Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the cautionary note regarding “Forward-Looking Statements” contained elsewhere in this Annual Report on Form 10-K. Additionally, you should read the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Sorrento Therapeutics, Inc. is a clinical and commercial stage biopharmaceutical company developing a portfolio of next generation treatments for three major therapeutic areas: cancer, infectious disease and pain.
Cancer. Our proprietary fully human G-MAB antibody library and ACEA small molecule library are the engines driving an innovative pipeline of new solutions for cancer. These molecular entities are then enhanced by leveraging our extensive proprietary immuno-oncology platforms such as immuno-cellular therapies (“DAR-T”), antibody-drug conjugates (“ADCs”), oncolytic virus (“Seprehvec”) and lymphatic drug delivery (“Sofusa”).
Infectious Disease. We have applied our antibody capability in the fight against COVID-19. We are developing highly sensitive and rapid diagnostics, and multi-modal treatments for the SARS-CoV-2 virus and its variants. Our diagnostics platforms include the COVIMARK lateral flow antigen test (launched as COVISTIX in Mexico and Brazil). We are also focused on bringing forward effective therapeutic solutions, including FUJOVEE (Abivertinib) and a protease inhibitor antiviral pill (STI-1558) as a stand-alone treatment.
Pain. In November 2022, Scilex Holding Company (“Scilex Holding”), our majority owned subsidiary, completed its business combination with Vickers Vantage Corp. I, a special purpose acquisition company. The flagship product of Scilex Holding, ZTlido®, was launched in 2018 as a prescription lidocaine topical product and has demonstrated superior adhesion and bioavailability compared to current lidocaine patches. Scilex Holding has built a commercial organization focused on neurologists and pain specialists and will leverage this capability for the potential launch of next-generation products that are currently in development. The first of these product candidates, SEMDEXA, is an injectable viscous gel formulation of a widely used corticosteroid designed to address the limitations associated with off label corticosteroid epidural injections. SEMDEXA has completed its pivotal study and Scilex Holding is preparing for its new drug application (“NDA”) submission.
We are also developing Resiniferatoxin (“RTX”), a naturally occurring non-opioid ultra-potent transient receptor potential vanilloid-1 agonist. When injected peripherally, a sustained desensitization occurs, resulting in reduction of noxious chronic pain symptoms that can last for months. RTX has the potential to be a multi-indication franchise asset and is nearing pivotal studies in intractable pain associated with cancer and moderate to severe knee osteoarthritis pain.
Voluntary Filing Under Chapter 11
As previously reported in our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 13, 2023, we and our wholly owned direct subsidiary, Scintilla Pharmaceuticals, Inc. (together with us, the “Debtors”), commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings are jointly administered under the caption In re Sorrento Therapeutics, Inc., et al. (the “Chapter 11 Cases”). We continue to operate our business in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. At hearings before the Bankruptcy Court on February 16, 2023 and February 21, 2023, we obtained approval from the Bankruptcy Court of certain “first day” motions containing customary relief intended to assure our ability to continue our ordinary course operations during the Chapter 11 Cases.
DIP Term Sheet
As previously reported in our Current Report on Form 8-K filed with the SEC on February 22, 2023, we and Scintilla executed that certain Debtor-In-Possession Term Loan Facility Summary of Terms and Conditions (the “DIP Term Sheet”) with JMB Capital Partners Lending, LLC (“JMB Capital” or the “DIP Lender”), pursuant to which JMB Capital (or its designees or its
assignees) are providing us with a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $75,000,000 in term loan commitments (the “DIP Facility”), subject to the terms and conditions set forth in the DIP Term Sheet. On February 20, 2023, we filed the Debtors’ Emergency Motion For Entry of Interim and Final Orders (I) Authorizing The Debtors to (A) Obtain Senior Secured Superpriority Postpetition Financing and (B) Use Cash Collateral, (II) Granting Liens and Providing Claims With Superpriority Administrative Expense Status, (III) Modifying The Automatic Stay, (IV) Scheduling A Final Hearing, and (V) Granting Related Relief (the “DIP Motion”) seeking the Bankruptcy Court’s approval of the DIP Facility and certain related relief. A copy of the DIP Term Sheet was attached to the Motion.
At a hearing before the Bankruptcy Court on February 21, 2023, the Bankruptcy Court granted the DIP Motion and entered an interim order (the “Interim DIP Order”) approving the DIP Facility on an interim basis and providing us with the necessary liquidity to continue to operate in Chapter 11. Upon entry of the Interim DIP Order and satisfaction of all applicable conditions precedent, as set forth in the DIP Term Sheet, we were authorized to make a single, initial draw of $30,000,000 on the DIP Facility (the “Initial Draw”). Definitive financing documentation, including a credit agreement and other documents evidencing the DIP Facility (collectively, the “DIP Documents”), will be negotiated and executed as soon as possible following the Initial Draw on the DIP Facility. The remaining amount of the DIP Facility will be available to the Debtors, subject to entry of an order granting the DIP Motion on a final basis (the “Final Order”) and compliance with the terms, conditions, and covenants to be set forth in the definitive DIP Documents, through additional draws of no less than $5,000,000 each upon five business days’ written notice to the DIP Lender. The DIP Facility contains economic and other terms that are the most favorable to us compared to the other proposals received by us, including, among others: (i) immediate access to interim financing of up to $30,000,000 (with up to $75,000,000 to be available in the aggregate), (ii) minimum draws of $5,000,000, (iii) interest at a per annum rate equal to 14% payable in cash on the first day of each month in (and a interest rate that shall accrue at an additional per annum rate of 3% plus the non- interest, payable in cash on the first day of each month), and (iv) other fees and charges as described in the DIP Term Sheet. The DIP Facility is secured by first-priority liens on substantially all of the Debtors’ unencumbered assets, subject to certain enumerated exceptions, and second-priority liens on those assets of the Debtors that are by certain permitted liens (as set forth in the Interim DIP Order).
