This Quarterly Report on Form 10-Q contains "forward-looking statements" about
our expectations, beliefs or intentions regarding our potential product
offerings, business, financial condition, results of operations, strategies or
prospects. You can identify forward-looking statements by the fact that these
statements do not relate strictly to historical or current matters. Rather,
forward-looking statements relate to anticipated or expected events, activities,
trends or results as of the date they are made and are often identified by the
use of words such as "assumes," "plans," "anticipate," "believe," "continue,"
"could," "estimate," "expect," "intend," "may," "might," or "will," and similar
expressions or variations. Because forward-looking statements relate to matters
that have not yet occurred, these statements are inherently subject to risks and
uncertainties that could cause our actual results to differ materially from any
future results expressed or implied by the forward-looking statements. Many
factors could cause our actual activities or results to differ materially from
the activities and results anticipated in forward-looking statements. These
factors include those described under the caption "Risk Factors" included
elsewhere in this Quarterly Report on Form 10-Q and in our other filings with
the Securities and Exchange Commission (the "SEC"). Furthermore, such
forward-looking statements speak only as of the date of this report. We
undertake no obligation to update any forward-looking statements to reflect
events or circumstances occurring after the date of such statements.
Overview
Sorrento Therapeutics, Inc., together with its subsidiaries (collectively, the
"Company", "we", "us", and "our") is a clinical stage and commercial
biopharmaceutical company focused on delivering innovative and clinically
meaningful therapies to address unmet medical needs.
At our core, we are antibody-centric and leverage our proprietary G-MAB™ library
and targeted delivery modalities to generate the next generation of cancer
therapeutics. Our fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47,
BCMA, LAG3, CTLA-4, CD137 and SARS-CoV-2 neutralizing antibodies, among others.
We also have programs assessing the use of our technologies and products in
autoimmune, inflammatory, viral and neurodegenerative diseases.
Our vision is to leverage these antibodies in conjunction with proprietary
targeted delivery modalities to generate the next generation of cancer
therapeutics. These modalities include proprietary chimeric antigen receptor
T-cell therapy ("CAR-T"), dimeric antigen receptor T-cell therapy ("DAR-T™"),
antibody drug conjugates ("ADCs") as well as bispecific antibody approaches. We
acquired Sofusa®, a drug delivery technology, in July 2018, which delivers
biologics directly into the lymphatic system to potentially achieve improved
efficacy and fewer adverse effects than standard parenteral therapy.
Additionally, our majority-owned subsidiary, Scilex Holding Company ("Scilex
Holding"), acquired the assets of Semnur Pharmaceuticals, Inc. ("Semnur") in
March 2019. Semnur's SEMDEXATM ("SP-102") compound has the potential to become
the first Food and Drug Administration ("FDA")-approved epidural steroid product
for the treatment of sciatica. In response to the global SARS-CoV-2 ("COVID-19")
pandemic, we are utilizing the Bruton's tyrosine kinase ("BTK") inhibitor
(Abivertinib, acquired from ACEA Therapeutics, Inc.) in a U.S. Phase II study of
cytokine storm associated with a COVID-19 infection and in a Phase II trial in
Brazil in mild, moderate and severe COVID-19 patients. We are also internally
developing and conducting clinical studies for potential coronavirus antiviral
therapies and vaccines, including COVI-MSC™, COVI-AMG™, COVIDROPSTM, COVIGUARDTM
and COVISHIELDTM; and diagnostic test solutions, including COVITRACK™, COVISTIX™
and COVITRACE™.
With each of our clinical and preclinical programs, we aim to tailor our
therapies to treat specific stages in the evolution of a disease, from
elimination, to equilibrium and escape. In addition, our objective in our
immuno-oncology programs is to focus on tumors that are resistant to current
treatments and where we can design focused trials based on a genetic signature
or biomarker to ensure patients have the best chance of a durable and
significant response. We have several immuno-oncology programs that are in or
near to entering the clinic. These include cellular therapies, oncolytic viruses
(SeprehvecTM) and a palliative care program targeted to treat intractable cancer
pain (RTX). Our cellular therapy programs focus on CAR-T and DAR-T for adoptive
cellular immunotherapy to treat both solid and liquid tumors.
From the start of the COVID-19 pandemic, our mission has been to leverage our
deep expertise in developing targeted antibodies for cancer immunotherapy to
create best-in-category treatments and diagnostics to ease suffering and assist
in the global response to COVID-19. We have leveraged, and continue to leverage,
our G-MAB library and antibody development engineering capabilities to advance a
number of promising diagnostics and neutralizing antibody candidates to test and
treat COVID-19 and the immune reactions associated with SARS-CoV-2 infection.
