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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number 001-36150
SORRENTO THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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33-0344842 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(I.R.S. Employer
Identification Number) |
4955 Directors Place
San Diego, California 92121
(Address of Principal Executive Offices)
(Registrant’s Telephone Number, Including Area Code)
Securities Registered pursuant to Section 12(b) of the
Act:
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Title of each class: |
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Trading Symbol (s) |
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Name of each exchange on which registered: |
Common Stock, $0.0001 par value |
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SRNE |
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The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated file, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act:
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Large accelerated filer |
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☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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☐ |
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Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒.
The number of shares of the issuer’s common stock, par value
$0.0001 per share, outstanding as of October 22, 2019 was
141,871,384.
Sorrento Therapeutics, Inc.
Form 10-Q for the Quarter Ended September 30,
2019
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts; unaudited)
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ASSETS |
September 30,
2019 |
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December 31,
2018 |
Current assets: |
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Cash and cash equivalents |
$ |
34,649 |
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$ |
158,738 |
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Restricted cash |
9,592 |
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9,592 |
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Marketable securities |
94 |
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297 |
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Accounts receivables, net |
11,560 |
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3,833 |
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Inventory |
4,335 |
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2,898 |
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Income tax receivable |
216 |
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526 |
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Prepaid expenses and other |
7,122 |
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3,680 |
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Total current assets |
67,568 |
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179,564 |
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Property and equipment, net |
30,338 |
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24,384 |
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Operating lease right-of-use assets |
47,799 |
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— |
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Intangibles, net |
64,299 |
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66,283 |
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Goodwill |
38,298 |
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38,298 |
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Cost method investments |
237,008 |
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237,008 |
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Equity method investments |
25,240 |
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27,980 |
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Restricted cash |
45,150 |
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45,000 |
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Other, net |
5,175 |
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5,570 |
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Total assets |
$ |
560,875 |
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$ |
624,087 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
26,750 |
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$ |
13,817 |
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Accrued payroll and related benefits |
14,665 |
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10,236 |
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Accrued expenses |
18,478 |
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13,403 |
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Current portion of deferred revenue |