The DIP Facility matures on the earliest of: (i) July 31, 2023; (ii) the effective date of any Chapter 11 plan of reorganization with respect to the Debtors; (iii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iv) the date of the acceleration of the DIP Loans and the termination of the DIP Commitments in accordance with the DIP Documents (each as defined in the DIP Term Sheet); (v) dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code; and (vi) forty-five (45) days after the filing of the DIP Motion (or such later date as agreed to by the DIP Lender), unless the Final Order has been entered by the Bankruptcy Court on or prior to such date. The DIP Facility does not contain a roll-up or cross-collateralization of prepetition debt or otherwise dictate how prepetition claims will be addressed in a Chapter 11 plan.
The Debtors anticipate seeking final approval of the DIP Facility at a final hearing on the DIP Motion on or around March 29, 2023, or any such other date that is no later than forty-five (45) days following the date of filing of the DIP Motion, as required under the DIP Term Sheet.
Listing
On February 13, 2023, we received written notice (the “Delisting Notice”) from the staff of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, the staff of Nasdaq had determined that our common stock will be delisted from Nasdaq. In the Delisting Notice, the staff of Nasdaq referenced the Chapter 11 Cases and associated public concerns raised by them, concerns regarding the residual equity interest of the existing listed securities holders and concerns about our ability to sustain compliance with all requirements for continued listing on Nasdaq. The Delisting Notice also indicated that we may appeal Nasdaq’s determination pursuant to procedures set forth in Nasdaq Listing Rule 5800 Series. On February 21, 2023, we requested an appeal of Nasdaq’s determination and a hearing before a Nasdaq hearings panel. We subsequently determined not to continue with the appeal process. In accordance with the Delisting Notice, trading of our common stock on Nasdaq was suspended at the opening of business on February 23, 2023, and at such time, our common stock commenced trading on the Pink Open Market under the symbol “SRNEQ”.
Significant Developments in the Quarter Ended December 31, 2022
In December 2022, we completed the Phase Ib enrollment of COVID-19 patients in China to assess the safety and efficacy of STI-1558 oral treatment.
In December 2022, we submitted a pre-NDA request meeting to the FDA to gain insights from the FDA for potential regulatory approval pathway for Abivertinib (FUJOVEE TM ) for the treatment of NSCLC.
On November 11, 2022, Scilex Holding shares began trading on the Nasdaq Capital Market under the ticker symbol “SCLX”. Scilex Holding’s trading debut comes after the completion of its business combination with Vickers Vantage Corp. I, a special purpose acquisition company. The combined company now operates as Scilex Holding Company.
In November 2022, we announced positive topline results from the completed Phase I study in Australia demonstrating STI-1558 was well tolerated and achieved pharmacokinetic levels confirming adequate blood levels were achieved to continue development of this oral antiviral treatment without the need for a Ritonavir booster.
In November 2022, we announced preliminary safety and efficacy data from a Phase IB study in China, which demonstrated that the safety profile was comparable between healthy uninfected subjects and infected subjects and that STI-1558 resulted in a dramatic rapid reduction in viral load.
In October 2022, we completed a Phase I study of its oral main viral protease (M pro ) inhibitor, STI-1558, conducted in Australia with 58 healthy volunteers.
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 of our employees, we continue to enforce standard safety protocols at our facilities and have implemented employee travel policies.
Results of Operations
The following discussion of our operating results explains material changes in our results of operations for the years ended December 31, 2022 and 2021. The discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. We operate in two operating and reportable segments, Sorrento Therapeutics and Scilex.
Comparison of the Years Ended December 31, 2022 and 2021
Revenues .
Dollars in thousands
Years Ended December 31,
Increase (decrease)
Sorrento Therapeutics segment
Product revenues
Service revenues
Total revenues
Scilex segment
Product revenues
Total revenues
Revenues were $62.8 million for the year ended December 31, 2022, as compared to $52.9 million for the year ended December 31, 2021.
The increase in revenues in our Sorrento Therapeutics segment was primarily attributed to $4.8 million in COVISTIX product sales, $2.0 million in other product sales and $2.3 million in other service revenues. These increases were partially offset by $8.6 million of lower contract manufacturing service revenues in 2022 compared to the prior year.
Revenues in our Scilex segment increased from $28.5 million to $38.0 million for the year ended December 31, 2022 as compared to the prior year due to increased product sales of ZTlido.
