NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
1
.
Nature of Operations and Business Activities
Na
t
ure of Operations and Basis of Presentation
Sorrento Therapeutics, Inc. (Nasdaq: SRNE), together with its subsidiaries (collectively, the “Company”) is a clinical stage and commercial biopharma company focused on delivering innovative and clinically meaningful therapies to patients and their families, globally, to address unmet medical needs. The Company primarily focuses on therapeutic areas in Immuno-Oncology and Non-Opioid Pain Management. The Company also has programs assessing the use of its technologies and products in auto-immune, inflammatory and neurodegenerative diseases.
At its core, the Company is an antibody-centric company and leverages its proprietary G-MAB™ library and targeted delivery modalities to generate the next generation of cancer therapeutics. The Company’s fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47, c-MET, VEGFR2, CCR2 and CD137 among others.
The Company’s vision is to leverage these antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy (“CAR-T”), dimeric antigen receptor T-cell therapy (“DAR-T”), antibody drug conjugates (“ADCs”) as well as bispecific antibody approaches. The Company acquired Sofusa
®
, a revolutionary drug delivery system, in July 2018, which delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and fewer adverse effects than standard parenteral immunotherapy. Additionally, the Company’s majority owned subsidiary, Scilex Holding Company (“Scilex Holding”), acquired the assets of Semnur Pharmaceuticals, Inc. (“Semnur”). Semnur’s SEMDEXA
TM
(SP-102) compound is expected to be the first FDA-approved non-opioid corticosteroid formulated as a viscous gel injection in development for the treatment of lumbosacral radicular pain/sciatica, containing no neurotoxic preservatives, surfactants, solvents or particulates.
With each of the Company’s clinical and pre-clinical programs, it aims to tailor its therapies to treat specific stages in the evolution of cancer, from elimination, to equilibrium and escape. In addition, the Company’s objective is to focus on tumors that are resistant to current treatments and where it can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. The Company has several immuno-oncology programs that are in or close to entering the clinic. These include cellular therapies, an oncolytic virus and a palliative care program targeted to treat intractable cancer pain.
Through
June 30, 2019
, the Company had devoted substantially all of its efforts to developing products, raising capital and building infrastructure.
The accompanying consolidated financial statements include the accounts of the Company’s subsidiaries. For consolidated entities where the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal, recurring and necessary for a fair statement of financial position, results of operations and cash flows. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
. Operating results for interim periods are not expected to be indicative of operating results for the Company’s
2019
fiscal year, or any subsequent period.
2. Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure.
The Company has plans in place to obtain sufficient additional funds to fulfill its operating and capital requirements for the next 12 months. The Company’s plans include continuing to fund its operating losses and capital funding needs through
public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued. As a result, management has concluded that the aforementioned conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.
As of
June 30, 2019
, the Company had
$350.9 million
of long term debt outstanding, comprised of convertible notes issued pursuant to the 2018 Securities Purchase Agreement (as defined below), the 2018 Purchase Agreements (as defined below) and the Indenture (as defined below) for Scilex Pharmaceuticals Inc. (“Scilex”) and the Loan Agreement (as defined below) (collectively, the “Debt Arrangements”) (See Note 10).
Each of the Debt Arrangements provides that, upon the occurrence of an event of default, the Purchasers or Lenders thereof (as applicable) may, by written notice to the Company, declare all of the outstanding principal and interest under such Debt Arrangement immediately due and payable. For purposes of the Debt Arrangements, an event of default includes, among other things, (i) the failure to pay outstanding indebtedness when due, (ii) the Company’s breach of certain representations, warranties, covenants or obligations under the documents relating to the Debt Arrangements, or (iii) the occurrence of certain insolvency events involving the Company. The Company believes that it is not probable that the material adverse event clause under the Debt Arrangements will be exercised.
If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. The Company may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. The consolidated financial statements do not reflect any adjustments that might be necessary if the Company is unable to continue as a going concern.
3. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.
Fair Value of Financial Instruments
The Company follows accounting guidance on fair value measurements for financial instruments measured on a recurring basis, as well as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair value is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial instruments:
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•
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Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.
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•
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Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace.
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•
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Level 3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
|
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires it to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the
fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.
The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable and payable, and other financial instruments in current assets or current liabilities.
Inventory
The Company determines inventory cost on a first-in, first-out basis. The Company reduces the carrying value of inventories to a lower of cost or net realizable value for those items that are potentially excess, obsolete or slow-moving. The Company reserves for excess and obsolete inventory based upon historical experience, sales trends, and specific categories of inventory and age of on-hand inventory. As of
June 30, 2019
, the Company’s inventory is primarily comprised of finished goods.
Research and Development Costs
All research and development costs are charged to expense as incurred. Such costs primarily consist of lab supplies, contract services, stock-based compensation expense, salaries and related benefits.
Acquired In-Process Research and Development Expense
The Company has acquired and may continue to acquire the rights to develop and commercialize new drug candidates. The up-front payments to acquire a new drug compound or drug delivery devices, as well as future milestone payments associated with asset acquisitions that do not meet the definition of a derivative and are deemed probable to achieve the milestones, are immediately expensed as acquired in-process research and development provided that the drug has not obtained regulatory approval for marketing and, absent obtaining such approval, have no alternative future use. The acquired in-process research and development related to the business combination of Virttu Biologics Limited (“Virttu”), for which certain products are under development and expected to be commercialized in the future, was capitalized and recorded within “Intangibles, net” on the accompanying consolidated balance sheet. The Company commenced amortization of acquired in-process research and development related to the business combination of Scilex upon commercialization of ZTlido
®
(lidocaine topical system) 1.8% in October 2018. Capitalized in-process research and development will be reviewed annually for impairment or more frequently as changes in circumstance or the occurrence of events suggest that the remaining value may not be recoverable. (See Note 4 for further discussion of acquired in-process research and development expense related to the acquisition of Semnur Pharmaceuticals, Inc.).
Revenue Recognition
As of June 30, 2019, the future performance obligations for royalty and license revenues relate to the license agreements with ImmuneOncia Therapeutics, LLC (“ImmuneOncia”) and NantCell, Inc. (“NantCell”).
The total consideration for the ImmuneOncia license performance obligation, effective September 1, 2016, represented
$9.6 million
. The estimated revenue expected to be recognized for future performance obligations, as of
June 30, 2019
, was approximately
$8.2 million
. The Company expects to recognize license revenue of approximately
$0.5 million
of the remaining performance obligation annually through the remaining term. The Company applied judgment in estimating the
20
-year contract term, analogous to the expected life of the patent, over which revenue is recognized over time given the ongoing performance obligation related to the Company’s participation on a steering committee for the technologies under the agreement.
As of
June 30, 2019
, the NantCell license agreement, effective April 21, 2015, represented
$110.0 million
of contract liabilities reflected in long-term deferred revenue. See Note 9 for additional information regarding the remaining performance obligation for the agreement.
Sales and Services Revenues
Sales and services revenues are comprised of Scilex product sales of ZTlido
®
(lidocaine topical system) 1.8%, contract manufacturing associated with sales of customized reagents at Concortis Biosystems Corp. (“Concortis”), materials and supply agreements, contract manufacturing services at BioServ Corporation, and the Company’s joint development agreement with Celularity Inc. (“Celularity”).
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed. The Company applied the practical expedient in Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
to the revenue contracts for Concortis sales and services and materials and supply agreements due to the general short-term length of such contracts.
The following table shows sales and service revenues disaggregated by product and services type for the
three and six
months ended
June 30, 2019
(in thousands):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2019
|
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2018
|
|
2019
|
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2018
|
|
Scilex product sales
|
$
|
4,660
|
|
|
$
|
—
|
|
|
$
|
7,519
|
|
|
$
|
—
|
|
|
Concortis sales and services
|
1,205
|
|
|
895
|
|
|
3,015
|
|
|
2,358
|
|
|
Materials and supply agreements
|
39
|
|
|
—
|
|
|
539
|
|
|
861
|
|
|
Bioserv sales and services
|
453
|
|
|
1,231
|
|
|
1,307
|
|
|
3,367
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Joint development agreement
|
—
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|
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1,667
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—
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3,333
|
|
|
|
$
|
6,357
|
|
|
$
|
3,793
|
|
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$
|
12,380
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|
|
$
|
9,919
|
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The Company is obligated to accept from customers the return of products sold that are damaged or do not meet certain specifications. The Company may authorize the return of products sold in accordance with the terms of its sales contracts, and estimates allowances for such amounts at the time of sale. The Company has not experienced any sales returns.
