Sorrento Therapeutics, Inc. - Quarter Report: 2022 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2022


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

For the transition period from to

Commission File Number 001-36150

SORRENTO THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

33-0344842

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

4955 Directors Place

San Diego, California 92121

(Address of Principal Executive Offices)

(858) 203-4100

(Registrant’s Telephone Number, Including Area Code)

Securities Registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol (s)	Name of each exchange on which registered:
Common Stock, $0.0001 par value	SRNE	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of November 4, 2022 was 471,880,267.

Sorrento Therapeutics, Inc.

Form 10-Q for the Quarter Ended September 30, 2022

Table of Contents


Part I	Financial Information	3
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021	3
	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021	8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

Part II	Other Information	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
SIGNATURES		44

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts; unaudited)


ASSETS	September 30, 2022			December 31, 2021
Current assets:
Cash and cash equivalents	$	70,686		$	36,665
Marketable investments		47,175			90,217
Accounts receivables, net		24,190			18,715
Inventory		17,961			8,106
Prepaid expenses		7,937			11,804
Other current assets		9,008			7,482
Total current assets		176,957			172,989
Property and equipment, net		43,634			41,325
Operating lease right-of-use assets		85,261			85,173
Intangibles, net		171,440			259,705
Goodwill		80,199			79,525
Equity investments		55,605			51,271
Other assets, net		2,518			4,830
Total assets	$	615,614		$	694,818
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	38,391		$	27,414
Accrued payroll and related benefits		29,197			21,503
Accrued expenses		59,764			37,975
Current portion of deferred revenue		281			1,108
Current portion of operating lease liabilities		13,373			11,539
Current portion of contingent consideration		397			397
Acquisition consideration		7,670			7,537
Current portion of debt		52,907			31,980
Total current liabilities		201,980			139,453
Long-term debt, net of discount		17,800			110,627
Deferred tax liabilities, net		1,744			2,426
Deferred revenue		117,224			118,942
Derivative liabilities		—			35,700
Operating lease liabilities		84,133			83,431
Contingent consideration		57,249			124,349
Other long-term liabilities		5,278			1,761
Total liabilities	$	485,408		$	616,689
Commitments and contingencies (See Note 10)
Equity:
Sorrento Therapeutics, Inc. equity
Common stock, $0.0001 par value 750,000,000 shares authorized and 468,290,927 and 314,573,225 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		47			32
Additional paid-in capital		1,916,794			1,513,758
Accumulated other comprehensive income		226			1,026
Accumulated deficit		(1,735,755	)		(1,386,604	)
Treasury stock, 7,568,182 shares at cost at September 30, 2022, and December 31, 2021		(49,464	)		(49,464	)
Total Sorrento Therapeutics, Inc. stockholders’ equity		131,848			78,748
Noncontrolling interests		(1,642	)		(619	)
Total equity		130,206			78,129
Total liabilities and stockholders’ equity	$	615,614		$	694,818

See accompanying notes to unaudited consolidated financial statements

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SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share amounts; unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenues:
Net product revenues	$	13,649		$	7,562		$	32,231		$	22,439
Service revenues		3,751			4,500			15,014			17,389
Total revenues		17,400			12,062			47,245			39,828
Operating costs and expenses:
Cost of products sold		7,283			1,172			15,638			2,549
Cost of services		985			2,215			4,092			7,345
Research and development		67,989			49,448			180,182			147,787
Acquired in-process research and development		—			11,125			12,272			23,608
Selling, general and administrative		50,159			48,489			142,873			142,176
Intangible amortization		1,127			1,000			3,196			3,105
(Decrease) increase on contingent consideration		(700	)		—			(67,100	)		100
Loss on impairment of intangible assets		—			—			90,780			—
Total operating costs and expenses		126,843			113,449			381,933			326,670
Loss from operations		(109,443	)		(101,387	)		(334,688	)		(286,842	)
Gain (loss) on derivative liabilities		500			(1,800	)		5,300			100
(Loss) gain on marketable investments		(16,084	)		(13,483	)		(43,042	)		17,047
Gain (loss) on debt extinguishment		33,433			—			27,701			(6,695	)
Gain (loss) on foreign currency exchange		610			(300	)		445			(841	)
Interest expense, net		(792	)		(2,900	)		(6,355	)		(7,282	)
Other income (loss)		74			97			(609	)		53
Loss before income tax		(91,702	)		(119,773	)		(351,248	)		(284,460	)
Income tax (expense) benefit		(1,015	)		386			(602	)		(461	)
Gain (loss) on equity method investments		62			164			3			(277	)
Net loss		(90,625	)		(119,995	)		(350,643	)		(284,276	)
Net loss attributable to noncontrolling interests		(1,049	)		(192	)		(1,492	)		(368	)
Net loss attributable to Sorrento	$	(89,576	)	$	(119,803	)	$	(349,151	)	$	(283,908	)
Net loss per share - basic per share attributable to Sorrento	$	(0.20	)	$	(0.40	)	$	(0.88	)	$	(0.98	)
Net loss per share - diluted per share attributable to Sorrento	$	(0.20	)	$	(0.40	)	$	(0.88	)	$	(0.98	)
Weighted-average shares used during period - basic shares attributable to Sorrento		451,621			299,276			397,601			290,029
Weighted-average shares used during period - diluted shares attributable to Sorrento		451,621			299,276			397,601			290,029