Cost of revenues .
Years Ended December 31,
Increase
Dollars in thousands
Sorrento Therapeutics segment
Scilex segment
Total cost of revenues
Cost of revenues for the years ended December 31, 2022 and 2021 were $33.5 million and $13.0 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. The costs generally include
employee-related expenses, including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.
The increase in cost of revenues in our Sorrento Therapeutics segment was driven by increased product sales and an $11.0 million increase in inventory reserves associated with COVISTIX product as compared to the prior year.
The increase in cost of revenues in our Scilex segment were driven by higher sales volumes of ZTlido and royalties to our ZTlido manufacturer as compared to the prior year.
Research and development expenses.
Years Ended December 31,
Increase (decrease)
Dollars in thousands
Sorrento Therapeutics segment
Scilex segment
Total research and development expenses
Research and development expenses for the years ended December 31, 2022 and 2021 were $221.2 million and $206.9 million, respectively. Research and development expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our FUJOVEE (Abivertinib), OVYDSO, SP-102, SP-103, RTX, oncolytic virus, ADC and oncology programs, among others. 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. We track external development costs by program; however, we do not allocate laboratory supplies, research and development (“R&D”) materials, personnel costs, share-based payments, facilities costs or other internal costs to specific development programs.
The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2021:
Dollars in thousands
Years ended December 31,
Increase (decrease)
Type of expense
Third party clinical and pre-clinical R&D expenses by program
Abivertinib
Resiniferatoxin (“RTX”)
COVID-19 therapies and diagnostics, excluding Abivertinib
Immuno-oncology and other programs
Total third party clinical and pre-clinical R&D expenses by program
Laboratory supplies and R&D materials expenses
Salary, consulting and other personnel costs
Non-cash share-based compensation expenses
Facility, depreciation and other expenses
Total research and development expenses - Sorrento Therapeutics segment
Total research and development expenses - Scilex segment
Total research and development expenses
Third party clinical and pre-clinical R&D expenses for our Sorrento Therapeutics segment largely fluctuated as a result of the timing of clinical trial spend and the timing of our acquisition of ACEA Therapeutics, Inc. (“ACEA”) (Abivertinib), which occurred in June 2021. Salaries, personnel costs and facilities expenses increased as compared to the same periods in the prior year as we continue expanding our R&D personnel headcount and infrastructure to support our R&D programs.
We expect our research and development expenses for our Scilex segment to increase as we incur incremental expenses associated with our product candidates that are currently under development and in clinical trials. Product candidates in later stages of clinical development generally have higher development costs, primarily due to the increased size and duration of later-stage clinical trials. Accordingly, we expect to incur significant research and development expenses in connection with our Phase 3 clinical trial for SEMDEXA, our ongoing Phase 2 clinical trials for SP-103, and initiation of Phase 2 trials for SP-104.
Acquired in-process research and development expenses . Acquired in-process research and development expenses for the year ended December 31, 2022 was $12.3 million, which included $11.7 million related to our acquisition of Virex Health, Inc. Acquired in-process research and development expenses for the year ended December 31, 2021 was $24.2 million and related to the asset purchase agreement with Aardvark Therapeutics, Inc., for $5.0 million and the entry into the exclusive license agreement with Icahn
School of Medicine at Mount Sinai for $7.5 million during the period as further described in Note 7 of the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K and $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period, as further described in Note 5 of the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K. The remainder for the year ended December 31, 2021, related to our investments in various licensing arrangements entered into during the period.
Selling, general and administrative (“SG&A”) expenses .
Years Ended December 31,
Increase (decrease)
Dollars in thousands
Sorrento Therapeutics segment
Scilex segment
Total sales, general and administrative expenses
SG&A expenses for the years ended December 31, 2022 and 2021, were $182.3 million and $196.9 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.
The decrease in SG&A expenses in our Sorrento Therapeutics segment was attributed to lower professional fees, including a decrease in legal and consulting costs by approximately $11.9 million, lower stock-based compensation expenses of $12.1 million and lower personnel costs of $5.6 million. Infrastructure-related expenses increased by $1.9 million compared to the prior fiscal year.
The increase in SG&A expenses in our Scilex segment were primarily attributed to increases in legal, consulting and insurance expenses compared to the prior fiscal year.
Increase (decrease) on contingent consideration . Gain on contingent consideration for the year ended December 31, 2022 was $75.4 million compared to a loss on contingent consideration of $9.2 million for the year ended December 31, 2021 and was attributed to the change in fair value of the Earn-Out Consideration associated with the acquisition of ACEA (see Note 3 and Note 7 of the accompanying notes to consolidated financial statements in this Annual Report on Form 10-K).
Loss on impairment of intangible assets. Loss on impairment of intangible assets for the year ended December 31, 2022 was $124.2 million, of which $122.8 million was attributed to the impairment of in-process research and development assets acquired from ACEA in 2021, as further described in Note 6 of the accompanying notes to consolidated financial statements in this Annual Report on Form 10-K.