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Our first generation SARS-CoV-2 neutralizing antibody was STI-1499 (COVIGUARD™),
which was engineered to prevent antibody dependent enhancement of disease. This
antibody was then optimized to produce the highly potent STI-2020, which is
being developed in two outpatient formulations: COVI-AMG (IV-push injection) and
COVIDROPS (intranasal). A U.S. Food and Drug Administration ("FDA")-cleared
Phase I study of COVI-AMG has been completed, and the FDA has cleared a Phase II
study of COVI-AMG in outpatients with COVID-19 and a Phase II study of COVI-AMG
in hospitalized patients with moderate or severe COVID-19. We have also
completed an FDA-cleared Phase I study of COVIDROPS of healthy volunteers and
are currently enrolling patients with mild COVID-19 in an outpatient study in
the UK. We are also developing two promising potential rescue treatments with
Abivertinib, an oral next generation dual EGFR/BTK inhibitor, to treat moderate
to severe hospitalized COVID-19 patients, and COVI-MSC™, human allogeneic
adipose-derived mesenchymal stem cells for patients suffering from
COVID-19-induced acute respiratory distress syndrome (ARDS). We have completed
enrollment in an FDA-cleared Phase II study for Abivertinib and an FDA-cleared
Phase Ib study for COVI-MSC. We are also working with the Brazilian Health
Regulatory Agency (ANVISA) to conduct a COVID-19 study with Abivertinib and MSC.
The Abivertinib study is fully enrolled and we are awaiting the clinical
results, and we also have clearance to begin a Phase II study with COVI-MSC. In
other preclinical development, we are rapidly screening new neutralizing
antibodies to address the multiple emerging variants of SARS-CoV-2 to
potentially combine with STI-2020 (COVI-AMG) in a cocktail therapy
(COVISHIELD™). We are also developing a multi-variant mRNA vaccine to
potentially provide protection for all of the current variants of concern.
In furtherance of our goal to develop products across the entire continuum of
COVID-19 solutions, we are further developing a number of highly sensitive and
rapid diagnostic tests. COVISTIX™ is a lateral flow antigen test that uses a
proprietary platinum-based colloid and antibody combination, resulting in high
sensitivity and accuracy. This is a simple and rapid (15-minute) test with a
shallow nasal swab and is designed for point-of-care and at-home use. This
product has been approved for use in Mexico as a point-of-care test. COVITRACK™
is a rapid SARS-CoV-2 IgG/IgM antibody test kit intended for use initially in
clinical laboratories and in point of care settings to quickly identify
individuals with anti-SARS-CoV-2 antibodies post-infection or post-vaccination.
COVITRACE™ was licensed from Columbia University as a rapid single step on-site
colorimetric detection test for SARS-COV-2 genomic RNA from a saliva sample
using targeted nucleic acid amplification for high throughput point-of-care
situations.
We have reported early data from Phase I trials of our carcinoembryonic antigen
("CEA")-directed CAR-T program. We have treated five patients with stage 4,
unresectable adenocarcinoma (four with pancreatic and one with colorectal
cancer) and CEA-positive liver metastases with anti-CEA CAR-T. We successfully
submitted an Investigational New Drug application ("IND") for anti-CD38 CAR-T
for the treatment of refractory or relapsed multiple myeloma ("RRMM"), obtained
clearance from the FDA and commenced a human clinical trial for this indication
in early 2018. We have dosed eleven patients. We intend to close this study to
further enrollment and start up a similar anti-CD38 CAR-T construct without the
myc-tag (which cannot be used in Europe), and to continue treating RRMM patients
in a Phase Ib/IIa study, which is expected to begin enrollment in the fourth
quarter of 2021. We have also received IND clearances from the FDA to start a
Phase I trial for our anti-CD47 mAb (STI-6643) in patients with selected
relapsed or refractory malignancies, and to start the first Phase I trial for
our allogeneic CD38 DAR-T cell therapy in multiple myeloma patients, the first
lead clinical candidate from our DAR-T platform.
Broadly speaking, we believe we are one of the world's leading cell therapy
companies today due to our investments in technology and infrastructure, which
have enabled significant progress in developing our next-generation non-viral,
"off-the-shelf" allogeneic DAR-T solutions. With "off-the-shelf" solutions,
DAR-T therapy can truly become a drug product platform rather than a treatment
procedure.
With respect to our ADC program, we began enrolling patients in the first
quarter of 2021 in a Phase Ib ascending dose study of our CD38 ADC for systemic
Amyloid light-chain (AL) amyloidosis and RRMM. An anti-TROP-2 ADC has been
approved for clinical trials in China by our partners with a drug payload SN38
(a DNA polymerase inhibitor) (ESG-401) and we have now received FDA
authorization to begin clinical trials in the U.S. Additionally, based upon our
recently announced exclusive licensing arrangement with Mayo Clinic for its
antibody-drug-nanoparticle albumin-bound (ADNAB™) platform, the next generation
in ADC technology, we intend to file several INDs to treat various cancer
targets.
