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☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Delaware						33-0344842
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification Number)

(858)			203-4100

Title of each class:

Trading Symbol (s)

Name of each exchange on which registered:

Common Stock, $0.0001 par value

SRNE

The Nasdaq Stock Market LLC

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

Part I			Financial Information
Item 1.			Consolidated Financial Statements (Unaudited)
			Consolidated Balance Sheets (Unaudited) as of September 30, 2019 and December 31, 2018			1
			Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018			3
			Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018			4
			Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018			5
			Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018			7
			Notes to Consolidated Financial Statements (Unaudited)			9
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			44
Item 4.			Controls and Procedures			45
Part II			Other Information			47
Item 1.			Legal Proceedings			47
Item 1A.			Risk Factors			48
Item 5.			Other Information			53
Item 6.			Exhibits			54
Signatures									56

ASSETS			September 30, 2019						December 31, 2018
Current assets:
Cash and cash equivalents			$	34,649					$	158,738
Restricted cash			9,592						9,592
Marketable securities			94						297
Accounts receivables, net			11,560						3,833
Inventory			4,335						2,898
Income tax receivable			216						526
Prepaid expenses and other			7,122						3,680
Total current assets			67,568						179,564
Property and equipment, net			30,338						24,384
Operating lease right-of-use assets			47,799						—
Intangibles, net			64,299						66,283
Goodwill			38,298						38,298
Cost method investments			237,008						237,008
Equity method investments			25,240						27,980
Restricted cash			45,150						45,000
Other, net			5,175						5,570
Total assets			$	560,875					$	624,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	26,750					$	13,817
Accrued payroll and related benefits			14,665						10,236
Accrued expenses			18,478						13,403
Current portion of deferred revenue			3,613						2,703
Acquisition consideration payable			11,312						11,312
Current portion of derivative liabilities			9,000						—
Current portion of debt			25,877						10,150
Current portion of operating lease liabilities			3,018						—
Total current liabilities			112,713						61,621
Long-term debt, net of discount			234,370						223,136
Deferred tax liabilities, net			8,634						9,416
Deferred revenue			114,783						116,274
Derivative liabilities			29,500						—
Operating lease liabilities			53,378						—
Deferred rent and other			828						6,140
Total liabilities			$	554,206					$	416,587
Commitments and contingencies (See Note 13)
Equity:
Sorrento Therapeutics, Inc. equity
Preferred stock, $0.0001 par value; 100,000,000 shares authorized and no shares issued or outstanding			—						—

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			13						13
Additional paid-in capital			692,473						626,658
Accumulated other comprehensive (loss) income			(129)						15
Accumulated deficit			(596,998)						(367,750)
Treasury stock, 7,568,182 shares at cost at September 30, 2019, and December 31, 2018			(49,464)						(49,464)
Total Sorrento Therapeutics, Inc. stockholders’ equity			45,895						209,472
Noncontrolling interests			(39,226)						(1,972)
Total equity			6,669						207,500
Total liabilities and stockholders’ equity			$	560,875					$	624,087

			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

			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)

			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

			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

1. Nature of Operations and Business Activities

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 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.

Through September 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.

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

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.

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.

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).

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.

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

Scilex Holding

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.

Concortis Biosystems Corporation (“Concortis”)

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

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

Starting on January 1, 2019, the Company re-segmented its business into two new operating segments: the Sorrento Therapeutics segment and the Scilex segment.

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

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.

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.

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”).

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.

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).

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 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.

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 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 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

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.

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