Legal settlements . We recorded $64.8 million in net legal settlements expense during the year ended December 31, 2022, which was attributed to the NantCell/NANTibody Arbitration disclosed in Note 11 of the accompanying notes to consolidated financial statements in this Annual Report on Form 10-K.
Gain (loss) on derivative liabilities . Gain on derivative liabilities for our Scilex segment for the year ended December 31, 2022 was $7.3 million compared to a loss on derivative liabilities of $0.3 million for the year ended December 31, 2021 and was mainly attributed to the change in fair value of the derivatives ascribed to the senior secured notes due 2026 (the “Scilex Notes”) as further described in Note 3 of the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K. There were no gains or losses on derivative liabilities for our Sorrento Therapeutics segment during the years ended December 31, 2022 and 2021.
Loss on marketable and equity investments . Loss on marketable investments for the year ended December 31, 2022 reflects $63.9 million in unrealized losses related to the change in fair value of our shares of Celularity Inc. (“Celularity”). Loss on equity investments for the year ended December 31, 2022 was $20.0 million and was attributed to other-than-temporary impairments of our equity investments without readily determinable fair value. Loss on marketable investments for the year ended December 31, 2021 reflects $39.8 million in unrealized losses related to the change in fair value of our shares of Celularity, $24.1 million of realized gains from the sale of our shares of ImmunityBio, Inc., and $0.7 million in realized gains related to other investments during the year ended December 31, 2021.
Gain (loss) on debt extinguishment. Gain on debt extinguishment for the year ended December 31, 2022 was $27.0 million and was attributable to repurchases of the aggregate principal amount of the Scilex Notes and was partially offset by a loss of debt extinguishment attributed to repayments made on the Bridge Loans (as defined below) during the year. Loss on debt extinguishment for the year ended December 31, 2021 was $6.7 million and was attributable to the repurchases of the outstanding principal on the Scilex Notes, and was partially offset by short-term debt forgiveness.
Scilex Notes principal increase . Actual cumulative net sales of ZTlido from the issue date of the Scilex Notes through December 31, 2021 did not equal or exceed 95% of a predetermined target sales threshold for such period, which resulted in a $28.0 million increase in the principal amount of the Scilex Notes, effective February 15, 2022. As a result, we recorded the increase of $28.0 million in principal and non-operating expense at December 31, 2021.
Interest expense . Interest expense for the years ended December 31, 2022 and 2021 was $8.6 million and $10.2 million, respectively. The decrease was attributed to the Scilex Notes as a result of the repurchases of aggregate principal. We recorded an offsetting increase in interest expense related to the ACEA significant debt arrangements and the Bridge Loans due to the timing of initiation of such loans. Interest income was immaterial for both periods.
Loss on equity method investments . Loss on equity method investments for the year ended December 31, 2022 was $18.4 million and was largely attributed to the other-than-temporary impairment of our NantStem equity method investment.
Income tax benefit . Income tax benefit for the years ended December 31, 2022 and 2021 was $2.4 million and $33.5 million, respectively. The higher income tax benefit during the year ended December 31, 2021 was primarily due to deferred tax liabilities recognized in 2021 from the ACEA acquisition resulting in a release of valuation allowance in 2021 compared to 2022.
Net loss . Net loss for the year ended December 31, 2022 was $577.8 million as compared to a net loss of $429.1 million for 2021, as a result of the factors discussed above.
Comparison of the Years Ended December 31, 2021 and 2020
For a discussion regarding our financial condition and results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, please refer to the discussion under the heading “Results of Operations— Comparison of the Years Ended December 31, 2021 and 2020” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.
Liquidity and Capital Resources
Voluntary Filing Under Chapter 11
We expect to continue operations in the normal course for the duration of the Chapter 11 Cases. To ensure ordinary course operations, we have obtained approval from the Bankruptcy Court for certain “first day” motions to continue our ordinary course operations after the filing date. We have also received interim approval from the Bankruptcy Court for $75.0 million of financing from JMB Capital Partners Lending, LLC, which will provide us with immediate liquidity so that we can continue operating our business as usual during the Chapter 11 Cases and pay the costs and professional fees associated therewith. However, for the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business plan, our financial condition, our liquidity and our continuation as a going concern are subject to a high degree of risk and uncertainty associated with our Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court.
As of December 31, 2022, we had $23.6 million in cash and cash equivalents attributable in part to proceeds from the following arrangements and agreements.
The Failure of Silicon Valley Bank
On March 10, 2023, we became aware that the Federal Deposit Insurance Corporation (“FDIC”) issued a press release (the “FDIC press release”) stating that Silicon Valley Bank, Santa Clara, California (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the Treasury Department announced that depositors of SVB will have access to all of their money starting March 13, 2023. We had approximately $2.8 million cash deposited with SVB as of each of December 31, 2022, February 13, 2023 when the Debtors commenced voluntary proceedings under Chapter 11, and March 10, 2023. On March 14, 2023, we regained access to the full amount of our cash that was deposited with SVB.
