total expected future amortization

 

$

44,381

 

 

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6. Significant Agreements and Contracts

License Agreement with Icahn School of Medicine at Mount Sinai

In March 2021, the Company entered into an exclusive license agreement (the “Mount Sinai License Agreement”) with Icahn School of Medicine at Mount Sinai (“Mount Sinai”) to acquire a worldwide, exclusive, sublicensable license to certain of Mount Sinai’s patents and monoclonal antibodies as well as technical information to develop, manufacture, commercialize, and exploit related products and services (“Licensed Products”) for all fields, uses, and applications, including for the diagnosis, prevention, treatment and cure of coronavirus.

As consideration for the Mount Sinai License Agreement, the Company paid Mount Sinai and upfront license fee of $7.5 million comprised of 851,305 shares of the Company’s common stock, which was expensed as acquired in-process research and development during the three months ended March 31, 2021. The Company also agreed to pay Mount Sinai (i) certain milestone payments upon the achievement of certain clinical trial and regulatory milestones, and (ii) certain royalties in the low-single digit to mid-single digit percentages of annual net sales of Licensed Products by the Company and a share of any sublicense revenue received by the Company from sublicensees.

Scilex Holding Ownership Increase

On January 29, 2021, the Company acquired additional shares of Scilex Holding Company (“Scilex Holding”), resulting in the Company holding approximately 99.9% of the outstanding common stock of Scilex Holding as of March 31, 2021.

Acquisition of SmartPharm Therapeutics, Inc.

On September 1, 2020, the Company completed the acquisition of SmartPharm Therapeutics, Inc. (“SmartPharm”), a gene-encoded protein therapeutics company developing non-viral DNA and RNA gene delivery platforms for COVID-19, Influenza and rare diseases with broad potential for application in enhancing antibody-centric therapeutics. The total base consideration paid to the holders of capital stock of SmartPharm in the acquisition was approximately $19.5 million, which was comprised of approximately 1.8 million shares of the Company’s common stock.

The purchase price allocation resulted in net identifiable assets of $19.5 million, which includes separate and distinct indefinite lived intangible assets comprised of acquired in-process research and development of $13.9 million, goodwill of $5.3 million and other net assets of $0.3 million. Customary tax related matters such as the filing of pre-acquisition tax returns are subject to finalization as of March 31, 2021. Such matters may result in adjustments to the purchase price allocation, which has not changed since December 31, 2020. Goodwill largely reflects the synergies expected to be achieved with SmartPharm’s gene delivery platforms and the assembled workforce. Goodwill is not deductible for tax purposes. Results of operations since the date of acquisition were not material.

License Agreement with NantCell

In April 2015, the Company and NantCell, Inc. (“NantCell”) entered into a license agreement. Under the terms of the agreement, the Company granted an exclusive license to NantCell covering patent rights, know-how and materials related to certain antibodies, ADCs and two CAR-TNK products. NantCell agreed to pay a royalty not to exceed five percent (5%) to the Company on any net sales of products 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 an equity sale of NantCell common stock to a third party. The Company terminated the agreement, effective January 29, 2020, due to NantCell`s material breach of the agreement. The termination and remedies related to such termination are currently pending in an arbitration before the American Arbitration Association. The Company has therefore deferred recognition of the upfront payment and the value of the equity interest received until the arbitration is concluded or resolved. 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 orderly transactions for identical or similar investments of NantCell.

7. Debt

2018 Purchase Agreements and Indenture for Scilex

On September 7, 2018, Scilex 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 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

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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. During the year ended December 31, 2020, Scilex Pharma repurchased an aggregate of $65.0 million in principal amount of the Scilex Notes.

In February 2021, Scilex Pharma repurchased an additional $20.0 million in principal amount of the Scilex Notes. In connection with the repurchase, the Company recorded a loss on partial debt extinguishment of $7.1 million during the three months ended March 31, 2021.

To estimate the fair value of the Scilex Notes, 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 Scilex Notes consisted of the following (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Principal

 

$

130,605

 

 

$

151,872

 

Unamortized debt discount

 

 

(42,475

)

 

 

(51,022

)

Unamortized debt issuance costs

 

 

(3,096

)

 

 

(3,698

)

Carrying value

 

$

85,034

 

 

$

97,152

 

Estimated fair value

 

$

129,900

 

 

$

122,300

 

 

Future minimum payments under the Scilex Notes, based on a percentage of projected net sales of ZTlido are estimated as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

2021 (Remaining nine months)

 

 

3,731

 

2022

 

 

5,505

 

2023

 

 

7,157

 

2024

 

 

8,758

 

2025

 

 

10,077

 

Thereafter

 

 

95,377

 

Total future minimum payments

 

 

130,605

 

Unamortized debt discount

 

 

(42,475

)

Unamortized capitalized debt issuance costs

 

 

(3,096

)

Total Scilex Notes

 

 

85,034

 

Current portion

 

 

(5,084

)

Long-term portion of Scilex Notes

 

$

79,950

 

 

The Company made principal payments of $21.3 million and $1.6 million during the three months ended March 31, 2021 and 2020, respectively. The imputed effective interest rate at March 31, 2021 was 9.4%. The amount of debt discount and debt issuance costs included in interest expense for the three months ended March 31, 2021 and 2020 was approximately $2.1 million and $2.9 million, respectively. On April 13, 2021 the Company made an additional principal payment of $20.0 million.

 

The Company identified a number of embedded derivatives that require bifurcation from the Scilex Notes and that 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. The Company re-evaluates this assessment each reporting period.