Bioserv Corporation (
“
Bioserv
”
)
Contract manufacturing services associated with the Company’s Bioserv operations related to finish and fill activities for drug products and reagents are recognized ratably over the contract term based on a time-based measure which reflects the transfer of services to the customer because the manufactured products are highly customized and do not have an alternative use to the Company. As of
December 31, 2018
and
June 30, 2019
, the estimated revenue expected to be recognized for future performance obligations associated with contract manufacturing services was approximately
$1.6 million
and
$0.9 million
, respectively.
The following table includes Bioserv sales and services revenue expected to be recognized in the future related to performance obligations that are undelivered or partially delivered at the end of the reporting period and do not include contracts with original durations of one year or less (in thousands):
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Remainder of 2019
|
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2020
|
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2021 and thereafter
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Contract manufacturing services
|
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$413
|
|
$407
|
|
$109
|
Joint Development Agreement
On September 26, 2017, the Company entered into a joint development agreement with Celularity whereby the Company agreed to provide research services to Celularity through June 30, 2018 in exchange for an upfront payment of
$5.0 million
. The revenue related to the joint development agreement of
$5.0 million
was recognized over the length of the service agreement as services were performed. The Company recorded sales and services revenues under the joint development agreement of
$3.3 million
during the six months ended June 30, 2018. The Company recorded
no
sales and services revenues under the joint development agreement during the six months ended June 30, 2019 as such arrangement is complete.
Reorganization of Segments
Starting on January 1, 2019, the Company re-segmented its business into
two
new operating segments: the Sorrento Therapeutics segment and the Scilex segment.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. ASU No. 2016-02 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a
right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU No. 2016-2 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-11, which allows for an optional transition method to adopt the lease standard by recognizing a cumulative-effect adjustment to the opening balance sheet of retained earnings in the period of adoption, with no adjustment to prior comparative periods. In March 2019, the FASB issued ASU No. 2019-01, which clarifies that entities are not subject to the transition disclosure requirements in Accounting Standards Codification (“ASC”) Topic 250-10-50-3 related to the effect of an accounting change on certain interim period financial information. ASU No. 2016-02 and all subsequent amendments (collectively, “ASC 842”) were effective for public entities for annual reporting periods beginning after December 15, 2018, including interim periods therein. The Company adopted ASC 842 during the first quarter of 2019 and elected to apply the cumulative-effect adjustment to the opening balance sheet and optional transition method to not present comparable prior periods as allowed under ASU No. 2018-11. The Company made the following practical expedients elections: (1) elected the short-term lease exception, (2) did not elect hindsight, and (3) elected to not separate its non-lease components from lease components. The Company adopted the transitional practical expedients, which allowed the Company to carry forward its historical assessment of whether existing agreements contained a lease and the classification of the Company’s existing operating leases, and also allowed the Company to not reassess initial direct costs. The adoption of ASC 842 resulted in the recording of
$44.9 million
in operating ROU assets and
$2.6 million
and
$47.8 million
in current portion of operating lease liabilities and non-current operating lease liabilities, respectively. Deferred rent, recorded in other current liabilities and other non-current liabilities, was derecognized. There were no adjustments to retained earnings. The Company will continue to report financial information for fiscal years ending on or before December 31, 2018 under the previous lease accounting standard.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU No. 2016-13 will have on the Company’s consolidated financial position, results of operations or cash flows.
4. Acquisitions
Acquisition of Semnur Pharmaceuticals, Inc.
On March 18, 2019, the Company, for limited purposes, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Semnur, Scilex Holding, Sigma Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Scilex Holding (“Merger Sub”), and Fortis Advisors LLC, solely as representative of the holders of Semnur equity (the “Equityholders’ Representative”). Pursuant to the Merger Agreement, Merger Sub merged with and into Semnur (the “Merger”), with Semnur surviving as a wholly owned subsidiary of Scilex Holding.
Concurrently with the execution of the Merger Agreement, the Company and each of the other holders of outstanding shares of capital stock of Scilex, the Company’s majority-owned subsidiary, contributed each share of Scilex capital stock that the Company or it owned to Scilex Holding in exchange for one share of Scilex Holding common stock (the “Contribution”). As a result of the Contribution, and prior to the consummation of the Merger, Scilex became a wholly-owned subsidiary of Scilex Holding and the Company became the owner of approximately
77%
of Scilex Holding’s issued and outstanding capital stock.
At the closing of the Semnur acquisition, Scilex Holding issued to the holders of Semnur’s capital stock and options to purchase Semnur’s common stock (collectively, the “Semnur Equityholders”) upfront consideration with a value of approximately
$70.0 million
plus the aggregate exercise price of outstanding options to purchase Semnur’s common stock (which amount was subsequently deducted from the amounts otherwise payable to the holders of such options), consisting of the following: (a) a cash payment of approximately
$15.0 million
, and (b)
47,392,287
shares of Scilex Holding common stock (the “Stock Consideration”). A portion of the cash consideration otherwise payable to the Semnur Equityholders was set aside for expenses incurred by the Equityholders’ Representative, and
4,749,095
shares of Scilex Holding common stock otherwise issuable to Semnur Equityholders were placed in escrow with a third party as security for the indemnification obligations of the Semnur Equityholders under the Merger Agreement, including in respect of breaches of representations and warranties of Semnur included in the Merger Agreement. The Semnur Equityholders that receive the Stock Consideration were required to
sign an exchange and registration rights agreement with the Company (the “Exchange Agreement”), which is further described below.
Following the issuance of the Stock Consideration, the Company is the owner of approximately
58%
of Scilex Holding’s issued and outstanding capital stock. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions contained therein, Scilex Holding also agreed to pay the Semnur Equityholders up to
$280.0 million
in aggregate contingent cash consideration based on the achievement of certain milestones, including obtaining the first approval of a New Drug Application of a Semnur product by the U.S. Food and Drug Administration (“FDA”) and the achievement of certain amounts of net sales of Semnur products.
Pursuant to the Exchange Agreement, and upon the terms and subject to the conditions contained therein, if within 18 months following the closing of the Merger (the “Closing”),
100%
of the outstanding equity of Scilex Holding has not been acquired by a third party and Scilex Holding has not entered into a definitive agreement with respect to, or otherwise consummated, a firmly underwritten offering of Scilex Holding capital stock on a major stock exchange that meets certain requirements and includes the Stock Consideration, then holders of the Stock Consideration may collectively elect to exchange, during the 60-day period commencing the date that is the 18 month anniversary of the Closing (the “Share Exchange”), the Stock Consideration for shares of the Company’s common stock with a value of
$55.0 million
based on a price per share of the Company’s common stock equal to the greater of (a) the 30-day trailing volume weighted average price of one share of the Company’s common stock as reported on The Nasdaq Stock Market LLC as of the consummation of the Share Exchange and (b)
$5.55
(subject to adjustment for any stock dividend, stock split, stock combination, reclassification or similar transaction).
Pursuant to the terms of the Exchange Agreement, and subject to the limitations contained therein, within 30 days following consummation of the Share Exchange (if it occurs at all), the Company agreed to prepare and file with the SEC a registration statement to enable the public resale on a delayed or continuous basis of the shares of the Company’s common stock issued in the Share Exchange (the “Registration Statement”) and use its commercially reasonable efforts to maintain the effectiveness of such Registration Statement for up to three years thereafter. In the Exchange Agreement, the Company has also agreed to indemnify the applicable Semnur Equityholders and their affiliates for certain liabilities related to such Registration Statement, including certain liabilities arising under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Jaisim Shah, a member of the Company’s Board of Directors, was Semnur’s Chief Executive Officer, a member of its Board of Directors and a stockholder of Semnur prior to the acquisition transaction.
The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. Under the Merger Agreement, Scilex Holding acquired the Semnur SEMDEXA
TM
(SP-102) technology for consideration valued at approximately
$70.0 million
, excluding contingent consideration, transaction costs of
$3.1 million
, and liabilities assumed of
$4.2 million
, which was allocated based on the relative fair value of the assets acquired. The
$70.0 million
of consideration consisted of
$15.0 million
in cash and shares of Scilex Holding valued at
$55.0 million
. No contingent consideration was recorded as of June 30, 2019 since the related regulatory approval milestones are not deemed probable until they actually occur. As a result, approximately
$75.3 million
was expensed as a component of acquired in-process research and development.