Debt Financings
Scilex Notes
On September 28, 2022, Scilex Pharma repurchased (the “Repurchase”) all of the outstanding aggregate principal amount of the Scilex Notes. As of immediately prior to the Repurchase, the aggregate principal amount of the Scilex Notes was approximately $67.7 million, and Scilex Pharma repurchased the Scilex Notes for an aggregate cash payment of approximately $39.7 million as the holders of the Scilex Notes forgave and discharged an aggregate of $28.0 million of principal amount of the Scilex Notes in connection with the Repurchase. See Note 8 of the accompanying notes to consolidated financial statements in this Annual Report on Form 10-K for additional details regarding the Scilex Notes.
February Bridge Loan and September Bridge Loan (collectively, the “ Bridge Loans ”)
On September 30, 2022, we entered into a bridge loan pursuant to which we borrowed $41.6 million (the “September Bridge Loan”). The September Bridge Loan bears interest at 6% per annum and matured on January 31, 2023. Upon the occurrence, and during the continuance, of an “Event of Default”, the September Bridge Loan shall bear interest at the rate of 15% per annum. We repaid $36.0 million of the September Bridge Loan during the fourth quarter of 2022. We repaid the remaining balance of $5.7 million in January 2023.
On February 16, 2022, we entered into a bridge loan pursuant to which we had borrowed $45.0 million (the “February Bridge Loan”). As of December 31, 2022, the February Bridge Loan was fully repaid.
ACEA Significant Debt Arrangements
The outstanding principal amount under ACEA significant debt arrangements assumed in connection with our 2021 acquisition of ACEA was $26.7 million as of December 31, 2022. The ACEA significant debt arrangements are comprised of a series of loans with maturity dates that 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.
Marketable Investments
As of December 31, 2022, we owned 20,422,124 shares of Class A Common Stock of Celularity (Nasdaq: CELU).
Equity Financings
At-the-Market Sales Agreement
On April 27, 2020, we entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners, as sales agent (the “Agent”), pursuant to which we could offer and sell through or to the Agent up to $250.0 million in shares of its common stock (the “Shares”). On December 4, 2020, we entered into Amendment No. 1 (the “December 2020 Amendment”) to the Sales Agreement, which amended the Sales Agreement to provide that we could offer and sell, from time to time, through or to the Agent, up to an additional $450.0 million in shares of our common stock, such that we could offer and sell up to an aggregate of $700.0 million in shares of our common stock pursuant to the Sales Agreement, as amended by the December 2020 Amendment (the “Original Amended Sales Agreement”).
On December 3, 2021, we amended and restated the Original Amended Sales Agreement to include Cantor Fitzgerald & Co., B. Riley Securities, Inc. and H.C. Wainwright & Co., LLC as additional sales agents for our “at the market offering” program (the “Amended and Restated Sales Agreement”).
On December 23, 2021, we entered into Amendment No. 1 (the “December 2021 Amendment”) to the Amended and Restated Sales Agreement, with Cantor Fitzgerald & Co., B. Riley Securities, Inc. and H.C. Wainwright & Co., LLC (the “Sales Agents”).
The December 2021 Amendment amended the Amended and Restated Sales Agreement to provide that we may offer and sell, from time to time, through or to the Sales Agents, as sales agents and/or principals, up to an additional $5,000,000,000 in shares of our common stock (the “Additional Shares”), such that we may offer and sell up to an aggregate of $5,442,943,290 in shares of our common stock (the “Offering”) pursuant to the Amended and Restated Sales Agreement, as amended by the December 2021 Amendment (the “Amended Sales Agreement”), inclusive of $442,943,290 in shares sold pursuant to the Original Amended Sales Agreement and the Amended and Restated Sales Agreement through December 22, 2021. Any Additional Shares offered and sold in the Offering will be issued pursuant to our shelf registration statement on Form S-3ASR (the “Registration Statement”), which became
automatically effective upon filing with the SEC on December 23, 2021. The Additional Shares may be offered only by means of a prospectus forming a part of the Registration Statement.
Subject to the terms and conditions of the Amended Sales Agreement, each Sales Agent will use its commercially reasonable efforts to sell the shares of our common stock from time to time, based upon our instructions. Under the Amended Sales Agreement, the Sales Agents may sell the shares of our common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended.
We have no obligation to sell any shares of our common stock pursuant to the Amended Sales Agreement, and may at any time suspend offers under the Amended Sales Agreement. The Offering will terminate upon (i) the election of the Sales Agents upon the occurrence of certain adverse events, (ii) three business days’ advance notice from us to the Sales Agents or a Sales Agent (with respect to itself) to us, or (iii) the sale of all $5,442,943,290.81 of shares of our common stock pursuant thereto.
Under the terms of the Amended Sales Agreement, the Sales Agents will be entitled to a commission at an initial fixed rate of 3.0% of the gross proceeds from each sale of shares of our common stock under the Amended Sales Agreement, which percentage may be adjusted (but not above 3.0%) based on the aggregate amount of securities sold by the Sales Agents pursuant to the Amended Sales Agreement. As discussed above, on February 13, 2023, the Debtors commenced voluntary proceedings under Chapter 11. Sales of shares of our common stock under the Amended Sales Agreement are subject to the pre-approval by the Bankruptcy Court during the pendency of the Chapter 11 Cases.