8. Stockholders’ Equity

Amended Sales Agreement

On December 4, 2020, the Company entered into Amendment No. 1 to that certain Sales Agreement dated April 27, 2020, with A.G.P./Alliance Global Partners, which provides that the Company may, from time to time, offer and sell securities to A.G.P./Alliance

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Global Partners in at-the-market transactions (as amended, the “Amended Sales Agreement”). During the three months ended March 31, 2021, the Company issued and sold an aggregate of 3,901,460 shares of its common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to the Company of approximately $42.2 million. Subsequent to March 31, 2021 and through April 30, 2021, the Company issued and sold an aggregate of 976,208 shares of its common stock pursuant to the Sales Agreement for aggregate net proceeds to the Company of approximately $7.7 million.

9. Stock Based Compensation

2019 Stock Incentive Plan (“2019 Plan”)

Total stock-based compensation recorded as operating expense under the 2019 Plan was $8.7 million and $2.1 million for the three months ended March 31, 2021 and 2020, respectively. Total unrecognized compensation expense related to unvested stock option grants as of March 31, 2021 was $46.4 million with a weighted average remaining vesting period of 2.8 years. Total unrecognized compensation expense related to unvested restricted stock unit (“RSU”) grants as of March 31, 2021 was $20.2 million, with a weighted average remaining vesting period of 4.0 years.

A summary of stock option activity under the 2019 Plan for the three months ended March 31, 2021 is as follows:

 

 

Options

Outstanding

 

 

Weighted-

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value (in thousands)

 

Outstanding at December 31, 2020

 

 

18,762,920

 

 

$

4.97

 

 

$

 

Options Granted

 

 

1,771,685

 

 

 

10.58

 

 

 

 

 

Options Cancelled

 

 

(474,188

)

 

 

4.81

 

 

 

 

 

Options Exercised

 

 

(368,375

)

 

 

4.20

 

 

 

 

 

Outstanding at March 31, 2021

 

 

19,692,042

 

 

$

5.49

 

 

$

62,105

 

 

The estimated fair value of each stock option grant was determined on the grant date using the Black-Scholes valuation model with the following weighted-average assumptions:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Weighted-average grant date fair value

 

$

8.63

 

 

$

1.36

 

Dividend yield

 

 

0

%

 

 

0

%

Volatility

 

 

111

%

 

 

94

%

Risk-free interest rate

 

 

1.00

%

 

 

0.71

%

Expected life of options (years)

 

6.0

 

 

5.9

 

 

A summary of RSU activity under the 2019 Plan for the three months ended March 31, 2021 is as follows:

 

 

Number of Shares

 

 

Weighted-

Average

Grant Date Fair Value Per Share

 

Outstanding at December 31, 2020

 

 

 

 

$

 

RSUs Granted

 

 

2,148,070

 

 

 

10.41

 

RSUs Released

 

 

(132,540

)

 

 

13.96

 

RSUs Cancelled

 

 

(5,941

)

 

 

10.18

 

Outstanding at March 31, 2021

 

 

2,009,589

 

 

$

10.18

 

 

The fair value of RSUs is determined based on the closing market price of the Company’s common stock on the grant date.

 

Scilex Holding Company

Under the Scilex Holding Company 2019 Stock Option Plan, total stock-based compensation recorded as operating expense was $1.9 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively. The total unrecognized compensation expense related to unvested stock option grants as of March 31, 2021 was $20.1 million, with a weighted average vesting period of 2.9 years.

Employee Stock Purchase Plan

Total stock-based compensation recorded as operating expense for the Company`s 2020 Employee Stock Purchase Plan was $0.3 million for the three months ended March 31, 2021.

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CEO Performance Award

Total stock-based compensation recorded as operating expense for the 10-year CEO performance award that was granted to the Company’s chief executive officer in 2020 and tied solely to the Company achieving market capitalization milestones (the “CEO Performance Award”) was $12.8 million for the three months ended March 31, 2021. As of March 31, 2021, the Company had approximately $126.7 million of total unrecognized stock-based compensation expense remaining under the CEO Performance Award.

10. Commitments and Contingencies

Litigation

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

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

 

An arbitration demand with the American Arbitration Association in Los Angeles, California against NantPharma, LLC and 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 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 the Securities and Exchange Commission 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. 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

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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 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. On July 21, 2020, NantPharma, LLC’s demands in arbitration were dismissed. The arbitration claims by NANTibody and NantCell, Inc. are currently pending before the American Arbitration Association. 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 and Chairman of the Board of Directors, Henry Ji, Ph.D., and its SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D. The action alleges that the Company, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public by publicly issuing false and/or misleading statements regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection and that such statements violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The suit seeks to recover damages caused by the alleged violations of federal securities laws, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On June 11, 2020, Jeannette Calvo filed a second putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-01066-JAH-WVG, against the same defendants alleging the same claims and seeking the same relief. On February 12, 2021, the U.S. District Court for the Southern District of California issued an order consolidating the cases and appointing a lead plaintiff, Andrew Zenoff (“Plaintiff”), and lead counsel. On April 5, 2021, Plaintiff filed a consolidated amended complaint in accordance with the U.S. District Court for the Southern District of California’s scheduling order. Pursuant to that scheduling order, any responsive pleading or motion to dismiss by the defendants is due by May 20, 2021; Plaintiff’s opposition to any motion to dismiss filed by the defendants is due by July 5, 2021; and any reply by the defendants is due by August 4, 2021. No hearing date for any motion by the defendants has been set. The Company is defending these matters vigorously.

Operating Leases

As of March 31, 2021, the Company’s leases have remaining lease terms of approximately 0.3 to 8.7 years, some of which include options to extend the lease terms for up to five years, and some of which allow for early termination. Short-term operating lease costs were immaterial.