5. 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):
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Fair Value Measurements at June 30, 2019
|
|
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Balance
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
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Significant Unobservable Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
61,385
|
|
|
$
|
61,385
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Restricted cash
|
54,742
|
|
|
54,742
|
|
|
—
|
|
|
—
|
|
|
Marketable securities
|
316
|
|
|
257
|
|
|
—
|
|
|
59
|
|
|
Total assets
|
$
|
116,443
|
|
|
$
|
116,384
|
|
|
$
|
—
|
|
|
$
|
59
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|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
7,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,900
|
|
|
Derivative liabilities - Non-current
|
19,900
|
|
|
—
|
|
|
—
|
|
|
19,900
|
|
|
Acquisition consideration payable
|
11,312
|
|
|
—
|
|
|
—
|
|
|
11,312
|
|
|
Acquisition consideration payable - Non-current
|
791
|
|
|
—
|
|
|
—
|
|
|
791
|
|
|
Total liabilities
|
$
|
39,903
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,903
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018
|
|
|
Balance
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
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Significant Unobservable Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
158,738
|
|
|
$
|
158,738
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Restricted cash
|
54,592
|
|
|
54,592
|
|
|
—
|
|
|
—
|
|
|
Marketable securities
|
297
|
|
|
247
|
|
|
—
|
|
|
50
|
|
|
Total assets
|
$
|
213,627
|
|
|
$
|
213,577
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition consideration payable
|
$
|
11,312
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,312
|
|
|
Acquisition consideration payable - Non-current
|
725
|
|
|
—
|
|
|
—
|
|
|
725
|
|
|
Total liabilities
|
$
|
12,037
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,037
|
|
The Company’s financial assets and liabilities carried at fair value are comprised of cash, cash equivalents, restricted cash, marketable securities and acquisition consideration payable. Cash and cash equivalents consist of money market accounts and bank deposits which are highly liquid and readily tradable. These investments are valued using inputs observable in active markets for identical securities. Marketable securities are valued using inputs observable in active markets for identical securities. The fair value of the contingent consideration is measured on a recurring basis using significant unobservable inputs (Level 3). Contingent consideration 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.
The following table includes a summary of the Company’s contingent consideration liabilities and acquisition consideration payables associated with acquisitions.
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|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value
|
|
Beginning balance at December 31, 2018
|
|
$
|
12,037
|
|
|
Re-measurement of Fair Value
|
|
66
|
|
|
Ending balance at June 30, 2019
|
|
$
|
12,103
|
|
As of
June 30, 2019
,
$9.9 million
of the Virttu contingent liability remains to be paid in cash.
The principal significant unobservable inputs used in the valuations of the contingent considerations are the discount rates, and probabilities assigned to scenario outcomes.
The Company recorded a loss on derivative liabilities of
$2.4 million
and
$16.9 million
, respectively, for the three and six months ended
June 30, 2019
, which was attributed to revised probabilities related to the timing of marketing approval for ZTlido
®
(lidocaine topical system) 5.4% or SP-103 (“SP-103”), and revised sales forecasts. The fair value of the derivative liabilities is estimated using the discounted cash flow method under the income approach combined with a Monte Carlo simulation model, which involves significant Level 3 inputs and assumptions including a discount rate of approximately
22.1%
, net sales forecasts and an estimated probability of
90%
of not meeting marketing approval before a predetermined date. Due to changes in timing of marketing approval probabilities for SP-103 and a revised forecast of cumulative net sales of ZTlido
®
(lidocaine topical system) 1.8% and SP-103, the fair value of the derivative liabilities changed, resulting in a loss in the Company’s consolidated statement of operations during the six months ended
June 30, 2019
and a corresponding derivative liability in the Company’s consolidated balance sheets at June 30, 2019. Further, due to the revised forecast of cumulative net sales of ZTlido
®
(lidocaine topical system) 1.8% and SP-103, the Company recorded a derivative liability of
$3.0 million
for the three and six months ended June 30, 2019, relating to tax indemnification obligations with respect to foreign note holders. The fair value of the derivative liability was estimated using a discounted cash flow probability model, which involves significant Level 3 inputs and assumptions including a risk-adjusted discount rate and estimated foreign tax withholdings.
The Company determined that the contingent acceleration feature of the Early Conditional Loan as further discussed in Note 10 represents an embedded derivative liability that met the criteria for bifurcation under ASU No. 2017-12,
Derivatives and hedging
. The fair value of the derivative liability involved significant Level 3 inputs and assumptions including estimated probabilities of satisfying certain commercial and financial milestones between August 7, 2019 and November 7, 2019 and is estimated using a with and without discounted cash flow approach. The Company recorded a debt discount for the fair value of the derivative liability of
$7.0 million
on the issuance date. The debt discount attributed to the derivative liability is being amortized over the remaining term of the Term Loans and is recorded as interest expense in the consolidated statement of operations. The Company performs a mark-to-market assessment for the derivative liability each reporting period. The Company recorded a loss on derivative liabilities associated with the 2019 Warrants (as defined in Note 10) of
$4.3 million
during the three months ended
June 30, 2019
as the Conditional Warrants were issued with the Amendment (See Note 10).
The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value
|
|
Beginning Balance at December 31, 2018
|
|
$
|
—
|
|
|
Additions
|
|
6,996
|
|
|
Re-measurement of Fair Value
|
|
20,804
|
|
|
Ending Balance at June 30, 2019
|
|
$
|
27,800
|
|
Non-financial assets and liabilities measured on a nonrecurring basis
Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow method or cost method, on a nonrecurring basis in accordance with authoritative guidance. These include items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.
6. Property and Equipment
Property and equipment consisted of the following as of
June 30, 2019
and
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Furniture and fixtures
|
$
|
1,237
|
|
|
$
|
1,127
|
|
|
Office equipment
|
678
|
|
|
632
|
|
|
Machinery and lab equipment
|
30,013
|
|
|
27,690
|
|
|
Leasehold improvements
|
9,798
|
|
|
9,001
|
|
|
Construction in progress
|
8,365
|
|
|
1,221
|
|
|
|
50,091
|
|
|
39,671
|
|
|
Less accumulated depreciation
|
(19,262
|
)
|
|
(15,287
|
)
|
|
|
$
|
30,829
|
|
|
$
|
24,384
|
|
Depreciation expense for the three months ended
June 30, 2019
and
2018
was
$1.9 million
and
$1.3 million
, respectively. Depreciation expense for the
six
months ended
June 30, 2019
and
2018
was
$4.0 million
and
$2.6 million
, respectively.
7. Investments
As of
June 30, 2019
and
December 31, 2018
, the aggregate carrying amount of the Company’s cost-method investments in non-publicly traded companies was
$237.0 million
and included an ownership interest in NantCell, Inc. (“NantCell”), NantBioScience, Inc. (“NantBioScience”), Globavir Biosciences, Inc., Brink Biologics, Inc., Coneksis, Inc., and Celularity.
No
impairment losses were recorded during the
six
months ended
June 30, 2019
.
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, a subsidiary of NantWorks, LLC (“NantWorks”), a private company owned by Dr. Patrick Soon-Shiong, established a new entity called Immunotherapy NANTibody, LLC (“NANTibody”) as a stand-alone biotechnology company with
$100.0 million
initial joint funding. NantCell owns
60%
of the equity interest of NANTibody and agreed to contribute
$60.0 million
to NANTibody. The Company owns
40%
of NANTibody and in July 2015, the Company had NantPharma, LLC (“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 will focus on accelerating the development of multiple immuno-oncology mAbs for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4mAbs, and other immune-check point antibodies as well as ADCs and bispecific antibodies.
NANTibody had been formed to advance pre-clinical and clinical immunology assets contributed by the Company and NantCell. The Company continues to hold
40%
of the outstanding equity of NANTibody and NantCell holds the remaining
60%
. Until July 2, 2017, NANTibody held approximately
$100.0 million
of cash and cash equivalents, and the Company recorded its investment in NANTibody at approximately
$40.0 million
. As an equity method investment, the Company’s ratable portion of
40%
of money expended for the development of intellectual property assets held by NANTibody would be reflected within income (loss) on equity method investments in its statement of operations. As a result of limited spending at NANTibody, the cash on hand at NANTibody remained at approximately
$100.0 million
since the inception of the NANTibody joint venture until July 2, 2017. Further, the Company’s equity method investment in NANTibody remained at approximately
$40.0 million
until July 2, 2017.
The financial statements of NANTibody are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.
In February 2018, NANTibody notified the Company that on July 2, 2017, NANTibody acquired all of the outstanding equity of IgDraSol in exchange for
$90.1 million
in cash. NANTibody purchased IgDraSol from NantPharma, which is controlled by NantWorks, an entity with a controlling interest in NantCell and NantPharma.
