Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as “assumes,” “plans,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” or “will,” and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (the “SEC”). Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
Sorrento Therapeutics, Inc., together with its subsidiaries (collectively, the “Company”, “we”, “us”, and “our”) is a clinical stage and commercial biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to address unmet medical needs.
At our core, we are antibody-centric and leverage our proprietary G-MAB™ library and targeted delivery modalities to generate the next generation of cancer therapeutics. Our fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47, BCMA, LAG3, CTLA-4, CD137 and SARS-CoV-2 neutralizing antibodies, among others. We also have programs assessing the use of our technologies and products in autoimmune, inflammatory, viral and neurodegenerative diseases.
Our vision is to leverage these antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy (“CAR-T”), dimeric antigen receptor T-cell therapy (“DAR-T™”), antibody drug conjugates (“ADCs”) as well as bispecific antibody approaches. We acquired Sofusa®, a drug delivery technology, in July 2018, which delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and fewer adverse effects than standard parenteral therapy. Additionally, our majority-owned subsidiary, Scilex Holding Company (“Scilex Holding”), acquired the assets of Semnur Pharmaceuticals, Inc. (“Semnur”) in March 2019. Semnur’s SEMDEXATM (“SP-102”) compound has the potential to become the first Food and Drug Administration (“FDA”)-approved epidural steroid product for the treatment of sciatica. In response to the global SARS-CoV-2 (“COVID-19”) pandemic, we are utilizing the Bruton’s tyrosine kinase (“BTK”) inhibitor (Abivertinib, acquired from ACEA Therapeutics, Inc.) in a U.S. Phase II study of cytokine storm associated with a COVID-19 infection and in a Phase II trial in Brazil in mild, moderate and severe COVID-19 patients. We are also internally developing and conducting clinical studies for potential coronavirus antiviral therapies and vaccines, including COVI-MSC™, COVI-AMG™, COVIDROPSTM, COVIGUARDTM and COVISHIELDTM; and diagnostic test solutions, including COVITRACK™, COVISTIX™ and COVITRACE™.
With each of our clinical and preclinical programs, we aim to tailor our therapies to treat specific stages in the evolution of a disease, from elimination, to equilibrium and escape. In addition, our objective in our immuno-oncology programs is to focus on tumors that are resistant to current treatments and where we can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. We have several immuno-oncology programs that are in or near to entering the clinic. These include cellular therapies, oncolytic viruses (SeprehvecTM) and a palliative care program targeted to treat intractable cancer pain (RTX). Our cellular therapy programs focus on CAR-T and DAR-T for adoptive cellular immunotherapy to treat both solid and liquid tumors.
From the start of the COVID-19 pandemic, our mission has been to leverage our deep expertise in developing targeted antibodies for cancer immunotherapy to create best-in-category treatments and diagnostics to ease suffering and assist in the global response to COVID-19. We have leveraged, and continue to leverage, our G-MAB library and antibody development engineering capabilities to advance a number of promising diagnostics and neutralizing antibody candidates to test and treat COVID-19 and the immune reactions associated with SARS-CoV-2 infection.