Supplemental quantitative information related to leases includes the following (in thousands, except for years and percentages):

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Operating cash outflows used for operating leases

 

$

2,487

 

 

$

2,414

 

ROU assets obtained in exchange for new and amended operating lease liabilities

 

$

 

 

$

795

 

Weighted average remaining lease term in years

 

8.2

 

 

9.1

 

Weighted average discount rate

 

 

12.2

%

 

 

12.2

%

 

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

 

Years ending December 31,

 

Operating

leases

 

2021 (Remaining nine months)

 

$

7,621

 

2022

 

 

10,054

 

2023

 

 

10,285

 

2024

 

 

10,418

 

2025

 

 

9,757

 

Thereafter

 

 

37,586

 

Total lease payments

 

 

85,721

 

Less imputed interest

 

 

(32,633

)

Total lease liabilities as of March 31, 2021

 

$

53,088

 

 

11. Income Taxes

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

The Company’s income tax benefit of $0.2 million and $0.3 million reflect effective tax rates of 9.3% and 0.4% for the three months ended March 31, 2021 and 2020, respectively.

The difference between the expected statutory federal tax rate of 21% and the 9.3% effective tax rate for the three months ended March 31, 2021 was primarily attributable to the valuation allowance against most of the Company’s deferred tax assets. For the three months ended March 31, 2021, when compared to the same period in 2020, the change in effective income tax rate was primarily attributable a similar tax benefit year over year applied against the amount of income in 2021 compared against the amount of loss in 2020.

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

12. Net Income (Loss) Per Share

 

For the three months ended March 31, 2021 and 2020, basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Potentially dilutive shares of common stock from outstanding stock options, RSUs and warrants are determined using the average share price for each period under the treasury stock method. Proceeds from the exercises of stock options and warrants and the average amount of unrecognized compensation expense are assumed to be used to repurchase shares.

 

The following table sets forth the reconciliation of basic and diluted loss per share for the three months ended March 31, 2021 and 2020 (in thousands except per share amounts):

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Numerator

 

 

 

 

 

 

 

 

Net income (loss) used for basic and diluted income (loss) per share

 

$

2,510

 

 

$

(65,195

)

 

 

 

 

 

 

 

 

 

Denominator for basic income (loss) per share

 

 

280,604

 

 

 

182,609

 

Potentially dilutive shares from stock options, RSUs and warrants

 

 

17,305

 

 

 

 

Denominator for diluted income (loss) per share

 

 

297,909

 

 

 

182,609

 

Basic income (loss) per share

 

$

0.01

 

 

$

(0.36

)

Diluted income (loss) per share

 

$

0.01

 

 

$

(0.36

)

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

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Anti-dilutive shares for outstanding options and RSUs

 

 

2,987

 

 

 

13,678

 

Anti-dilutive shares for outstanding warrants

 

 

 

 

 

52,548

 

 

13. Segment Information

The Company operates in 2 operating and reportable segments, Sorrento Therapeutics and Scilex. With the exception of unrestricted cash balances, the Company’s Chief Operating Decision Maker does not regularly review asset information by reportable segment and, therefore, it does not report asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.

The following table presents information about the Company’s reportable segments for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

Sorrento

Therapeutics

 

 

Scilex

 

 

Total

 

 

Sorrento

Therapeutics

 

 

Scilex

 

 

Total

 

External revenues

 

$

7,269

 

 

$

6,986

 

 

$

14,255

 

 

$

2,510

 

 

$

5,211

 

 

$

7,721

 

Operating expenses

 

 

81,877

 

 

 

17,283

 

 

 

99,160

 

 

 

33,248

 

 

 

17,636

 

 

 

50,884

 

Operating loss

 

 

(74,608

)

 

 

(10,297

)

 

 

(84,905

)

 

 

(30,738

)

 

 

(12,425

)

 

 

(43,163

)

Unrestricted cash

 

 

31,109

 

 

 

10,569

 

 

 

41,678

 

 

 

11,777

 

 

 

10,120

 

 

 

21,897

 

 

 

14. Subsequent Events

Merger Agreement for Proposed Acquisition of ACEA Therapeutics

On April 2, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ACEA Therapeutics, Inc., an exempted company incorporated with limited liability in the Cayman Islands (“ACEA”), AT Merger Sub, Inc., an exempted company incorporated with limited liability in the Cayman Islands and wholly owned subsidiary of the Company (“Merger Sub”), and Fortis Advisors LLC, as representative of the shareholders of ACEA (the “Shareholders’ Representative”). The Merger Agreement provides for the merger of Merger Sub with and into ACEA (the “Merger”), with ACEA surviving as a wholly owned subsidiary of the Company.

As consideration for the Merger, following the closing of the Merger, the Company will pay to the holders of securities of ACEA (the “ACEA Equityholders”) an amount equal to $38,000,000 (plus the Company’s agreed upon share of certain interest, fees and other expenses), as such amount may be adjusted pursuant to the terms of the Merger Agreement for indebtedness, transaction expenses and cash (the “Closing Consideration”). A portion of the Closing Consideration otherwise payable to the ACEA Equityholders will be set aside for expenses incurred by the Shareholders’ Representative. In addition to the Closing Consideration, and subject to the achievement of certain clinical and sales milestones (as described below), the Company shall also pay the ACEA Equityholders (i) up to $450,000,000 in additional payments, subject to the receipt of certain regulatory approvals and achievement of certain net sales targets with respect to the assets acquired in the Merger and (ii) with respect to specified royalty-bearing products, 5 to 10 percent of the annual net sales thereof (the “Earn-Out Consideration” and together with the Closing Consideration, the “Merger Consideration”), in each case in accordance with the terms of an earn-out agreement to be entered into by and between the Company and the Shareholders’ Representative in connection with the closing of the Merger.