3,613 |
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2,703 |
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Acquisition consideration payable |
11,312 |
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11,312 |
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Current portion of derivative liabilities |
9,000 |
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— |
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Current portion of debt |
25,877 |
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10,150 |
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Current portion of operating lease liabilities |
3,018 |
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— |
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Total current liabilities |
112,713 |
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61,621 |
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Long-term debt, net of discount |
234,370 |
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223,136 |
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Deferred tax liabilities, net |
8,634 |
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9,416 |
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Deferred revenue |
114,783 |
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116,274 |
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Derivative liabilities |
29,500 |
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— |
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Operating lease liabilities |
53,378 |
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— |
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Deferred rent and other |
828 |
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6,140 |
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Total liabilities |
$ |
554,206 |
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$ |
416,587 |
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Commitments and contingencies (See Note 13) |
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Equity: |
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Sorrento Therapeutics, Inc. equity |
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Preferred stock, $0.0001 par value; 100,000,000 shares authorized
and no shares issued or outstanding
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— |
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— |
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Common stock, $0.0001 par value 750,000,000 shares authorized and
131,001,293 and 122,280,092 shares issued and outstanding at
September 30, 2019 and December 31, 2018, respectively
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13 |
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13 |
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Additional paid-in capital |
692,473 |
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626,658 |
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Accumulated other comprehensive (loss) income |
(129) |
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15 |
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Accumulated deficit |
(596,998) |
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(367,750) |
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Treasury stock, 7,568,182 shares at cost at September 30, 2019, and
December 31, 2018
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(49,464) |
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(49,464) |
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Total Sorrento Therapeutics, Inc. stockholders’ equity
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45,895 |
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209,472 |
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Noncontrolling interests |
(39,226) |
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(1,972) |
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Total equity |
6,669 |
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207,500 |
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Total liabilities and stockholders’ equity
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$ |
560,875 |
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$ |
624,087 |
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See accompanying notes to unaudited consolidated financial
statements
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts;
unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Net product revenues |
$ |
3,810 |
|
|
$ |
1,121 |
|
|
$ |
11,868 |
|
|
$ |
1,982 |
|
Service revenues |
1,968 |
|
|
2,984 |
|
|
6,530 |
|
|
12,282 |
|
Total
revenues |
5,778 |
|
|
4,105 |
|
|
18,398 |
|
|
14,264 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
Cost of products sold |
2,839 |
|
|
662 |
|