See accompanying notes to unaudited consolidated financial statements

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SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands; unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net loss	$	(90,625	)	$	(119,995	)	$	(350,643	)	$	(284,276	)
Other comprehensive income:
Foreign currency translation adjustments		(611	)		22			(800	)		635
Total other comprehensive (loss) income		(611	)		22			(800	)		635
Comprehensive loss		(91,236	)		(119,973	)		(351,443	)		(283,641	)
Comprehensive loss attributable to noncontrolling interests		(1,049	)		(192	)		(1,492	)		(368	)
Comprehensive loss attributable to Sorrento	$	(90,187	)	$	(119,781	)	$	(349,951	)	$	(283,273	)

See accompanying notes to unaudited consolidated financial statements

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SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands; unaudited)


	Nine Months Ended September 30, 2022
	Common Stock					Treasury Stock							Accumulated
	Shares		Amount			Shares		Amount			Additional Paid-in Capital		Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2021		314,573	$	32			7,568	$	(49,464	)	$	1,513,758	$	1,026		$	(1,386,604	)	$	(619	)	$	78,129
Issuance of common stock under equity compensation plans		438		—			—		—			132		—			—			—			132
Issuance of common stock for equity offerings		58,875		6			—		—			164,431		—			—			—			164,437
Acquisitions consideration paid in equity		1,282		—			—		—			4,435		—			—			—			4,435
Stock-based compensation		—		—			—		—			20,854		—			—			—			20,854
Foreign currency translation adjustment		—		—			—		—			—		(1,249	)		—			—			(1,249	)
Net (loss) income		—		—			—		—			—		—			(40,815	)		275			(40,540	)
Balance, March 31, 2022		375,168	$	38			7,568	$	(49,464	)	$	1,703,610	$	(223	)	$	(1,427,419	)	$	(344	)	$	226,198
Issuance of common stock under equity compensation plans		544		—			—		—			668		—			—			—			668
Issuance of common stock for equity offerings		60,707		6			—		—			104,163		—			—			—			104,169
Stock-based compensation		—		—			—		—			18,369		—			—			—			18,369
Changes to noncontrolling interests		—		(26	)		—		—			—		—			—			4,802			4,776
Foreign currency translation adjustment		—		—			—		—			—		1,060			—			—			1,060
Net loss		—		—			—		—			—		—			(218,760	)		(718	)		(219,478	)
Balance, June 30, 2022		436,419	$	18			7,568	$	(49,464	)	$	1,826,810	$	837		$	(1,646,179	)	$	3,740		$	135,762
Issuance of common stock under equity compensation plans		305		—			—		—			20		—			—			—			20
Issuance of common stock for equity offerings		31,567		3			—		—			71,426		—			—			—			71,429
Other acquisitions, license agreements and investments paid in equity		—		26			—		—			5		—			—			—			31
Stock-based compensation		—		—			—		—			18,533		—			—			—			18,533
Changes to noncontrolling interests		—		—			—		—			—		—			—			(4,333	)		(4,333	)
Foreign currency translation adjustment		—		—			—		—			—		(611	)		—			—			(611	)
Net loss		—		—			—		—			—		—			(89,576	)		(1,049	)		(90,625	)
Balance, September 30, 2022		468,291	$	47			7,568	$	(49,464	)	$	1,916,794	$	226		$	(1,735,755	)	$	(1,642	)	$	130,206