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

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

Overview

Sorrento Therapeutics, Inc., together with its subsidiaries (collectively, the “Company”, “we”, “us”, and “our”) is a clinical stage and commercial biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to address unmet medical needs.

At our core, we are antibody-centric 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, CD137 and SARS-CoV-2 neutralizing antibodies, 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. We acquired Sofusa®, a drug delivery 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 SEMDEXATM (“SP-102”) compound has the potential to become the first Food and Drug Administration (“FDA”)-approved epidural steroid product for the treatment of sciatica. In response to the global SARS-CoV-2 (“COVID-19”) pandemic, we are utilizing the Bruton’s tyrosine kinase (“BTK”) inhibitor (in-licensed from ACEA Therapeutics, Inc.) in a U.S. Phase II study of cytokine storm associated with a COVID-19 infection and in a Phase II trial in Brazil in mild, moderate and severe COVID-19 patients. We are also internally developing potential coronavirus antiviral therapies and vaccines, including ACE-MABTM, COVIDTRAPTM, COVI-MABTM, COVIGUARDTM, COVISHIELDTM , COVI-AMG™ and T-VIVA-19TM; and diagnostic test solutions, including COVITRACK™, COVISTIX™ and COVITRACE™.

With each of our clinical and pre-clinical programs, we aim to tailor our therapies to treat specific stages in the evolution of a disease, from elimination, to equilibrium and escape. In addition, our objective is to focus on tumors that are resistant to current treatments and where we can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. We have several immuno-oncology programs that are in or near to entering the clinic. These include cellular therapies, oncolytic viruses (SeprehvecTM) 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.

From the start of the COVID-19 pandemic, our mission has been to leverage our deep expertise in developing targeted antibodies for cancer immunotherapy to create best-in-category treatments and diagnostics to ease suffering and assist in the global response to COVID-19. We have leveraged, and continue to leverage, our G-MAB library and antibody development engineering capabilities to advance a number of promising diagnostics and neutralizing antibody candidates to test and treat COVID-19 and the immune reactions associated with SARS-CoV-2 infection.

Our first generation SARS-CoV-2 neutralizing antibody was STI-1499 (COVIGUARD™), which was engineered to prevent antibody dependent enhancement. This antibody was then optimized to produce the highly potent STI-2020, which is currently being developed in two outpatient formations: COVI-AMG (IV-push injection) and COVI-DROPS (nasal). COVI-AMG has been cleared by the U.S. Food and Drug Administration (“FDA”) for a Phase I study of healthy volunteers, a Phase II study in outpatients with COVID-19 and a Phase II study in hospitalized patients with moderate or severe COVID-19, and we are awaiting FDA clearance for a Phase I study of COVIDROPS of healthy volunteers and patients with mild COVID-19. Sorrento also has developed two promising potential rescue treatments with Abivertinib, an oral next generation dual EGFR/BTK inhibitor, to treat moderate to severe hospitalized COVID-19 patients and COVI-MSC™, a human allogeneic adipose-derived mesenchymal stem cells for patients

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suffering from COVID-19-induced acute respiratory distress (ARD). Both have been cleared by the FDA and are in Phase Ib clinical studies. We are also working with Brazilian regulators (“ANVISA”) to conduct a COVID-19 study with Abivertinib and potentially with COVI-AMG TM. In pre-clinical development, we are rapidly screening new neutralizing antibodies to address the multiple emerging variants of SARS-CoV-2 to potentially add to STI-2020 in a cocktail (COVI-SHIELD™) and exploring novel mechanistic approaches such as soluble recombinant fusion protein traps (COVIDTRAPTM) to potentially inhibit the binding of SARS-CoV-2’s spike protein with host ACE2 receptors, thereby potentially preventing viral cell entry.

In furtherance of our goal to develop products across the entire continuum of COVID-19 solutions, we are further developing a number of highly sensitive and rapid diagnostic tests. COVISTIX™ is a lateral flow antigen test that uses a proprietary platinum-based colloid and antibody combination, resulting in high sensitivity and accuracy. This is a simple and rapid (15-minute) test with a shallow nasal swab and is designed for point-of-care and at-home use. COVITRACK™ is a rapid SARS-CoV-2 IgG/IgM antibody test kit intended for use initially in clinical laboratories and in point of care settings to quickly identify individuals with anti-SARS-CoV-2 antibodies post-infection or post- vaccination. COVITRACE™ was licensed from Columbia University as a rapid single step on-site colorimetric detection test for SARS-COV-2 genomic RNA from a saliva sample using targeted nucleic acid amplification for high throughput point-of-care situations.

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. We successfully submitted an Investigational New Drug application (IND”) for anti-CD38 CAR-T for the treatment of refractory or relapsed multiple myeloma (RRMM), obtained clearance from the FDA and commenced a human clinical trial for this indication in early 2018. We have dosed eleven patients. We intend to close this study to further enrollment and start up a similar anti-CD38 CAR-T construct without the myc-tag (which cannot be used in Europe), and to continue treating RRMM patients in a Phase Ib/IIa study, which will begin enrollment in the first quarter of 2021. We filed INDs for our CD47 mAb and the first of our DAR-T platform product candidates in the first quarter of 2021.

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 DAR-T solutions. With “off-the-shelf” solutions, DAR-T therapy can truly become a drug product platform rather than a treatment procedure.

