Item 1.Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
1. Description of Business and Basis of Presentation
Description of Business
Sorrento Therapeutics, Inc. (the “Company”) is a clinical stage and commercial, 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 clinical stage fully human antibodies (“G-MAB™ library”), clinical stage immuno-cellular therapies (“CAR-T”, “DAR-T™”), clinical stage 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 six months ended June 30, 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.
8
Table of Contents
Revenue Recognition
The following table shows revenue disaggregated by product and service type for the three and six months ended June 30, 2021 and 2020 (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Scilex Pharmaceuticals Inc. product sales
|
|
$
|
7,802
|
|
|
$
|
5,757
|
|
|
$
|
14,788
|
|
|
$
|
10,969
|
|
Other product revenue
|
|
|
52
|
|
|
|
37
|
|
|
|
89
|
|
|
|
73
|
|
Net product revenue
|
|
$
|
7,854
|
|
|
$
|
5,794
|
|
|
$
|
14,877
|
|
|
$
|
11,042
|
|
Concortis Biosystems Corporation
|
|
$
|
3,468
|
|
|
$
|
1,507
|
|
|
$
|
8,930
|
|
|
$
|
2,829
|
|
Bioserv Corporation
|
|
|
1,382
|
|
|
|
1,586
|
|
|
|
2,581
|
|
|
|
2,617
|
|
Other service revenue
|
|
|
807
|
|
|
|
120
|
|
|
|
1,378
|
|
|
|
240
|
|
Service revenue
|
|
$
|
5,657
|
|
|
$
|
3,213
|
|
|
$
|
12,889
|
|
|
$
|
5,686
|
|
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.
9
Table of Contents
3. Fair Value Measurements
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
Fair Value Measurements at June 30, 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
|
|
$
|
77,291
|
|
|
$
|
77,291
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable investment
|
|
|
34,410
|
|
|
|
34,410
|
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
111,701
|
|
|
$
|
111,701
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities - non-current
|
|
$
|
33,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,500
|
|
Contingent consideration and acquisition consideration payable
|
|
|
65,682
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65,682
|
|
Contingent consideration and acquisition consideration payable - non-current
|
|
|
121,504
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121,504
|
|
Total liabilities
|
|
$
|
220,686
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
220,686
|
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
56,464
|
|
|
$
|
56,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities - non-current
|
|
$
|
35,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,400
|
|
Contingent consideration and acquisition consideration payable
|
|
|
398
|
|
|
|
—
|
|
|
|
—
|
|
|
|
398
|
|
Contingent consideration and acquisition consideration payable - non-current
|
|
|
549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
549
|
|
Total liabilities
|
|
$
|
36,347
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,347
|
|
Contingent Consideration and Acquisition Consideration Payable
In connection with the acquisition of ACEA Therapeutics, Inc. as disclosed in Note 6, the Company preliminarily recorded estimated contingent consideration of $186.1 million as of the acquisition closing date of June 1, 2021. The Company assesses the fair value of contingent consideration using a discounted cash flow method combined with a Monte Carlo simulation model. Significant Level 3 assumptions used in the measurement include revenue projections, a discount rate of 14.4% and estimated probabilities of successful commercialization. As defined in Note 6, the Indebtedness Shares are subject to a true-up, as set forth in the ACEA Merger Agreement, if the price at which such shares were issued is greater than the closing price of the Company’s common stock on the date that is six months after June 1, 2021 (“Put Option”). The Company assesses the fair value of the Put Option using a Black-Scholes model and Level 3 assumptions. As of June 1, 2021, the Company recorded a total fair value of $8.1 million associated with the Put Option. The Put Option is included within the current portion of the contingent consideration. During the three months ended June 30, 2021, the Company recorded a loss of $0.1 million related to the change in fair value of the contingent consideration resulting from the passage of time since June 1, 2021.