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Outside of immuno-oncology programs, as part of our global aim to provide a wide
range of therapeutic products to meet underserved markets, we have made
investments in non-opioid pain management. These include resiniferatoxin
("RTX"), which is a non-opioid-based toxin that specifically targets transient
receptor potential vanilloid-1 ("TRPV1") which, depending on the site of
injection, can ablate, or destroy, nerves expressing TRPV1 or temporarily
defunctionalize them. TRPV1 is responsible for the noxious chronic and
inflammatory pain signaling that occurs post injury or trauma but leaves other
nerve functions intact. RTX has been granted orphan drug status for the
treatment of intractable pain with end-stage cancer and two Phase Ib trials
(intrathecal and epidural routes) have been completed. A Phase Ib trial studying
tolerance and efficacy of RTX for the control of moderate to severe
osteoarthritis knee pain was initiated in late 2018 and intermediate results
have shown efficacy with no dose limiting toxicities. We have received
clearances to proceed with Phase II clinical trials of RTX for treating severe
cancer pain (epidural) and for treating moderate-to-severe osteoarthritis of the
knee pain (intra-articular). Both trials are expected to commence in 2021 and
enrollment in both trials is expected to be completed in 2022.
Also, in this area, we have developed in-house and acquired proprietary
technologies to responsibly develop next generation, branded pharmaceutical
products to better manage patients' medical conditions, maximize the quality of
life of patients and assist healthcare providers. The flagship product of our
majority-owned subsidiary, Scilex Pharmaceuticals Inc. ("Scilex Pharma"),
ZTlido® (lidocaine topical system 1.8%) ("ZTlido"), is a next-generation
lidocaine delivery system, which was approved by the FDA for the treatment of
postherpetic neuralgia, a severe neuropathic pain condition in February 2018,
and was commercially launched in October 2018. Scilex Pharma has now built a
full commercial organization, which includes sales, marketing, market access and
medical affairs.
Impact of COVID-19 on Our Business
We are closely monitoring the COVID-19 pandemic and its potential impact on our
business. In an effort to protect the health and safety of our employees, we
took proactive action from the earliest signs of the outbreak, including
implementing social distancing policies at our facilities, facilitating remote
working arrangements and imposing employee travel restrictions.
On September 24, 2021, the Safer Federal Workforce Task Force issued written
guidance to implement Executive Order 14042 ("Ensuring Adequate COVID Safety
Protocols for Federal Contractors"), which was signed by President Biden on
September 9, 2021. As a federal contractor, we have mandated that all of our
employees and, in addition, contractors that enter our U.S. buildings and
certain other locations, be fully vaccinated against COVID-19, subject to
disability and religious exemptions, by December 8, 2021.
For more information on the risks associated with COVID-19, refer to Part II,
Item 1A, "Risk Factors" herein.
Recent Developments
Acquisition of ACEA Therapeutics, Inc.
On June 1, 2021, we completed the acquisition of ACEA Therapeutics, Inc.
("ACEA") pursuant to the terms of the Agreement and Plan of Merger (the "ACEA
Merger Agreement"), dated as of April 2, 2021, by and among us, AT Merger Sub,
Inc., an exempted company incorporated with limited liability in the Cayman
Islands and our wholly owned subsidiary, ACEA and Fortis Advisors LLC, as
representative of the shareholders of ACEA, whereby ACEA became our wholly owned
subsidiary. With operations in both China and the United States, ACEA is
developing multiple clinical and preclinical-stage new chemical entity
compounds, including the late clinical drug candidate, Abivertinib.
The total value of the consideration paid by us for the acquisition of ACEA was
equal to $38.0 million plus approximately $1.9 million (which amount represented
our agreed upon share of certain interest, fees and other expenses) resulting in
an aggregate payment of approximately $39.9 million (which amount is subject to
further adjustment for indebtedness, transaction expenses and cash, in each case
pursuant to the terms of the ACEA Merger Agreement) (the "Closing
Consideration"). Pursuant to the terms of the ACEA Merger Agreement, a portion
of the Closing Consideration equal to (i) $38,059,326 was used to repay certain
existing indebtedness of ACEA, which amount was paid to the holders thereof in
the form of shares of our common stock and an aggregate of 5,519,469 shares
("Indebtedness Shares") of our common stock were issued in respect thereof based
on a price per share equal to $6.8955 (representing the volume weighted average
closing price per share of Common Stock, as reported on The Nasdaq Stock Market
LLC, for the 10 consecutive trading days ending on the date that was three
trading days prior to the Closing Date) and (ii) $100,000 was set aside for
expenses incurred by the shareholders' representative thereunder. The
Indebtedness Shares are subject to a true-up, as set forth in the ACEA Merger
Agreement, if the price at which such shares were issued is greater than the
closing price of our common stock on the date that is six months after June 1,
2021.
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In addition to the Closing Consideration, we will pay the ACEA equityholders (i)
up to $450.0 million in additional payments, subject to the receipt of certain
regulatory approvals and achievement of certain net sales targets with respect
to the assets acquired from ACEA and (ii) five to ten percent of the annual net
sales on specified royalty-bearing products (the "Earn-Out Consideration"). The
fair value of the Earn-Out Consideration on the acquisition date was
preliminarily estimated to be $186.1 million. The amount referenced in clause
(i) of the preceding sentence includes the amounts that would have otherwise
been due to ACEA under that certain License Agreement, dated July 13, 2020,
between us and ACEA, which agreement was terminated in its entirety upon
completion of the acquisition of ACEA.