|
3,868 |
|
|
663 |
|
Cost of services |
2,387 |
|
|
1,515 |
|
|
6,947 |
|
|
4,052 |
|
Research and development |
27,573 |
|
|
19,567 |
|
|
77,916 |
|
|
52,124 |
|
Acquired in-process research and development |
— |
|
|
9,478 |
|
|
75,301 |
|
|
9,478 |
|
Selling, general and administrative |
25,234 |
|
|
20,102 |
|
|
78,128 |
|
|
41,102 |
|
Intangible amortization |
991 |
|
|
655 |
|
|
2,949 |
|
|
1,974 |
|
Loss on contingent liabilities and acquisition consideration
payable |
37 |
|
|
33 |
|
|
103 |
|
|
13,696 |
|
Total operating costs and expenses |
59,061 |
|
|
52,012 |
|
|
245,212 |
|
|
123,089 |
|
Loss from operations |
(53,283) |
|
|
(47,907) |
|
|
(226,814) |
|
|
(108,825) |
|
Loss on trading securities |
(221) |
|
|
(26) |
|
|
(203) |
|
|
(144) |
|
Loss on derivative liabilities |
(10,700) |
|
|
— |
|
|
(35,792) |
|
|
— |
|
(Loss) gain on foreign currency exchange |
(521) |
|
|
18 |
|
|
(619) |
|
|
(551) |
|
Interest expense |
(9,459) |
|
|
(2,684) |
|
|
(28,059) |
|
|
(48,744) |
|
Interest income |
182 |
|
|
219 |
|
|
1,021 |
|
|
229 |
|
|
|
|
|
|
|
|
|
Loss before income tax |
(74,002) |
|
|
(50,380) |
|
|
(290,466) |
|
|
(158,035) |
|
Income tax benefit |
(221) |
|
|
(826) |
|
|
(782) |
|
|
(3,152) |
|
Loss on equity method investments |
(1,431) |
|
|
(900) |
|
|
(3,902) |
|
|
(3,926) |
|
Net loss |
(75,212) |
|
|
(50,454) |
|
|
(293,586) |
|
|
(158,809) |
|
Net loss attributable to noncontrolling interests |
(10,797) |
|
|
(3,126) |
|
|
(64,338) |
|
|
(5,045) |
|
Net loss attributable to Sorrento |
$ |
(64,415) |
|
|
$ |
(47,328) |
|
|
$ |
(229,248) |
|
|
$ |
(153,764) |
|
Net loss per share - basic per share attributable to
Sorrento |
$ |
(0.49) |
|
|
$ |
(0.40) |
|
|
$ |
(1.83) |
|
|
$ |
(1.52) |
|
Net loss per share - diluted per share attributable to
Sorrento |
$ |
(0.50) |
|
|
$ |
(0.40) |
|
|
$ |
(2.00) |
|
|
$ |
(1.52) |
|
Weighted-average shares used during period - basic per share
attributable to Sorrento |
130,800 |
|
|
117,021 |
|
|
125,240 |
|
|
100,959 |
|
Weighted-average shares used during period - diluted per share
attributable to Sorrento |
140,445 |
|
|
117,021 |
|
|
132,265 |
|
|
100,959 |
|
See accompanying notes to unaudited consolidated financial
statements
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
Net loss |
$ |
(75,212) |
|
|
$ |
(50,454) |
|
|
$ |
(293,586) |
|
|
$ |
(158,809) |
|
Other comprehensive gain (loss): |
|
|
|
|
|
|
|
Foreign currency translation adjustments |
(177) |
|
|
(74) |
|
|
(144) |
|
|
(163) |
|
Total other comprehensive loss |
(177) |
|
|
(74) |
|
|
(144) |
|
|
(163) |
|
Comprehensive loss |
(75,389) |
|
|
(50,528) |
|
|
(293,730) |
|
|
(158,972) |
|
Comprehensive loss attributable to noncontrolling
interests |
(10,797) |
|
|
(3,126) |
|
|
(64,338) |
|
|
(5,045) |
|
Comprehensive loss attributable to Sorrento |
$ |
(64,592) |
|
|
$ |
(47,402) |
|
|
$ |
(229,392) |
|
|
$ |
(153,927) |
|
See accompanying notes to unaudited consolidated financial
statements
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except for share amounts; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Treasury Stock |
|
|
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Accumulated
Deficit |
|
Noncontrolling
Interest |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
Total |
Balance, December 31, 2018 |
122,280,092 |
|
|
$ |
13 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
626,658 |
|
|
$ |
15 |
|
|
$ |
(367,750) |
|
|
$ |
(1,972) |
|
|
$ |
207,500 |
|
Issuance of common stock upon exercise of stock options |
158,699 |
|
|
— |
|
|
— |
|
|
— |
|
|
289 |
|
|
— |
|
|
— |
|
|
— |
|
|
289 |
|
Issuance of common stock for public placement, net |
229,168 |
|
|
— |
|
|
— |
|
|
— |
|
|
947 |
|
|
— |
|
|
— |
|
|
— |
|
|
947 |
|
Equity contribution related to Semnur acquisition |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
27,991 |
|
|
— |
|
|
— |
|
|
26,600 |
|
|
54,591 |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
8,978 |
|
|
— |
|
|
— |
|
|
— |
|
|
8,978 |
|
Issuance of 2019 Warrants |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,288 |
|
|
— |
|
|
— |
|
|
— |
|
|
4,288 |
|
2019 Public Offering of common stock and warrants, net of issuance
costs |
8,333,334 |
|
|
— |
|
|
— |
|
|
— |
|
|
23,322 |
|
|
— |
|
|
— |
|
|
— |
|
|
23,322 |
|
Adjustment to noncontrolling interest |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
484 |
|
|
484 |
|
Foreign currency translation adjustment |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(144) |
|
|
|
|
|
— |
|
|
(144) |
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(229,248) |
|
|
(64,338) |
|
|
(293,586) |
|
Balance, September 30, 2019 |
131,001,293 |
|
|
$ |
13 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
692,473 |
|
|
$ |
(129) |
|
|
$ |
(596,998) |
|
|
$ |
(39,226) |
|
|
$ |
6,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Treasury Stock |
