Item 1.Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
1. Description of Business and Basis of Presentation
Description of Business
Sorrento Therapeutics, Inc., together with its subsidiaries (the “Company”), is a clinical stage and commercial biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to address unmet medical needs.
At its core, the Company is antibody-centric and leverages its proprietary G-MAB™ library and 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. The Company also has programs assessing the use of its technologies and products in autoimmune, inflammatory, viral and neurodegenerative diseases.
Outside of immuno-oncology programs, as part of the Company’s global aim to provide a wide range of therapeutic and diagnostic products to meet underserved markets, the Company has made investments in non-opioid pain management and is currently conducting preclinical development of multiple therapeutic, vaccine and diagnostic product candidates utilizing its proprietary platforms for the potential treatment, prevention and detection of COVID-19 and SARS-CoV-2.
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, 2019. Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2020 fiscal year, or any subsequent period. The unaudited interim financial statements included herein reflect all normal and recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented.
Use of Estimates
To prepare consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”), management must make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
During the nine months ended September 30, 2020, there have been no changes to the Company`s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 outside of new accounting pronouncements as described below.
Revenue Recognition
The following table shows revenue disaggregated by product and service type for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Scilex Pharmaceuticals Inc. product sales
|
|
$
|
7,837
|
|
|
$
|
3,770
|
|
|
$
|
18,806
|
|
|
$
|
11,289
|
|
Other product revenue
|
|
|
37
|
|
|
|
40
|
|
|
|
110
|
|
|
|
579
|
|
Net product revenue
|
|
$
|
7,874
|
|
|
$
|
3,810
|
|
|
$
|
18,916
|
|
|
$
|
11,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concortis Biosystems Corporation
|
|
$
|
2,261
|
|
|
$
|
1,607
|
|
|
$
|
5,089
|
|
|
$
|
4,622
|
|
Bioserv Corporation
|
|
|
1,498
|
|
|
|
233
|
|
|
|
4,116
|
|
|
|
1,540
|
|
Other service revenue
|
|
|
120
|
|
|
|
128
|
|
|
|
360
|
|
|
|
368
|
|
Service revenue
|
|
$
|
3,879
|
|
|
$
|
1,968
|
|
|
$
|
9,565
|
|
|
$
|
6,530
|
|
9
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to improve financial reporting by requiring timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments in this update were adopted using a modified retrospective transition method as of January 1, 2020, which had no cumulative impact to accumulated deficit.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to improve the effectiveness of the disclosure requirements for fair value measurements. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty will be applied prospectively as of the beginning of the fiscal year of adoption with all other amendments being applied retrospectively to all periods presented upon their effective date. The adoption of the standard had no material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for interim and annual periods for the Company beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact this standard will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This update also eliminated the qualitative assessment requirements for a reporting unit with zero or negative carrying value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted, and must be applied on a prospective basis. The adoption of the standard had no material impact on the Company’s consolidated financial statements.
2. Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has negative working capital and recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure.
The Company has plans in place to obtain sufficient additional 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.
10
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 September 30, 2020
|
|
|
|
Balance
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
75,176
|
|
|
$
|
75,176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
120,176
|
|
|
$
|
120,176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities - non-current
|
|
$
|
42,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,900
|
|
Acquisition consideration payable
|
|
|
398
|
|
|
|
—
|
|
|
|
—
|
|
|
|
398
|
|
Acquisition consideration payable - non-current
|
|
|
549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
549
|
|
Total liabilities
|
|
$
|
43,847
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,847
|
|
|
|
Fair Value Measurements at December 31, 2019
|
|
|
|
Balance
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,521
|
|
|
$
|
22,521
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash
|
|
|
58,248
|
|
|
|
58,248
|
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
80,769
|
|
|
$
|
80,769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
8,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,800
|
|
Derivative liabilities - non-current
|
|
|
35,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
Acquisition consideration payable
|
|
|
908
|
|
|
|
—
|
|
|
|
—
|
|
|
|
908
|
|
Acquisition consideration payable - non-current
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
Total liabilities
|
|
$
|
44,747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,747
|
|
The Company’s financial assets and liabilities carried at fair value are comprised of cash, cash equivalents, restricted cash, derivative liabilities and acquisition consideration payable. Cash and cash equivalents consist of money market accounts and bank deposits that are highly liquid and readily tradable. These investments are valued using inputs observable in active markets for identical securities. The fair value of the acquisition consideration payable is measured on a recurring basis using significant unobservable inputs (Level 3). Acquisition consideration payable is measured using the income approach and discounting to present value the contingent payments expected to be made based on assessment of the probability that the company would be required to make such future payment. There were no changes to the fair value of acquisition consideration payable during the nine months ended September 30, 2020.
Derivative liabilities
The Company recorded a loss on derivative liabilities of $1.0 million and a gain on derivative liabilities of $5.9 million for the three and nine months ended September 30, 2020, respectively, which related to the compound derivative liabilities associated with the Term Loans (as defined in Note 7) and the Scilex Notes (as defined in Note 7). The compound derivative liabilities consist of the fair value of various embedded features. Significant, Level 3 inputs and assumptions for the Term Loans consisted of the estimated probability of restructuring debt arrangements during the first half of 2020 and estimated probabilities of satisfying certain commercial and financial milestones estimated using a with and without discounted cash flow approach. As explained further in Note 7, the Term Loans were paid in full as of September 30, 2020.
11
As of September 30, 2020, 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. The key assumptions for the Scilex Notes include a 6.6% risk adjusted net sales forecast, an effective debt yield of 18%, estimated probabilities of 55% and 100% of not obtaining marketing approval before July 1, 2023 and March 31, 2021, respectively, and an estimated probability of an initial public offering by Scilex Holding Company (“Scilex Holding”) that satisfies certain valuation thresholds and timing considerations.
The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2020:
(in thousands)
|
|
Fair Value
|
|
Beginning Balance at December 31, 2019
|
|
$
|
43,800
|
|
Additions
|
|
|
8,800
|
|
Re-measurement of Fair Value
|
|
|
(9,700
|
)
|
Ending Balance at September 30, 2020
|
|
$
|
42,900
|
|
4. Investments
Investments in entities over which the Company has significant influence, but not a controlling interest, are accounted for using the equity method, with the Company’s share of earnings or losses reported in loss on equity method investments. The Company’s equity method investments primarily include an ownership interest in Immunotherapy NANTibody, LLC (“NANTibody”) and NantCancerStemCell, LLC (“NantStem”). The Company’s other equity investments primarily include an ownership interest in ImmunityBio, Inc., NantBioScience, Inc. (“NantBioScience”) and Celularity Inc. These other investments are carried at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments.