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Our first generation SARS-CoV-2 neutralizing antibody was STI-1499 (COVIGUARD™), which was engineered to prevent antibody dependent enhancement of disease. This antibody was then optimized to produce the highly potent STI-2020, which is being developed in two outpatient formulations: COVI-AMG (IV-push injection) and COVIDROPS (intranasal). A U.S. Food and Drug Administration (“FDA”)-cleared Phase I study of COVI-AMG has been completed, and the FDA has cleared a Phase II study of COVI-AMG in outpatients with COVID-19 and a Phase II study of COVI-AMG in hospitalized patients with moderate or severe COVID-19. We have also completed an FDA-cleared Phase I study of COVIDROPS of healthy volunteers and are currently enrolling patients with mild COVID-19 in an outpatient study in the UK. We are also developing two promising potential rescue treatments with Abivertinib, an oral next generation dual EGFR/BTK inhibitor, to treat moderate to severe hospitalized COVID-19 patients, and COVI-MSC™, human allogeneic adipose-derived mesenchymal stem cells for patients suffering from COVID-19-induced acute respiratory distress syndrome (ARDS). We have completed enrollment in an FDA-cleared Phase II study for Abivertinib and an FDA-cleared Phase Ib study for COVI-MSC. We are also working with the Brazilian Health Regulatory Agency (ANVISA) to conduct a COVID-19 study with Abivertinib and MSC. The Abivertinib study is fully enrolled and we are awaiting the clinical results, and we also have clearance to begin a Phase II study with COVI-MSC. In other preclinical development, we are rapidly screening new neutralizing antibodies to address the multiple emerging variants of SARS-CoV-2 to potentially combine with STI-2020 (COVI-AMG) in a cocktail therapy (COVISHIELD™). We are also developing a multi-variant mRNA vaccine to potentially provide protection for all of the current variants of concern.
In furtherance of our goal to develop products across the entire continuum of COVID-19 solutions, we are further developing a number of highly sensitive and rapid diagnostic tests. COVISTIX™ is a lateral flow antigen test that uses a proprietary platinum-based colloid and antibody combination, resulting in high sensitivity and accuracy. This is a simple and rapid (15-minute) test with a shallow nasal swab and is designed for point-of-care and at-home use. This product has been approved for use in Mexico as a point-of-care test. COVITRACK™ is a rapid SARS-CoV-2 IgG/IgM antibody test kit intended for use initially in clinical laboratories and in point of care settings to quickly identify individuals with anti-SARS-CoV-2 antibodies post-infection or post-vaccination. COVITRACE™ was licensed from Columbia University as a rapid single step on-site colorimetric detection test for SARS-COV-2 genomic RNA from a saliva sample using targeted nucleic acid amplification for high throughput point-of-care situations.
We have reported early data from Phase I trials of our carcinoembryonic antigen (“CEA”)-directed CAR-T program. We have treated five patients with stage 4, unresectable adenocarcinoma (four with pancreatic and one with colorectal cancer) and CEA-positive liver metastases with anti-CEA CAR-T. We successfully submitted an Investigational New Drug application (“IND”) for anti-CD38 CAR-T for the treatment of refractory or relapsed multiple myeloma (“RRMM”), obtained clearance from the FDA and commenced a human clinical trial for this indication in early 2018. We have dosed eleven patients. We intend to close this study to further enrollment and start up a similar anti-CD38 CAR-T construct without the myc-tag (which cannot be used in Europe), and to continue treating RRMM patients in a Phase Ib/IIa study, which is expected to begin enrollment in the fourth quarter of 2021. We have also received IND clearances from the FDA to start a Phase I trial for our anti-CD47 mAb (STI-6643) in patients with selected relapsed or refractory malignancies, and to start the first Phase I trial for our allogeneic CD38 DAR-T cell therapy in multiple myeloma patients, the first lead clinical candidate from our DAR-T platform.
Broadly speaking, we believe we are one of the world’s leading cell therapy companies today due to our investments in technology and infrastructure, which have enabled significant progress in developing our next-generation non-viral, “off-the-shelf” allogeneic DAR-T solutions. With “off-the-shelf” solutions, DAR-T therapy can truly become a drug product platform rather than a treatment procedure.
With respect to our ADC program, we began enrolling patients in the first quarter of 2021 in a Phase Ib ascending dose study of our CD38 ADC for systemic Amyloid light-chain (AL) amyloidosis and RRMM. An anti-TROP-2 ADC has been approved for clinical trials in China by our partners with a drug payload SN38 (a DNA polymerase inhibitor) (ESG-401) and we have now received FDA authorization to begin clinical trials in the U.S. Additionally, based upon our recently announced exclusive licensing arrangement with Mayo Clinic for its antibody-drug-nanoparticle albumin-bound (ADNAB™) platform, the next generation in ADC technology, we intend to file several INDs to treat various cancer targets.