With respect to our ADC program, we began enrolling patients in the first quarter of 2021 in a Phase Ib ascending dose study of our CD38 ADC for systemic Amyloid light-chain amyloidosis. Based upon our recently announced exclusive license from Mayo Clinic for its antibody-drug-nanoparticle albumin-bound (“ADNAB”) platform, the next generation in ADC technology, we intend to file several INDs to treat various cancer targets.

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 toxin that specifically targets transient receptor potential vanilloid-1 (“TRPV1”) which, depending on the site of injection, can ablate, or destroy, nerves expressing TRPV1 or temporarily defunctionalize them. TRPV1 is responsible for the noxious chronic and inflammatory pain signaling that occurs post injury or trauma, but leaves other nerve functions intact. RTX has been granted orphan drug status for the treatment of intractable pain with end-stage cancer and two Phase Ib trials (intrathecal and epidural routes) in that indication have or will soon be completed. A Phase Ib trial studying tolerance and efficacy of RTX for the control of moderate to severe osteoarthritis knee pain was initiated in late 2018 and intermediate results have shown efficacy with no dose limiting toxicities. The osteoarthritis trial enrolled the last patient in the first quarter of 2020, and we expect to release the final safety clinical data by the middle of 2021. We plan to start knee arthritis registrational trials after the completion of required preclinical studies.

Also, in this area, we have developed in-house and acquired proprietary technologies to responsibly develop next generation, branded pharmaceutical products to better manage patients’ medical conditions, maximize the quality of life of patients and assist healthcare providers. The flagship product of our majority-owned subsidiary, Scilex Pharmaceuticals Inc. (“Scilex Pharma”), ZTlido® (lidocaine topical system 1.8%) (“ZTlido”), is a next-generation lidocaine delivery system, which was approved by the FDA for the treatment of postherpetic neuralgia, a severe neuropathic pain condition in February 2018, and was commercially launched in October 2018. Scilex Pharma has now built a full commercial organization, which includes sales, marketing, market access and medical affairs. 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.

Impact of COVID-19 on Our Business

We are closely monitoring the COVID-19 pandemic and its potential impact on our business. In an effort to protect the health 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.

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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 work. Such delays could materially impact our business. 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 remain unpredictable. 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 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 March 31, 2021 and 2020

Revenues. Revenues were $14.3 million for the three months ended March 31, 2021, as compared to $7.7 million for the three months ended March 31, 2020.

Revenues in our Sorrento Therapeutics segment increased from $2.5 million to $7.3 million for the three months ended March 31, 2021 compared to the same quarter of the prior year and were primarily attributed to higher contract manufacturing service revenues.

Revenues in our Scilex segment increased from $5.2 million to $7.0 million for the three months ended March 31, 2021 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 March 31, 2021 and 2020 were $3.4 million and $2.4 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 $0.6 million and was driven by the increase in revenues.

Cost of revenues for our Scilex segment increased by $0.3 million and was driven by higher sales of ZTlido.

Research and Development (“R&D”) Expenses. Research and development expenses for the three months ended March 31, 2021 and 2020 were $43.8 million and $21.2 million, respectively. Research and development expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our RTX, COVID-19, SP-102, oncolytic virus, ADC and oncology programs. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses.

R&D expenses for our Sorrento Therapeutics segment increased by $22.5 million as compared to the same quarter of the prior year and were driven by higher headcount and increased clinical development costs across our R&D platforms.

R&D expenses for our Scilex segment increased by $0.2 million as compared to the same quarter of the prior year and were primarily driven by increased costs associated with our research and development product portfolio.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses during the three months ended March 31, 2021 totaled $7.5 million. These expenses primarily related to licensing arrangements entered into during the period. We did not have acquired in-process research and development expenses during the three months ended March 31, 2020.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses for the three months ended March 31, 2021 and 2020 were $43.4 million and $26.3 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 $17.9 million and were primarily attributed to higher headcount and stock-based compensation expense compared to the same quarter of the prior year.

SG&A expenses for our Scilex segment decreased by approximately $0.8 million and were attributed to cost savings resulting from a more focused marketing strategy for ZTlido and savings arising from the transfer of a contracted to in-house sales force.

Gain on Derivative Liabilities. Gain on derivative liabilities for the three months ended March 31, 2021 was $2.2 million compared to a gain of $4.9 million in the same quarter in 2020 and was primarily attributed to revised probabilities and revised sales

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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.

Gain on Marketable Investment. Gain on marketable investment reflects the change in fair value of our investment in ImmunityBio, Inc.

Loss on Debt Extinguishment, net. Loss on debt extinguishment for the three months ended March 31, 2021 was $6.1 million and was primarily attributed to the repurchases of the outstanding principal on the Scilex Notes (as defined below).

Loss on debt extinguishment for same quarter of the prior year was $23.6 million and was attributed to the repayments of outstanding principal on our prior term loans with certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, “Oaktree”).

Interest Expense, net. Interest expense for the three months ended March 31, 2021 and 2020 was $2.4 million and $6.8 million, respectively. The decrease resulted primarily from a decrease in interest expense associated with the Oaktree term loans, which were fully repaid in year ended December 31, 2020. Interest income was immaterial for both periods.

Income Tax Benefit. Income tax benefit for the three months ended March 31, 2021 and 2020 was $0.2 million and $0.3 million, respectively. The decrease in income tax benefit was primarily attributable to the impact of earnings in the current year.

Net Income (Loss). Net income for the three months ended March 31, 2021 was $2.4 million. Net loss for the three months ended March 31, 2020 was $69.2 million.

Liquidity and Capital Resources

As of March 31, 2021, we had $41.7 million in cash and cash equivalents attributable in part to the following financing arrangements:

Debt Financings

Scilex Notes

In September 2018, 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.