10
Table of Contents
Changes in estimated fair value of acquisition consideration payable, including contingent consideration liabilities, since December 31, 2020 are as follows:
(in thousands)
|
|
Fair Value
|
|
Beginning Balance at December 31, 2020
|
|
$
|
947
|
|
Contingent consideration related to the acquisition of ACEA Therapeutics, Inc.
|
|
|
186,139
|
|
Change in fair value measurement
|
|
|
100
|
|
Ending Balance at June 30, 2021
|
|
$
|
187,186
|
|
Derivative liabilities
The Company recorded a loss on derivative liabilities of $0.3 million and a gain of $1.9 million for the three and six months ended June 30, 2021, respectively, 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 combined with a Monte Carlo simulation model. This involves significant Level 3 inputs and assumptions, including a 6.6% risk adjusted net sales forecast and an effective debt yield of 14.0%.
The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the six months ended June 30, 2021:
(in thousands)
|
|
Fair Value
|
|
Beginning Balance at December 31, 2020
|
|
$
|
35,400
|
|
Re-measurement of Fair Value
|
|
|
(1,900
|
)
|
Ending Balance at June 30, 2021
|
|
$
|
33,500
|
|
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”), Celularity Inc. and Aardvark Therapeutics, Inc. (“Aardvark”). 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.
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 loss on marketable investment of $63.9 million during the three months ended June 30, 2021 and a gain on marketable investment of $30.5 million during the six months ended June 30, 2021. The Company sold 5,889,334 shares of ImmunityBio common stock during the three and six months ended June 30, 2021 for net proceeds to the Company of $95.2 million.
During the three months ended June 30, 2021, the Company paid $5.0 million in cash for 3,888,932 shares of Series B Preferred Stock of Aardvark. The Company accounts for its investment in Aardvark as an equity investment without a readily determinable fair value and carries its investment in Aardvark at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. Tien Lee, MD, a member of the board of directors of Scilex Holding, a majority owned subsidiary of the Company, is the founder and chief executive officer of Aardvark. Kim D. Janda, Ph.D., a member of the board of directors of the Company, is a member of the advisory board of Aardvark.
In July 2021, the Company paid consideration of $5.0 million in cash for an additional 3,888,932 shares of Series B Preferred Stock of Aardvark, resulting in an increase in the Company’s ownership interest in Aardvark to approximately 8%.
11
Table of Contents
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 income or 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. (“NantCell”) holds the remaining 60%. The Company’s investment in NANTibody had a carrying value of zero as of June 30, 2021 due to the Company’s share of cumulative losses. As of December 31, 2020, the carrying value of the Company’s investment in NANTibody was approximately $0.5 million.
NANTibody recorded a net loss of $0.8 million and $1.7 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, NANTibody had $3.4 million in current assets, $6.0 million in current liabilities, $0.1 million in noncurrent assets and no 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 income or 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. As of June 30, 2021, the carrying value of the Company’s investment in NantStem was approximately $18.2 million. As of December 31, 2020, the carrying value of the Company`s investment in NantStem was $18.1 million.
NantStem recorded a net income of zero and a net loss of $0.4 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, NantStem had $81.5 million in current assets, no current liabilities, $0.6 million in noncurrent assets and no 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
The Company had goodwill of $52.9 million as of June 30, 2021, which preliminarily increased by $9.3 million as compared to $43.6 million as of December 31, 2020 due to the Company’s acquisition of ACEA. Goodwill for the Sorrento Therapeutics segment and Scilex segment was $46.2 million and $6.7 million, respectively, as of June 30, 2021.