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Outside of immuno-oncology programs, as part of our global aim to provide a wide range of therapeutic products to meet underserved markets, we have made investments in non-opioid pain management. These include resiniferatoxin (“RTX”), which is a non-opioid-based toxin that specifically targets transient receptor potential vanilloid-1 (“TRPV1”) which, depending on the site of injection, can ablate, or destroy, nerves expressing TRPV1 or temporarily defunctionalize them. TRPV1 is responsible for the noxious chronic and inflammatory pain signaling that occurs post injury or trauma but leaves other nerve functions intact. RTX has been granted orphan drug status for the treatment of intractable pain with end-stage cancer and two Phase Ib trials (intrathecal and epidural routes) have been completed. A Phase Ib trial studying tolerance and efficacy of RTX for the control of moderate to severe osteoarthritis knee pain was initiated in late 2018 and intermediate results have shown efficacy with no dose limiting toxicities. We have received clearances to proceed with Phase II clinical trials of RTX for treating severe cancer pain (epidural) and for treating moderate-to-severe osteoarthritis of the knee pain (intra-articular). Both trials are expected to commence in 2021 and enrollment in both trials is expected to be completed in 2022.
Also, in this area, we have developed in-house and acquired proprietary technologies to responsibly develop next generation, branded pharmaceutical products to better manage patients’ medical conditions, maximize the quality of life of patients and assist healthcare providers. The flagship product of our majority-owned subsidiary, Scilex Pharmaceuticals Inc. (“Scilex Pharma”), ZTlido® (lidocaine topical system 1.8%) (“ZTlido”), is a next-generation lidocaine delivery system, which was approved by the FDA for the treatment of postherpetic neuralgia, a severe neuropathic pain condition in February 2018, and was commercially launched in October 2018. Scilex Pharma has now built a full commercial organization, which includes sales, marketing, market access and medical affairs.
Impact of COVID-19 on Our Business
We are closely monitoring the COVID-19 pandemic and its potential impact on our business. In an effort to protect the health and safety of our employees, we took proactive action from the earliest signs of the outbreak, including implementing social distancing policies at our facilities, facilitating remote working arrangements and imposing employee travel restrictions.
On September 24, 2021, the Safer Federal Workforce Task Force issued written guidance to implement Executive Order 14042 (“Ensuring Adequate COVID Safety Protocols for Federal Contractors”), which was signed by President Biden on September 9, 2021. As a federal contractor, we have mandated that all of our employees and, in addition, contractors that enter our U.S. buildings and certain other locations, be fully vaccinated against COVID-19, subject to disability and religious exemptions, by December 8, 2021.
For more information on the risks associated with COVID-19, refer to Part II, Item 1A, “Risk Factors” herein.
Recent Developments
Acquisition of ACEA Therapeutics, Inc.
On June 1, 2021, we 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 us, AT Merger Sub, Inc., an exempted company incorporated with limited liability in the Cayman Islands and our wholly owned subsidiary, ACEA and Fortis Advisors LLC, as representative of the shareholders of ACEA, whereby ACEA became our wholly owned subsidiary. 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 us for the acquisition of ACEA was equal to $38.0 million plus approximately $1.9 million (which amount represented our 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 our common stock and an aggregate of 5,519,469 shares (“Indebtedness Shares”) of our 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 our common stock on the date that is six months after June 1, 2021.
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In addition to the Closing Consideration, we 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 us and ACEA, which agreement was terminated in its entirety upon completion of the acquisition of ACEA.
The preliminary purchase price allocation was calculated based on an upfront consideration of $44.1 million, which was based on our closing share price on June 1, 2021. The ACEA Merger Agreement resulted in an upfront consideration of $44.1 million 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 we are 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 recognized as incurred and compensation expense associated with pre-merger option awards was recognized for post-combination services. 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 September 30, 2021, and such matters may result in adjustments to the purchase price allocation.