On December 14, 2020, we, Scilex Pharma, U.S. Bank National Association, as trustee and collateral agent, and the beneficial owners of the Scilex Notes and the Scilex Note Purchasers entered into a Consent Under and Amendment No. 3 to Indenture and Letter of Credit (the “Amendment”), which amended: (i) the Indenture, and (ii) the irrevocable standby letter of credit that we issued to Scilex Pharma in connection with the Indenture.

On December 14, 2020, and in connection with the Amendment, the aggregate $45.0 million in restricted funds held in previously established reserve and collateral accounts were released and Scilex Pharma utilized such funds to repurchase an aggregate of $45.0 million in principal amount of the Scilex Notes. Scilex Pharma also repurchased $20.0 million in principal amount of the Scilex Notes in each of December 2020 and February 2021.

Equity Financings

Amended Sales Agreement

On December 4, 2020, we entered into Amendment No. 1 to that certain Sales Agreement, dated April 27, 2020, with A.G.P./Alliance Global Partners, which provides that we may, from time to time, offer and sell securities to A.G.P./Alliance Global Partners in at-the-market transactions (as amended, the “Amended Sales Agreement”). During the three months ended March 31, 2020, we issued and sold an aggregate of 3,901,460 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds of approximately $42.2 million. Subsequent to March 31, 2021 and through April 30, 2021, we issued and sold an aggregate of 976,208 shares of our common stock pursuant to the Sales Agreement for aggregate net proceeds of approximately $7.7 million.

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Contingent Consideration

We have contingent consideration obligations in connection with certain acquisition and licensing transactions that are contingent upon achieving certain specified milestones or the occurrence of certain events, including those described within the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q. Upon the achievement of such milestones or the occurrence of such events, we will be obligated to make certain cash or stock payments in accordance with the terms of such acquisition and license agreements.

Use of Cash

Cash Flows from Operating Activities. Net cash used for operating activities was $48.1 million for the three months ended March 31, 2021 as compared to $38.6 million for the three months ended March 31, 2020. 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 $2.0 million for the three months ended March 31, 2021, which was primarily attributed to expenditures on laboratory equipment. During the three months ended March 31, 2020, net cash used by investing activities related to purchases of equipment and was not significant.

Cash Flows from Financing Activities. Net cash provided by financing activities was $35.4 million for the three months ended March 31, 2021 as compared to net cash provided by financing activities of $24.7 million for the three months ended March 31, 2020. During the three months ended March 31, 2021, we received $42.2 million from equity offerings, proceeds from short-term debt of $11.8 million and proceeds of $10.6 million from common stock issuances and warrant exercises. We repaid $21.3 million in principal amount of the Scilex Notes, of which $16.8 million was attributed to principal included within financing activities and $4.5 million was attributed to principal included in operating activities. We also repaid $11.8 million in other short-term debt. During the three months ended March 31, 2020, we repaid $55.5 million of outstanding principal under the prior term loans with Oaktree, and $2.3 million of related exit fees and prepayment fees thereon and a made payments of $1.6 million on the Scilex Notes. This use of cash was offset by proceeds received of $62.6 million from equity offerings and an additional $21.0 million from common stock issuances and warrant exercises.

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. 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, grant agreements and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.

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

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to debt 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. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and there have been no material changes during the three months ended March 31, 2021.

Contractual Obligations and Commitments

As of March 31, 2021, 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, 2020.

Off-Balance Sheet Arrangements

Since our inception through March 31, 2021, 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 1, “Significant Accounting 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 March 31, 2021, we held an investment in an equity security with a readily determinable fair value, which is included as a current marketable investment within our consolidated balance sheets. Our investment in this publicly traded equity security is recorded at fair value and is subject to market price volatility. Changes in the fair value of this investment is recorded in our consolidated statement of operations within gain (loss) on marketable investment. As of March 31, 2021, a price change of 10 percent would increase or decrease the fair value of our marketable investment by $19.4 million.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such terms are defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. In designing and evaluating 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.

Changes in Internal Control over Financial Reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q. There has been no change to our internal control over financial reporting during our most recent fiscal quarter that our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

The information under the caption “Litigation” set forth in Note 10 in the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.is incorporated herein by reference.

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Item 1A.Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, 2020, 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, 2020. 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 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 checkpoint inhibitors derived from our proprietary G-MAB™ library platform, antibody drug conjugates (“ADCs”), bispecific antibodies (“BsAbs”), as well as Chimeric Antigen 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) (“SEMDEXATM”) to be commercially available for a few years, if at all. Additionally, our COVID-19 related product candidates, including STI-1499 (neutralizing antibody; COVIGUARDTM), STI-2020 (affinity matured neutralizing antibody; COVI-AMGTM), STI-2099 (intranasal affinity matured neutralizing antibody; COVIDROPSTM), neutralizing antibody cocktail (COVISHIELDTM), STI-5656 (Abivertinib), STI-4398 (ACE2 receptor decoy protein; COVIDTRAPTM), STI-8282 (allogeneic adipose-derived mesenchymal stem cells; COVI-MSCTM), STI-2030 (Salicyn-30) serological IgM/IgG antibody diagnostic test (COVITRACKTM), saliva-based antigen diagnostic test for SARS-CoV-2 (COVITRACETM) and lateral flow viral antigen diagnostic test for SARS-CoV-2 (COVISTIXTM), 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 March 31, 2021 and December 31, 2020, we had an accumulated deficit of $955.8 million and $958.3 million, respectively. We continue to incur significant research and development and other expenses related to our ongoing operations. We have incurred operating losses since our inception, expect to continue to incur significant operating losses for the foreseeable future, and we expect these losses to increase as we: (i) advance RTX, STI-6129 (anti-CD38 ADC), SP-103, SEMDEXATM and our other product candidates, including our COVID-19 related product candidates, STI-2020 (COVI-AMGTM), STI-2099 (COVIDROPSTM), STI-8282 (COVI-MSCTM) and STI-5656 (Abivertinib), into further clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) conduct further studies for our preclinical COVID-19 related product candidates, including a neutralizing antibody cocktail (COVISHIELDTM), STI-4398 (COVIDTRAPTM), and STI-2030 (Salicyn-30), to advance to clinical trials and seek regulatory approval; (iii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iv) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, (vi) invest in our joint ventures, collaborations or other third party agreements, (vii) incur expenses in conjunction with defending and enforcing our rights in various litigation matters, (viii) expand our corporate, development and manufacturing infrastructure, and (ix) support our subsidiaries, including Scilex Holding Company and SmartPharm Therapeutics, Inc., in their clinical trial, development and commercialization efforts. As such, we are subject to all risks incidental to the development of new biopharmaceutical products and related companion diagnostics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