|
|
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Accumulated
Deficit |
|
Noncontrolling
Interest |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
Total |
Balance, June 30, 2019 |
122,645,334 |
|
|
$ |
13 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
665,515 |
|
|
$ |
48 |
|
|
$ |
(532,583) |
|
|
$ |
(28,913) |
|
|
$ |
54,616 |
|
Issuance of common stock upon exercise of stock options |
22,625 |
|
|
— |
|
|
— |
|
|
— |
|
|
30 |
|
|
— |
|
|
— |
|
|
— |
|
|
30 |
|
Equity contribution related to Semnur acquisition |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(409) |
|
|
— |
|
|
— |
|
|
— |
|
|
(409) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,015 |
|
|
— |
|
|
— |
|
|
— |
|
|
4,015 |
|
Issuance of 2019 Warrants |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
2019 Public Offering of common stock and warrants, net of issuance
costs |
8,333,334 |
|
|
— |
|
|
— |
|
|
— |
|
|
23,322 |
|
|
— |
|
|
— |
|
|
— |
|
|
23,322 |
|
Adjustment to noncontrolling interest |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
484 |
|
|
484 |
|
Foreign currency translation adjustment |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(177) |
|
|
— |
|
|
— |
|
|
(177) |
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(64,415) |
|
|
(10,797) |
|
|
(75,212) |
|
Balance, September 30, 2019 |
131,001,293 |
|
|
$ |
13 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
692,473 |
|
|
$ |
(129) |
|
|
$ |
(596,998) |
|
|
$ |
(39,226) |
|
|
$ |
6,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Treasury Stock |
|
|
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Accumulated
Deficit |
|
Noncontrolling
Interest |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
Total |
Balance, December 31, 2017 |
82,903,567 |
|
|
$ |
9 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
413,901 |
|
|
$ |
242 |
|
|
$ |
(165,120) |
|
|
$ |
7,042 |
|
|
$ |
206,610 |
|
Adoption impact of ASC 606 |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
910 |
|
|
— |
|
|
910 |
|
Issuance of common stock upon exercise of stock options |
42,565 |
|
|
— |
|
|
— |
|
|
— |
|
|
302 |
|
|
— |
|
|
— |
|
|
— |
|
|
302 |
|
Issuance of common stock for BDL settlement |
309,916 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,340 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,340 |
|
Issuance of common stock for Scilex settlement |
1,381,346 |
|
|
— |
|
|
— |
|
|
— |
|
|
13,744 |
|
|
— |
|
|
— |
|
|
— |
|
|
13,744 |
|
Issuance of common stock for public placement and investments,
net |
10,396,489 |
|
|
2 |
|
|
— |
|
|
— |
|
|
71,475 |
|
|
— |
|
|
— |
|
|
— |
|
|
71,477 |
|
Issuance of common stock for Virttu settlement |
1,795,011 |
|
|
— |
|
|
— |
|
|
— |
|
|
11,308 |
|
|
— |
|
|
— |
|
|
— |
|
|
11,308 |
|
Issuance of common stock related to conversion of notes
payable |
22,038,565 |
|
|
2 |
|
|
— |
|
|
— |
|
|
49,998 |
|
|
— |
|
|
— |
|
|
— |
|
|
50,000 |
|
Beneficial conversion feature recorded on convertible
notes |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
12,006 |
|
|
— |
|
|
— |
|
|
— |
|
|
12,006 |
|
Warrants issued in connection with convertible notes |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9,646 |
|
|
— |
|
|
— |
|
|
— |
|
|
9,646 |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,218 |
|
|
— |
|
|
— |
|
|
(29) |
|
|
4,189 |
|
Foreign currency translation adjustment |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(163) |
|
|
— |
|
|
— |
|
|
(163) |
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(153,764) |
|
|
(5,045) |
|
|
(158,809) |
|
Balance, September 30, 2018 |
118,867,459 |
|
|
$ |
13 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
588,938 |
|
|
$ |
79 |
|
|
$ |
(317,974) |
|
|
$ |
1,968 |
|
|
$ |
223,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Treasury Stock |
|
|
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Accumulated
Deficit |
|
Noncontrolling
Interest |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
Total |
Balance, June 30, 2018 |
116,240,963 |
|
|
$ |
12 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
574,316 |
|
|
$ |
153 |
|
|
$ |
(270,646) |
|
|
$ |
5,094 |
|
|
$ |
259,465 |
|
Issuance of common stock upon exercise of stock options |
16,750 |
|
|
— |
|
|
— |
|
|
— |
|
|
141 |
|
|
— |
|
|
— |
|
|
— |
|
|
141 |
|
Issuance of common stock for public placement and investments,
net |
2,609,746 |
|
|
1 |
|
|
— |
|
|
— |
|
|
13,204 |
|
|
— |
|
|
— |
|
|
— |
|
|
13,205 |
|
Issuance of common stock for Virttu settlement |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Issuance of common stock related to conversion of notes
payable |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Beneficial conversion feature recorded on convertible