Intangible assets with indefinite useful lives totaling $278.7 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 June 30, 2021 and December 31, 2020 is as follows (in thousands, except for years):
June 30, 2021
|
|
Weighted
Average
Amortization
Period (Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles,
Net
|
|
Customer relationships
|
|
|
2
|
|
|
$
|
1,585
|
|
|
$
|
1,439
|
|
|
$
|
146
|
|
Acquired technology
|
|
|
19
|
|
|
|
3,410
|
|
|
|
1,324
|
|
|
|
2,086
|
|
Acquired in-process research and development
|
|
|
—
|
|
|
|
278,660
|
|
|
|
—
|
|
|
|
278,660
|
|
Technology placed in service
|
|
|
15
|
|
|
|
21,940
|
|
|
|
4,022
|
|
|
|
17,918
|
|
Patent rights
|
|
|
15
|
|
|
|
32,720
|
|
|
|
10,193
|
|
|
|
22,527
|
|
Assembled workforce
|
|
|
5
|
|
|
|
605
|
|
|
|
284
|
|
|
|
321
|
|
Internally developed software
|
|
|
2
|
|
|
|
520
|
|
|
|
173
|
|
|
|
347
|
|
Total intangible assets
|
|
|
|
|
|
$
|
339,440
|
|
|
$
|
17,435
|
|
|
$
|
322,005
|
|
12
Table of Contents
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 $1.1 million and $1.0 million for the three months ended June 30, 2021 and 2020, respectively. Aggregate amortization expense was $2.1 million and $2.0 million for the six months ended June 30, 2021 and 2020, respectively. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at June 30, 2021 is as follows (in thousands):
Years Ending December 31,
|
|
Amount
|
|
2021 (Remaining six months)
|
|
$
|
2,070
|
|
2022
|
|
|
4,140
|
|
2023
|
|
|
4,048
|
|
2024
|
|
|
3,870
|
|
2025
|
|
|
3,845
|
|
Thereafter
|
|
|
25,372
|
|
Total expected future amortization
|
|
$
|
43,345
|
|
6. Significant Agreements and Contracts
Acquisition of ACEA Therapeutics, Inc.
On June 1, 2021, the Company completed the acquisition of ACEA Therapeutics, Inc. (“ACEA”) pursuant to the terms of the Agreement and Plan of Merger (the “ACEA Merger Agreement”), dated as of April 2, 2021, by and among the Company, AT Merger Sub, Inc., an exempted company incorporated with limited liability in the Cayman Islands and wholly owned subsidiary of the Company, ACEA and Fortis Advisors LLC, as representative of the shareholders of ACEA, whereby ACEA became a wholly owned subsidiary of the Company. With operations in both China and the United States, ACEA is developing multiple clinical and preclinical-stage new chemical entity compounds, including the late clinical drug candidate, Abivertinib.
The total value of the consideration paid by the Company for the acquisition of ACEA was equal to $38.0 million plus approximately $1.9 million (which amount represented the Company’s agreed upon share of certain interest, fees and other expenses) resulting in an aggregate payment of approximately $39.9 million (which amount is subject to further adjustment for indebtedness, transaction expenses and cash, in each case pursuant to the terms of the ACEA Merger Agreement (the “Closing Consideration”). Pursuant to the terms of the ACEA Merger Agreement, a portion of the Closing Consideration equal to (i) $38,059,326 was used to repay certain existing indebtedness of ACEA, which amount was paid to the holders thereof in the form of shares of common stock of the Company and an aggregate of 5,519,469 shares (“Indebtedness Shares”) of the Company’s common stock were issued in respect thereof based on a price per share equal to $6.8955 (representing the volume weighted average closing price per share of Common Stock, as reported on The Nasdaq Stock Market LLC, for the 10 consecutive trading days ending on the date that was three trading days prior to the Closing Date) and (ii) $100,000 was set aside for expenses incurred by the shareholders’ representative thereunder. The Indebtedness Shares are subject to a true-up, as set forth in the ACEA Merger Agreement, if the price at which such shares were issued is greater than the closing price of the Company’s common stock on the date that is six months after June 1, 2021.
In addition to the Closing Consideration, the Company will pay the ACEA equityholders (i) up to $450.0 million in additional payments, subject to the receipt of certain regulatory approvals and achievement of certain net sales targets with respect to the assets acquired from ACEA and (ii) five to ten percent of the annual net sales on specified royalty-bearing products (the “Earn-Out Consideration”). The fair value of the Earn-Out Consideration on the acquisition date was preliminarily estimated to be $186.1 million. The amount referenced in clause (i) of the preceding sentence includes the amounts that would have otherwise been due to ACEA under that certain License Agreement, dated July 13, 2020, between the Company and ACEA, which agreement was terminated in its entirety upon completion of the acquisition of ACEA.