Although the Company has had a designee serving on the Board of Directors of NANTibody since the formation of NANTibody in April 2015, and although the Company has held
40%
of the outstanding equity of NANTibody since NANTibody’s formation, neither the Company nor its director designee was given any advance notice of NANTibody’s purchase of IgDraSol or of any board meeting or action to approve such purchase. As such, the Company’s designee on NANTibody’s Board of Directors was not given an opportunity to consider or vote on the transaction as a director and the Company was not given an opportunity to consider or vote on the transaction in its position as a significant (
40%
) equity holder of NANTibody.
As a result of the July 2, 2017 purchase of IgDraSol, NANTibody’s cash and cash equivalents were reduced from
$99.6 million
as of June 30, 2017 to
$9.5 million
as of September 30, 2017, and NANTibody’s contributed capital was reduced from
$100.0 million
as of June 30, 2017 to
$10.0 million
as of September 30, 2017, to effect the transfer of IgDraSol from NantPharma to NANTibody. No additional information was provided to the Company to explain why NANTibody’s total assets as of September 30, 2017 were reduced by approximately
$90.1 million
. The Company requested, but did not receive, additional information from NANTibody for purposes of supporting the value of IgDraSol, including any information regarding clinical advancements in the entity since the sale of IgDraSol by the Company in May 2015.
Prior to the communication of the transfer of IgDraSol from NantPharma to NANTibody, the Company relied on the cash and cash equivalents of NANTibody for purposes of determining the value of its investment in NANTibody, which capital was expended by NANTibody to acquire IgDraSol on July 2, 2017. As a result of the transfer of IgDraSol, the Company reassessed the recoverability of its equity method investment in NANTibody as of July 2, 2017. In doing so, the Company considered the expected outcomes for the intellectual property assets held by NANTibody as of July 2, 2017. As a result of the lack of evidence of any development activity associated with any of the assets held in NANTibody, given the passage of time since the formation of the joint venture, many competitive products from other drug developers worldwide have advanced and/or commercialized for the targeted disease indications of the assets held in NANTibody, and given the Company’s minority interest in NANTibody (the investee), the Company concluded that it does not have the ability to recover the carrying amount of the investment and an other-than-temporary decline in the value of the investment had occurred. Accordingly, an impairment was recorded to the Company’s equity method investment in NANTibody for the three and nine months ended September 30, 2017. The fair value of the Company’s investment in NANTibody was measured at fair value on July 2, 2017 using significant unobservable inputs (Level 3) due to the determination of fair value requiring significant judgment, including the potential outcomes of the intellectual property assets held by NANTibody. For these reasons, fair value was determined by applying the Company’s
40%
equity interest in NANTibody to the remaining cash and cash equivalents, which resulted in an impairment of
$36.0 million
. The impairment resulted in a revised carrying value of the Company’s investment in NANTibody of
$3.7 million
which approximated its ratable
40%
ownership of the cash maintained by NANTibody expected to be used for future research and development. As of
June 30, 2019
and 2018, the carrying value of the Company’s investment in NANTibody was approximately
$3.2 million
and
$3.5 million
, respectively.
NANTibody recorded a net loss of
$257 thousand
and
$484 thousand
for the three months ended March 31, 2019 and 2018, respectively. The Company recorded its portion of loss from NANTibody in loss on equity method investments on its consolidated statements of operations for the
six
months ended
June 30, 2019
and
2018
. As of March 31, 2019, NANTibody had
$9.5 million
in current assets and
$1.2 million
in current liabilities and
no
noncurrent assets or noncurrent liabilities. As of March 31, 2018, NANTibody had
$9.8 million
in current assets and
$1.8 million
in current liabilities and
no
noncurrent assets or noncurrent liabilities.
NantStem
In July 2015, the Company and NantBioScience established a new entity called NantCancerStemCell, LLC (“NantStem”) as a stand-alone biotechnology company with
$100.0 million
initial joint funding. As initially organized, NantBioScience was obligated to make a
$60.0 million
cash contribution to NantStem for a
60%
equity interest in NantStem, and the Company was obligated to make a
$40.0 million
cash contribution to NantStem for a
40%
equity interest in NantStem.
Fifty
percent of these contributions were funded in July 2015 and the remaining amounts were to be made by no later than September 30, 2015. The Company had NantPharma contribute its portion of the initial joint funding of
$20.0 million
to NantStem from the proceeds of the sale of IgDraSol. Pursuant to a Side Letter dated October 13, 2015, the NantStem joint venture agreement was amended to relieve the Company of the obligation to contribute the second
$20.0 million
payment, and its ownership interest in NantStem was reduced to
20%
. NantBioScience’s funding obligations were unchanged. The Side Letter was negotiated at the same time the Company issued a call option on shares of NantKwest that it owned to Cambridge Equities, L.P. (“Cambridge”), a related party to NantBioScience.
A loss related to other-than-temporary impairment of
$0.5 million
was recognized for the equity investment in NantStem for the year ended December 31, 2018. There was
no
loss related to other-than-temporary impairment recognized for the equity investment for the three months ended March 31, 2019 and 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. The Company’s investment in NantStem is reported in equity method investments on its consolidated balance sheets and its share of NantStem’s loss is recorded in loss on equity method investments on its consolidated statement of operations. As of
June 30, 2019
and 2018, the carrying value of the Company’s investment in NantStem was approximately
$17.8 million
and
$18.2 million
, respectively.
The financial statements of NantStem are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.
NantStem recorded a net loss of
$61 thousand
and
$331 thousand
for the three months ended March 31, 2019 and 2018, respectively. The Company recorded its portion of loss from NantStem in income (loss) on equity method investments on its consolidated statements of operations for the
six
months ended
June 30, 2019
and
2018
. As of March 31, 2019, NantStem had
$75.2 million
in current assets and
$83 thousand
in current liabilities and
$5.1 million
in noncurrent assets and
no
noncurrent liabilities. As of March 31, 2018, NantStem had
$82.3 million
in current assets and
$27 thousand
in current liabilities and
no
noncurrent assets or noncurrent liabilities.
The Company records its portion of losses from other equity method investments in loss on equity method investments on its consolidated statements of operations for the
six
months ended
June 30, 2019
and
2018
.
8. Goodwill and Intangible Assets
At each of
June 30, 2019
and
December 31, 2018
, the Company had recorded goodwill of
$38.3 million
.
Starting on January 1, 2019, the Company re-segmented its business into
two
new operating segments: the Sorrento Therapeutics segment and the Scilex segment. These segments are the Company’s reporting units, and are the level at which the Company conducts its goodwill impairment evaluations. Goodwill was allocated to the Sorrento Therapeutics and the Scilex operating segments on a relative fair value basis. Goodwill for the Sorrento Therapeutics segment and Scilex segment was
$31.6 million
and
$6.7 million
, respectively, as of
June 30, 2019
.
Amortization for the intangible assets that have finite useful lives is generally recorded on a straight-line basis over their useful lives. Intangible assets with indefinite useful lives totaling
$13.9 million
are included in acquired in-process research and development in the table below. A summary of the Company’s identifiable intangible assets as of
June 30, 2019
and
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Weighted average amortization period (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangibles, net
|
|
Customer relationships
|
|
6
|
|
$
|
1,585
|
|
|
$
|
1,387
|
|
|
$
|
198
|
|
|
Acquired technology
|
|
19
|
|
3,410
|
|
|
973
|
|
|
2,437
|
|
|
Acquired in-process research and development
|
|
15
|
|
35,834
|
|
|
1,097
|
|
|
34,737
|
|
|
Patent rights
|
|
15
|
|
32,720
|
|
|
5,831
|
|
|
26,889
|
|
|
Assembled workforce
|
|
5
|
|
$
|
605
|
|
|
$
|
41
|
|
|
$
|
564
|
|
|
Total intangible assets
|
|
|
|
$
|
74,154
|
|
|
$
|
9,329
|
|
|
$
|
64,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Weighted average amortization period (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangibles, net
|
|
Customer relationships
|
|
6
|
|
$
|
1,585
|
|
|
$
|
1,373
|
|
|
$
|
212
|
|
|
Acquired technology
|
|
19
|
|
3,410
|
|
|
885
|
|
|
2,525
|
|
|
Acquired in-process research and development
|
|
15
|
|
35,834
|
|
|
366
|
|
|
35,468
|
|
|
Patent rights
|
|
15
|
|
32,720
|
|
|
4,742
|
|
|
27,978
|
|
|
Assembled workforce
|
|
5
|
|
105
|
|
|
5
|
|
|
100
|
|
|
Total intangible assets
|
|
|
|
$
|
73,654
|
|
|
$
|
7,371
|
|
|
$
|
66,283
|
|
As of
June 30, 2019
, the weighted average amortization period for identifiable intangible assets is
14.9 years
. Aggregate amortization expense was
$1.0 million
and
$0.7 million
for the three months ended
June 30, 2019
and
2018
, respectively. Aggregate amortization expense was
$2.0 million
and
$1.3 million
for the
six
months ended
June 30, 2019
and
2018
, respectively.