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

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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, 2020 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 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 SEMDEXATM, and our COVID-19 product candidates;

 

the number of product candidates we pursue;

 

our ability to develop and advance our current product candidates and programs into, and successfully complete, clinical studies;

 

the time and costs involved in obtaining regulatory approvals;

 

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;

 

the effect of competing technological and market developments;

 

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

 

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 obligations under our debt arrangements;

 

the time and costs involved in defending and enforcing our rights in various litigation matters;

 

our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;

 

the effect of the COVID-19 pandemic; and

 

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.

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 operate our business” below, the Scilex Indenture includes negative covenants that place limitations on the following: the incurrence of debt, the payment of dividends by Scilex Pharmaceuticals Inc. (“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.

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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.

 

Our portfolio of marketable securities is subject to market, interest and credit risk that may reduce its value.

We maintain a portfolio of marketable securities. Changes in the value of our portfolio of marketable securities could adversely affect our earnings. In particular, the value of our investments may decline due to increases in interest rates, downgrades of the bonds and other securities included in our portfolio, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, declines in the value of collateral underlying the securities included in our portfolio and other factors. In addition, the COVID-19 pandemic has and may continue to adversely affect the financial markets in some or all countries worldwide. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost. Although we attempt to mitigate these risks through diversification of our investments and continuous monitoring of our portfolio's overall risk profile, the value of our investments may nevertheless decline.

Risks Related to Our Business and Industry

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, we have not completed a corporate-sponsored clinical trial. Phase I trials are ongoing for RTX for knee osteoarthritis, RTX for cancer-related pain and anti-CD38 CAR-T for multiple myeloma and a Phase III trial is ongoing for SEMDEXATM for the treatment of lumbosacral radicular pain. Non-clinical studies are ongoing and a Phase II trial is planned to start in the second half of 2021 with higher strength SP-103. We are currently in a Phase II study of abivertinib for cytokine storm related to COVID-19 infection, a Phase I study of mesenchymal stem cells for the treatment of respiratory distress syndrome associated with COVID-19 infection and Phase I studies of STI-1499, STI-2020 and STI-8282 in healthy adults and/or mild or hospitalized patients with COVID-19. 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 SEMDEXATM, clinical trials of CAR-T, including targeting CD38 using a CAR-T cell therapy, our biosimilar/biobetters antibodies, clinical trials of our COVID-19 related product candidates 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 COVITRACK 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. Additionally, on December 22, 2020, we announced the submission of an Emergency Use Authorization (“EUA”)

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to the FDA for our COVISTIX in vitro diagnostic test kit for the rapid detection of the SARS-CoV-2 virus nucleocapsid antigen in nasal samples of patients.

An EUA would allow us to market and sell COVITRACK and/or COVISTIX 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 COVITRACK or COVISTIX, we will rely on the FDA policies and guidance in connection with the marketing and sale of COVITRACK and COVISTIX. If these policies and guidance change unexpectedly and/or materially or if we misinterpret them, potential sales of COVITRACK and COVISTIX 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 COVITRACK or COVISTIX would remain in place. The termination of an EUA for COVITRACK or COVISTIX, 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 may be adversely affected if we do not manage our current growth and do not successfully execute our growth initiatives.

We have experienced growth in our headcount and operations, which has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. We anticipate further growing through both internal development projects as well as external opportunities, which include the acquisition, partnering and in-licensing of products, technologies and companies or the entry into strategic alliances and collaborations. The availability of high quality development opportunities is limited and we are not certain that we will be able to identify candidates that we and our shareholders consider suitable or complete transactions on terms that are acceptable to us and our shareholders. In order to pursue such opportunities, we may require significant additional financing, which may not be available to us on favorable terms, if at all. Even if we are able to successfully identify and complete acquisitions and other strategic alliances and collaborations, we may not be able to integrate them or take full advantage of them and therefore may not realize the benefits that we expect.

To effectively manage our current and future potential growth, we will need to continue to enhance our operational, financial and management processes and to effectively expand, train and manage our employee base. Supporting our growth initiatives will require significant capital expenditures and management resources, including investments in research and development, sales and marketing, manufacturing and other areas of our business. If we do not successfully manage our current growth and do not successfully execute our growth initiatives, then our business and financial results may be adversely affected and we may incur asset impairment or restructuring charges.

The growth of our business depends on our ability to attract and retain qualified personnel and to develop and maintain key relationships.