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Table of Contents
The preliminary purchase price allocation was calculated based on an upfront consideration of $44.1 million, which was based on the Company’s closing share price on June 1, 2021. The ACEA Merger Agreement resulted in net identifiable assets of approximately $230.2 million, which includes separate and distinct intangible assets comprised of acquired in-process research and development of $250.4 million, goodwill of $9.3 million, fair value of debt assumed of approximately $32.1 million and other net assets of approximately $2.6 million. The purchase price allocation is preliminary as the Company is still completing the valuation of the intangible assets, contingent consideration, taxes, the fair value of debt assumed and other net assets, changes to which may also increase or decrease the amount of goodwill recognized. Goodwill largely reflects the broad-spectrum and synergistic infrastructures and expertise in pharmaceutical and biological drug discovery, development and manufacturing, and expanded geographic coverage in China and North America. Goodwill is not deductible for tax purposes. Acquisition costs were expensed as incurred. Results of operations since the date of acquisition were not material. Customary tax related matters such as the filing of pre-acquisition tax returns are subject to finalization as of June 30, 2021, and such matters may result in adjustments to the purchase price allocation.
The Company is still in the process of finalizing the working capital adjustments and the purchase price allocation, given the timing of the acquisition and the size and scope of the assets and liabilities subject to valuation. While the Company does not expect material changes in the valuation outcome, certain assumptions and findings that were in place at the date of acquisition could result in changes in the purchase price allocation.
Asset Purchase Agreement with Aardvark Therapeutics, Inc.
In April 2021, the Company entered into an asset purchase agreement (the “Aardvark Asset Purchase Agreement”) with Aardvark to acquire Aardvark’s Delayed Burst Release Low Dose Naltrexone (DBR-LDN), or ARD-301, asset and intellectual property rights, for the treatment of chronic pain, fibromyalgia and chronic post-COVID syndrome. As consideration for the purchase of the assets, the Company paid Aardvark an upfront license fee of $5.0 million comprised of 616,655 shares of the Company’s common stock, and which was expensed as acquired in-process research and development during the three and six months ended June 30, 2021. The Company also agreed to pay Aardvark (i) milestone payments upon the receipt of certain regulatory approvals, and (ii) milestone payments upon the Company’s achievement of certain commercial sales milestones. The Company will also pay certain royalties in the mid-single digit to low-double digit percentages of annual net sales by the Company. Tien Lee, MD, a member of the board of directors of Scilex Holding, a majority owned subsidiary of the Company, is the founder and chief executive officer of Aardvark. Kim D. Janda, Ph.D., a member of the board of directors of the Company, is a member of the advisory board of Aardvark. As discussed in Note 4, the Company holds an investment interest in Aardvark.
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 an 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.
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 June 30, 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.
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Table of Contents
License Agreement with NantCell
In April 2015, the Company and NantCell entered into a license agreement. Under the terms of the agreement, the Company granted an exclusive license to NantCell covering patent rights, know-how and materials related to certain antibodies, ADCs and 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 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.
During the six months ended June 30, 2021, Scilex Pharma repurchased an additional $40.0 million in principal amount of the Scilex Notes. In connection with the repurchases, the Company recorded a loss on partial debt extinguishment of $6.9 million and $14.0 million during the three and six months ended June 30, 2021, respectively.
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):
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Principal
|
|
$
|
109,431
|
|
|
$
|
151,872
|
|
Unamortized debt discount
|
|
|
(34,232
|
)
|
|
|
(51,022
|
)
|
Unamortized debt issuance costs
|
|
|
(2,498
|
)
|
|
|
(3,698
|
)
|
Carrying value
|
|
$
|
72,701
|
|
|
$
|
97,152
|
|
Estimated fair value
|
|
$
|
115,600
|
|
|
$
|
122,300
|
|
15
Table of Contents
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 six months)
|
|
|
3,410
|
|
2022
|
|
|
7,340
|
|
2023
|
|
|
9,543
|
|
2024
|
|
|
11,677
|
|
2025
|
|
|
13,436
|
|
Thereafter
|
|
|
64,025
|
|
Total future minimum payments
|
|
|
109,431
|
|
Unamortized debt discount
|
|
|
(34,232
|
)
|
Unamortized capitalized debt issuance costs
|
|
|
(2,498
|
)
|
Total Scilex Notes
|
|
|
72,701
|
|
Current portion
|
|
|
(6,846
|
)
|
Long-term portion of Scilex Notes
|
|
$
|
65,855
|
|
The Company made principal payments of $42.4 million and $2.5 million during the six months ended June 30, 2021 and 2020, respectively. The imputed effective interest rate at June 30, 2021 was 10.4%. The amount of debt discount and debt issuance costs included in interest expense for the three months ended June 30, 2021 and 2020 was approximately $1.9 million and $2.9 million, respectively. During the six months ended June 30, 2021 and 2020, the amount of debt discount and debt issuance costs included in interest expense was $4.0 million and $5.7 million, respectively.