We currently intend to use any additional net proceeds from the Offering for working capital and general corporate purposes, which may include capital expenditures, research and development expenditures, regulatory affairs expenditures, clinical trial expenditures, acquisitions of new technologies and investments, business combinations and the repayment, refinancing, redemption or repurchase of indebtedness or capital stock. We also may use a portion of the net proceeds to repurchase or redeem a portion or all of the Scilex Notes.
During the year ended December 31, 2022, we sold an aggregate of 205,374,865 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to us of approximately $402.3 million. Subsequent to December 31, 2022 and through February 9, 2023, we sold an aggregate of 28,335,932 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to us of approximately $28.4 million.
Universal Shelf Registration Statement
On December 23, 2021, we filed an automatic universal shelf registration statement on Form S-3 (the “WKSI Shelf Registration Statement”) with the SEC as a well-known seasoned issuer as defined in Rule 405 under the Securities Act. The WKSI Shelf Registration Statement provides us with the ability to offer an indeterminate amount of securities, including equity and other securities as described in the WKSI Shelf Registration Statement. Pursuant to the WKSI Shelf Registration Statement, we may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at the time of any offering. In connection with the WKSI Shelf Registration Statement, we entered into the Amended Sales Agreement (discussed above) and included in the WKSI Shelf Registration Statement a prospectus covering $5,000,000,000 of shares of our common stock issuable pursuant to the Amended Sales Agreement. We will no longer qualify as a well-known seasoned issuer upon the filing of this Annual Report on Form 10-K and therefore, if we wish to have a shelf registration statement, available will either need to convert the WKSI Shelf Registration to a non-well-known seasoned issuer shelf registration statement or file a new shelf registration statement.
Yorkville Standby Equity Purchase Agreement
On November 17, 2022, Scilex Holding entered into a Standby Equity Purchase Agreement (the "Yorkville Purchase Agreement") with YA II PN, Ltd. (“Yorkville”), whereby Scilex Holding has the right, but not the obligation, to sell to Yorkville up to $500.0 million of shares of its common stock from time to time at Scilex Holding’s sole and absolute discretion during the 36 months following the execution of the Yorkville Purchase Agreement, subject to certain conditions. As consideration for Yorkville's commitment to purchase shares of common stock at Scilex Holding’s direction upon the terms and subject to the conditions set forth in the Yorkville Purchase Agreement, upon execution of the Yorkville Purchase Agreement, Scilex Holding issued 250,000 shares of common stock to Yorkville and paid a $10,000 structuring fee. On February 8, 2023, Scilex Holding entered into an Amended and Restated Standby Equity Purchase Agreement with Yorkville (the “A&R Yorkville Purchase Agreement”), amending, restating and superseding the Yorkville Purchase Agreement dated November 17, 2022. Pursuant to the A&R Yorkville Purchase Agreement, the shares of Scilex common stock, if any, that Scilex Holding elects to sell to Yorkville pursuant to a Yorkville Advance will be
purchased at a price equal to 98% of the lowest daily volume weighted average price of the common stock for any trading day on the date of delivery of a written purchase notice to Yorkville.
B. Riley Standby Equity Purchase Agreement
On January 8, 2023, Scilex Holding entered into a Standby Equity Purchase Agreement (the "B. Riley Purchase Agreement") with B. Riley Principal Capital II, LLC (“B. Riley”), whereby Scilex Holding shall have the right, but not the obligation, to sell to B. Riley up to $500.0 million of its shares of Scilex Holding’s common stock from time to time at Scilex Holding’s sole and absolute discretion any time during the 36 months following the execution of the B. Riley Purchase Agreement, subject to certain conditions. Scilex Holding expects to use the net proceeds received from this for working capital and general corporate purposes. As consideration for B. Riley’s commitment to purchase shares of common stock at Scilex Holding’s direction upon the terms and subject to the conditions set forth in the B. Riley Purchase Agreement, upon execution of the B. Riley Purchase Agreement, Scilex Holding issued 250,000 shares of common stock to B. Riley and paid a $10,000 structuring fee.
Scilex Holding Business Combination
On November 10, 2022, Scilex Holding consummated the previously-announced business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger, dated as of March 17, 2022 (as amended, restated or supplemented from time to time, including by Amendment No. 1 to Agreement and Plan of Merger, dated as of September 12, 2022) (the “Merger Agreement”), by and among Scilex Holding, Vantage Merger Sub Inc., Scilex Holding's then-wholly owned subsidiary (the “Merger Sub”), and the pre-Business Combination Scilex Holding Company (“Legacy Scilex”). Pursuant to the terms of the Merger Agreement, Scilex Holding effected a deregistration under the Cayman Islands Companies Act (as revised) and a domestication under Section 388 of the Delaware General Corporation Law, as amended (the “DGCL”), pursuant to which Scilex Holding's jurisdiction of incorporation was changed from the Cayman Islands to the State of Delaware, and, on the terms and subject to the conditions set forth in the Merger Agreement and in accordance with the DGCL, Merger Sub merged with and into Legacy Scilex (the “Merger” or the “Business Combination”), with Legacy Scilex surviving as Scilex Holding's wholly owned subsidiary. On November 11, 2022, shares of Scilex Holding Company (“Scilex Holding”) began trading on the Nasdaq Capital Market under the ticker symbol “SCLX”. In connection with the Business Combination, Scilex Holding changed its name from Vickers Vantage Corp. I to Scilex Holding Company.