notes |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Warrants issued in connection with convertible notes |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,277 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,277 |
|
Foreign currency translation adjustment |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(74) |
|
|
— |
|
|
— |
|
|
(74) |
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(47,328) |
|
|
(3,126) |
|
|
(50,454) |
|
Balance, September 30, 2018 |
118,867,459 |
|
|
$ |
13 |
|
|
7,568,182 |
|
|
$ |
(49,464) |
|
|
$ |
588,938 |
|
|
$ |
79 |
|
|
$ |
(317,974) |
|
|
$ |
1,968 |
|
|
$ |
223,560 |
|
See accompanying notes to unaudited consolidated financial
statements
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Operating activities |
2019 |
|
2018 |
Net loss |
$ |
(293,586) |
|
|
$ |
(158,809) |
|
Adjustments to reconcile net loss to net cash used for operating
activities: |
|
|
|
Depreciation and amortization |
8,248 |
|
|
6,192 |
|
Non-cash operating lease cost |
3,069 |
|
|
— |
|
Non-cash interest expense |
15,964 |
|
|
44,272 |
|
|
|
|
|
Acquisition-related IPR&D |
75,301 |
|
|
9,478 |
|
Amortization of debt issuance costs |
1,590 |
|
|
2,634 |
|
Loss on trading securities |
203 |
|
|
144 |
|
Stock-based compensation |
8,978 |
|
|
4,188 |
|
|
|
|
|
Loss on derivative liabilities |
35,792 |
|
|
— |
|
Loss on equity method investments |
3,902 |
|
|
3,926 |
|
|
|
|
|
Loss on contingent liabilities and acquisition consideration
payable |
103 |
|
|
13,696 |
|
Deferred tax provision |
(782) |
|
|
(3,062) |
|
Changes in operating assets and liabilities, excluding effect of
acquisitions: |
|
|
|
Accounts receivable |
(7,727) |
|
|
(67) |
|
|
|
|
|
|
|
|
|
Accrued payroll |
4,429 |
|
|
3,683 |
|
Prepaid expenses and other |
(3,699) |
|
|
(99) |
|
|
|
|
|
Accounts payable |
8,782 |
|
|
7,233 |
|
|
|
|
|
Deferred revenue |
(581) |
|
|
(3,482) |
|
Other |
(97) |
|
|
(359) |
|
Acquisition consideration payable for Scilex |
— |
|
|
(2,020) |
|
|
|
|
|
Accrued expenses and other liabilities |
3,137 |
|
|
5,663 |
|
Net cash used in operating activities |
(136,974) |
|
|
(66,789) |
|
Investing activities |
|
|
|
Purchases of property and equipment |
(9,582) |
|
|
(5,748) |
|
Purchase of assets related to Semnur, net of cash
acquired |
(17,040) |
|
|
— |
|
Purchase of assets related to Sofusa |
— |
|
|
(10,000) |
|
Contributions to joint venture |
(1,162) |
|
|
— |
|
|
|
|
|
Net cash used in investing activities |
(27,784) |
|
|
(15,748) |
|
Financing activities |
|
|
|
Proceeds from public offering, net of issuance costs |
23,322 |
|
|
— |
|
Proceeds from Early Conditional Loan, net of issuance
costs |
18,858 |
|
|
— |
|
Proceeds from bridge loan for Scilex regulatory
milestone |
— |
|
|
20,000 |
|
Repayment of bridge loan for Scilex regulatory
milestone |
— |
|
|
(20,000) |
|
Proceeds from loan agreement |
— |
|
|
1,586 |
|
Short-term bridge loan, net of issuance costs |
— |
|
|
19,675 |
|
Short-term loan repayment |
(740) |
|
|
— |
|
Scilex consideration for regulatory milestone |
— |
|
|
(22,466) |
|
Payment on Scilex Notes |
(1,701) |
|
|
— |
|
Proceeds from issuance of common stock, net |
947 |
|
|
71,481 |
|
Proceeds from issuance of Scilex notes, net of issuance
costs |
— |
|
|
134,275 |
|
|
|
|
|
Proceeds from issuance of convertible notes |
— |
|
|
37,849 |
|
Proceeds from exercise of stock options |
289 |
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
40,975 |
|
|
242,703 |
|
Net change in cash, cash equivalents and restricted
cash |
(123,783) |
|
|
160,166 |
|
Net effect of exchange rate changes on cash |
(156) |
|
|
(154) |
|
Cash, cash equivalents and restricted cash at beginning of
period |
213,330 |
|
|
20,429 |
|
Cash, cash equivalents and restricted cash at end of
period |
$ |
89,391 |
|
|
$ |
180,441 |
|
Supplemental disclosures: |
|
|
|
Cash paid during the period for: |
|
|
|
Income taxes |
$ |
13 |
|
|
$ |
15 |
|
Interest paid |
$ |
10,046 |
|
|
$ |
1,453 |
|
Supplemental disclosures of non-cash investing and financing
activities: |
|
|
|
Semnur acquisition consideration paid in equity |
$ |
54,591 |
|
|
$ |
— |
|
Semnur acquisition costs incurred but not paid |
$ |
601 |
|
|
|
$ |
— |
|
BDL non-cash consideration |
$ |
— |
|
|
$ |
2,340 |
|
Property and equipment costs incurred but not paid |
$ |
1,408 |
|
|
$ |
59 |
|
Scilex non-cash consideration for
regulatory milestone |
$ |
— |
|
|
$ |
13,744 |
|
|
|
|
|
Conversion of convertible
notes |
$ |
— |
|
|
$ |
50,000 |
|
Reconciliation of cash, cash equivalents and restricted cash within
the Company’s consolidated balance sheets: |
|
|
|
Cash and cash equivalents |
34,649 |
|
|
135,441 |
|
Restricted cash |
54,742 |
|
|
45,000 |
|
Cash, cash equivalents, and restricted cash |
$ |
89,391 |
|
|
$ |
180,441 |
|
See accompanying notes to unaudited consolidated financial
statements
SORRENTO THERAPEUTICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
1.