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 (See Note 3). The Company re-evaluates this assessment each reporting period.
ACEA Significant Debt Arrangements
At the closing of the transactions contemplated by the ACEA Merger Agreement and as a result thereof, on June 1, 2021, the Company, as the indirect parent to Hangzhou ACEA Pharmaceutical Research Co., Ltd. (“ACEA Hangzhou”) and Zhejiang ACEA Pharmaceutical Co., Ltd. (“ACEA Zhejiang”), each of which are indirect subsidiaries of ACEA, succeeded to the financial obligations of ACEA Hangzhou and ACEA Zhejiang, each of whom are parties to agreements with ACEA Bio (Hangzhou) Co., Ltd. (“ACEA Bio”) (an entity unrelated to ACEA Hangzhou and ACEA Zhejiang) as set forth below.
Pursuant to that certain Contract, dated as of August 15, 2018, between ACEA Hangzhou and ACEA Bio, ACEA Hangzhou borrowed an aggregate of approximately $29.1 million (184,600,000 RMB) from ACEA Bio in a series of loans thereunder (the “Contract”). Each loan under the Contract is for a period of 10 years and the maturity dates thereof range from August 15, 2023 to August 15, 2028. Each loan is interest free for the first five years, after which time the interest rate is 5.39% per annum.
Pursuant to that certain Loan Agreement, dated as of January 6, 2018, between ACEA Zhejiang and ACEA Bio, ACEA Zhejiang borrowed approximately $1.3 million (8,000,000 RMB) from ACEA Bio (the “Loan Agreement”). The maturity date under the Loan Agreement is one year from the date when the loan was remitted to ACEA Zhejiang’s bank account and current maturity is January 1, 2022. The interest rate under the Loan Agreement is 4.786% per annum.
The outstanding principal amount under the Contract and Loan Agreement as of June 30, 2021 is $30.4 million. As part of the preliminary purchase price allocation, the Company estimated the fair value of the Contract and Loan Agreement to be approximately $17.1 million.
8. Stockholders’ Equity
Amended Sales Agreement
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Table of Contents
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 Global Partners in at-the-market transactions (as amended, the “Amended Sales Agreement”). During the six months ended June 30, 2021, the Company issued and sold an aggregate of 9,787,935 shares of its common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to the Company of approximately $93.0 million.
9. Stock Based Compensation
2019 Stock Incentive Plan (“2019 Plan”)
Total stock-based compensation expense under the 2019 Plan was $6.8 million and $2.1 million for the three months ended June 30, 2021 and 2020, respectively, and $15.4 million and $4.1 million for the six months ended June 30, 2021 and 2020, respectively. The total unrecognized compensation expense related to unvested stock option grants as of June 30, 2021 was $39.9 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 June 30, 2021 was $20.2 million, with a weighted average remaining vesting period of 3.7 years.