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	Nine Months Ended September 30, 2021
	Common Stock				Treasury Stock								Accumulated
	Shares		Amount		Shares		Amount			Additional Paid-in Capital			Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interest			Total
Balance, December 31, 2020		275,286	$	28		7,568	$	(49,464	)	$	1,172,346		$	520		$	(958,279	)	$	(24,420	)	$	140,731
Issuance of common stock under equity compensation plans		500		—		—		—			5,394			—			—			—			5,394
Issuance of common stock upon exercise of warrants		2,550		—		—		—			9,050			—			—			—			9,050
Issuance of common stock for equity offerings		3,901		1		—		—			42,208			—			—			—			42,209
Other acquisitions, license agreements and investments paid in equity		851		—		—		—			7,500			—			—			—			7,500
Changes to noncontrolling interests from increased ownership in Scilex Holding		2,567		—		—		—			(23,963	)		—			—			23,963			—
Stock-based compensation		—		—		—		—			23,660			—			—			—			23,660
Foreign currency translation adjustment		—		—		—		—			—			(75	)		—			—			(75	)
Net income (loss)		—		—		—		—			—			—			2,510			(92	)		2,418
Balance, March 31, 2021		285,655	$	29		7,568	$	(49,464	)	$	1,236,195		$	445		$	(955,769	)	$	(549	)	$	230,887
Issuance of common stock under equity compensation plans		300		—		—		—			1,377			—			—			—			1,377
Issuance of common stock for equity offerings		5,886		1		—		—			50,751			—			—			—			50,752
Equity issued for the acquisition of ACEA Therapeutics, Inc.		5,519		—		—		—			42,168			—			—			—			42,168
Other acquisitions, license agreements and investments paid in equity		615		—		—		—			5,378			—			—			—			5,378
Stock-based compensation		—		—		—		—			20,984			—			—			—			20,984
Foreign currency translation adjustment		—		—		—		—			—			688			—			—			688
Net loss		—		—		—		—			—			—			(166,615	)		(84	)		(166,699	)
Balance, June 30, 2021		297,975	$	30		7,568	$	(49,464	)	$	1,356,853		$	1,133		$	(1,122,384	)	$	(633	)	$	185,535
Issuance of common stock under equity compensation plans		337		—		—		—			1,281			—			—			—			1,281
Issuance of common stock for equity offerings		5,056		1		—		—			41,917			—			—			—			41,918
Other acquisitions, license agreements and investments paid in equity		99		—		—		—			812			—			—			—			812
Other changes to noncontrolling interests		—		—		—		—			—			—			—			651			651
Stock-based compensation		—		—		—		—			21,103			—			—			—			21,103
Foreign currency translation adjustment		—		—		—		—			—			22			—			—			22
Net loss		—		—		—		—			—			—			(119,803	)		(192	)		(119,995	)
Balance, September 30, 2021		303,467	$	31		7,568	$	(49,464	)	$	1,421,966		$	1,155		$	(1,242,187	)	$	(174	)	$	131,327

See accompanying notes to unaudited consolidated financial statements

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SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)