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 of this Form 10-K. 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.
Cash Flow Summary
December 31,
December 31,
(in thousands)
Net cash provided by (used by)
Operating activities
Investing activities
Financing activities
Use of Cash
Cash Flows from Operating Activities . Net cash used for operating activities was $293.9 million for year ended December 31, 2022 as compared to $281.8 million for the year ended December 31, 2021. Net cash used reflects the cash spent on our research activities and cash spent to support the commercial launch of our products.
Associated with the voluntary filing of Chapter 11 in February 2023, we plan to lower our operating budget and further reduce the scale of our operations, in addition to funding ongoing operations, we have incurred and expect to incur significant professional fees and other costs in connection with and throughout our Chapter 11 cases.
We expect to continue to incur substantial and increasing losses and negative net cash flows from operating activities.
Cash Flows from Investing Activities . Net cash used by investing activities was $28.5 million for the year ended December 31, 2022 and was attributed to the spend of approximately $8.3 million related to various investments in new technologies and preclinical programs, $6.5 million in connection with the acquisition of Virex Health, net of cash acquired, and approximately $13.7 million primarily attributed to expenditures on laboratory equipment. During the year ended December 31, 2021, net cash provided by investing activities was $79.8 million and we spent approximately $35.3 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 $8.9 million primarily attributed to expenditures on laboratory equipment.
Cash Flows from Financing Activities . Net cash provided by financing activities was $311.7 million for year ended December 31, 2022 as compared to $181.3 million for year ended December 31, 2021. During the year ended December 31, 2022, we received $402.3 million from equity offerings, proceeds from short-term debt of $96.1 million, proceeds of $1.2 million from common stock issuances and warrant exercises and $0.4 million of proceeds net of transaction costs paid relating to the Scilex Business Combination. During the year ended December 31, 2022, we repaid $106.0 million in principal amount of the Scilex Notes, of which $84.8 million was attributed to principal included within financing activities and $21.2 million was attributed to principal included in operating activities. We also repaid $103.5 million in other short-term debt. During the year ended December 31, 2021, we repaid $45.9 million in principal amount of the Scilex Notes, of which $32.7 million was attributed to principal included within financing activities and $13.1 million was attributed to principal included in operating activities. We also repaid $53.0 million in other 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 expect to continue operations in the normal course for the duration of the Chapter 11 Cases. To ensure ordinary course operations, we have obtained approval from the Bankruptcy Court for certain “first day” motions to continue our ordinary course operations after the filing date. We have also received interim approval from the Bankruptcy Court for $75.0 million of financing from JMB Capital Partners Lending, LLC, which will provide us with immediate liquidity so that we can continue operating our business as usual during the Chapter 11 Cases and pay the costs and professional fees associated therewith. However, for the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business plan, our financial condition, our liquidity and our continuation as a going concern are subject to a high degree of risk and uncertainty associated with our Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court. 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 about our ability to continue as a going .
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. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K, do not include any adjustments that might result from the outcome of these uncertainties.
We anticipate that we will continue to incur net losses into the foreseeable future as we develop and consummate a Chapter 11 plan of reorganization and advance our product pipeline and other product candidates.
Material Cash Requirements
As of December 31, 2022, our material contractual obligations are as follows:
Short-term operating lease liabilities as disclosed in Note 11 in the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K;
Short-term accrued legal settlements of $174.8 million, inclusive of interest, as disclosed in Note 11 ;
Short-term debt of $5.7 million related to the September Bridge Loan discussed above; and
In connection with the acquisition of ACEA as further discussed in Note 7 , we recorded short term acquisition consideration of $7.5 million as of December 31, 2022.
Our material long-term contractual obligations include:
Long-term operating lease liabilities as disclosed in Note 11 in the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K;
In connection with the acquisition of ACEA as further discussed in Note 7 , we recorded long term contingent consideration of $48.4 million as of December 31, 2022; and
Long-term debt of $26.7 million related to the ACEA Significant Debt Arrangements discussed above.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe the following accounting policies and estimates are most critical to aid in understanding and evaluating our reported financial results.
Revenue Recognition. Our revenues are generated from product revenues, the sale of customized reagents and other materials, contract manufacturing services, grant revenue and other service revenues. We do not have significant costs associated with costs to obtain contracts with our customers. Substantially all of our revenues and accounts receivable result from contracts with customers.
We recognize revenue when control of the products is transferred to the customers in an amount that reflects the consideration we expect to receive from the customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract and the contract price, allocating the contract price to the distinct performance obligations in the contract and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. We recognize revenue for satisfied performance obligations only when no significant reversals are expected (see Note 1 of the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K).