A summary of stock option activity under the 2019 Plan for the six months ended June 30, 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
|
|
|
2,187,485
|
|
|
10.45
|
|
|
|
|
|
Options Cancelled
|
|
|
(798,272
|
)
|
|
5.63
|
|
|
|
|
|
Options Exercised
|
|
|
(536,119
|
)
|
|
3.91
|
|
|
|
|
|
Outstanding at June 30, 2021
|
|
|
19,616,014
|
|
|
$
|
5.58
|
|
|
$
|
84,623
|
|
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:
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted-average grant date fair value
|
|
$
|
8.57
|
|
|
$
|
3.69
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
111
|
%
|
|
|
103
|
%
|
Risk-free interest rate
|
|
|
1.00
|
%
|
|
|
0.46
|
%
|
Expected life of options (years)
|
|
5.6
|
|
|
5.7
|
|
A summary of RSU activity under the 2019 Plan for the six months ended June 30, 2021 is as follows:
|
|
Number of Shares
|
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
|
Outstanding at December 31, 2020
|
|
|
—
|
|
|
$
|
—
|
|
RSUs Granted
|
|
|
2,375,892
|
|
|
|
10.25
|
|
RSUs Released
|
|
|
(132,540
|
)
|
|
|
13.96
|
|
RSUs Cancelled
|
|
|
(82,362
|
)
|
|
|
10.12
|
|
Outstanding at June 30, 2021
|
|
|
2,160,990
|
|
|
$
|
10.02
|
|
Scilex Holding Company
Under the Scilex Holding Company 2019 Stock Option Plan, total stock-based compensation expense was $1.0 million and $1.3 million for the three months ended June 30, 2021 and 2020, respectively, and $2.9 million for the six months ended June 30, 2021 and 2020, respectively. The total unrecognized compensation expense related to unvested stock option grants as of June 30, 2021 was $18.1 million, with a weighted average vesting period of 2.7 years.
17
Table of Contents
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 and $0.6 million for the three and six months ended June 30, 2021, respectively.
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 $12.9 million and $25.8 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2021, the Company had approximately $113.8 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 (“NantPharma”) and Chief Executive Officer Patrick Soon-Shiong, related to alleged fraud and breaches of the Stock Sale and Purchase Agreement, dated May 14, 2015, entered into between NantPharma 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 against NantPharma. On March 5, 2020, the Company filed a legal action against Dr. Soon-Shiong in Los Angeles Superior Court, asserting claims for fraudulent inducement and common law fraud, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The action alleges that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq™ for the purpose of halting its progression to the market. In connection with filing this civil action in the Los Angeles Superior Court, where the Company will have the right to a jury trial against Dr. Soon-Shiong, the Company has dismissed Dr. Soon-Shiong from the related, ongoing arbitration against NantPharma; and
|
|
•
|
An action in the Los Angeles Superior Court derivatively on behalf of NANTibody against NantCell, Inc., NANTibody Board Member and NantCell, Inc. Chief Executive Officer Patrick Soon-Shiong, and NANTibody officer Charles Kim, related to several breaches of the June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between the Company and NantCell, Inc. The suit also alleges breaches of fiduciary duties and seeks, inter alia, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring the Company’s equity method investment in NANTibody to its invested amount as of June 30, 2017 of $40.0 million. On May 24, 2019, NantCell, Inc. and Dr. Soon-Shiong filed a cross-complaint against the Company and Dr. Henry Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Exclusive License Agreement for certain antibodies (dated June 11, 2015 and entered into between NANTibody, LLC and the Company), and alleged tortious interference with contract. On May 24, 2019, NANTibody and NantPharma filed a new complaint in the action against the Company and Dr. Henry Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Stock Sale and Purchase Agreement, alleged breaches of the Exclusive License Agreement for certain antibodies (dated April 21, 2015 and entered into between NantCell, Inc. and the Company), and alleged tortious interference with contract. On July 8, 2019, the Company and Dr. Henry Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Los Angeles Superior Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc., and NantPharma have re-filed their claims in arbitration with the American Arbitration Association. On May 4, 2020, the Company filed counterclaims against NANTibody and NantPharma related to breaches of the April 21, 2015 and June 11, 2015 Exclusive License Agreements. With the counterclaims, the Company is seeking money damages in an amount yet
|
18
Table of Contents
|
|
to be determined. The claims against Dr. Soon-Shiong have been stayed pending resolution of the claims filed in arbitration. The original derivative action is no longer stayed, and the parties are currently engaged in discovery in the suit.
|
On May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-00966-AJB-DEB, against the Company, its President, Chief Executive Officer 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, the defendants filed their motion to dismiss on May 20, 2021 and Plaintiff filed its opposition to the motion on July 2, 2021. The defendants’ reply was filed on August 4, 2021. A hearing date for the motion has been set for September 2, 2021. The Company is defending these matters vigorously.