	Nine Months Ended September 30,
Operating activities	2022			2021
Net loss	$	(350,643	)	$	(284,276	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		9,892			9,603
Non-cash operating lease cost		2,997			3,057
Non-cash interest expense and amortization of debt issuance costs		5,382			5,899
Payment on notes attributed to accreted interest related to the debt discounts		(22,057	)		(11,791	)
Acquired in-process research and development		12,271			23,608
Stock-based compensation		57,617			67,509
(Gain) loss on debt extinguishment		(27,701	)		6,695
(Gain) on derivative liabilities		(5,300	)		(100	)
Loss (gain) on marketable investments		43,042			(17,047	)
(Gain) loss on equity method investments		(3	)		277
(Gain) loss on contingent consideration		(67,100	)		100
Loss on impairment of intangible assets		90,780			—
Deferred income taxes		(682	)		(1,834	)
Changes in operating assets and liabilities, excluding effect of acquisitions:
Accounts receivable		(5,402	)		(697	)
Inventory		(4,496	)		(5,427	)
Accrued payroll		7,833			(4,941	)
Prepaid expenses, deposits and other assets		4,654			(631	)
Accounts payable		5,710			(3,549	)
Accrued expenses and other liabilities		20,780			35,589
Deferred revenue		(2,544	)		417
Right-of-use assets, operating leases		(549	)		(32,509	)
Other		—			364
Net cash used for operating activities		(225,519	)		(209,684	)
Investing activities
Proceeds from sale of marketable investment		—			124,113
Purchases of property and equipment		(9,133	)		(6,662	)
ACEA acquisition consideration paid in cash, net of cash acquired		—			(754	)
Virex Health acquisition consideration paid in cash, net of cash acquired		(6,544	)		—
Other acquisitions and investments considerations paid in cash, net of cash acquired		(7,807	)		(34,645	)
Net cash (used for) provided by investing activities		(23,484	)		82,052
Financing activities
Proceeds from equity offerings, net of issuance costs		340,036			134,878
Proceeds from short-term debt, net of issuance costs		98,560			35,053
Proceeds from exercises of stock options and warrants		825			13,255
Repayments of debt and other obligations		(152,783	)		(72,711	)
Net cash provided by financing activities		286,638			110,475
Net change in cash, cash equivalents and restricted cash		37,635			(17,157	)
Net effect of exchange rate changes on cash		(3,614	)		428
Cash, cash equivalents and restricted cash at beginning of period		36,665			56,464
Cash, cash equivalents and restricted cash at end of period	$	70,686		$	39,735
Supplemental disclosures:
Cash paid during the period for:
Interest		665			86
Income Taxes		29			1,200
Supplemental disclosures of non-cash investing and financing activities:
Changes to noncontrolling interests from increased ownership in Scilex Holding		—			23,963
ACEA acquisition consideration paid in equity		—			42,168
Virex Health acquisition consideration paid in equity		4,435			—
Deferred consideration for intangible asset acquisition		3,650			—
Other acquisitions, license agreements and investments paid in equity		—			13,689
Property and equipment costs incurred but not paid		753			1,162
Short-term debt		—			7,304

See accompanying notes to unaudited consolidated financial statements

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SORRENTO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the subsidiaries of Sorrento Therapeutics, Inc. (the “Company”). For consolidated entities where the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. All intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current period presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2022. Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2022 fiscal year, or any subsequent period. The unaudited interim financial statements included herein reflect all normal and recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented.

Use of Estimates

To prepare consolidated financial statements in conformity with accounting principles generally accepted in the U.S., management must make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Significant Accounting Policies

During the nine months ended September 30, 2022, there have been no changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.

Revenue Recognition

The following table shows revenue disaggregated by product and service type for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Scilex Pharmaceuticals Inc. product sales	$	11,377	$	7,525	$	26,115	$	22,313
Sorrento Therapeutics, Inc. product revenues		2,272		37		6,116		126
Net product revenues	$	13,649	$	7,562	$	32,231	$	22,439
Concortis Biosystems Corporation	$	1,818	$	3,164	$	8,435	$	12,094
Bioserv Corporation		540		968		2,007		3,549
Other service revenues		1,393		368		4,572		1,746
Service revenues	$	3,751	$	4,500	$	15,014	$	17,389

The Company recorded $1.8 million in other service revenues associated with Celularity Inc. (“Celularity”) for the nine months ended September 30, 2022. The Company held an ownership interest of approximately 14.1% of Celularity on a non-diluted basis at September 30, 2022. See Note 4 for details.

Inventory

The Company had $12.5 million in finished goods and $5.5 million in raw materials and other inventory at September 30, 2022. The Company had $4.7 million in finished goods and $3.3 million in raw materials and other inventory at December 31, 2021.

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2. Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has negative working capital and recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure.

The Company has plans in place to obtain sufficient additional fundraising to fulfill its operating, debt servicing and capital requirements for the next 12 months. The Company’s plans include continuing to fund its and its subsidiaries' operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued. As a result, management has concluded that the aforementioned conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are issued.

If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. The Company may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. The consolidated financial statements do not reflect any adjustments that might be necessary if the Company is unable to continue as a going concern.

If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.