Rebates are discounts that we pay under either government or private health care programs. Government rebate programs include state Medicaid drug rebate programs, the Medicare coverage gap discount programs and the Tricare programs. Commercial rebate and fee programs relate to contractual agreements with commercial healthcare providers, under which we pay rebates and fees for access to and position on that provider’s patient drug formulary. Rebates and chargebacks paid under government programs are generally mandated under law, whereas private rebates and fees are generally contractually negotiated with commercial healthcare providers. Both types of rebates vary over time. We record a reduction to gross product sales at the time the customer takes title to the product based on estimates of expected rebate claims. We monitor the sales trends and adjust for these rebates on a regular basis to reflect the most recent rebate experience and contractual obligations. Reserves for rebates and chargebacks are recorded as accrued rebates and fees under current liabilities within our consolidated balance sheet.
Investments in Other Entities . We hold a portfolio of investments in equity securities. Investments in entities over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in loss on equity investments. Our other equity investments are carried at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments.
All investments are reviewed on a regular basis for possible impairment. If an investment’s fair value is determined to be less than its net carrying value and the decline is determined to be other-than-temporary, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an other-than-temporary decline in value has occurred include: the magnitude of the impairment and length of time that the estimated market value was below the cost basis; financial condition and business prospects of the investee; our intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment; issues that raise concerns about the investee’s ability to continue as a going concern; and any other information that we may be aware of related to the investment. We do not report the fair value of our equity investments in non-publicly traded companies because it is not readily determinable.
Debt, Including Debt With Detachable Warrants. Debt with detachable warrants is evaluated for the classification of warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with equity-classified warrants, the proceeds from the issuance of convertible debt are first allocated to the debt and the warrants at their relative estimated fair values. The portion of the proceeds so allocated to the warrants are accounted for as paid-in capital and a debt discount. The remaining proceeds, as further reduced by discounts created by the bifurcation of embedded derivatives and beneficial conversion features, are allocated to the debt. We account for debt as liabilities measured at amortized cost and amortize the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument. We consider whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. Embedded features that require bifurcation are initially and subsequently measured at fair value. See Note 3 of the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K for additional discussion on the derivative liabilities associated with embedded features in our debt instruments.
If the amount allocated to the convertible debt results in an effective per share conversion price less than the fair value of our common stock on the commitment date, the intrinsic value of this beneficial conversion feature is recorded as a discount to the convertible debt with a corresponding increase to additional paid in capital. The beneficial conversion feature discount is equal to the difference between the effective conversion price and the fair value of our common stock at the commitment date, unless limited by the remaining proceeds allocated to the debt.
We may enter financing arrangements, the terms of which involve significant assumptions and estimates, including future net product sales, in determining interest expense, amortization period of the debt discount, as well as the classification between current and long-term portions. In estimating future net product sales, we assess prevailing market conditions using various external market data against our anticipated sales and planned commercial activities. Consequently, we impute interest on the carrying value of the debt and record interest expense using an imputed effective interest rate. We reassess the expected payments each reporting period and account for any changes through an adjustment to the effective interest rate on a prospective basis, with a corresponding impact to the classification of our current and long-term portions.
Intangible assets. In order to estimate the fair value of our identifiable intangible assets and other long-lived assets, we primarily use an income approach, using the present value of estimated future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.
Contingent consideration. The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition and is determined using a discounted cash flow model or Monte Carlo simulation model. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with applicable milestones, discount rates and the related probabilities and payment structure in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the consolidated statement of operations. Contingent consideration arrangements assumed by an asset acquisition will be measured and accrued when such contingency is resolved.
Recent Accounting Pronouncements
Refer to Note 1 of the accompanying notes to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk.
Interest Rate Risk. Our exposure to market risk is confined to our cash and cash equivalents and debt. We have cash and cash equivalents and invest primarily in high-quality money market funds, which we believe are subject to limited credit risk. Due to the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We do not believe that we have any material exposure to interest rate risk arising from our investments and we do not use derivative financial instruments to hedge against interest rate risk.
Capital Market Risk . We currently do not have significant revenues from grants or sales and services and we have no product revenues from our planned principal operations and therefore depend on funds raised through other sources. One source of funding is through future debt or equity offerings. Our ability to raise funds in this manner depends upon, among other things, capital market forces affecting our stock price.
Beginning in 2021, we held investments in marketable investments with readily determinable fair values, which are included as current marketable investments within our consolidated balance sheets. Our investment in these publicly traded equity securities is recorded at fair value and is subject to market price volatility. Changes in the fair value of such investments are recorded in our consolidated statement of operations within loss on marketable investments.
Concentration Risk. Prior to April 2, 2022, sales to Scilex's sole distributor represented 100% of Scilex's net revenue. On April 2, 2022, Scilex announced the expansion of its direct distribution network to national and regional wholesalers and pharmacies. The distributor continued to provide traditional third-party logistics functions for Scilex. Scilex had four customers during the year ended December 31, 2022, which individually generated 10% or more of our total product revenue. These customers accounted for 78% of our consolidated product revenue for the year ended December 31, 2022, individually ranging between 17% to 23%. As of December 31, 2022, these customers represented 82% of our consolidated outstanding accounts receivable, individually ranging between 22% to 33%.
Item 8. Financial Statemen ts and Supplementary Data.
Our consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15(a)(1) and (a)(2), respectively, of this Annual Report on Form 10-K.