During the nine months ended September 30, 2020, the Company recorded an impairment loss of approximately $3.8 million related to an equity method investment for which the Company determined the investment’s value is no longer supportable. The loss is included within loss on equity method investments in the Company’s consolidated statement of operations.
NANTibody
In 2013, the Company acquired IgDraSol Inc. (“IgDraSol”), a private company focused on the development of oncologic agents for the treatment of cancer, from a third party unrelated to the NantWorks, LLC (“NantWorks”) affiliated entities for 3.0 million shares of the Company’s common stock and $380,000 of cash for a total purchase price of $29.1 million. This transaction included the acquisition of IgDraSol’s lead compound, CynviloqTM, a micellar diblock copolymeric paclitaxel formulation drug product.
In May 2015, the Company entered into an agreement with NantPharma, LLC (“NantPharma”), a NantWorks company, pursuant to which the Company sold to NantPharma all of its equity interests in IgDraSol, which continued to hold the rights to CynviloqTM. Pursuant to the agreement, NantPharma paid the Company an upfront fee of $90.1 million, of which $60.0 million was required to be used by the Company to fund two joint ventures, as described below.
In April 2015, the Company and NantCell, Inc. (which subsequently changed its name to ImmunityBio, Inc.) (“NantCell”), a subsidiary of NantWorks, a private company owned by Dr. Patrick Soon-Shiong, established a new entity called Immunotherapy NANTibody, LLC (“NANTibody”) as a stand-alone biotechnology company with $100.0 million initial joint funding. NantCell owns 60% of the equity interest of NANTibody and agreed to contribute $60.0 million to NANTibody. The Company owns 40% of NANTibody and in July 2015, the Company had NantPharma contribute its portion of the initial joint funding of $40.0 million to NANTibody from the proceeds of the sale of IgDraSol. Additionally, the Company and NantCell were allowed to appoint two and three representatives, respectively, to NANTibody’s five-member Board of Directors. NANTibody focuses on accelerating the development of multiple immuno-oncology mAbs for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4mAbs and other immune-check point antibodies as well as ADCs and bispecific antibodies.
NANTibody had been formed to advance pre-clinical and clinical immunology assets contributed by the Company and NantCell. The Company continues to hold 40% of the outstanding equity of NANTibody and NantCell holds the remaining 60%. Until July 2, 2017, NANTibody held approximately $100.0 million of cash and cash equivalents, and the Company recorded its investment in NANTibody at approximately $40.0 million. As an equity method investment, the Company’s ratable portion of 40% of money expended for the development of intellectual property assets held by NANTibody would be reflected within income (loss) on equity method investments in its statement of operations. As a result of limited spending at NANTibody, the cash on hand at NANTibody remained at approximately $100.0 million since the inception of the NANTibody joint venture until July 2, 2017. Further, the Company’s equity method investment in NANTibody remained at approximately $40.0 million until July 2, 2017.
12
In February 2018, NANTibody notified the Company that on July 2, 2017, NANTibody acquired all of the outstanding equity of IgDraSol in exchange for $90.1 million in cash. NANTibody purchased IgDraSol from NantPharma, which is controlled by NantWorks, an entity with a controlling interest in NantCell and NantPharma.
Although the Company has had a designee serving on the Board of Directors of NANTibody since the formation of NANTibody in April 2015, and although the Company has held 40% of the outstanding equity of NANTibody since NANTibody’s formation, neither the Company nor its director designee was given any advance notice of NANTibody’s purchase of IgDraSol or of any board meeting or action to approve such purchase. As such, the Company’s designee on NANTibody’s Board of Directors was not given an opportunity to consider or vote on the transaction as a director and the Company was not given an opportunity to consider or vote on the transaction in its position as a significant (40%) equity holder of NANTibody.
As a result of the July 2, 2017 purchase of IgDraSol, NANTibody’s cash and cash equivalents were reduced from $99.6 million as of June 30, 2017 to $9.5 million as of September 30, 2017, and NANTibody’s contributed capital was reduced from $100.0 million as of June 30, 2017 to $10.0 million as of September 30, 2017, to effect the transfer of IgDraSol from NantPharma to NANTibody. No additional information was provided to the Company to explain why NANTibody’s total assets as of September 30, 2017 were reduced by approximately $90.1 million. The Company requested, but did not receive, additional information from NANTibody for purposes of supporting the value of IgDraSol, including any information regarding clinical advancements in the entity since the sale of IgDraSol by the Company in May 2015.
Prior to the communication of the transfer of IgDraSol from NantPharma to NANTibody, the Company relied on the cash and cash equivalents of NANTibody for purposes of determining the value of its investment in NANTibody, which capital was expended by NANTibody to acquire IgDraSol on July 2, 2017. As a result of the transfer of IgDraSol, the Company reassessed the recoverability of its equity method investment in NANTibody as of July 2, 2017. In doing so, the Company considered the expected outcomes for the intellectual property assets held by NANTibody as of July 2, 2017. As a result of the lack of evidence of any development activity associated with any of the assets held in NANTibody, given the passage of time since the formation of the joint venture, many competitive products from other drug developers worldwide have advanced and/or commercialized for the targeted disease indications of the assets held in NANTibody, and given the Company’s minority interest in NANTibody (the investee), the Company concluded that it does not have the ability to recover the carrying amount of the investment and an other-than-temporary decline in the value of the investment had occurred. Accordingly, an impairment was recorded to the Company’s equity method investment in NANTibody for the three and nine months ended September 30, 2017. The fair value of the Company’s investment in NANTibody was measured at fair value on July 2, 2017 using significant unobservable inputs (Level 3) due to the determination of fair value requiring significant judgment, including the potential outcomes of the intellectual property assets held by NANTibody. For these reasons, fair value was determined by applying the Company’s 40% equity interest in NANTibody to the remaining cash and cash equivalents, which resulted in an impairment of $36.0 million. The impairment resulted in a revised carrying value of the Company’s investment in NANTibody of $3.7 million which approximated its ratable 40% ownership of the cash maintained by NANTibody expected to be used for future research and development. As of September 30, 2020 and 2019, the carrying value of the Company’s investment in NANTibody was approximately $0.6 million and $2.5 million, respectively.
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 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.
NANTibody recorded a net loss of $1.6 million and $1.7 million for the three months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, NANTibody had $6.4 million in current assets, $4.7 million in current liabilities, $0.2 million in noncurrent assets and no noncurrent liabilities.