3. Fair Value Measurements

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):


	Fair Value Measurements at September 30, 2022
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable investments	$	47,175	$	47,175	$	—	$	—
Total assets	$	47,175	$	47,175	$	—	$	—
Liabilities:
Current portion of contingent consideration	$	397	$	—	$	—	$	397
Contingent consideration - non-current		57,249		—		—		57,249
Total liabilities	$	57,646	$	—	$	—	$	57,646

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	Fair Value Measurements at December 31, 2021
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable investments	$	90,217	$	2,560	$	—	$	87,657
Total assets	$	90,217	$	2,560	$	—	$	87,657
Liabilities:
Derivative liabilities - non-current	$	35,700	$	—	$	—	$	35,700
Current portion of contingent consideration		397		—		—		397
Contingent consideration - non-current		124,349		—		—		124,349
Total liabilities	$	160,446	$	—	$	—	$	160,446

Marketable Investments

As disclosed in Note 4, the Company holds 20,422,124 shares of Class A Common Stock of Celularity, of which 19,922,124 shares were subject to certain transfer restrictions as of December 31, 2021. The transfer restrictions lapsed on July 16, 2022. The shares held by the Company are measured at fair value at each reporting period based on the closing price of Celularity’s common stock on the last trading day of each reporting period. Prior to July 16, 2022, the shares subject to transfer restrictions were adjusted for a discount for lack of marketability. As of July 16, 2022, the shares previously subject to transfer restrictions were transferred to Level 1 due to the use of the quoted market price to measure fair value.

Changes in fair value of the Company’s investment in Celularity since December 31, 2021 are as follows (Level 3):


(in thousands)	Fair Value
Beginning Balance at December 31, 2021	$	87,657
Change in fair value measurement of Restricted Shares		(26,098	)
Transfer from Level 3 to Level 1		(61,559	)
Ending Balance at September 30, 2022	$	—

Contingent Consideration

During the three and nine months ended September 30, 2022, the Company recorded a gain of $0.7 million and $67.1 million, respectively, which related to the change in fair value of the contingent consideration associated with its acquisition of ACEA Therapeutics, Inc. (“ACEA”) (See Note 6 for details). The Company assesses the fair value of contingent consideration using a discounted cash flow method combined with a Monte Carlo simulation model. Significant Level 3 assumptions used in the measurement included revenue projections, a discount rate of 23.0% as of September 30, 2022, and estimated probabilities of successful commercialization.

Changes in estimated fair value of contingent consideration liabilities since December 31, 2021 are as follows (Level 3):


(in thousands)	Fair Value
Beginning Balance at December 31, 2021	$	124,746
Change in fair value measurement		(67,100	)
Ending Balance at September 30, 2022	$	57,646

Derivative liabilities

The Company recorded a gain on derivative liability of $0.5 million and $5.3 million for the three and nine months ended September 30, 2022, respectively, which related to the derivative liability associated with the Scilex Notes (as defined in Note 7). The fair value of the derivative liability associated with the Scilex Notes decreased by $30.4 million immediately after the entry into the Indenture Amendment (as defined in Note 7) associated with the Scilex Notes on June 2, 2022 (see Note 7 for additional details). The Indenture Amendment was accounted for as troubled debt restructuring; therefore, the carrying amount of the Scilex Notes, net, was adjusted to reflect the aforementioned change in fair value of the derivative liability. The fair value of the derivative liability

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associated with the Scilex Notes was estimated using the discounted cash flow method combined with a Monte Carlo simulation model including consideration of the terms of the Indenture Amendment. Significant Level 3 assumptions used in the measurement included a 6.1% risk adjusted net sales forecast and an effective debt yield of 21.5% as of June 30, 2022. The Scilex Notes were fully extinguished in September 2022 (see Note 7 for additional details) and, as such, there were no remaining derivative liabilities as of September 30, 2022.

The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2022:


(in thousands)	Fair Value
Beginning Balance at December 31, 2021	$	35,700
Change in fair value measurement		(35,700	)
Ending Balance at September 30, 2022	$	—

4. Investments

As of September 30, 2022, the Company’s equity method investments include an ownership interest in Immunotherapy NANTibody, LLC (“NANTibody”), NantCancerStemCell, LLC (“NantStem”), Deverra Therapeutics, Inc. (“Deverra”) and ImmuneOncia Therapeutics, LLC, among others. The Company’s equity investments without readily determinable fair value include an ownership interest in NantBioScience, Inc., Aardvark Therapeutics, Inc. (“Aardvark”) and Elsie Biotechnologies, Inc. (“Elsie”), among others. The Company’s equity investments with readily determinable fair value include an ownership interest in Celularity.

Celularity

As of September 30, 2022, the Company owned 20,422,124 shares of Class A Common Stock of Celularity. During the three and nine months ended September 30, 2022, the Company recorded unrealized losses on marketable investments of $16.1 million and $43.0 million, respectively, in connection with the changes in fair value of its shares of Celularity Class A Common Stock. The Company’s investment in Celularity is included within marketable investments under current assets within its consolidated balance sheets.