Estimated future amortization expense related to intangible assets at
June 30, 2019
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
2019 (Remaining nine months)
|
|
$
|
1,435
|
|
|
2020
|
|
2,869
|
|
|
2021
|
|
3,923
|
|
|
2022
|
|
3,923
|
|
|
2023
|
|
3,918
|
|
|
2024
|
|
3,827
|
|
|
Thereafter
|
|
44,930
|
|
|
Total expected future amortization
|
|
$
|
64,825
|
|
9. Significant Agreements and Contracts
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. As of
June 30, 2019
, the Company had not yet provided all of the items noted in the agreement, including research services for and on behalf of NantCell, and therefore has recorded the entire upfront payment and value of the equity interest received as deferred revenue. Specifically, only a portion of the materials associated with the licensed assets have been delivered while the majority of the licensed assets remain undelivered and the related research activities are still to be performed. The Company will recognize the upfront payment and the value of the equity interest received over the period beginning with the commencement of the last item delivered. 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 in the consolidated balance sheets and evaluated for other-than-temporary impairment on a quarterly basis.
10. Debt
2018 Securities Purchase Agreement in Private Placement and Amendment to Warrants
On March 26, 2018, the Company entered into a Securities Purchase Agreement (the “March 2018 Securities Purchase Agreement”) with certain accredited investors (the “March 2018 Purchasers”). Pursuant to the March 2018 Securities Purchase Agreement, the Company agreed to issue and sell to the March 2018 Purchasers, in a Private Placement (the “March 2018 Private Placement”), (1) convertible promissory notes in an aggregate principal amount of
$120,500,000
(the “Notes”), and (2)
warrants to purchase
8,591,794
shares of the common stock of the Company (the “Warrants”). On June 13, 2018, the Company entered into an amendment (the “June 2018 Amendment”) to the March 2018 Securities Purchase Agreement. Under the terms of the June 2018 Amendment, the Company and the March 2018 Purchasers agreed that the aggregate principal amount of the Notes was reduced to
$37,848,750
and that the aggregate number of shares of Common Stock issuable upon exercise of the Warrants was reduced to
2,698,662
, and also agreed to certain other adjustments to the threshold principal amount of the Notes required to remain outstanding in order for certain rights and obligations to apply to the Notes.
On June 13, 2018, the Company issued and sold to the March 2018 Purchasers, in the March 2018 Private Placement (1) Notes in an aggregate principal amount of
$37,848,750
, and (2) Warrants to purchase an aggregate of
2,698,662
shares of Common Stock. The Notes accrue interest at a rate equal to
5.0%
per annum and mature upon the earlier to occur of June 13, 2023 and the date of the closing of a change of control (the “Maturity Date”). In connection with the issuance of the Notes and the Warrants, the Company recorded a debt discount of approximately
$21.6 million
based on an allocation of proceeds to the Warrants of approximately
$9.6 million
and a beneficial conversion feature of approximately
$12.0 million
, before issuance costs.
On November 7, 2018, the Company entered into an Agreement and Consent (the “Agreement and Consent”) with the March 2018 Purchasers and agreed to amend the Warrants to reduce the exercise price per share of its common stock thereunder from
$8.77
to
$3.28
. The amendment of the Warrants resulted in a loss on debt extinguishment of
$1.9 million
representing the incremental fair value of the modified Warrants along with the difference between the fair value and carrying value of the Notes at the modification date of November 7, 2018.
The Company determined that the amendment of the Warrants resulted in an extinguishment at the modification date. As a result, the Company recorded a loss on debt extinguishment for the difference between the fair value of
$23.1 million
and the carrying value of
$17.0 million
, or
$6.1 million
. The Company recorded the loss as of the date of modification, or November 7, 2018. As of
June 30, 2019
, the estimated Level 3 fair value of the Notes was approximately
$16.9 million
, compared to the carrying value of
$24.7 million
. The fair value of the Notes was estimated using a lattice model with Level 3 inputs including the historical stock price volatility, risk-free interest rate and debt yield.
Borrowings under the Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Face value of loan
|
$
|
37,849
|
|
|
$
|
37,849
|
|
|
Unamortized debt discount
|
(14,288
|
)
|
|
(14,804
|
)
|
|
Accretion of debt discount
|
1,099
|
|
|
515
|
|
|
Ending balance
|
$
|
24,660
|
|
|
$
|
23,560
|
|
Interest expense recognized for stated interest on the Notes for the three and six months ended
June 30, 2019
totaled
$0.5 million
and
$0.9 million
, respectively. The amount of debt discount and debt issuance costs included in interest expense for the three and six months ended
June 30, 2019
was approximately
$0.6 million
and
$1.1 million
, respectively.
The Company identified a number of embedded derivatives that require bifurcation from the Notes and separate accounting as a single compound derivative. The current fair value attributed to the bifurcated compound derivative is immaterial. The Company will re-evaluate this assessment each reporting period.
2018 Purchase Agreements and Indenture for Scilex
On September 7, 2018, Scilex 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, among other things, issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of
$224,000,000
(the “Scilex Notes”) for an aggregate purchase price of
$140,000,000
(the “Scilex Notes Offering”). In connection with the Scilex Notes Offering, Scilex also entered into the Indenture governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”), and the Company. Pursuant to the Indenture, the Company agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex under the Indenture (the “Guarantee”).
The net proceeds of the Scilex Notes Offering were approximately
$89.3 million
, after deducting the Scilex Notes Offering expenses payable by Scilex and funding a segregated reserve account with
$20.0 million
(the “Reserve Account”) and
a segregated collateral account with
$25.0 million
(the “Collateral Account”) pursuant to the terms of the Indenture. As of June 30, 2019, the estimated fair value of the Scilex Notes was approximately
$136.2 million
compared to the carrying value of
$149.0 million
. The Company uses the discounted cash flow method under the income approach, which involves significant Level 3 inputs and assumptions, combined with a Monte Carlo simulation, as appropriate. The value of the debt instrument is based on the present value of future interest and principal payments, discounted at a rate of return reflective the Company’s credit risk.
Borrowings of the 2018 Purchase Agreements and Indenture for Scilex consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Face value of loan
|
$
|
224,000
|
|
|
$
|
224,000
|
|
|
Unamortized debt discount
|
(77,624
|
)
|
|
(84,000
|
)
|
|
Capitalized debt issuance costs
|
(5,313
|
)
|
|
(5,748
|
)
|
|
Accretion of debt discount
|
8,288
|
|
|
6,376
|
|
|
Amortization of debt issuance cost
|
570
|
|
|
435
|
|
|
Payments
|
(918
|
)
|
|
—
|
|
|
Ending balance
|
$
|
149,003
|
|
|
$
|
141,063
|
|
Future minimum payments under the Scilex Notes, based on a percentage of projected net sales of ZTlido
®
(lidocaine topical system) 1.8% are estimated as follows (in thousands):
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
2019 (Remaining six months)
|
$
|
3,237
|
|
|
2020
|
17,960
|
|
|
2021
|
25,035
|
|
|
2022
|
41,705
|
|
|
2023
|
72,299
|
|
|
2024
|
62,846
|
|
|
Total future minimum payments
|
223,082
|
|
|
Unamortized debt discount
|
(69,336
|
)
|
|
Unamortized capitalized debt issuance costs
|
(4,743
|
)
|
|
Total minimum payment
|
149,003
|
|
|
Current portion
|
(11,532
|
)
|
|
Long-term portion of Scilex Notes
|
$
|
137,471
|
|
The amount of debt discount and debt issuance costs included in interest expense for the
three and six
months ended
June 30, 2019
was approximately
$4.2 million
and
$8.9 million
, respectively.
The Company identified a number of embedded derivatives that require bifurcation from the Scilex Notes and separate accounting as a single compound derivative. The Company recorded this derivative within its consolidated financial statements (See Note 5). The Company re-evaluates this assessment each reporting period.