Nature of Operations and Business Activities
Nature
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”) and 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”) in
March 2019. Semnur’s SEMDEXATM
(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 September 30, 2019, the Company had devoted
substantially all of its efforts to developing products, raising
capital and building infrastructure.
The Company has reclassified historically presented revenue and
cost of revenue to conform to the current period presentation. The
reclassification had no impact on previously reported results of
operations or financial position.
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 September 30, 2019, the Company had $356.5 million of
long term debt outstanding, comprised of convertible notes issued
pursuant to the March 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 Pharma”) 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:
•Level
1: Observable inputs such as unadjusted quoted prices in active
markets for identical instruments.
•Level
2: Quoted prices for similar instruments that are directly or
indirectly observable in the marketplace.
•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 considers
the need for allowances for excess and obsolete inventory based
upon historical experience, sales trends, and specific categories
of inventory and age of on-hand inventory. As of September 30,
2019, the Company’s inventory is primarily comprised of finished
goods, and the related allowance for excess inventory was
$2.2 million.
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 sheets.
The Company commenced amortization of acquired in-process research
and development related to the business combination of Scilex
Pharma upon commercialization of ZTlido®
(lidocaine topical system) 1.8% in October 2018. Capitalized
in-process research and development is 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).
Revenue Recognition
As of September 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 Company considers both of these entities as
related parties and accounts for them as equity method and cost
method investments, respectively.
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 September 30, 2019,
was approximately $8.1 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 September 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.
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 Biosystems Corp.
(“Concortis”) sales and services and materials and supply
agreements due to the general short-term length of such
contracts.
The following table shows revenue disaggregated by product and
services type for the three and nine months ended
September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
Scilex Pharma product sales |
$ |
3,770 |
|
|
$ |
— |
|
|
$ |
11,289 |
|
|
$ |
— |
|
Other product sales |
40 |
|
|
1,121 |
|
|
579 |
|
|
1,982 |
|
Net product revenue |
$ |
3,810 |
|
|
$ |
1,121 |
|
|
$ |
11,868 |
|
|
$ |
1,982 |
|
|
|
|
|
|
|
|
|
Concortis Biosystems Corporation
|
$ |
1,607 |
|
|
$ |
1,042 |
|
|
$ |
4,622 |
|
|
$ |
3,400 |
|
Bioserv Corporation
|
233 |
|
|
1,528 |
|
|
1,540 |
|
|
4,895 |
|
Joint development agreement |
— |
|
|
— |
|
|
— |
|
|
3,333 |
|
Other revenue |
128 |
|
|
|
414 |
|
|
|
368 |
|
|
|
654 |
|
Service revenue |
$ |
1,968 |
|
|
$ |
2,984 |
|
|
$ |
6,530 |
|
|
$ |
12,282 |
|
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.
Scilex Holding
The Company’s revenue is generated from product sales within the
United States. The Company does not have significant costs
associated with costs to obtain contract with its customer.
Substantially all of the Company’s revenue and accounts receivable
result from a sole customer.
Revenue from product sales is fully comprised of sales of
ZTlido®
(lidocaine topical system) 1.8%. The Company’s performance
obligation with respect to sales of ZTlido®
(lidocaine topical system) 1.8% is satisfied at a point in time,
which transfers control upon delivery of product to the customer.
The Company considers control to have transferred upon delivery
because the customer has legal title to the asset, physical
possession of the asset has been transferred to the customer, the
customer has significant risks and rewards of ownership of the
asset, and the Company has a present right to payment at that time.
The Company identified a single performance obligation. Invoicing
typically occurs upon shipment and the length of time between
invoicing and when payment is due is not significant. The aggregate
dollar value of unfulfilled orders as of September 30, 2019 was not
material.