The preliminary purchase price allocation was calculated based on an upfront
consideration of $44.1 million, which was based on our closing share price on
June 1, 2021. The ACEA Merger Agreement resulted in an upfront consideration of
$44.1 million in net identifiable assets of approximately $230.2 million, which
includes separate and distinct intangible assets comprised of acquired
in-process research and development of $250.4 million, goodwill of $9.3 million,
fair value of debt assumed of approximately $32.1 million and other net assets
of approximately $2.6 million. The purchase price allocation is preliminary as
we are still completing the valuation of the intangible assets, contingent
consideration, taxes, the fair value of debt assumed and other net assets,
changes to which may also increase or decrease the amount of goodwill
recognized. Goodwill largely reflects the broad-spectrum and synergistic
infrastructures and expertise in pharmaceutical and biological drug discovery,
development and manufacturing, and expanded geographic coverage in China and
North America. Goodwill is not deductible for tax purposes. Acquisition costs
were recognized as incurred and compensation expense associated with pre-merger
option awards was recognized for post-combination services. Results of
operations since the date of acquisition were not material. Customary tax
related matters such as the filing of pre-acquisition tax returns are subject to
finalization as of September 30, 2021, and such matters may result in
adjustments to the purchase price allocation.
We are still in the process of finalizing the working capital adjustments and
the purchase price allocation, given the timing of the acquisition and the size
and scope of the assets and liabilities subject to valuation. While we do not
expect material changes in the valuation outcome, certain assumptions and
findings that were in place at the date of acquisition could result in changes
in the purchase price allocation.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
Revenues. Revenues were $12.1 million for the three months ended September 30,
2021, as compared to $11.8 million for the three months ended September 30,
2020.
Revenues in our Sorrento Therapeutics segment increased from $3.9 million to
$4.5 million for the three months ended September 30, 2021 compared to the same
quarter of the prior year and were primarily attributed to higher contract
manufacturing service revenues.
Revenues in our Scilex segment decreased from $7.8 million to $7.5 million for
the three months ended September 30, 2021 compared to the same period of the
prior year. The decrease is attributed to higher gross-to-net provisions for
Medicaid utilization related to sales of ZTlido.
Cost of revenues. Cost of revenues for the three months ended September 30, 2021
and 2020 were $3.4 million and $2.7 million, respectively, and relate to product
sales, the sale of customized reagents and providing contract manufacturing
services. These costs generally include employee-related expenses, including
salary and benefits, direct materials and overhead costs including rent,
depreciation, utilities, facility maintenance and insurance.
Cost of revenues for our Sorrento Therapeutics segment increased by $0.1 million
and was driven by the increase in revenues.
Cost of revenues for our Scilex segment increased by $0.6 million and was
attributed to higher provisions for excess inventories.
Research and Development ("R&D") Expenses. R&D expenses for the three months
ended September 30, 2021 and 2020 were $49.4 million and $32.0 million,
respectively. R&D expenses primarily include expenses associated with isolating
and advancing human antibody drug candidates derived from our libraries, as well
as advancing our RTX, COVID-19, SP-102, oncolytic viruses, ADC and oncology
programs. Such expenses consist primarily of salaries and personnel-related
expenses, stock-based compensation expense, clinical development expenses,
preclinical testing, lab supplies, consulting costs, depreciation and other
expenses.
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R&D expenses for our Sorrento Therapeutics segment increased by $18.2 million as
compared to the same quarter of the prior year and were driven by higher
headcount and increased clinical development costs spent on advancing our
various R&D programs.
R&D expenses for our Scilex segment decreased by $0.7 million as compared to the
same quarter of the prior year and were driven by lower clinical development
costs.
Acquired In-process Research and Development Expenses. Acquired in-process
research and development expenses during the three months ended September 30,
2021 totaled $11.1 million, of which $10.2 million related to our investment in
Deverra Therapeutics, Inc. during the period as further described in Note 4
of the accompanying notes to the consolidated financial statements in Part I,
Item 1 of this Quarterly Report on Form 10-Q, and $0.9 million related to
investments in various licensing arrangements entered during the period.
Acquired in-process research and development expenses during the three months
ended September 30, 2020 totaled $34.8 million and related to various licensing
arrangements entered into during the period.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses for the
three months ended September 30, 2021 and 2020 were $48.5 million and $24.3
million, respectively, and consisted primarily of salaries and personnel-related
expenses, stock-based compensation expense, professional fees, infrastructure
expenses, legal and other general corporate expenses.
SG&A expenses for our Sorrento Therapeutics segment increased by approximately
$20.4 million and were primarily attributed to higher headcount, professional
fees and stock-based compensation expense as compared to the same quarter of the
prior year.
SG&A expenses for our Scilex segment increased by approximately $3.8 million and
were attributed to higher professional fees.
Loss on Derivative Liabilities. Loss on derivative liabilities for the three
months ended September 30, 2021 was $1.8 million compared to a loss of $1.0
million in the same quarter in 2020 and was primarily attributed to revised
probabilities and revised sales forecasts as further described in Note 3 of
the accompanying notes to the consolidated financial statements in Part I, Item
1 of this Quarterly Report on Form 10-Q.