2018 Oaktree Term Loan Agreement
On November 7, 2018, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a Term Loan Agreement (the “Loan Agreement”) with certain funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the “Lenders”) and Oaktree Fund Administration, LLC, as administrative and collateral agent (the “Agent”), for an initial term loan of
$100.0 million
(the “Initial Loan”) and a second tranche of
$50.0 million
, subject to the achievement of certain commercial and financial milestones between August 7, 2019 and November 7, 2019 and the satisfaction of certain customary conditions (the “Conditional Loan”). The Initial Loan matures on November 7, 2023 (the “Maturity Date”) and bears interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus the applicable margin, or
7%
. The net proceeds of the Initial Loan were approximately
$91.3 million
, after deducting estimated loan costs, commissions, fees and expenses and funding a debt service reserve account with approximately
$9.6 million
(the “Debt Service Reserve Account”), and will be used for general corporate purposes. In connection with the Loan Agreement, the Company and the Guarantors entered into a Collateral Agreement with the Agent (the “Collateral Agreement”). The Collateral Agreement provides that the Term Loans are secured by substantially all of the Company’s and the Guarantors’ assets, and a pledge of
100%
of the equity interests in other
entities each of the Company and the Guarantors holds (subject to certain exceptions and other than equity interests held by the Company or a Guarantor in certain foreign subsidiaries, which is limited to
65%
of such voting equity interests). In connection with the Loan Agreement, on November 7, 2018, the Company issued to the Lenders warrants to purchase
6,288,985
shares of the Company’s common stock (the “Initial Warrants”). The Initial Warrants have an exercise price per share of
$3.28
, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable from May 7, 2019 through May 7, 2029 and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Initial Warrants (the “Initial Warrant Shares”), in which case the Initial Warrants shall also be exercisable on a cashless exercise basis. In connection with the Loan Agreement, on November 7, 2018, the Company and the Lenders entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, the Company agreed to file one or more registration statements with the SEC for the purpose of registering for resale the Initial Warrant Shares and the shares of common stock issuable upon exercise of warrants that may be issued in connection with the Conditional Loan (the “Conditional Warrants”). Under the Registration Rights Agreement, the Company agreed to file a registration statement with the SEC registering all of the Initial Warrant Shares and the shares of common stock issuable upon exercise of the Conditional Warrants for resale by no later than the 45th day following the issuance of the Initial Warrants and the Conditional Warrants, respectively.
On May 3, 2019, the Company, the Guarantors and the Lenders and the Agent entered into an amendment (the “Amendment”) to the Loan Agreement. Under the terms of the Amendment, among other things, the Lenders agreed to make available to the Company
$20.0 million
of the Conditional Loan, notwithstanding that the commercial and financial milestones had not occurred (the “Early Conditional Loan”). The Lenders also agreed to loan the Company the remaining
$30.0 million
of the Conditional Loan upon the satisfaction of the commercial and financial milestones between August 7, 2019 and November 7, 2019 (the “Remaining Conditional Loan” and, together with the Initial Loan and the Early Conditional Loan, the “Term Loans”). The Term Loans, other than the Early Conditional Loan, will mature on November 7, 2023. The Early Conditional Loan will mature on May 3, 2020; however, if the commercial and financial milestones have occurred on or prior to such date, the Early Conditional Loan will mature on November 7, 2023. The Term Loans may be prepaid by the Company, in whole or in part at any time, subject to a prepayment fee. Upon any prepayment or repayment of all or a portion of the Term Loans (including the Early Conditional Loan and the Remaining Conditional Loan), the Company has agreed to pay the Lenders an exit fee equal to
1.25%
of the principal amount paid or prepaid amounting to approximately
$1.5 million
. The Early Conditional Loan was funded on May 3, 2019.
The Company accounted for the Amendment as a debt modification and not a debt extinguishment under ASC Topic 470-50, as the terms of the Early Conditional Loan were not substantially different from those of the Initial Loan. The Company incurred approximately
$0.8 million
in fees directly related to the Amendment which were expensed as incurred during the three months ended June 30, 2019.
In connection with the Amendment, on May 3, 2019, the Company issued to the Lenders warrants to purchase an aggregate of
1,333,304
shares of the Company’s common stock (the “2019 Warrants”). The 2019 Warrants have an exercise price per share of
$3.94
, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable from November 3, 2019 through November 3, 2029 and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the 2019 Warrants (the “2019 Warrant Shares”), in which case the 2019 Warrants shall also be exercisable on a cashless exercise basis. The Company recorded a loss on derivative liabilities associated with the 2019 Warrants of
$4.3 million
during the three months ended
June 30, 2019
as the Conditional Warrants were issued with the Amendment.
The fair value of the Term Loans was estimated using a discounted cash flow model with Level 3 inputs with key inputs that include debt yield, coupon rate and maturity dates. As of
June 30, 2019
, the estimated fair value of the Term Loans was approximately
$57.0 million
. Borrowings under the Initial Loan and the Early Conditional Loan consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Face value of loan
|
$
|
120,000
|
|
|
$
|
100,000
|
|
|
Debt discount - warrants
|
(26,248
|
)
|
|
(26,659
|
)
|
|
Debt discount - derivative
|
(6,996
|
)
|
|
—
|
|
|
Capitalized debt issuance costs
|
(7,685
|
)
|
|
(6,658
|
)
|
|
Accretion of debt discount
|
1,882
|
|
|
411
|
|
|
Amortization of debt issuance costs
|
503
|
|
|
115
|
|
|
Ending balance
|
$
|
81,456
|
|
|
$
|
67,209
|
|
Interest expense recognized for stated interest on the Term Loans totaled
$2.7 million
and
$5.0 million
for the three and six months ended
June 30, 2019
, respectively. The amount of debt discount and debt issuance costs included in interest expense on the Term Loans for the three and six months ended
June 30, 2019
was approximately
$1.3 million
and
$2.4 million
, respectively.
The Company identified a number of embedded derivatives that require bifurcation from the Initial Loan and separate accounting as a single compound derivative. As the current fair value attributed to the bifurcated compound derivative is immaterial, the Company has not recorded this derivative within its consolidated financial statements. The Company re-evaluates this assessment each reporting period.
The Company identified certain embedded derivatives that require bifurcation from the Early Conditional Loan and separate accounting as a single compound derivative. Certain of these embedded features include a contingent accelerated repayment feature. The Company deems the contingent accelerated repayment feature derivative to be material and recorded it within its consolidated financial statements (See Note 5). The Company re-evaluates this assessment each reporting period.
11. Shareholder Equity
2019 Public Offering of Common Stock and Warrants
On June 28, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with JMP Securities LLC (the “Representative”), as representative of the several underwriters named therein (the “Underwriters”), relating to a firm commitment underwritten public offering (the “Offering”) of
8,333,334
shares of the Company’s common stock (“Common Stock”), Series A warrants to purchase up to an aggregate of
8,333,334
shares of Common Stock (the “Series A Warrants”), Series B warrants to purchase up to an aggregate of
8,333,334
shares of Common Stock (the “Series B Warrants”) and Series C warrants to purchase up to an aggregate of
8,333,334
shares of Common Stock (the “Series C Warrants” and, together with the Series A Warrants and the Series B Warrants, the “Warrants”). The public offering price is
$3.00
per share of Common Stock and accompanying Warrants and the Underwriters have agreed to purchase the Common Stock and accompanying Warrants pursuant to the Underwriting Agreement at a price of
$2.82
per share and accompanying Warrants. The Series A Warrants will be exercisable six months from the date of issuance, will expire on the 10-year anniversary of the date of issuance and will have an exercise price of
$3.75
. The Series B warrants will be exercisable commencing on the date of issuance, will expire on the date that is nine months from the date of issuance and will have an exercise price of
$3.00
per share. The Series C Warrants will be exercisable six months from the date of issuance and only to the extent and in proportion to a holder of the Series C warrants exercising its Series B Warrants, will expire on the 10-year anniversary of the date of issuance and will have an exercise price of
$3.75
per share.
Under the terms of the Underwriting Agreement, the Company also granted to the Underwriters an option, exercisable in whole or in part at any time for a period of
30
days from the date of the Underwriting Agreement, to purchase up to an additional
1,250,000
shares of Common Stock (“Additional Shares”) and/or
1,250,000
combinations of Warrants (comprised of an aggregate of
1,250,000
Series A Warrants,
1,250,000
Series B Warrants and
1,250,000
Series C Warrants) (“Warrant Combinations”), at the public offering price of
$2.99
per Additional Share and the public offering price per Warrant Combination of
$0.01
, less underwriting discounts and commissions.
The net proceeds from this offering were approximately
$23.1 million
, after deducting underwriting discounts and commissions and other estimated offering expenses, and were received in July 2019.