For product sales, the Company records gross-to-net sales
adjustments for government and managed care rebates, chargebacks,
wholesaler and distributor fees, sales returns and prompt payment
discounts. Such variable consideration are estimated in the period
of the sale and are estimated using a most likely amount approach
based primarily upon provisions included in the Company’s customer
contract, customary industry practices and current government
regulations. There were no significant changes in estimates of
variable consideration during the nine months ended September 30,
2019.
Concortis
Biosystems Corporation (“Concortis”)
Revenues for Concortis operations are comprised of contract
manufacturing associated with sales of customized reagents and
relate to providing synthetic expertise to a customers’ synthesis
of reagents by delivering proprietary cytotoxins, linkers and
linker-toxins and ADC service using industry standard toxins and
antibodies provided by customers. Revenues are recognized at a
point in time upon the transfer of control, which is generally upon
shipment given the short contract terms which are generally three
months or less.
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 September 30,
2019, the estimated revenue expected to be recognized for future
performance obligations associated with contract manufacturing
services was approximately $1.6 million and $1.2 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2019 |
|
2020 |
|
2021 and thereafter |
Contract manufacturing services |
|
$403 |
|
|
$701 |
|
|
$109 |
|
Joint Development Agreement
On September 26, 2017, the Company entered into a joint development
agreement with Celularity Inc. (“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
nine months ended September 30, 2018. The Company recorded no sales
and services revenues under the joint development agreement during
the nine months ended September 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 lease right-of-use (“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 reports 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.
In July 2019, the FASB issued ASU No. 2019-07,
Codification Updates to SEC Sections - Amendments to SEC Paragraphs
Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update
and Simplification, and Nos. 33-10231 and 33-10442, Investment
Company Reporting Modernization and Miscellaneous Updates (SEC
Update) (“ASU 2019-07”).
ASU 2019-07 aligns the guidance in various sections of the ASC with
the requirements of certain final rules of the Securities and
Exchange Commission. ASU 2019-07 was effective immediately. The
adoption of ASU 2019-07 did not have a material impact 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 Pharma, the Company’s majority-owned
subsidiary, contributed each share of Scilex Pharma capital stock
that the Company or it owned to Scilex Holding in exchange for one
share of Scilex Holding common stock (the “Contribution”). In
connection with the Contribution, the Company provided Scilex
Holding with a loan with an initial principal amount of $16.5
million in the form of a note payable, which loan was used to fund
the acquisition of Semnur. As a result of the Contribution, and
prior to the consummation of the Merger, Scilex Pharma 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.
The upfront consideration was comprised of the following: (a) a
cash payment of approximately $15.0 million, and (b) $55.0 million
of shares of Scilex Holding common stock (47,039,315 shares issued
and 352,972 shares issuable, valued at $1.16 per share) (the “Stock
Consideration”).
On August 7, 2019, Scilex Holding entered into an amendment to the
Merger Agreement to provide that, following the consummation of
Scilex Holding’s first bona fide equity financing with one or more
third-party financing sources on an arms’ length basis with gross
proceeds to Scilex Holding of at least $40.0 million, certain of
the former Semnur Equityholders will be paid cash in lieu of: (a)
the 352,972 shares of the Company’s common stock otherwise issuable
to such Semnur Equityholders pursuant to the Merger Agreement, and
(b) any shares that would otherwise be issued to such Semnur
Equityholders upon release of shares held in escrow pursuant to the
Merger Agreement, with such shares in each case valued at $1.16 per
share. The amendment resulted in a reclassification of $0.4 million
from additional paid-in capital to accrued
liabilities.
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’s
ownership in Scilex Holding was diluted to 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,
which is comprised of a $40.0 million payment that will be due upon
obtaining the first approval of a New Drug Application of a Semnur
product by the U.S. Food and Drug Administration (the “FDA”) and
additional payments that will be due upon the achievement of
certain amounts of net sales of Semnur products as follows: (a) a
$20.0 million payment upon the achievement of $100.0 million in
cumulative net sales of a Semnur product, (b) a $20.0 million
payment upon the achievement of $250.0 million in cumulative net
sales of a Semnur product, (c) a $50.0 million payment upon the
achievement of $500.0 million in cumulative net sales of
a
Semnur product, and (d) a $150.0 million payment upon the
achievement of $750.0 million in cumulative net sales of a Semnur
product.