We are 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 we do 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.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
Revenues. Revenues were $12.1 million for the three months ended September 30, 2021, as compared to $11.8 million for the three months ended September 30, 2020.
Revenues in our Sorrento Therapeutics segment increased from $3.9 million to $4.5 million for the three months ended September 30, 2021 compared to the same quarter of the prior year and were primarily attributed to higher contract manufacturing service revenues.
Revenues in our Scilex segment decreased from $7.8 million to $7.5 million for the three months ended September 30, 2021 compared to the same period of the prior year. The decrease is attributed to higher gross-to-net provisions for Medicaid utilization related to sales of ZTlido.
Cost of revenues. Cost of revenues for the three months ended September 30, 2021 and 2020 were $3.4 million and $2.7 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. These costs generally include employee-related expenses, including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.
Cost of revenues for our Sorrento Therapeutics segment increased by $0.1 million and was driven by the increase in revenues.
Cost of revenues for our Scilex segment increased by $0.6 million and was attributed to higher provisions for excess inventories.
Research and Development (“R&D”) Expenses. R&D expenses for the three months ended September 30, 2021 and 2020 were $49.4 million and $32.0 million, respectively. R&D expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our RTX, COVID-19, SP-102, oncolytic viruses, ADC and oncology programs. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses.
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R&D expenses for our Sorrento Therapeutics segment increased by $18.2 million as compared to the same quarter of the prior year and were driven by higher headcount and increased clinical development costs spent on advancing our various R&D programs.
R&D expenses for our Scilex segment decreased by $0.7 million as compared to the same quarter of the prior year and were driven by lower clinical development costs.
Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses during the three months ended September 30, 2021 totaled $11.1 million, of which $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period as further described in Note 4 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and $0.9 million related to investments in various licensing arrangements entered during the period.
Acquired in-process research and development expenses during the three months ended September 30, 2020 totaled $34.8 million and related to various licensing arrangements entered into during the period.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses for the three months ended September 30, 2021 and 2020 were $48.5 million and $24.3 million, respectively, and consisted primarily of salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.
SG&A expenses for our Sorrento Therapeutics segment increased by approximately $20.4 million and were primarily attributed to higher headcount, professional fees and stock-based compensation expense as compared to the same quarter of the prior year.
SG&A expenses for our Scilex segment increased by approximately $3.8 million and were attributed to higher professional fees.
Loss on Derivative Liabilities. Loss on derivative liabilities for the three months ended September 30, 2021 was $1.8 million compared to a loss of $1.0 million in the same quarter in 2020 and was primarily attributed to revised probabilities and revised sales forecasts as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Loss on Marketable Investments. Loss on marketable investments reflects $6.4 million of realized losses from the sale of our shares of ImmunityBio, Inc. during the period and $7.7 million in unrealized losses related to the change in fair value of our shares of Celularity Inc. We recorded approximately $0.7 million in unrealized gains related to other investments during the period.
Interest Expense, net. Interest expense for the three months ended September 30, 2021 and 2020 was $2.9 million and $2.6 million, respectively. The decrease resulted primarily from a decrease in interest expense associated with the term loans with Oaktree Capital Management L.P. and affiliates (the “Oaktree Term Loans”), which were fully repaid in the year ended December 31, 2020. Interest income was immaterial for both periods.
Income Tax Expense. Income tax expense for the three months ended September 30, 2021 was $0.4 million as compared to $0.1 million for the three months ended September 30, 2020. The increase in income tax expense was primarily attributable to return to provision adjustments and income tax payments, offset by income tax benefits from stock-based compensation windfall, revaluation of deferred taxes for U.S. state blended effective tax rate adjustments, and changes in valuation allowance.