Operating Leases
As of June 30, 2021, the Company’s leases have remaining lease terms of approximately 0.2 to 8.4 years, some of which include options to extend the lease terms for up to five years, and some of which allow for early termination. 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Operating cash flows used for operating leases
|
|
$
|
2,567
|
|
|
$
|
2,487
|
|
|
$
|
5,054
|
|
|
$
|
4,896
|
|
ROU assets obtained in exchange for new and amended operating lease liabilities
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
795
|
|
Operating lease expense
|
|
$
|
2,508
|
|
|
$
|
2,533
|
|
|
$
|
5,015
|
|
|
$
|
5,072
|
|
Weighted average remaining lease term in years
|
|
7.9
|
|
|
8.9
|
|
|
7.9
|
|
|
8.9
|
|
Weighted average discount rate
|
|
|
12.2
|
%
|
|
|
12.2
|
%
|
|
|
12.2
|
%
|
|
|
12.2
|
%
|
Maturities of lease liabilities were as follows (in thousands):
Years ending December 31,
|
|
Operating
leases
|
|
2021 (Remaining six months)
|
|
$
|
5,072
|
|
2022
|
|
|
10,054
|
|
2023
|
|
|
10,285
|
|
2024
|
|
|
10,418
|
|
2025
|
|
|
9,757
|
|
Thereafter
|
|
|
37,586
|
|
Total lease payments
|
|
|
83,172
|
|
Less imputed interest
|
|
|
(30,849
|
)
|
Total lease liabilities as of June 30, 2021
|
|
$
|
52,323
|
|
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Table of Contents
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 $0.8 million and $2.2 million reflect effective tax rates of 0.5% and 1.5% for the six months ended June 30, 2021 and 2020, respectively. The Company’s income tax benefit of $0.6 million and $1.9 million reflect effective tax rates of 0.4% and 2.3% for the three months ended June 30, 2021 and 2020, respectively.
The difference between the expected statutory federal tax rate of 21% and the 0.5% effective tax rate for the six months ended June 30, 2021 was primarily attributable to the valuation allowance against most of the Company’s deferred tax assets. For the six months ended June 30, 2021, when compared to the same period in 2020, the increase in the tax benefit and change in effective income tax rate was primarily attributable to the impact of the Company’s valuation allowance against current net loss.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2007 and later are subject to examination by the U.S. and state tax authorities due to the existence of the net operating loss and research credit carryforwards.
12. Loss Per Share
For the three and six months ended June 30, 2021 and 2020, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.
The following table sets forth the reconciliation of basic and diluted loss per share for the three and six months ended June 30, 2021 and 2020 (in thousands except per share amounts):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
|
$
|
(166,615
|
)
|
|
$
|
(77,740
|
)
|
|
$
|
(164,105
|
)
|
|
$
|
(142,935
|
)
|
Net loss used for diluted earnings per share
|
|
$
|
(166,615
|
)
|
|
$
|
(77,740
|
)
|
|
$
|
(164,105
|
)
|
|
$
|
(142,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for Basic Loss Per Share
|
|
|
290,003
|
|
|
|
216,956
|
|
|
|
285,330
|
|
|
|
199,782
|
|
Denominator for Diluted Loss Per Share
|
|
|
290,003
|
|
|
|
216,956
|
|
|
|
285,330
|
|
|
|
199,782
|
|
Basic Loss Per Share
|
|
$
|
(0.57
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.72
|
)
|
Diluted Loss Per Share
|
|
$
|
(0.57
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.72
|
)
|
The potentially dilutive stock options that were excluded because the effect would have been anti-dilutive for the six months ended June 30, 2021 and 2020 were 2.7 million and 11.5 million, respectively. The potentially dilutive warrants that were excluded because the effect would have been anti-dilutive for the six months ended June 30, 2021 and 2020 were 16.0 million and 41.1 million, respectively.
13. Segment Information
The Company operates in two operating and reportable segments, Sorrento Therapeutics and Scilex. With the exception of unrestricted cash balances, the Company’s 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.