NantStem
In July 2015, the Company and NantBioScience established a new entity called NantCancerStemCell, LLC (“NantStem”) as a stand-alone biotechnology company with $100.0 million initial joint funding. As initially organized, NantBioScience was obligated to make a $60.0 million cash contribution to NantStem for a 60% equity interest in NantStem, and the Company was obligated to make a $40.0 million cash contribution to NantStem for a 40% equity interest in NantStem. Fifty percent of these contributions were funded in July 2015 and the remaining amounts were to be made by no later than September 30, 2015. The Company had NantPharma contribute its portion of the initial joint funding of $20.0 million to NantStem from the proceeds of the sale of IgDraSol. Pursuant to a Side Letter dated October 13, 2015, the NantStem joint venture agreement was amended to relieve the Company of the obligation to contribute the second $20.0 million payment, and its ownership interest in NantStem was reduced to 20%. NantBioScience’s funding obligations were unchanged. The Side Letter was negotiated at the same time the Company issued a call option on shares of NantKwest that it owned to Cambridge Equities, L.P. (“Cambridge”), a related party to NantBioScience.
13
A loss related to other-than-temporary impairment of $0.5 million was recognized for the equity investment in NantStem for the year ended December 31, 2018.
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 September 30, 2020 and 2019, the carrying value of the Company’s investment in NantStem was approximately $18.0 million and $17.8 million, respectively.
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 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.
NantStem recorded a net gain of $0.9 million and a net loss of $0.3 million for the three months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, NantStem had $78.9 million in current assets, $2.2 million in noncurrent assets and no current and noncurrent liabilities.
5. Goodwill and Intangible Assets
At both September 30, 2020 and December 31, 2019, the Company had recorded goodwill of $38.3 million. Goodwill for the Sorrento Therapeutics segment and Scilex segment was $31.6 million and $6.7 million, respectively, as of September 30, 2020. The Company’s Scilex reporting unit had a negative carrying value of net assets and there were no indicators of impairment of goodwill identified.
Intangible assets with indefinite useful lives totaling $33.5 million are included in acquired in-process research and development in the table below. A summary of the Company’s identifiable intangible assets as of September 30, 2020 and December 31, 2019 is as follows (in thousands, except for years):
September 30, 2020
|
|
Weighted
Average
Amortization
Period (Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles,
Net
|
|
Customer relationships
|
|
|
6
|
|
|
$
|
1,585
|
|
|
$
|
1,419
|
|
|
$
|
166
|
|
Acquired developed technology
|
|
|
19
|
|
|
|
3,410
|
|
|
|
1,192
|
|
|
|
2,218
|
|
Acquired in-process research and development
|
|
|
—
|
|
|
|
33,516
|
|
|
|
—
|
|
|
|
33,516
|
|
Technology placed in service
|
|
|
15
|
|
|
|
21,940
|
|
|
|
2,925
|
|
|
|
19,015
|
|
Patent rights
|
|
|
15
|
|
|
|
32,720
|
|
|
|
8,558
|
|
|
|
24,162
|
|
Assembled workforce
|
|
|
5
|
|
|
605
|
|
|
192
|
|
|
|
413
|
|
Internally developed software
|
|
|
1
|
|
|
|
520
|
|
|
|
43
|
|
|
|
477
|
|
Total intangible assets
|
|
|
|
|
|
$
|
94,296
|
|
|
$
|
14,329
|
|
|
$
|
79,967
|
|
December 31, 2019
|
|
Weighted
Average
Amortization
Period (Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles,
Net
|
|
Customer relationships
|
|
|
6
|
|
|
$
|
1,585
|
|
|
$
|
1,401
|
|
|
$
|
184
|
|
Acquired developed technology
|
|
|
19
|
|
|
|
3,410
|
|
|
|
1,060
|
|
|
|
2,350
|
|
Acquired in-process research and development
|
|
|
—
|
|
|
|
14,360
|
|
|
|
—
|
|
|
|
14,360
|
|
Technology placed in service
|
|
|
15
|
|
|
|
21,940
|
|
|
|
1,828
|
|
|
|
20,112
|
|
Patent rights
|
|
|
15
|
|
|
|
32,720
|
|
|
|
6,922
|
|
|
|
25,798
|
|
Assembled workforce
|
|
|
5
|
|
|
|
605
|
|
|
|
101
|
|
|
|
504
|
|
Total intangible assets
|
|
|
|
|
|
$
|
74,620
|
|
|
$
|
11,312
|
|
|
$
|
63,308
|
|
14
Aggregate amortization expense was $1.0 million for each of the three months ended September 30, 2020 and 2019. Aggregate amortization expense was $3.0 million and $2.9 million for the nine months ended September 30, 2020 and 2019, respectively. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at September 30, 2020 is as follows (in thousands):
Years Ending December 31,
|
|
Amount
|
|
2020 (Remaining three months)
|
|
$
|
1,035
|
|
2021
|
|
|
4,400
|
|
2022
|
|
|
3,966
|
|
2023
|
|
|
3,961
|
|
2024
|
|
|
3,870
|
|
2025
|
|
|
3,845
|
|
Thereafter
|
|
|
25,373
|
|
Total expected future amortization
|
|
$
|
46,450
|
|
6. Significant Agreements and Contracts
2020 Acquisition
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 and is subject to certain adjustments for net working capital, indebtedness, transaction expenses and cash.
The preliminary purchase price allocation resulted in net identifiable assets of approximately $19.5 million, which includes separate and distinct intangible assets of approximately $19.2 million and other net assets of approximately $0.3 million. The purchase price allocation is preliminary as the Company is still completing the valuation of the intangible assets, assumed liabilities and goodwill. Results of operations since the date of acquisition were not material.
2019 Acquisitions
Acquisition of Semnur Pharmaceuticals, Inc.
In March 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Semnur Pharmaceuticals, Inc. (“Semnur”) and Scilex Holding, whereby Semnur became a wholly-owned subsidiary of Scilex Holding (the “Merger”), and thereby Scilex Holding acquired Semnur’s SEMDEXATM (SP-102) technology for consideration valued at approximately $70.0 million, excluding contingent consideration, transaction costs of $3.1 million and liabilities assumed of $4.2 million, which was allocated based on the relative fair value of the assets acquired. The $70.0 million of consideration consisted of approximately $15.0 million in cash and shares of Scilex Holding valued at approximately $55.0 million (the “Stock Consideration”).