Loss on Marketable Investments. Loss on marketable investments reflects $6.4
million of realized losses from the sale of our shares of ImmunityBio, Inc.
during the period and $7.7 million in unrealized losses related to the change in
fair value of our shares of Celularity Inc. We recorded approximately $0.7
million in unrealized gains related to other investments during the period.
Interest Expense, net. Interest expense for the three months ended September 30,
2021 and 2020 was $2.9 million and $2.6 million, respectively. The decrease
resulted primarily from a decrease in interest expense associated with the term
loans with Oaktree Capital Management L.P. and affiliates (the "Oaktree Term
Loans"), which were fully repaid in the year ended December 31, 2020. Interest
income was immaterial for both periods.
Income Tax Expense. Income tax expense for the three months ended September 30,
2021 was $0.4 million as compared to $0.1 million for the three months ended
September 30, 2020. The increase in income tax expense was primarily
attributable to return to provision adjustments and income tax payments, offset
by income tax benefits from stock-based compensation windfall, revaluation of
deferred taxes for U.S. state blended effective tax rate adjustments, and
changes in valuation allowance.
Net Loss. Net loss for the three months ended September 30, 2021 and 2020 was
$120.0 million and $87.1 million, respectively.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenues. Revenues were $39.8 million for the nine months ended September 30,
2021, as compared to $28.5 million for the nine months ended September 30, 2020.
Revenues in our Sorrento Therapeutics segment increased from $9.7 million to
$13.0 million for the nine months ended September 30, 2021, compared to the same
period of the prior year and were primarily attributed to higher contract
manufacturing service revenues.
Revenues in our Scilex segment increased from $18.8 million to $22.3 million for
the nine months ended September 30, 2021 compared to the same period of the
prior year and were attributed to increased product sales of ZTlido.
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Cost of revenues. Cost of revenues for the nine months ended September 30, 2021
and 2020 were $9.9 million and $7.4 million, respectively, and relate to product
sales, the sale of customized reagents and providing contract manufacturing
services. These costs generally include employee-related expenses including
salary and benefits, direct materials and overhead costs including rent,
depreciation, utilities, facility maintenance and insurance.
Cost of revenues for our Sorrento Therapeutics segment increased by $1.8 million
and was driven by the increase in revenues.
Cost of revenues for our Scilex segment increased by $0.8 million and was
attributed to higher sales volumes of ZTlido.
R&D Expenses. R&D expenses for the nine months ended September 30, 2021 and 2020
were $147.8 million and $77.3 million, respectively. R&D expenses primarily
include expenses associated with isolating and advancing human antibody drug
candidates derived from our libraries, as well as advancing our RTX, COVID-19,
SP-102, oncolytic viruses, ADC and oncology programs. Such expenses consist
primarily of salaries and personnel-related expenses, stock-based compensation
expense, clinical development expenses, preclinical testing, lab supplies,
consulting costs, depreciation and other expenses.
R&D expenses for our Sorrento Therapeutics segment increased by $71.0 million as
compared to the same period of the prior fiscal year and were primarily driven
by higher headcount and increased clinical development costs spent on advancing
our various R&D programs.
R&D expenses for our Scilex segment decreased by $0.5 million as compared to the
same period of the prior fiscal year and were primarily driven by lower clinical
development cost.
Acquired In-process Research and Development Expenses. Acquired in-process
research and development expenses for the nine months ended September 30, 2021
totaled $23.6 million and related to the Aardvark Asset Purchase Agreement and
the entry into the Mount Sinai License Agreement during the period as further
described in Note 6 of the accompanying notes to the consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Additionally, $10.2 million related to our investment in Deverra Therapeutics,
Inc. during the period as further described in Note 4 of the accompanying
notes to the consolidated financial statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q, and $0.9 million related to our investments in
various licensing arrangements entered into during the period. Acquired
in-process research and development expenses for the nine months ended September
30, 2020 totaled $39.7 million and primarily related to various licensing
arrangements entered into during the period, as well as other investments in new
technologies and preclinical programs.
SG&A Expenses. SG&A expenses for the nine months ended September 30, 2021 and
2020 were $142.3 million and $75.0 million, respectively, and consisted
primarily of salaries and personnel-related expenses, stock-based compensation
expense, professional fees, infrastructure expenses, legal and other general
corporate expenses.
SG&A expenses for our Sorrento Therapeutics segment increased by approximately
$63.9 million and were primarily attributed to higher headcount and stock-based
compensation expense as compared to the same period of the prior year.
SG&A expenses for our Scilex segment increased by approximately $3.3 million and
were primarily attributed to cost savings resulting from a shift to more
favorable marketing programs for ZTlido and optimizing the sales force,
partially offset by higher selling expenses to support higher sales volumes of
ZTlido.
Gain on Derivative Liabilities. Gain on derivative liabilities for the nine
months ended September 30, 2021 was $0.1 million compared to a gain of $5.9
million in the same period in 2020 and was primarily attributed to revised
probabilities and revised sales forecasts as further described in Note 3 of
the accompanying notes to the consolidated financial statements in Part I, Item
1 of this Quarterly Report on Form 10-Q.