As of the firm commitment date of June 28, 2019, the Company entered into a forward contract to issue and sell a fixed number of shares of common stock and warrants in exchange for a stated purchase price payable on July 2, 2019, issued options to purchase a fixed number of shares of common stock for a fixed purchase price (subject to certain adjustments for dividends and similar distributions), and issued options to purchase additional warrants in exchange for a stated purchase price. Management determined that these instruments were freestanding financial instruments and qualified for equity classification as of the firm commitment date.
12. Stock Incentive Plans
2009 Stock Incentive Plan
The following table summarizes stock option activity as of
June 30, 2019
and the changes for the period then ended (dollar values in thousands, other than weighted-average exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
10,523,075
|
|
|
$
|
4.91
|
|
|
$
|
1,723
|
|
|
Options Granted
|
2,666,800
|
|
|
$
|
3.84
|
|
|
|
|
|
Options Canceled
|
(661,525
|
)
|
|
$
|
1.86
|
|
|
|
|
|
Options Exercised
|
(136,074
|
)
|
|
$
|
5.21
|
|
|
|
|
|
Outstanding at June 30, 2019
|
12,392,276
|
|
|
$
|
4.70
|
|
|
$
|
2,350
|
|
The aggregate intrinsic value of options exercised during the three months ended
June 30, 2019
and
2018
was
$175 thousand
and
$4 thousand
, respectively. The aggregate intrinsic value of options exercised during the
six
months ended
June 30, 2019
and
2018
was
$306 thousand
and
$52 thousand
, respectively. The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of employee stock options was estimated at the grant date using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
Weighted-average grant date fair value
|
$
|
3.05
|
|
|
$
|
7.39
|
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
Volatility
|
100
|
%
|
|
81
|
%
|
|
Risk-free interest rate
|
1.87
|
%
|
|
2.52
|
%
|
|
Expected life of options
|
6.1 years
|
|
|
6.1 years
|
|
The total employee and director stock-based compensation recorded as operating expenses was
$2.0 million
and
$1.0 million
for the three months ended
June 30, 2019
and
2018
, respectively, and
$3.5 million
and
$2.2 million
for the
six
months ended
June 30, 2019
and
2018
, respectively.
The total unrecognized compensation cost related to unvested employee and director stock option grants as of
June 30, 2019
was
$19.6 million
and the weighted average period over which these grants are expected to vest is
2.1 years
.
Stock-based compensation expense related to non-employee consultants recorded as operating expenses was
$0.1 million
and
$0.2 million
for the three months ended
June 30, 2019
and
2018
, respectively, and
$0.2 million
and
$0.3 million
for the
six
months ended
June 30, 2019
and
2018
, respectively.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consists of the following at
June 30, 2019
:
|
|
|
|
|
|
|
Common stock warrants outstanding under the loan and security agreements
|
7,688,181
|
|
|
Common stock warrants outstanding under the Hercules securities agreement
|
306,748
|
|
|
Common stock warrants outstanding under the convertible notes
|
14,819,872
|
|
|
Common stock options outstanding under the Non-Employee Director Plan
|
3,200
|
|
|
Authorized for future grant or issuance under the 2009 Stock Incentive Plan
|
18,188,332
|
|
|
Shares issuable upon the conversion of the 2018 Notes
|
5,397,325
|
|
|
Issuable under assignment agreement based upon achievement of certain milestones
|
80,000
|
|
|
|
46,483,658
|
|
Scilex Pharmaceuticals Inc. 2017 Equity Incentive Plan
In June 2017, the Company’s subsidiary Scilex Pharmaceuticals Inc. adopted the Scilex Pharmaceuticals Inc. 2017 Equity Incentive Plan, (the “Scilex Pharma 2017 Plan”). The Scilex Pharma 2017 Plan reserved
24.0 million
shares of Scilex common stock. Stock options granted under this plan typically vest 1/4th of the shares on the first anniversary of the vesting commencement date and 1/48th of the remaining options vest each month thereafter. The Scilex Pharma 2017 Plan was amended and restated on July 5, 2018.
Upon closing of the Company’s acquisition of Semnur, the Scilex Pharma 2017 Equity Incentive Plan was terminated, and each option to purchase Scilex Pharmaceuticals common stock outstanding and unexercised immediately prior to the Closing were cancelled and substituted for that number of options to acquire common stock of Scilex Holding, as further described in Note 4.
The total employee and director stock-based compensation recorded as operating expenses was
$0.2 million
and
$0.1 million
for the three months ended June 30, 2019 and 2018, respectively, and
$0.3 million
and
$0.1 million
for the six months ended June 30, 2019 and 2018, respectively.
Stock-based compensation expense related to non-employee consultants recorded as operating expenses was
$0.6 million
for each of the three and six months ended June 30, 2019. Stock-based compensation expense related to non-employee consultants was immaterial for the three and six months ended June 30, 2018.
Scilex Holding Company 2019 Stock Option Plan
The board of directors of Scilex Holding adopted the Scilex Holding Company 2019 Stock Option Plan (the “2019 Stock Option Plan”) on May 28, 2019. The Scilex Holding 2019 Stock Option Plan was approved by the stockholders of Scilex Holding on June 7, 2019. As of June 30, 2019, options to purchase
25,412,608
shares of the common stock of Scilex Holding were outstanding and
8,035,276
shares were reserved for awards available for future issuance.
13. 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 Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The actions allege that Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. Specifically, the Company has filed:
|
|
|
|
•
|
An arbitration demand with the American Arbitration Association in Los Angeles, California against NantPharma, LLC and Chief Executive Officer Patrick Soon-Shiong, seeking damages in excess of
$1 billion
, as well as additional punitive damages, related to alleged fraud and breaches of the Stock Sale and Purchase Agreement, dated May 14, 2015, entered into between NantPharma LLC and the Company, included as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2015. On May 24, 2019, NantCell, Inc., Mr. Soon-Shiong and NANTibody General Counsel Charles Kim filed a motion in the Los Angeles Superior Court to stay or dismiss the Company’s arbitration demand. The Company makes no representations as to the likely success or outcome of such arbitration; and
|
|
|
|
|
•
|
An action in the Los Angeles Superior Court derivatively on behalf of Immunotherapy NANTibody LLC (“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 amount of
$40 million
. On May 24, 2019, NantCell, Inc. and Mr. Soon-Shiong filed a cross-complaint against the Company and Dr. Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Exclusive License Agreement for certain antibodies (dated April 21, 2015 and entered into between NantCell, Inc. and the Company), and tortious interference with contract. On May 24, 2019, NANTibody and NantPharma, LLC filed a new complaint in the action against the Company and Dr. Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Stock Sale and Purchase Agreement, alleged breaches of the Exclusive License Agreement for certain
|
antibodies (dated April 21, 2015 and entered into between NantCell, Inc. and the Company), and tortious interference with contract. On July 8, 2019, the Company and Dr. Ji filed a motion to compel this action to arbitration. The parties are currently engaged in discovery in the suit. The Company makes no representations as to the likely success or outcome of such lawsuit.
Operating Leases
The Company leases administrative, research and development, sales and marketing and manufacturing facilities under various non-cancelable lease agreements. Facility leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. As of
June 30, 2019
, the Company’s leases have remaining lease terms of approximately
0.9
to
10.3
years, some of which include options to extend the lease terms for up to
five years
, and some of which allow for early termination. In calculating the lease liability, lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Many of the Company’s leases are subject to variable lease payments. Variable lease payments are recognized in the period in which the obligation for those payments are incurred, are not included in the measurement of the right-of-use assets or lease liabilities and are immaterial. Additionally, certain leases may be subject to annual changes in the consumer price index (“CPI”). Changes in the CPI are treated as variable lease payments and do not result in a remeasurement of the right-of-use assets or lease liabilities.
As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of June 30, 2019, the Company has no finance leases.
Operating lease costs were
$2.7 million
and
$5.0 million
for the
three and six
months ended
June 30, 2019
, respectively, and were primarily comprised of long-term operating lease costs. Short-term operating lease costs were immaterial.
Supplemental quantitative information related to leases includes the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
Six months ended June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
1,867
|
|
|
$
|
3,399
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new and amended operating lease liabilities
|
$
|
4,447
|
|
|
$
|
4,747
|
|
|
|
|
|
|
|
Weighted average remaining lease term in years - operating leases
|
9.9 years
|
|
|
9.9 years
|
|
|
Weighted average discount rate - operating leases
|
12.2
|
%
|
|
12.2
|
%
|
During the second quarter of 2019, Scilex amended its Mission Viejo, CA lease resulting in an extended term through 2024 and approximately
4,000
square feet of additional office space. During the second quarter of 2019, the Company amended its cGMP fill and finish and storage lease resulting in an extended term through 2029 and approximately
21,300
square feet of additional space expected to be added in the first quarter of 2020.