Net Loss. Net loss for the three months ended September 30, 2021 and 2020 was $120.0 million and $87.1 million, respectively.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenues. Revenues were $39.8 million for the nine months ended September 30, 2021, as compared to $28.5 million for the nine months ended September 30, 2020.
Revenues in our Sorrento Therapeutics segment increased from $9.7 million to $13.0 million for the nine months ended September 30, 2021, compared to the same period of the prior year and were primarily attributed to higher contract manufacturing service revenues.
Revenues in our Scilex segment increased from $18.8 million to $22.3 million for the nine months ended September 30, 2021 compared to the same period of the prior year and were attributed to increased product sales of ZTlido.
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Cost of revenues. Cost of revenues for the nine months ended September 30, 2021 and 2020 were $9.9 million and $7.4 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. These costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.
Cost of revenues for our Sorrento Therapeutics segment increased by $1.8 million and was driven by the increase in revenues.
Cost of revenues for our Scilex segment increased by $0.8 million and was attributed to higher sales volumes of ZTlido.
R&D Expenses. R&D expenses for the nine months ended September 30, 2021 and 2020 were $147.8 million and $77.3 million, respectively. R&D expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our RTX, COVID-19, SP-102, oncolytic viruses, ADC and oncology programs. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses.
R&D expenses for our Sorrento Therapeutics segment increased by $71.0 million as compared to the same period of the prior fiscal year and were primarily driven by higher headcount and increased clinical development costs spent on advancing our various R&D programs.
R&D expenses for our Scilex segment decreased by $0.5 million as compared to the same period of the prior fiscal year and were primarily driven by lower clinical development cost.
Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the nine months ended September 30, 2021 totaled $23.6 million and related to the Aardvark Asset Purchase Agreement and the entry into the Mount Sinai License Agreement during the period as further described in Note 6 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Additionally, $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period as further described in Note 4 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and $0.9 million related to our investments in various licensing arrangements entered into during the period. Acquired in-process research and development expenses for the nine months ended September 30, 2020 totaled $39.7 million and primarily related to various licensing arrangements entered into during the period, as well as other investments in new technologies and preclinical programs.
SG&A Expenses. SG&A expenses for the nine months ended September 30, 2021 and 2020 were $142.3 million and $75.0 million, respectively, and consisted primarily of salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.
SG&A expenses for our Sorrento Therapeutics segment increased by approximately $63.9 million and were primarily attributed to higher headcount and stock-based compensation expense as compared to the same period of the prior year.
SG&A expenses for our Scilex segment increased by approximately $3.3 million and were primarily attributed to cost savings resulting from a shift to more favorable marketing programs for ZTlido and optimizing the sales force, partially offset by higher selling expenses to support higher sales volumes of ZTlido.
Gain on Derivative Liabilities. Gain on derivative liabilities for the nine months ended September 30, 2021 was $0.1 million compared to a gain of $5.9 million in the same period in 2020 and was primarily attributed to revised probabilities and revised sales forecasts as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Gain on Marketable Investments. Gain on marketable investments reflects $24.1 million of realized gains from the sale of our shares of ImmunityBio, Inc. during the period and $7.7 million in unrealized losses related to the change in fair value of our shares of Celularity Inc. We recorded approximately $0.7 million in unrealized gains related to other investments during the period.
Loss on Debt Extinguishment. Loss on debt extinguishment for the nine months ended September 30, 2021 was $6.7 million and was primarily attributed to the repurchases of the outstanding principal on the Scilex Notes, and was partially offset by short-term debt forgiveness. Loss on debt extinguishment for the nine months ended September 30, 2020 was $51.9 million and was attributed to the repayments of outstanding principal on the Oaktree Term Loans.
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Interest Expense. Interest expense for the nine months ended September 30, 2021 and 2020 was $7.3 million and $17.7 million, respectively. The decrease resulted primarily from a decrease in interest expense associated with the Oaktree Term Loans, which were fully repaid in the year ended December 31, 2020. Interest income was immaterial for both periods.