Pursuant to the Merger Agreement, Scilex Holding also agreed to pay the holders of Semnur’s capital stock and options (the “Semnur Equityholders”) up to $280.0 million in aggregate contingent cash consideration based on the achievement of certain milestones, which is comprised of a $40.0 million payment that will be due upon obtaining the first approval of a New Drug Application of a Semnur product by the U.S. Food and Drug Administration (the “FDA”) and additional payments that will be due upon the achievement of certain amounts of net sales of Semnur products as follows: (a) a $20.0 million payment upon the achievement of $100.0 million in cumulative net sales of a Semnur product, (b) a $20.0 million payment upon the achievement of $250.0 million in cumulative net sales of a Semnur product, (c) a $50.0 million payment upon the achievement of $500.0 million in cumulative net sales of a Semnur product, and (d) a $150.0 million payment upon the achievement of $750.0 million in cumulative net sales of a Semnur product.
In March 2019, the Company also entered into an Exchange and Registration Rights Agreement (the “Exchange Agreement”) with the Semnur Equityholders. Pursuant to the Exchange Agreement, if within 18 months of the closing of the Merger, 100% of the outstanding equity of Scilex Holding had not been acquired by a third party or Scilex Holding had not entered into a definitive agreement with respect to, or otherwise consummated, a firmly underwritten offering of Scilex Holding’s capital stock that meets certain requirements and includes the Stock Consideration, then the Semnur Equityholders could collectively elect to exchange, during the 60-day period commencing the date that is the 18 month anniversary of the closing of the Merger, the Stock Consideration for shares of the Company’s common stock with a value of $55.0 million (the “Semnur Share Exchange”) based on a price per share of the Company’s common stock equal to the greater of (a) the 30-day trailing volume weighted average price of one share of the
15
Company’s common stock as reported on the Nasdaq Capital Market as of the consummation of the Semnur Share Exchange and (b) $5.55 (subject to adjustment for any stock dividend, stock split, stock combination, reclassification or similar transaction) (the “Exchange Price”). On September 28, 2020, the Company entered into an amendment to the Exchange Agreement (the Exchange Agreement, as amended, the “Amended Exchange Agreement”) to, among other things, provide that if the Company received notice from the Semnur Equityholders that they will proceed with the Semnur Share Exchange (the “Exchange Notice”), the Company could, in its sole discretion, elect, within seven days of receipt of the Exchange Notice, to exchange all the Stock Consideration and the rights to receive cash from Scilex Holding held by the Semnur Equityholders for an amount in cash equal to $55.0 million, in lieu of issuing $55.0 million of shares of the Company’s common stock at the Exchange Price.
The Semnur acquisition was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. No contingent consideration was recorded as of December 31, 2019 or September 30, 2020 since the related regulatory approval milestones are not deemed probable until they actually occur. Approximately $75.3 million was expensed as acquired in-process research and development during the three months ended March 31, 2019.
Semnur Cash Exchange Payment
Pursuant to the Amended Exchange Agreement, as described above, on September 28, 2020, the Semnur Equityholders delivered the Exchange Notice. On October 5, 2020, the Company notified the Semnur Equityholders of its election to pay cash, and paid $55.0 million in cash to the Semnur Equityholders in exchange for the Stock Consideration on October 9, 2020. Following the completion of the Semnur Share Exchange, the Company holds approximately 82.3% of the outstanding common stock of Scilex Holding.
License Agreements
License Agreement with ACEA Therapeutics, Inc.
In July 2020, the Company entered into a License Agreement (the “ACEA License Agreement”) with ACEA Therapeutics, Inc. (“ACEA”). Pursuant to the ACEA License Agreement, ACEA granted the Company an exclusive license and right under certain patents and certain know-how and other intellectual property (“Licensed Know-How”) to fully utilize, exploit and commercialize (i) the Licensed Know-How, (ii) Abivertinib (AC0010), a selective, orally available irreversible small molecule tyrosine kinase inhibitor to Bruton’s tyrosine kinase and mutant epidermal growth factor receptor, including any improvements thereto, and (iii) (a) any composition, product, or component part thereof, and (b) any and all services offered in connection or associated therewith, in all fields of use, including the diagnosis, treatment and/or cure of any human disease or disorder worldwide, other than the People’s Republic of China.
As consideration for the license under the ACEA License Agreement, the Company paid ACEA an up-front license fee of $15.0 million in cash, which was expensed as acquired in-process research and development during the three and nine months ended September 30, 2020. The Company also agreed to pay ACEA (i) certain milestone payments upon the receipt of certain regulatory approvals, and (ii) certain milestone payments upon the Company’s or its affiliates’ achievement of certain commercial sales milestones. The milestone payments may be comprised of cash or any combination of cash and common stock of the Company, in any case as determined by the Company so long as no more than 50% of any upfront payment or milestone payment is comprised of common stock. The Company will also pay certain royalties in the mid-single digit to low-double digit percentages of annual net sales by the Company.
License Agreement with The Trustees of Columbia University in the City of New York
In July 2020, the Company entered into an Exclusive License Agreement (the “Columbia License Agreement”) with The Trustees of Columbia University in the City of New York (“Columbia”). Pursuant to the Columbia License Agreement, Columbia granted the Company (i) an exclusive license under certain patents, other intellectual property and materials to discover, develop, commercialize and exploit certain products and services (“Products”) in all diagnostic applications of high-performance loop-mediated isothermal amplification (“HP-LAMP”) for coronaviruses and influenza viruses (the “Field”) worldwide, subject to certain limitations. Pursuant to the Columbia License Agreement, Columbia also granted to the Company an option, exercisable for twelve months from the effective date of the Columbia License Agreement and subject to the satisfaction of certain conditions, to acquire an exclusive worldwide license to such patents, other intellectual property and materials for additional diagnostic application(s) of HP-LAMP (other than for coronaviruses and influenza viruses), subject to certain limitations.
As consideration for the license under the Columbia License Agreement, the Company paid Columbia an up-front license fee of $5.0 million in cash, which was expensed as acquired in-process research and development during the three and nine months ended September 30, 2020. The Company also agreed to pay Columbia (i) an earned royalty on the net sales of Products in the Field worldwide, and (ii) minimum annual royalty payments of $1.0 million no later than ten days following the first bona fide commercial sale of a Product to a third-party customer and on an annual basis thereafter. In addition, the Company agreed to pay Columbia a percentage of certain non-royalty sublicense revenue and other payments received by the Company from its sublicensees as
16
consideration for the grant of any sublicense, option or similar rights. Pursuant to the Columbia License Agreement, the Company also agreed to pay certain one-time, development milestone payments to Columbia upon the receipt of certain regulatory approvals or the first commercial sale of certain Products for diagnostic applications within the Field.