        The achievement of our commercial, research and development and external growth objectives depends upon our ability to attract and retain qualified scientific, manufacturing, sales and marketing and executive personnel and to develop and maintain relationships with qualified clinical researchers and key distributors. Competition for these people and relationships is intense and comes from a variety of sources, including pharmaceutical and biotechnology companies, universities and non-profit research organizations.

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 March 31, 2020 to March 31, 2021, our closing stock price ranged from $1.73 to $18.82 per share, and from January 4, 2021 to April 30, 2021, our closing stock price ranged from $6.93 to $16.51 per share. The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:

 

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

 

our failure to commercialize our product candidates, if approved;

 

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

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adverse regulatory decisions;

 

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

 

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

 

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

 

our dependence on third parties, including CROs;

 

announcements of the introduction of new products by our competitors;

 

market conditions in the pharmaceutical and biotechnology sectors;

 

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

 

future issuances of common stock or other securities;

 

the addition or departure of key personnel;

 

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

 

actual or anticipated variations in quarterly operating results;

 

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

 

overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies;

 

conditions or trends in the biotechnology and biopharmaceutical industries;

 

introduction of new products offered by us or our competitors;

 

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

 

issuances of debt or equity securities;

 

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

 

trading volume of our common stock;

 

ineffectiveness of our internal controls;

 

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

 

failure to effectively integrate the acquired companies’ operations;

 

general political and economic conditions;

 

effects of natural or man-made catastrophic events

 

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

 

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

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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.

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

Since December 31, 2020, we have issued the following securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

(1) On January 29, 2021, we entered into certain Exchange Agreements (the “Exchange Agreements”) with certain stockholders of Scilex Holding Company (“Scilex Holding”), pursuant to which we acquired additional shares of Scilex Holding in exchange for an aggregate of 2,567,456 shares of our common stock, which were issued on January 29, 2021. The issuance of the shares to the former Scilex Holding stockholders were not registered under the Securities Act in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder. Each of the former Scilex Holding stockholders represented that it was an “accredited investor,” as defined in Regulation D, and was acquiring the shares of common stock for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.

(2) On March 4, 2021, we entered into an exclusive license agreement (the “Mount Sinai License Agreement”) with Icahn School of Medicine at Mount Sinai (“Mount Sinai”) to acquire a worldwide, exclusive, sublicensable license to certain of Mount Sinai’s patents and monoclonal antibodies as well as technical information to develop, manufacture, commercialize, and exploit related products and services (“Licensed Products”) for all fields, uses, and applications, including for the diagnosis, prevention, treatment and cure of coronavirus. As consideration for the Mount Sinai License Agreement, we paid Mount Sinai and upfront license fee of $7.5 million comprised of 851,305 shares of our common stock, which were issued on March 12, 2021. The issuances of the shares to Mount Sinai were not registered under the Securities Act in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder. Mount Sinai represented that it was an “accredited investor,” as defined in Regulation D, and was acquiring the shares of common stock for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

Not applicable.

Item 5.Other Information.

None.

Item 6.Exhibits.

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EXHIBIT INDEX

 

Exhibit

No.

 

Description

 

 

 

2.1^

 

Agreement and Plan of Merger, dated April 2, 2021, by and among Sorrento Therapeutics, Inc., AT Merger Sub, Inc., ACEA Therapeutics, Inc. and Fortis Advisors LLC, as representative of the shareholders of ACEA Therapeutics, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 5, 2021).

 

 

 

3.1

 

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

 

3.2

 

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

 

3.3

 

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

 

4.1

 

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

 

 

 

4.2

 

Voting Agreement, dated 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

 

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).

 

4.5

 

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).

 

4.6

 

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).

 

4.7

 

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).

 

4.8

 

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).

 

4.9

 

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).

 

4.10

 

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).

 

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4.11

 

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).

 

4.12

 

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).

 

4.13

 

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).

 

4.14

 

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).

 

4.15

 

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).

 

4.16

 

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

 

4.17

 

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

 

4.18

 

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

 

 

 

10.1†

 

Binding Term Sheet, dated as of February 24, 2021, by and between Sorrento Therapeutics, Inc. and ANP Technologies, Inc.

 

 

 

10.2+*

 

Exclusive License Agreement, dated as of March 4, 2021, by and between Sorrento Therapeutics, Inc. and the Icahn School of Medicine at Mount Sinai.

 

 

 

10.3

 

Stock Purchase Agreement, dated as of March 4, 2021, by and between Sorrento Therapeutics, Inc. and the Icahn School of Medicine at Mount Sinai (incorporated by reference to Exhibit 4.18 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on April 9, 2021).

 

 

 

10.4

 

Amendment to Binding Term Sheet, dated as of April 20, 2021, by and between Sorrento Therapeutics, Inc. and ANP Technologies, Inc.

 

10.5#†

 

Sorrento Therapeutics, Inc. 2021 Cash-Settled Stock Appreciation Rights Plan.

 

10.6#† 

 

Sorrento Therapeutics, Inc. Stock Appreciation Rights Award Agreement.

 

 

 

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 Najjam Asghar, 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 Najjam Asghar, 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

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

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101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

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(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.

Filed herewith.

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SIGNATURES

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

 

 

 

Sorrento Therapeutics, Inc.

 

 

 

 

Date:

May 05, 2021

By:

/s/ Henry Ji, Ph.D.

 

 

 

Henry Ji, Ph.D.

 

 

 

Chairman of the Board of Directors, Chief Executive Officer & President

 

 

 

(Principal Executive Officer)

 

 

 

 

Date:

May 05, 2021

By:

/s/ Najjam Asghar

 

 

 

Najjam Asghar

 

 

 

Senior Vice President & Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

36