Income Tax Benefit. Income tax benefit for the nine months ended September 30, 2021 and 2020 was $0.5 million and $2.1 million, respectively. The decrease in income tax benefit was primarily attributable to return to provision adjustments and income tax payments, offset by income tax benefits from stock-based compensation windfall, revaluation of deferred taxes for U.S. state blended effective tax rate adjustments, and changes in valuation allowance.
Net Loss. Net loss for the nine months ended September 30, 2021 and 2020 was $284.3 million and $241.3 million, respectively.
Liquidity and Capital Resources
As of September 30, 2021, we had $39.7 million in cash and cash equivalents attributable in part to the following financing arrangements:
Debt Financings
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, we, 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 September 30, 2021 is $30.4 million. As a part of the preliminary purchase price allocation, we estimated the fair value of the Contract and Loan Agreement to be approximately $17.1 million.
Scilex Notes
In September 2018, Scilex Pharma entered into purchase agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and us. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of $224.0 million (the “Scilex Notes”) for an aggregate purchase price of $140.0 million (the “Scilex Notes Offering”). In connection with the Scilex Notes Offering, Scilex Pharma also entered into an Indenture (the “Indenture”) governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee and collateral agent, and us. Pursuant to the Indenture, we agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.
On December 14, 2020, we, Scilex Pharma, U.S. Bank National Association, as trustee and collateral agent, and the beneficial owners of the Scilex Notes and the Scilex Note Purchasers entered into a Consent Under and Amendment No. 3 to Indenture and Letter of Credit (the “Amendment”), which amended: (i) the Indenture, and (ii) the irrevocable standby letter of credit that we issued to Scilex Pharma in connection with the Indenture.
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On December 14, 2020, and in connection with the Amendment, the aggregate $45.0 million in restricted funds held in previously established reserve and collateral accounts were released and Scilex Pharma utilized such funds to repurchase an aggregate of $45.0 million in principal amount of the Scilex Notes. Scilex Pharma also repurchased $20.0 million in principal amount of the Scilex Notes in each of December 2020, February 2021 and April 2021.
Equity Financings
Amended Sales Agreement
On December 4, 2020, we entered into Amendment No. 1 to that certain Sales Agreement, dated April 27, 2020, with A.G.P./Alliance Global Partners, which provides that we may, from time to time, offer and sell securities to A.G.P./Alliance Global Partners in at-the-market transactions (as amended, the “Amended Sales Agreement”). During the nine months ended September 30, 2021, we issued and sold an aggregate of 14,844,426 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds of approximately $134.9 million. Subsequent to September 30, 2021 and through November 2, 2021, we sold an aggregate of 3,863,371 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to us of approximately $25.2 million.
Marketable Investments
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, we owned 10,000,000 shares of common stock of ImmunityBio, and we therefore received 8,190,000 shares of common stock of the post-merger company.
Prior to the Merger, our investment in ImmunityBio was historically included as an equity investment in our consolidated balance sheets and accounted for as an equity security without a readily determinable fair value. As of the completion of the Merger, we accounted for our investment in ImmunityBio as an equity investment with a readily determinable fair value and reclassified our investment in ImmunityBio to marketable investments within our consolidated balance sheets. The investment in ImmunityBio was classified as a current asset because the investment was liquidated to finance our current operations. In connection with the change in fair value of our investment in ImmunityBio, we recorded a realized loss on marketable investments of $6.4 million during the three months ended September 30, 2021 and a realized gain on marketable investments of $24.1 million during the nine months ended September 30, 2021. We sold 8,190,000 shares of ImmunityBio common stock during the nine months ended September 30, 2021 for net proceeds to us of $124.0 million. We had no remaining shares of ImmunityBio common stock as of September 30, 2021.