License Agreement with Mayo Foundation
In September 2020, the Company entered into a patent and know-how license agreement (the “Mayo License Agreement”) with Mayo Foundation for Medical Education and Research (“Mayo”). Pursuant to the Mayo License Agreement, Mayo granted the Company a sublicensable license under certain of Mayo’s patents, know-how, and materials relating to targeted nanoparticle therapies (“Patent Rights”, “Know-How”, and “Materials”, respectively) to reproduce, use, commercialize, and exploit related products, processes and services (“Licensed Products”) for the prevention, diagnosis and/or treatment of human diseases and conditions worldwide.
As consideration for the license under the Mayo License Agreement, the Company paid Mayo an upfront license fee of $9.3 million comprised of approximately $2.3 million in cash and 996,803 shares of the Company’s common stock, and which was expensed as acquired in-process research and development during the three and nine months ended September 30, 2020. The Company also agreed to (i) reimburse Mayo up to $3.4 million for preclinical and clinical research expenses associated with the Know-How, Patent Rights and Materials arising prior to the entry into the Mayo License Agreement, and (ii) reimburse Mayo approximately $2.0 million for expenses related to the development and manufacturing of the Materials arising prior to the entry into the Mayo License Agreement. Such reimbursements were accrued for and expensed as acquired in-process research and development during the three and nine months ended September 30, 2020.
The Company also agreed to pay Mayo (i) certain milestone payments upon the initiation of certain clinical trials, (ii) certain milestone payments upon the receipt of certain regulatory approvals, and (iii) certain milestone payments upon the achievement of certain commercial sales milestones. The Company will also pay 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.
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 (as defined) from the assets licensed by the Company to NantCell. In addition to the future royalties payable under this agreement, NantCell paid an upfront payment of $10.0 million to the Company and issued 10 million shares of NantCell common stock to the Company valued at $100.0 million based on a recent equity sale of NantCell common stock to a third party. 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.
17
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):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Principal
|
|
$
|
218,187
|
|
|
$
|
221,666
|
|
Unamortized debt discount
|
|
|
(60,131
|
)
|
|
|
(67,839
|
)
|
Unamortized debt issuance costs
|
|
|
(3,866
|
)
|
|
|
(4,360
|
)
|
Carrying value
|
|
$
|
154,190
|
|
|
$
|
149,467
|
|
Estimated fair value
|
|
$
|
171,100
|
|
|
$
|
150,800
|
|
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,
|
|
|
|
|
2020 (Remaining three months)
|
|
$
|
1,315
|
|
2021
|
|
|
4,636
|
|
2022
|
|
|
5,535
|
|
2023
|
|
|
7,233
|
|
2024
|
|
|
8,830
|
|
2025
|
|
|
10,142
|
|
Thereafter
|
|
|
180,496
|
|
Total future minimum payments
|
|
|
218,187
|
|
Unamortized debt discount
|
|
|
(60,131
|
)
|
Unamortized capitalized debt issuance costs
|
|
|
(3,866
|
)
|
Total Scilex Notes
|
|
|
154,190
|
|
Current portion
|
|
|
(4,732
|
)
|
Long-term portion of Scilex Notes
|
|
$
|
149,458
|
|
The Company made principal payments of $3.5 million and $1.7 million during the nine months ended September 30, 2020 and 2019, respectively, which were based on a percentage of net sales of ZTlido. The imputed effective interest rate at September 30, 2020 was 6.5%. The amount of debt discount and debt issuance costs included in interest expense for the three months ended September 30, 2020 and 2019 was approximately $2.5 million and $3.2 million, respectively. During the nine months ended September 30, 2020 and 2019, the amount of debt discount and debt issuance costs included in interest expense was $8.2 million and $12.0 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.
The 2018 Purchase Agreements and Indenture, as amended, provide that, upon the occurrence of an event of default, the lenders thereunder may, by written notice to the Company, declare all of the outstanding principal and interest under the Indenture immediately due and payable. For purposes of the Indenture, an event of default includes, among other things, (i) a failure to pay any amounts when due under the Indenture, (ii) a breach or other failure to comply with the covenants (including financial, notice and reporting covenants) under the Indenture, (iii) a failure to make any payment on, or other event triggering an acceleration under, other material indebtedness of the Company, and (iv) the occurrence of certain insolvency or bankruptcy events (both voluntary and involuntary) involving the Company or certain of its subsidiaries. The Company is subject to certain customary default clauses under the Indenture and is in compliance with event of default clauses under the Indenture.
18
2018 Oaktree Term Loan Agreement
In November 2018, the Company entered into a Term Loan Agreement (the “Loan Agreement”) with certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the “Lenders”) and Oaktree Fund Administration, LLC, as administrative and collateral agent, for an initial term loan of $100.0 million (the “Initial Loan”). In May 2019, the Company entered into an amendment to the Loan Agreement, under which terms the Lenders agreed to make available to the Company $20.0 million (collectively, with the Initial Loan, the “Term Loans”). During the nine months ended September 30, 2020, the Company repaid $120.0 million of outstanding principal under the Term Loans plus approximately $9.4 million of related prepayment premium, exit fees and accrued interest thereon. In connection with the repayment of outstanding principal, the Company recorded a loss on debt settlement of $51.9 million.
Interest expense recognized for stated interest on the Term Loans was $0.0 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019 the interest expense for stated interest on the Term Loans totaled $3.0 million and $1.4 million, respectively. The amount of debt discount and debt issuance costs included in interest expense on the Term Loans for the three months ended September 30, 2020 and 2019 was $0.0 million and $0.6 million, respectively. During the nine months ended September 30, 2020 and 2019, the amount of debt discount and debt issuance costs included in interest expense was $2.2 million and $1.7 million, respectively.
8. Stockholders’ Equity
Aspire Transaction
In February 2020, the Company entered into a Common Stock Purchase Agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC, (“Aspire Capital”), pursuant to which Aspire Capital was committed to purchase up to an aggregate of $75.0 million of shares of the Company’s common stock over a 24-month term. Upon execution of the Aspire Purchase Agreement, the Company issued to Aspire Capital 897,308 shares of the Company’s common stock as a commitment fee. The Company used and is using proceeds it received under the Aspire Purchase Agreement for working capital and general corporate purposes and for the repayment of the Term Loans.
During the nine months ended September 30, 2020, the Company issued and sold an aggregate of 33,825,010 shares of the Company’s common stock to Aspire Capital for aggregate net proceeds to the Company of $75.0 million. On April 24, 2020, the Aspire Purchase Agreement terminated effective immediately in accordance with its terms as the Company issued and sold, as of such date, the full $75.0 million of shares available for issuance thereunder.