Maturities of lease liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
Years ending December 31,
|
Operating leases
|
|
2019 (Remaining six months)
|
$
|
3,602
|
|
|
2020
|
9,581
|
|
|
2021
|
9,041
|
|
|
2022
|
9,154
|
|
|
2023
|
9,404
|
|
|
2024
|
9,477
|
|
|
Thereafter
|
47,027
|
|
|
Total lease payments
|
97,286
|
|
|
Less imputed interest
|
(42,842
|
)
|
|
Total lease liabilities as of June 30, 2019
|
$
|
54,444
|
|
14. Income Taxes
The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, research credits and temporary differences. In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, management has determined that it is appropriate to maintain a valuation allowance against the Company’s U.S. federal and state deferred tax assets, with the exception of an amount equal to its deferred tax liabilities.
The Company’s income tax benefit of
$0.6 million
and
$2.3 million
reflect effective tax rates of
0.26%
and
2.1%
for the
six
months ended
June 30, 2019
and
2018
, respectively. The Company’s income tax benefit of
$0.4 million
and
$1.4 million
reflect effective tax rates of
0.54%
and
1.86%
for the three months ended
June 30, 2019
and
2018
, respectively.
The difference between the expected statutory federal tax expense of
21%
and the
0.26%
effective tax expense for the
six
months ended
June 30, 2019
was primarily attributable to the valuation allowance against most of the Company’s deferred tax assets. For the
six
months ended
June 30, 2019
, when compared to the same period in 2018, the decrease in the tax benefit and change in effective income tax rate was primarily attributable to the increased valuation allowance in 2019.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2007 and later are subject to examination by the U.S. and state tax authorities due to the existence of the NOL carryforwards.
15. Related Party Agreements
As further discussed in Note 4, on March 18, 2019, the Company entered into a Merger Agreement with Semnur, Scilex Holding, Merger Sub, and Fortis Advisors LLC, solely as representative of the Equityholders’ Representative. Pursuant to the Merger Agreement, Merger Sub merged with and into Semnur, with Semnur surviving as a wholly owned subsidiary of Scilex Holding. Jaisim Shah, a member of the Company’s Board of Directors, was Semnur’s Chief Executive Officer, a member of its Board of Directors and a stockholder of Semnur prior to the acquisition transaction. Following the issuance of the Stock Consideration as discussed in Note 4, the Company is the owner of approximately
58%
of Scilex Holding’s issued and outstanding capital stock.
As of
June 30, 2019
, approximately
15%
of the outstanding capital stock of Scilex Holding represents a noncontrolling interest and continues to be held by ITOCHU CHEMICAL FRONTIER Corporation. Scilex has entered into a product development agreement with ITOCHU CHEMICAL FRONTIER Corporation, which serves as the sole manufacturer and supplier to Scilex for the ZTlido
®
product. During the
three and six
months ended
June 30, 2019
, Scilex purchased approximately
$2.5 million
and
$5.7 million
, respectively, of inventory from ITOCHU CHEMICAL FRONTIER Corporation.
16. Loss Per Share
For the three and
six
months ended
June 30, 2019
and
2018
, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share is calculated to give effect to all dilutive securities, using the treasury stock method.
The following table sets forth the reconciliation of basic and diluted loss per share for the three and
six
months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss attributable to Sorrento
|
$
|
(56,762
|
)
|
|
$
|
(73,864
|
)
|
|
$
|
(164,833
|
)
|
|
$
|
(106,436
|
)
|
|
Net loss attributable to Semnur holders of Scilex Holding
|
(6,093
|
)
|
|
—
|
|
|
(28,824
|
)
|
|
—
|
|
|
Net loss used for diluted earnings per share
|
$
|
(62,855
|
)
|
|
$
|
(73,864
|
)
|
|
$
|
(193,657
|
)
|
|
$
|
(106,436
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator for Basic Loss Per Share
|
122,549
|
|
|
100,563
|
|
|
122,415
|
|
|
92,795
|
|
|
Potentially dilutive shares of Sorrento common stock issuable upon Share Exchange
|
9,910
|
|
|
—
|
|
|
5,717
|
|
|
—
|
|
|
Denominator for Diluted Loss Per Share
|
132,459
|
|
|
100,563
|
|
|
128,132
|
|
|
92,795
|
|
|
Basic Loss Per Share
|
$
|
(0.46
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(1.15
|
)
|
|
Diluted Loss Per Share
|
$
|
(0.47
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.15
|
)
|
The potentially dilutive stock options that would have been excluded because the effect would have been anti-dilutive for the
six
months ended
June 30, 2019
and
2018
were
9.7 million
and
2.5 million
, respectively. The potentially dilutive warrants that would have been excluded because the effect would have been anti-dilutive for the
six
months ended
June 30, 2019
and
2018
were
10.7 million
and
2.2 million
, respectively.
17. Segment Information
During the quarter ended March 31, 2019, the Company realigned its businesses into
two
operating and reportable segments, Sorrento Therapeutics and Scilex. The Company reports segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (“CODM”), which is the Company’s Chief Executive Officer, for making decisions and assessing performance as the source of the Company’s reportable segments. The CODM allocates resources and assesses the performance of each operating segment based on licensing, sales and services revenue, operating expenses, and operating income (loss) before interest and taxes. The Company has determined its reportable segments to be Sorrento Therapeutics and Scilex based on the information used by the CODM.
Sorrento Therapeutics
. The Sorrento Therapeutics segment is organized around the Company’s Immuno-Oncology therapeutic area, leveraging its proprietary G-MAB™ antibody library and targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy (“CAR-T”), dimeric antigen receptor T-cell therapy (“DAR-T”), antibody drug conjugates (“ADCs”) as well as bispecific antibody approaches. Additionally, this segment also includes Sofusa
®
, a revolutionary drug delivery system that delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and fewer adverse effects than standard parenteral immunotherapy, and resiniferatoxin (“RTX”), which is a non-opioid-based neurotoxin and is currently in clinical trials for late stage cancer pain and osteoarthritis.
Scilex
. The Scilex segment is largely organized around the Company’s non-opioid pain management operations. As of June 30, 2019, revenues from the Scilex segment are exclusively derived from the sale of ZTlido
®
(lidocaine topical system) 1.8%.
|
|
|
|
•
|
In October 2018, Scilex commercially launched its ZTlido
®
(lidocaine topical system) 1.8% product and began recognizing revenue in the fourth quarter of 2018.
|
|
|
|
|
•
|
Semnur’s SEMDEXA
TM
(SP-102) compound is the first non-opioid corticosteroid formulated as a viscous gel injection in development for the treatment of lumbosacral radicular pain/sciatica, containing no neurotoxic preservatives, surfactants, solvents or particulates. SEMDEXA
TM
has been awarded fast track status by the FDA. See Note 4 for further detail on the Semnur acquisition.
|
The Company manages its assets on a company basis, not by segments, as many of its assets are shared or commingled. The Company’s CODM does not regularly review asset information by reportable segment and, therefore, it does not report asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.
The following table presents information about the Company’s reportable segments for the three and
six
months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
2019
|
|
2018
|
|
(in thousands)
|
Sorrento Therapeutics
|
Scilex
|
Total
|
|
Sorrento Therapeutics
|
Scilex
|
Total
|
|
External revenues
|
$
|
1,817
|
|
$
|
4,660
|
|
$
|
6,477
|
|
|
$
|
3,913
|
|
$
|
—
|
|
$
|
3,913
|
|
|
Operating expenses
|
36,299
|
|
20,539
|
|
56,838
|
|
|
28,076
|
|
4,208
|
|
32,284
|
|
|
Operating loss before interest and taxes
|
(34,482
|
)
|
(15,879
|
)
|
(50,361
|
)
|
|
(24,163
|
)
|
(4,208
|
)
|
(28,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
(in thousands)
|
Sorrento Therapeutics
|
Scilex
|
Total
|
|
Sorrento Therapeutics
|
Scilex
|
Total
|
|
External revenues
|
$
|
5,101
|
|
$
|
7,519
|
|
$
|
12,620
|
|
|
$
|
10,159
|
|
$
|
—
|
|
$
|
10,159
|
|
|
Operating expenses
|
71,431
|
|
114,720
|
|
186,151
|
|
|
63,776
|
|
7,298
|
|
71,074
|
|
|
Operating loss before interest and taxes
|
(66,330
|
)
|
(107,201
|
)
|
(173,531
|
)
|
|
(53,617
|
)
|
(7,298
|
)
|
(60,915
|
)
|