On July 16, 2021, Celularity Inc. (“Pre-Merger Celularity”), a company of which we 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. We received 19,922,124 shares of Class A common stock of the post-merger company in the Celularity Merger. We 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. Our investment in Celularity has historically been accounted for as an equity security without a readily determinable fair value. As of the trading commencement date, we account for our investment in Celularity as an equity security with a readily determinable fair value. As of September 30, 2021, we 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 us 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.
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Contingent Consideration
We have contingent consideration obligations in connection with certain acquisition and licensing transactions that are contingent upon achieving certain specified milestones or the occurrence of certain events, including those described within the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Upon the achievement of such milestones or the occurrence of such events, we will be obligated to make certain cash or stock payments in accordance with the terms of such acquisition and license agreements.
Use of Cash
Cash Flows from Operating Activities. Net cash used for operating activities was $209.7 million for the nine months ended September 30, 2021 as compared to $118.7 million for the nine months ended September 30, 2020. Net cash used reflects the cash spent on our research activities and cash spent to support the commercial launch of our products.
We expect to continue to incur substantial and increasing losses and negative net cash flows from operating activities as we seek to expand and support our clinical and preclinical development and research activities, support the commercial launch of our products and fund our joint ventures, collaborations and other third-party agreements.
Cash Flows from Investing Activities. Net cash used by investing activities was $82.1 million for the nine months ended September 30, 2021, and was attributed to proceeds of $124.1 million from sales of marketable investments, partially offset by $34.6 million related to various investments in new technologies and preclinical programs, $0.8 million in connection with the acquisition of ACEA, net of cash acquired, and approximately $6.7 million primarily attributed to expenditures on laboratory equipment. During the nine months ended September 30, 2020, net cash used by investing activities was $28.5 million, which was comprised of $22.3 million in licensing arrangements, $2.3 million in new technologies and preclinical programs and $3.8 million on equipment and building improvements.
Cash Flows from Financing Activities. Net cash provided by financing activities was $110.5 million for the nine months ended September 30, 2021 as compared to net cash provided by financing of $185.8 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, we received $134.9 million from equity offerings, proceeds from short-term debt of $35.1 million and proceeds of $13.3 million from common stock issuances and warrant exercises. During the nine months ended September 30, 2021, we repaid $44.2 million in principal amount of the Scilex Notes, of which $32.4 million was attributed to principal included within financing activities and $11.8 million was attributed to principal included in operating activities. We also repaid $40.3 million in other short-term debt. During the nine months ended September 30, 2020, we repaid $120.0 million of outstanding principal under the Term Loans, paid $6.3 million of related exit and prepayment fees thereon, made payments of $3.5 million on the Scilex Notes and repaid $3.0 million in short-term debt.
Future Liquidity Needs. We have principally financed our operations through underwritten public offerings and private debt and equity financings, as we have not generated any significant product related revenue from our principal operations to date. We will need to raise additional capital before we exhaust our current cash resources in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally. We will seek to raise additional funds through various potential sources, such as equity and debt financings or through corporate collaboration, grant agreements and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.
We cannot be certain that additional funding will be available on acceptable terms, or at all. If we issue additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. We may also seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available.
We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) advance our product pipeline and other product candidates into clinical trials, (ii) continue our development of, and seek regulatory approvals for, our product candidates in clinical trials, (iii) expand our corporate infrastructure, and (iv) incur our share of joint venture and collaboration costs for our products and technologies.
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Uses of Cash. We have and plan to expand our business and intellectual property portfolio through the acquisition of new businesses and technologies as well as entering into licensing arrangements.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to debt, derivative liabilities, revenue recognition, leases, contingent liabilities and acquisition consideration payable, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and there have been no material changes during the three months ended September 30, 2021.
Contractual Obligations and Commitments
As of September 30, 2021, there were no material changes outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Off-Balance Sheet Arrangements
Since our inception through September 30, 2021, other than off-balance sheet arrangements already disclosed, we have not engaged in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
New Accounting Pronouncements
Refer to Note 1, “Significant Accounting Policies” and “Recent Accounting Pronouncements” in the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.