Equity Distribution Agreement
On April 27, 2020, the Company voluntarily terminated the Equity Distribution Agreement, dated October 1, 2019 (the “Distribution Agreement”), that the Company entered into with JMP Securities LLC (“JMP Sales Agent”), effective immediately. Pursuant to the Distribution Agreement, the Company could offer and sell, from time to time, through the JMP Sales Agent, shares of the Company’s common stock having an aggregate offering price of up to $75,000,000. During the term of the Distribution Agreement, the Company sold an aggregate of 2,120,149 shares of its common stock thereunder for aggregate gross proceeds to the Company of approximately $7.4 million. The Distribution Agreement was terminable at will by the Company with no penalty.
Sales Agreement
On April 27, 2020, the Company entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Sales Agent”), pursuant to which the Company may offer and sell through or to the Sales Agent (the “Offering”) up to $250.0 million in shares of its common stock (the “Shares”). Any Shares offered and sold in the Offering will be issued pursuant to the Company’s universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”) and the prospectus supplement relating to the Offering filed with the Securities and Exchange Commission (the “SEC”) on April 27, 2020. The Offering will terminate upon (a) the election of the Sales Agent upon the occurrence of certain adverse events, (b) three business days’ advance notice from one party to the other, or (c) the sale of all of the Shares. Under the terms of the Sales Agreement, the Sales Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the Sales Agreement. During the nine months ended September 30, 2020, the Company sold an aggregate of 17,579,496 shares of its common stock pursuant to the Sales Agreement for aggregate net proceeds to the Company of approximately $122.8 million. Subsequent to September 30, 2020 and through November 6, 2020, the Company sold an aggregate of 4,596,637 shares of its common stock pursuant to the Sales Agreement for aggregate net proceeds to the Company of approximately $36.2 million.
19
Common Stock Purchase Agreement
On April 27, 2020, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Arnaki Ltd. (the “Purchaser”), pursuant to which the Purchaser is committed to purchase up to an aggregate of $250.0 million of shares of the Company’s common stock over the 36-month term of the Purchase Agreement on the terms set forth therein. Any Shares offered and sold to the Purchaser will be issued pursuant to the Shelf Registration Statement and the prospectus supplement relating to offering of shares pursuant to the Purchase Agreement filed with the SEC on April 27, 2020.
On any business day over the term of the Purchase Agreement (each, a “Purchase Date”), the Company has the right, in its sole discretion, to present the Purchaser with a purchase notice directing the Purchaser to purchase up to 650,000 shares of common stock per business day. The Company and the Purchaser also may mutually agree to increase the number of shares that may be sold to as much as an additional 3,600,000 shares per Purchase Date. The Company also has the right, in its sole discretion, to grant the Purchaser an option to purchase additional shares of common stock, subject to a maximum number of shares determined by the Company on each Purchase Date. The aggregate purchase price paid by the Purchaser shall not exceed $5.0 million per Purchase Date, unless mutually agreed upon by the Company and the Purchaser. The purchase price of the common stock pursuant to the Purchase Agreement will generally be equal to 97.5% of the daily volume weighted average purchase price of the common stock on the Purchase Date. During the nine months ended September 30, 2020, the Company sold an aggregate of 1,423,077 shares of its common stock pursuant to the Purchase Agreement for aggregate net proceeds of $8.0 million.
Effective October 27, 2020, the Company voluntarily terminated the Purchase Agreement. The Purchase Agreement was terminable at will by the Company with no penalty.
9. Stock Based Compensation
2019 Stock Incentive Plan
A summary of stock option activity under the Sorrento Therapeutics, Inc. 2009 Stock Incentive Plan and the Sorrento Therapeutics, Inc. 2019 Stock Incentive Plan for the nine months ended September 30, 2020 is as follows (in thousands, except price data):
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2019
|
|
|
14,586,661
|
|
|
$
|
4.36
|
|
|
$
|
5,136
|
|
Options Granted
|
|
|
6,339,500
|
|
|
$
|
5.25
|
|
|
|
|
|
Options Canceled
|
|
|
(2,682,068
|
)
|
|
$
|
4.57
|
|
|
|
|
|
Options Exercised
|
|
|
(1,213,924
|
)
|
|
$
|
4.21
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
17,030,169
|
|
|
$
|
4.68
|
|
|
$
|
111,676
|
|
During the three and nine months ended September 30, 2020, the Company also granted 37,891 shares of unrestricted stock that vested on the grant date and were fully expensed in the period therein. 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.
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average grant date fair value
|
|
$
|
4.14
|
|
|
$
|
3.05
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
104
|
%
|
|
|
100
|
%
|
Risk-free interest rate
|
|
|
0.45
|
%
|
|
|
1.87
|
%
|
Expected life of options (years)
|
|
5.7
|
|
|
6.1
|
|
Total stock-based compensation recorded as operating expense under the Sorrento Therapeutics, Inc. 2019 Stock Incentive Plan was $5.0 million and $2.4 million for the three months ended September 30, 2020 and 2019, respectively, and $9.2 million and $6.1 million for the nine months ended September 30, 2020 and 2019, respectively. The total unrecognized compensation cost related to unvested stock option grants as of September 30, 2020 was $34.0 million and the weighted average period over which these grants are expected to vest is 2.7 years.
20
Scilex Holding Company
Under the Scilex Holding Company 2019 Stock Option Plan and Scilex Pharmaceuticals Inc. 2017 Equity Incentive Plan, total stock-based compensation recorded as operating expense was $1.3 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively, and $4.1 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively. The total unrecognized compensation cost related to unvested stock option grants as of September 30, 2020 was $11.5 million and the weighted average period over which these grants are expected to vest is 2.5 years.
Employee Stock Purchase Plan
On October 16, 2020 at the Company’s 2020 Annual Meeting of Stockholders (the “Annual Meeting”), the Company’s stockholders approved the Company’s 2020 Employee Stock Purchase Plan (“ESPP”). Under the terms of the ESPP, the Company’s employees can elect to have up to 15% of their annual compensation, up to a maximum of $25,000 per year, withheld to purchase shares of the Company’s common stock for a purchase price equal to 85% of the lesser of the fair market value per share (at closing) of the Company’s common stock on (i) the commencement date of the six-month offering period, or (ii) the respective purchase date. The initial offering period will commence on November 6th and end on May 5th, with subsequent offering periods commencing on May 6th of each year and ending on November 5th of the following year.