20
Table of Contents
The following table presents information about the Company’s reportable segments for the three and six months ended June 30, 2021 and 2020:
|
|
Three Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
(in thousands)
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
External revenues
|
|
$
|
5,709
|
|
|
$
|
7,802
|
|
|
$
|
13,511
|
|
|
$
|
3,258
|
|
|
$
|
5,749
|
|
|
$
|
9,007
|
|
Operating expenses
|
|
|
98,553
|
|
|
|
15,508
|
|
|
|
114,061
|
|
|
|
41,443
|
|
|
|
15,292
|
|
|
|
56,735
|
|
Operating loss
|
|
|
(92,844
|
)
|
|
|
(7,706
|
)
|
|
|
(100,550
|
)
|
|
|
(38,185
|
)
|
|
|
(9,543
|
)
|
|
|
(47,728
|
)
|
Unrestricted cash
|
|
|
72,252
|
|
|
|
5,039
|
|
|
|
77,291
|
|
|
|
17,251
|
|
|
|
7,137
|
|
|
|
24,388
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
(in thousands)
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
External revenues
|
|
$
|
12,978
|
|
|
$
|
14,788
|
|
|
$
|
27,766
|
|
|
$
|
5,767
|
|
|
$
|
10,961
|
|
|
$
|
16,728
|
|
Operating expenses
|
|
|
180,430
|
|
|
|
32,791
|
|
|
|
213,221
|
|
|
|
74,691
|
|
|
|
32,928
|
|
|
$
|
107,619
|
|
Operating loss
|
|
|
(167,452
|
)
|
|
|
(18,003
|
)
|
|
|
(185,455
|
)
|
|
|
(68,924
|
)
|
|
|
(21,967
|
)
|
|
|
(90,891
|
)
|
Unrestricted cash
|
|
|
72,252
|
|
|
|
5,039
|
|
|
|
77,291
|
|
|
|
17,251
|
|
|
|
7,137
|
|
|
|
24,388
|
|
14. Subsequent Events
Marketable investment
On July 16, 2021, Celularity Inc. (“Pre-Merger Celularity”), a company of which the Company held an equity interest, completed its previously announced merger with GX Acquisition Corp. (the “Celularity Merger”). Following the completion of the Celularity Merger, the combined, publicly traded company formerly known as GX Acquisition Corp. was named Celularity Inc. (“Celularity”) and its Class A common stock commenced trading on the Nasdaq Capital Market on July 19, 2021 under the ticker “CELU”. In connection with the Celularity Merger, all outstanding shares of Series A Preferred Stock of Pre-Merger Celularity were converted into shares of Pre-Merger Celularity common stock and then each share of Pre-Merger Celularity common stock was converted into the right to receive shares of Class A common stock of the post-merger company. The Company received 19,922,124 shares of Class A common stock of the post-merger company in the Celularity Merger. The Company also purchased an aggregate of 500,000 shares of Class A common stock of Celularity for an aggregate purchase price of $5,000,000 in a private placement transaction that closed on July 16, 2021 concurrently with the closing of the Celularity Merger. The Company’s investment in Celularity has historically been accounted for as an equity security without a readily determinable fair value. As of the trading commencement date, the Company accounts for its investment in Celularity as an equity security with a readily determinable fair value. As of July 30, 2021, the Company owned 20,422,124 shares of Class A common stock of Celularity. 19,922,124 shares of the Class A Common Stock of Celularity held by the Company are subject to transfer restrictions until the earliest to occur of (i) 365 days after July 16, 2021; (ii) the first day after the date on which the closing price of the Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after July 16, 2021; or (iii) the date on which Celularity completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Celularity’s public shareholders having the right to exchange their Class A Common Stock for cash, securities or other property, subject to certain exceptions.
New lease
On July 1, 2021, the Company entered into a binding term sheet (the “Term Sheet”) with HCP Life Science REIT, Inc., setting forth the terms and conditions by which the Company will lease premises located at 4930 Directors Place, San Diego, California. The lease (the “Lease”) will have an initial 188-month term and include approximately 163,205 rentable square feet. The initial rent for the Lease is approximately $5.10 per square foot and is subject to an annual increase. Pursuant to the Term Sheet, not less than twelve months prior to the expiration of the then-current term of the Lease, the Company has an option to extend the Lease term for up to two additional five-year terms at then current market rates.
21
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