Gain on Marketable Investments. Gain on marketable investments reflects $24.1
million of realized gains from the sale of our shares of ImmunityBio, Inc.
during the period and $7.7 million in unrealized losses related to the change in
fair value of our shares of Celularity Inc. We recorded approximately $0.7
million in unrealized gains related to other investments during the period.
Loss on Debt Extinguishment. Loss on debt extinguishment for the nine months
ended September 30, 2021 was $6.7 million and was primarily attributed to the
repurchases of the outstanding principal on the Scilex Notes, and was partially
offset by short-term debt forgiveness. Loss on debt extinguishment for the nine
months ended September 30, 2020 was $51.9 million and was attributed to the
repayments of outstanding principal on the Oaktree Term Loans.
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Interest Expense. Interest expense for the nine months ended September 30, 2021
and 2020 was $7.3 million and $17.7 million, respectively. The decrease resulted
primarily from a decrease in interest expense associated with the Oaktree Term
Loans, which were fully repaid in the year ended December 31, 2020. Interest
income was immaterial for both periods.
Income Tax Benefit. Income tax benefit for the nine months ended September 30,
2021 and 2020 was $0.5 million and $2.1 million, respectively. The decrease in
income tax benefit was primarily attributable to return to provision adjustments
and income tax payments, offset by income tax benefits from stock-based
compensation windfall, revaluation of deferred taxes for U.S. state blended
effective tax rate adjustments, and changes in valuation allowance.
Net Loss. Net loss for the nine months ended September 30, 2021 and 2020 was
$284.3 million and $241.3 million, respectively.
Liquidity and Capital Resources
As of September 30, 2021, we had $39.7 million in cash and cash equivalents
attributable in part to the following financing arrangements:
Debt Financings
ACEA Significant Debt Arrangements
At the closing of the transactions contemplated by the ACEA Merger Agreement and
as a result thereof, on June 1, 2021, we, as the indirect parent to Hangzhou
ACEA Pharmaceutical Research Co., Ltd. ("ACEA Hangzhou") and Zhejiang ACEA
Pharmaceutical Co., Ltd. ("ACEA Zhejiang"), each of which are indirect
subsidiaries of ACEA, succeeded to the financial obligations of ACEA Hangzhou
and ACEA Zhejiang, each of whom are parties to agreements with ACEA Bio
(Hangzhou) Co., Ltd. ("ACEA Bio") (an entity unrelated to ACEA Hangzhou and ACEA
Zhejiang) as set forth below.
Pursuant to that certain Contract, dated as of August 15, 2018, between ACEA
Hangzhou and ACEA Bio, ACEA Hangzhou borrowed an aggregate of approximately
$29.1 million (184,600,000 RMB) from ACEA Bio in a series of loans thereunder
(the "Contract"). Each loan under the Contract is for a period of 10 years and
the maturity dates thereof range from August 15, 2023 to August 15, 2028. Each
loan is interest free for the first five years, after which time the interest
rate is 5.39% per annum.
Pursuant to that certain Loan Agreement, dated as of January 6, 2018, between
ACEA Zhejiang and ACEA Bio, ACEA Zhejiang borrowed approximately $1.3 million
(8,000,000 RMB) from ACEA Bio (the "Loan Agreement"). The maturity date under
the Loan Agreement is one year from the date when the loan was remitted to ACEA
Zhejiang's bank account and current maturity is January 1, 2022. The interest
rate under the Loan Agreement is 4.786% per annum.
The outstanding principal amount under the Contract and Loan Agreement as of
September 30, 2021 is $30.4 million. As a part of the preliminary purchase price
allocation, we estimated the fair value of the Contract and Loan Agreement to be
approximately $17.1 million.
Scilex Notes
In September 2018, Scilex Pharma entered into purchase agreements (the "2018
Purchase Agreements") with certain investors (collectively, the "Scilex Note
Purchasers") and us. Pursuant to the 2018 Purchase Agreements, on September 7,
2018, Scilex Pharma issued and sold to the Scilex Note Purchasers senior secured
notes due 2026 in an aggregate principal amount of $224.0 million (the "Scilex
Notes") for an aggregate purchase price of $140.0 million (the "Scilex Notes
Offering"). In connection with the Scilex Notes Offering, Scilex Pharma also
entered into an Indenture (the "Indenture") governing the Scilex Notes with U.S.
Bank National Association, a national banking association, as trustee and
collateral agent, and us. Pursuant to the Indenture, we agreed to irrevocably
and unconditionally guarantee, on a senior unsecured basis, the punctual
performance and payment when due of all obligations of Scilex Pharma under the
Indenture.
On December 14, 2020, we, Scilex Pharma, U.S. Bank National Association, as
trustee and collateral agent, and the beneficial owners of the Scilex Notes and
the Scilex Note Purchasers entered into a Consent Under and Amendment No. 3 to
Indenture and Letter of Credit (the "Amendment"), which amended: (i) the
Indenture, and (ii) the irrevocable standby letter of credit that we issued to
Scilex Pharma in connection with the Indenture.