CEO Performance Award
On August 7, 2020, the Compensation Committee of the Company`s Board of Directors (the “Compensation Committee”) approved a grant to Henry Ji, Ph.D., the Company’s Chairman of the Board, Chief Executive Officer and President, of a 10-year CEO performance award tied solely to achieving market capitalization milestones (the “CEO Performance Award”), subject to approval of the Company’s stockholders at the Annual Meeting. The CEO Performance Award consists of a 10-year option to purchase an aggregate of 24,935,882 shares of the Company’s common stock, which was equal to 10% of the Company’s outstanding shares of common stock on the day prior to the date of grant, and vests in ten tranches. Each of the ten tranches vests only if a market capitalization milestone is met. To meet the first market capitalization milestone, the Company’s current market capitalization must increase to $5.0 billion. For the next two milestones, the Company’s market capitalization must continue to increase in additional $2.0 billion increments. For the three milestones thereafter, the Company’s market capitalization must increase in additional $3.0 billion increments. For the next three milestones thereafter, the Company’s market capitalization must increase in additional $4.0 billion increments. For the final milestone, the Company’s market capitalization must increase by an additional $5.0 billion. Thus, for Dr. Ji to fully vest in the award, the Company’s market capitalization must increase to $35.0 billion. The exercise price per share subject to the CEO Performance Award is $17.30, which is a 20% premium to the closing sales price of the Company’s common stock on August 7, 2020, the date the CEO Performance Award was approved by the Compensation Committee. The CEO Performance Award was approved by the Company`s stockholders at the Annual Meeting held on October 16, 2020, which represents the date of grant for accounting purposes.
10. Commitments and Contingencies
Litigation
In the normal course of business, the Company may be named as a defendant in one or more lawsuits. Other than as set forth below, the Company is not a party to any outstanding material litigation and management is currently not aware of any legal proceedings that, individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.
On April 3, 2019, the Company filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. Specifically, the Company has filed:
|
•
|
An arbitration demand with the American Arbitration Association in Los Angeles, California against NantPharma, LLC and Chief Executive Officer Patrick Soon-Shiong, related to alleged fraud and breaches of the Stock Sale and Purchase Agreement, dated May 14, 2015, entered into between NantPharma, LLC and the Company, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with SEC on August 7, 2015. On May 24, 2019, NantCell, Inc., Dr. Soon-Shiong and Immunotherapy NANTibody LLC (“NANTibody”) General Counsel Charles Kim filed a motion in the Los Angeles Superior Court to stay or dismiss the Company’s arbitration demand. On October 9, 2019, the Los Angeles Superior Court denied the motion to stay or dismiss the arbitration demand, and the arbitration is ongoing against NantPharma. On March 5, 2020, the Company filed a legal action against Dr. Soon-Shiong in Los Angeles Superior Court, asserting claims for fraudulent inducement and common law fraud, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The action alleges that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq for the purpose of halting its progression to the market. In connection with filing this civil
|
21
|
|
action in the Los Angeles Superior Court, where the Company will have the right to a jury trial against Dr. Soon-Shiong, the Company has dismissed Dr. Soon-Shiong from the related, ongoing arbitration against NantPharma, LLC; and
|
|
•
|
An action in the Los Angeles Superior Court derivatively on behalf of NANTibody against NantCell, Inc., NANTibody Board Member and NantCell, Inc. Chief Executive Officer Patrick Soon-Shiong, and NANTibody officer Charles Kim, related to several breaches of the June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between the Company and NantCell, Inc. The suit also alleges breaches of fiduciary duties and seeks, inter alia, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma, LLC and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring the Company’s equity method investment in NANTibody to its invested amount as of June 30, 2017 of $40.0 million. On May 24, 2019, NantCell, Inc. and Dr. Soon-Shiong filed a cross-complaint against the Company and Dr. Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Exclusive License Agreement for certain antibodies (dated June 11, 2015 and entered into between NANTibody, LLC and the Company), and tortious interference with contract. On May 24, 2019, NANTibody and NantPharma, LLC filed a new complaint in the action against the Company and Dr. Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Stock Sale and Purchase Agreement, alleged breaches of the Exclusive License Agreement for certain antibodies (dated April 21, 2015 and entered into between NantCell, Inc. and the Company), and tortious interference with contract. On July 8, 2019, the Company and Dr. Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Los Angeles Superior Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, LLC, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc., and NantPharma, LLC have re-filed their claims in arbitration with the American Arbitration Association. On May 4, 2020, the Company filed counterclaims against NANTibody and NantPharma related to breaches of the April 21, 2015 and June 11, 2015 Exclusive License Agreements. With the counterclaims, the Company is seeking money damages in an amount yet to be determined. The claims against Dr. Soon-Shiong have been stayed pending resolution of the claims filed in arbitration. The original derivative action is no longer stayed, and the parties are currently engaged in discovery in the suit.
|
On May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-00966-AJB-DEB, against the Company, its President, Chief Executive Officer 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. It is anticipated that these cases will be consolidated as part of the lead plaintiff and counsel appointment process under the Private Securities Litigation Reform Act. The Company is defending these matters vigorously.
Operating Leases
As of September 30, 2020, the Company’s leases have remaining lease terms of approximately 0.2 to 9.2 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating cash flows used for operating leases
|
|
$
|
2,531
|
|
|
$
|
1,712
|
|
|
$
|
7,354
|
|
|
$
|
5,057
|
|
ROU assets obtained in exchange for new and amended
operating lease liabilities
|
|
$
|
1,083
|
|
|
$
|
2,030
|
|
|
$
|
1,878
|
|
|
$
|
6,777
|
|
Operating lease expense
|
|
$
|
2,580
|
|
|
$
|
2,554
|
|
|
$
|
7,550
|
|
|
$
|
7,416
|
|
Weighted average remaining lease term in years
|
|
8.6
|
|
|
9.5
|
|
|
8.6
|
|
|
9.5
|
|
Weighted average discount rate
|
|
|
12.2
|
%
|
|
|
12.2
|
%
|
|
|
12.2
|
%
|
|
|
12.2
|
%
|
22
Maturities of lease liabilities were as follows (in thousands):
Years ending December 31,
|
|
Operating
leases
|
|
2020 (Remaining three months)
|
|
$
|
2,576
|
|
2021
|
|
|
9,985
|
|
2022
|
|
|
10,047
|
|
2023
|
|
|
10,285
|
|
2024
|
|
|
10,418
|
|
2025
|
|
|
9,757
|
|
Thereafter
|
|
|
43,174
|
|
Total lease payments
|
|
|
96,242
|
|
Less imputed interest
|
|
|
(41,319
|
)
|
Total lease liabilities as of September 30, 2020
|
|
$
|
54,923
|
|
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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. In addition, the CARES Act makes the Alternative Minimum Tax Credit 100% refundable for taxable years beginning in 2018 and 2019. The Company has recorded an income tax benefit of $0.1 million related to this legislation.