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 “Merger 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 Merger 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 (the “Securities Act”), and the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
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 SEMDEXATM
(SP-102) technology for consideration valued at approximately $70.0
million, excluding contingent consideration, transaction costs of
$3.1 million and liabilities assumed of $4.2 million, which was
allocated based on the relative fair value of the assets acquired.
The $70.0 million of consideration consisted of $15.0 million in
cash and shares of Scilex Holding valued at $55.0 million. No
contingent consideration was recorded as of September 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2019 |
|
|
|
|
|
|
|
Balance |
|
Quoted Prices in Active Markets (Level 1) |
|
Significant Other Observable Inputs (Level 2) |
|
Significant Unobservable Inputs (Level 3) |
Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
34,649 |
|
|
$ |
34,649 |
|
|
$ |
— |
|
|
$ |
— |
|
Restricted cash |
54,742 |
|
|
54,742 |
|
|
— |
|
|
— |
|
Marketable securities |
94 |
|
|
81 |
|
|
— |
|
|
13 |
|
Total assets |
$ |
89,485 |
|
|
$ |
89,472 |
|
|
$ |
— |
|
|
$ |
13 |
|
Liabilities: |
|
|
|
|
|
|
|
Derivative liabilities |
$ |
9,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,000 |
|
Derivative liabilities - Non-current |
29,500 |
|
|
— |
|
|
— |
|
|
29,500 |
|
Acquisition consideration payable |
11,312 |
|
|
— |
|
|
— |
|
|
11,312 |
|
Acquisition consideration payable - Non-current |
828 |
|
|
— |
|
|
— |
|
|
828 |
|
Total liabilities |
$ |
50,640 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
50,640 |
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 |
|
|
|
|
|
|
|
Balance |
|
Quoted Prices in Active Markets (Level 1) |
|
Significant Other Observable Inputs (Level 2) |
|
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.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Fair Value |
Beginning balance at December 31, 2018 |
|
$ |
12,037 |
|
|
|
|
|
|
|
Re-measurement of Fair Value |
|
103 |
|
|
|
|
Ending balance at September 30, 2019 |
|
$ |
12,140 |
|
As of September 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 $9.6
million and $29.5 million for the three and nine months ended
September 30, 2019, respectively, which was primarily
attributed to revised probabilities related to the timing of
marketing approval for ZTlido®
(lidocaine topical system) 5.4% (“SP-103”), revised sales forecasts
and tax indemnification obligations with respect to foreign note
holders. 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 19.6%, net sales forecasts and estimated
probabilities of 55% and 95% of not obtaining marketing approval
before predetermined dates as of September 30, 2019.
The Company determined that the contingent acceleration feature of
the Early Conditional Loan (as defined 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 (as defined in Note 10) and is recorded as
interest expense in the consolidated statement of operations. The
Company performs a mark-to-market assessment for the derivative
liability related to the contingent acceleration feature of the
Early Conditional Loan each reporting period and recorded a loss on
derivative liabilities of $1.1 million and $2.0 million for the
three and nine months ended September 30, 2019, respectively.
The Company also recorded a loss on derivative liabilities
associated with the 2019 Warrants (as defined in Note 10) of $4.3
million on the issuance date, as the Conditional Warrants were
issued with the Amendment (See Note 10). Further, the derivative
liability associated with the 2019 Warrants was reclassified to
additional-paid-in-capital upon issuance of the 2019
Warrants.
The following table includes a summary of the derivative
liabilities measured at fair value using significant unobservable
inputs (Level 3) during the nine months ended September 30,
2019:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Fair Value |
Beginning Balance at December 31, 2018 |
|
$ |
— |
|
Additions |
|
6,996 |
|
Re-measurement of Fair Value |
|
31,504 |
|
Ending Balance at September 30, 2019 |
|
$ |
38,500 |
|
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
September 30, 2019 and December 31, 2018 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
|
December 31, 2018 |
Furniture and fixtures |
$ |
1,240 |
|
|
$ |
1,127 |
|
Office equipment |
659 |
|
|
632 |
|
Machinery and lab equipment |
30,675 |
|
|
27,690 |
|
Leasehold improvements |
9,716 |
|
|
9,001 |
|
|