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On December 14, 2020, and in connection with the Amendment, the aggregate $45.0
million in restricted funds held in previously established reserve and
collateral accounts were released and Scilex Pharma utilized such funds to
repurchase an aggregate of $45.0 million in principal amount of the Scilex
Notes. Scilex Pharma also repurchased $20.0 million in principal amount of the
Scilex Notes in each of December 2020, February 2021 and April 2021.
Equity Financings
Amended Sales Agreement
On December 4, 2020, we entered into Amendment No. 1 to that certain Sales
Agreement, dated April 27, 2020, with A.G.P./Alliance Global Partners, which
provides that we may, from time to time, offer and sell securities to
A.G.P./Alliance Global Partners in at-the-market transactions (as amended, the
"Amended Sales Agreement"). During the nine months ended September 30, 2021, we
issued and sold an aggregate of 14,844,426 shares of our common stock pursuant
to the Amended Sales Agreement for aggregate net proceeds of approximately
$134.9 million. Subsequent to September 30, 2021 and through November 2, 2021,
we sold an aggregate of 3,863,371 shares of our common stock pursuant to the
Amended Sales Agreement for aggregate net proceeds to us of approximately $25.2
million.
Marketable Investments
On March 9, 2021, NantKwest, Inc. and ImmunityBio completed their previously
announced 100% stock-for-stock merger (the "Merger"). The combined company
operates under the name ImmunityBio, Inc. and its shares of common stock
commenced trading on the Nasdaq Global Select Market on March 10, 2021 under the
new ticker, "IBRX". The former stockholders of ImmunityBio were entitled to
receive 0.8190 shares of common stock of the combined company for each
outstanding share of ImmunityBio common stock held immediately prior to the
Merger. Prior to the closing of the Merger, we owned 10,000,000 shares of common
stock of ImmunityBio, and we therefore received 8,190,000 shares of common stock
of the post-merger company.
Prior to the Merger, our investment in ImmunityBio was historically included as
an equity investment in our consolidated balance sheets and accounted for as an
equity security without a readily determinable fair value. As of the completion
of the Merger, we accounted for our investment in ImmunityBio as an equity
investment with a readily determinable fair value and reclassified our
investment in ImmunityBio to marketable investments within our consolidated
balance sheets. The investment in ImmunityBio was classified as a current asset
because the investment was liquidated to finance our current operations. In
connection with the change in fair value of our investment in ImmunityBio, we
recorded a realized loss on marketable investments of $6.4 million during the
three months ended September 30, 2021 and a realized gain on marketable
investments of $24.1 million during the nine months ended September 30, 2021. We
sold 8,190,000 shares of ImmunityBio common stock during the nine months ended
September 30, 2021 for net proceeds to us of $124.0 million. We had no remaining
shares of ImmunityBio common stock as of September 30, 2021.
On July 16, 2021, Celularity Inc. ("Pre-Merger Celularity"), a company of which
we held an equity interest, completed its previously announced merger with GX
Acquisition Corp. (the "Celularity Merger"). Following the completion of the
Celularity Merger, the combined, publicly traded company formerly known as GX
Acquisition Corp. was named Celularity Inc. ("Celularity") and its Class A
common stock commenced trading on the Nasdaq Capital Market on July 19, 2021
under the ticker "CELU". In connection with the Celularity Merger, all
outstanding shares of Series A Preferred Stock of Pre-Merger Celularity were
converted into shares of Pre-Merger Celularity common stock and then each share
of Pre-Merger Celularity common stock was converted into the right to receive
shares of Class A common stock of the post-merger company. We received
19,922,124 shares of Class A common stock of the post-merger company in the
Celularity Merger. We also purchased an aggregate of 500,000 shares of Class A
common stock of Celularity for an aggregate purchase price of $5,000,000 in a
private placement transaction that closed on July 16, 2021 concurrently with the
closing of the Celularity Merger. Our investment in Celularity has historically
been accounted for as an equity security without a readily determinable fair
value. As of the trading commencement date, we account for our investment in
Celularity as an equity security with a readily determinable fair value. As of
September 30, 2021, we owned 20,422,124 shares of Class A common stock of
Celularity. 19,922,124 shares of the Class A Common Stock of Celularity held by
us are subject to transfer restrictions until the earliest to occur of (i) 365
days after July 16, 2021; (ii) the first day after the date on which the closing
price of the Class A Common Stock equals or exceeds $12.00 per share (as
adjusted for stock splits, stock dividends, reorganizations, recapitalizations
and the like) for any 20 trading days within any 30-trading day period
commencing at least 150 days after July 16, 2021; or (iii) the date on which
Celularity completes a liquidation, merger, capital stock exchange,
reorganization or other similar transaction that results in all of Celularity's
public shareholders having the right to exchange their Class A Common Stock for
cash, securities or other property, subject to certain exceptions.
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Contingent Consideration
We have contingent consideration obligations in connection with certain
acquisition and licensing transactions that are contingent upon achieving
certain specified milestones or the occurrence of certain events, including
those described within the accompanying notes to the consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Upon the
achievement of such milestones or the occurrence of such events, we will be
obligated to make certain cash or stock payments in accordance with the terms of
such acquisition and license agreements.