The Company’s income tax benefit of $2.1 million and $0.8 million reflect effective tax rates of 0.9% and 0.27% for the nine months ended September 30, 2020 and 2019, respectively. The Company’s income tax expense of $0.1 million and income tax benefit of $0.2 million reflect effective tax rates of 0.1% and 0.30% for the three months ended September 30, 2020 and 2019, respectively.
The difference between the expected statutory federal tax rate of 21% and the 0.9% effective tax rate for the nine months ended September 30, 2020 was primarily attributable to the valuation allowance against most of the Company’s deferred tax assets. For the nine months ended September 30, 2020, when compared to the same period in 2019, 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.
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. Related Party Agreements
As of September 30, 2020, approximately 14.7% of the outstanding capital stock of Scilex Holding represents a portion of noncontrolling interest and continues to be held by ITOCHU CHEMICAL FRONTIER Corporation. Scilex Pharma has entered into a product development agreement with ITOCHU CHEMICAL FRONTIER Corporation, which serves as the sole manufacturer and supplier to Scilex Pharma for the ZTlido product. Scilex Pharma purchased approximately $0.7 million of inventory from ITOCHU CHEMICAL FRONTIER Corporation during the nine months ended September 30, 2020.
13. Loss Per Share
For the three and nine months ended September 30, 2020 and 2019, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is calculated to give effect to all dilutive securities, using the treasury stock method and the if-converted method for potentially dilutive shares of common stock issuable upon the Semnur Share Exchange.
23
The following table sets forth the reconciliation of basic and diluted loss per share for the three and nine months ended September 30, 2020 and 2019 (in thousands except per share amounts):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sorrento
|
|
$
|
(84,023
|
)
|
|
$
|
(64,415
|
)
|
|
$
|
(226,959
|
)
|
|
$
|
(229,248
|
)
|
Net loss attributable to Semnur holders of Scilex Holding
|
|
|
(1,868
|
)
|
|
|
(6,205
|
)
|
|
|
(8,524
|
)
|
|
|
(34,819
|
)
|
Net loss used for diluted earnings per share
|
|
$
|
(85,891
|
)
|
|
$
|
(70,620
|
)
|
|
$
|
(235,483
|
)
|
|
$
|
(264,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for Basic Loss Per Share
|
|
|
251,211
|
|
|
|
130,800
|
|
|
|
217,050
|
|
|
|
125,240
|
|
Potentially dilutive shares of Sorrento common stock issuable upon Semnur Share Exchange
|
|
|
6,459
|
|
|
|
9,645
|
|
|
|
6,459
|
|
|
|
7,025
|
|
Denominator for Diluted Loss Per Share
|
|
|
257,670
|
|
|
|
140,445
|
|
|
|
223,509
|
|
|
|
132,265
|
|
Basic Loss Per Share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(1.83
|
)
|
Diluted Loss Per Share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(2.00
|
)
|
The potentially dilutive stock options that would have been excluded because the effect would have been anti-dilutive for the nine months ended September 30, 2020 and 2019 were 9.3 million and 9.7 million, respectively. The potentially dilutive warrants that would have been excluded because the effect would have been anti-dilutive for the nine months ended September 30, 2020 and 2019 were 18.6 million and 47.8 million, respectively.
14. 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.
The following table presents information about the Company’s reportable segments for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
External revenues
|
|
$
|
3,927
|
|
|
$
|
7,826
|
|
|
$
|
11,753
|
|
|
$
|
2,007
|
|
|
$
|
3,771
|
|
|
$
|
5,778
|
|
Operating expenses
|
|
|
82,868
|
|
|
|
11,989
|
|
|
|
94,857
|
|
|
|
34,480
|
|
|
|
24,581
|
|
|
|
59,061
|
|
Operating loss
|
|
|
(78,941
|
)
|
|
|
(4,163
|
)
|
|
|
(83,104
|
)
|
|
|
(32,473
|
)
|
|
|
(20,810
|
)
|
|
|
(53,283
|
)
|
Unrestricted cash
|
|
|
71,004
|
|
|
|
4,172
|
|
|
|
75,176
|
|
|
|
20,860
|
|
|
|
13,789
|
|
|
|
34,649
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
|
Sorrento
Therapeutics
|
|
|
Scilex
|
|
|
Total
|
|
External revenues
|
|
$
|
9,694
|
|
|
$
|
18,787
|
|
|
$
|
28,481
|
|
|
$
|
7,109
|
|
|
$
|
11,289
|
|
|
$
|
18,398
|
|
Operating expenses
|
|
|
157,559
|
|
|
|
44,917
|
|
|
|
202,476
|
|
|
|
105,912
|
|
|
|
139,300
|
|
|
$
|
245,212
|
|
Operating loss
|
|
|
(147,865
|
)
|
|
|
(26,130
|
)
|
|
|
(173,995
|
)
|
|
|
(98,803
|
)
|
|
|
(128,011
|
)
|
|
|
(226,814
|
)
|
Unrestricted cash
|
|
|
71,004
|
|
|
|
4,172
|
|
|
|
75,176
|
|
|
|
20,860
|
|
|
|
13,789
|
|
|
|
34,649
|
|
24
15. Subsequent Events
License Agreement with Personalized Stem Cells, Inc.
On October 12, 2020, the Company entered into a license agreement (the “License Agreement”) with Personalized Stem Cells, Inc. (“PSC”). Pursuant to the License Agreement, PSC granted the Company an exclusive license and right under certain patents, certain know-how and other intellectual property to fully utilize, exploit and commercialize certain products and services using allogeneic adipose-derived stem cells for or in respect of human health, including the diagnosis and treatment and/or cure of any human disease or disorder (excluding commercial sales for the diagnosis, treatment and/or cure of SARS-CoV-2 or other respiratory diseases in the People’s Republic of China) worldwide (excluding the People’s Republic of China for products directed at COVID-19 or other respiratory diseases). PSC also agreed to transfer certain cell lines composed of stromal vascular cells, master cell banks and finished final drug lots (the “Product Materials”) to the Company. The Company agreed to grant PSC rights to use data derived by the Company from a certain Phase I COVID-19 study for PSC’s own programs that are not competitive with the businesses or activities of the Company, and for PSC to sublicense such data to third parties for research, development and regulatory purposes.
As consideration for the license under the License Agreement, the Company has agreed to pay PSC an upfront license fee of $3.5 million in cash. The Company also agreed to pay PSC (i) a milestone payment upon the issuance of a regulatory approval, and (ii) certain milestone payments upon PSC’s manufacture and delivery of the Product Materials to the Company. The Company will also pay royalties in the low-single digit percentages of annual net sales of licensed products and services by the Company and a share of any sublicense revenue received by the Company from sublicensees.
25