Use of Cash
Cash Flows from Operating Activities. Net cash used for operating activities was
$209.7 million for the nine months ended September 30, 2021 as compared to
$118.7 million for the nine months ended September 30, 2020. Net cash used
reflects the cash spent on our research activities and cash spent to support the
commercial launch of our products.
We expect to continue to incur substantial and increasing losses and negative
net cash flows from operating activities as we seek to expand and support our
clinical and preclinical development and research activities, support the
commercial launch of our products and fund our joint ventures, collaborations
and other third-party agreements.
Cash Flows from Investing Activities. Net cash used by investing activities was
$82.1 million for the nine months ended September 30, 2021, and was attributed
to proceeds of $124.1 million from sales of marketable investments, partially
offset by $34.6 million related to various investments in new technologies and
preclinical programs, $0.8 million in connection with the acquisition of ACEA,
net of cash acquired, and approximately $6.7 million primarily attributed to
expenditures on laboratory equipment. During the nine months ended September 30,
2020, net cash used by investing activities was $28.5 million, which was
comprised of $22.3 million in licensing arrangements, $2.3 million in new
technologies and preclinical programs and $3.8 million on equipment and building
improvements.
Cash Flows from Financing Activities. Net cash provided by financing activities
was $110.5 million for the nine months ended September 30, 2021 as compared to
net cash provided by financing of $185.8 million for the nine months ended
September 30, 2020. During the nine months ended September 30, 2021, we received
$134.9 million from equity offerings, proceeds from short-term debt of $35.1
million and proceeds of $13.3 million from common stock issuances and warrant
exercises. During the nine months ended September 30, 2021, we repaid $44.2
million in principal amount of the Scilex Notes, of which $32.4 million was
attributed to principal included within financing activities and $11.8 million
was attributed to principal included in operating activities. We also repaid
$40.3 million in other short-term debt. During the nine months ended September
30, 2020, we repaid $120.0 million of outstanding principal under the Term
Loans, paid $6.3 million of related exit and prepayment fees thereon, made
payments of $3.5 million on the Scilex Notes and repaid $3.0 million in
short-term debt.
Future Liquidity Needs. We have principally financed our operations through
underwritten public offerings and private debt and equity financings, as we have
not generated any significant product related revenue from our principal
operations to date. We will need to raise additional capital before we exhaust
our current cash resources in order to continue to fund our research and
development, including our plans for clinical and preclinical trials and new
product development, as well as to fund operations generally. We will seek to
raise additional funds through various potential sources, such as equity and
debt financings or through corporate collaboration, grant agreements and license
agreements. We can give no assurances that we will be able to secure such
additional sources of funds to support our operations, or, if such funds are
available to us, that such additional financing will be sufficient to meet our
needs. These conditions, among others, raise substantial doubt about our ability
to continue as a going concern.
We cannot be certain that additional funding will be available on acceptable
terms, or at all. If we issue additional equity securities to raise funds, the
ownership percentage of existing stockholders would be reduced. New investors
may demand rights, preferences or privileges senior to those of existing holders
of common stock. If we are unable to raise additional capital in sufficient
amounts or on terms acceptable to us, we may have to significantly delay, scale
back or discontinue the development or commercialization of one or more of our
product candidates. We may also seek collaborators for one or more of our
current or future product candidates at an earlier stage than otherwise would be
desirable or on terms that are less favorable than might otherwise be available.
We anticipate that we will continue to incur net losses into the foreseeable
future as we: (i) advance our product pipeline and other product candidates into
clinical trials, (ii) continue our development of, and seek regulatory approvals
for, our product candidates in clinical trials, (iii) expand our corporate
infrastructure, and (iv) incur our share of joint venture and collaboration
costs for our products and technologies.
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Uses of Cash. We have and plan to expand our business and intellectual property
portfolio through the acquisition of new businesses and technologies as well as
entering into licensing arrangements.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which are
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities, related
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. We continually evaluate our estimates and judgments, the most
critical of which are those related to debt, derivative liabilities, revenue
recognition, leases, contingent liabilities and acquisition consideration
payable, income taxes and stock-based compensation. We base our estimates and
judgments on historical experience and other factors that we believe to be
reasonable under the circumstances. Materially different results can occur as
circumstances change and additional information becomes known. Our critical
accounting policies and estimates are discussed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2020, and there have been no
material changes during the three months ended September 30, 2021.
Contractual Obligations and Commitments
As of September 30, 2021, there were no material changes outside of the ordinary
course of business, in our outstanding contractual obligations from those
disclosed within "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2020.
Off-Balance Sheet Arrangements
Since our inception through September 30, 2021, other than off-balance sheet
arrangements already disclosed, we have not engaged in any off-balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K.
New Accounting Pronouncements
Refer to Note 1 , "Significant Accounting Policies" and "Recent Accounting
Pronouncements" in the accompanying notes to the consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a
discussion of recent accounting pronouncements.
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