Aardvark

In 2021, the Company paid $10.0 million in cash for an aggregate of 7,777,864 shares of Series B Preferred Stock of Aardvark. The Company accounts for its investment in Aardvark as an equity investment without a readily determinable fair value and carries its investment in Aardvark at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The Company’s investment in Aardvark was $10.0 million as of each of September 30, 2022 and December 31, 2021. Tien Lee, MD, a member of the board of directors of Scilex Holding Company (“Scilex Holding”), a majority owned subsidiary of the Company, is the founder and chief executive officer of Aardvark. Kim D. Janda, Ph.D., a member of the Board of Directors of the Company, is a member of the advisory board of Aardvark.

Elsie

In 2021, the Company paid $10.0 million in cash for an aggregate of 10,000,000 shares of Series A Preferred Stock of Elsie Biotechnologies, Inc. (“Elsie”). The Company accounts for its investment in Elsie as an equity investment without a readily determinable fair value and carries its investment in Elsie at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The Company’s investment in Elsie was $10.0 million as of each of September 30, 2022 and December 31, 2021. In connection with the Company's purchase of Series A Preferred Stock of Elsie, Dr. Henry Ji, the Company’s Chairman of the Board of Directors, Chief Executive Officer and President, was appointed to the board of directors of Elsie.

NANTibody

As of September 30, 2022, the Company’s investment in NANTibody had a carrying value of zero due to the Company’s share of cumulative losses. NANTibody recorded a net loss of $0.8 million for the three months ended June 30, 2022. As of June 30, 2022, NANTibody had $2.4 million in current assets, $10.9 million in current liabilities, $0.1 million in noncurrent assets and no noncurrent liabilities.

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The financial statements of NANTibody are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a one quarter lag.

NantStem

As of September 30, 2022, the carrying value of the Company’s investment in NantStem was approximately $18.8 million. NantStem recorded net income of $0.7 million for the three months ended June 30, 2022. As of June 30, 2022, NantStem had $84.5 million in current assets, no current liabilities, $0.5 million in noncurrent assets and no noncurrent liabilities.

The financial statements of NantStem are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a one quarter lag.

5. Goodwill and Intangible Assets

Goodwill totaled $80.2 million as of September 30, 2022. Goodwill for the Sorrento Therapeutics segment and the Scilex segment was $73.5 million and $6.7 million, respectively, as of September 30, 2022. As of September 30, 2022, intangible assets with indefinite useful lives totaling $127.7 million are included in acquired in-process research and development (“IPR&D”) in the table below.

Goodwill and intangible assets are assessed annually for impairment on October 1 and more frequently whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. In June 2022, the Company decided to pause for future evaluation the development of Abivertinib, which was acquired from ACEA in 2021 (see Note 6 for details), for the treatment of hospitalized COVID-19 patients. This event led to an assessment to determine if an impairment occurred for the associated IPR&D assets in the second quarter of 2022. Based on a quantitative analysis for impairment performed at June 30, 2022, the Company determined that approximately $90.8 million associated with the IPR&D assets, which are in the Sorrento Therapeutics segment, had been impaired and recorded within the loss on impairment of intangible assets in the consolidated statement of operations during the second quarter of 2022. The quantitative analysis is considered a Level 3 non-recurring fair value measurement and is based on the discounted cash flow method that estimates the present value of risk adjusted projected cash flow derived from the IPR&D assets using a discount rate of 16% at June 30, 2022. As of September 30, 2022, the Abivertinib development program associated with COVID-19 treatment remained paused and under evaluation, and the Company did not identify any indicators of additional impairment as of September 30, 2022. The Company performed an evaluation of goodwill, including a qualitative analysis considering the overall market capitalization of the Company in comparison to the carrying value of the Company's reporting units at September 30, 2022, and it determined that it was not more likely than not that an impairment of goodwill existed at either of the reporting units at September 30, 2022.

A summary of the Company’s identifiable intangible assets as of September 30, 2022 and December 31, 2021 is as follows (in thousands, except for years):


			September 30, 2022						December 31, 2021
September 30, 2022	Weighted Average Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization		Intangibles, Net		Gross Carrying Amount		Accumulated Amortization		Intangibles, Net
Customer relationships		2	$	1,585	$	1,472	$	113	$	1,585	$	1,453	$	132
Acquired technology		19		3,410		1,544		1,866		3,410		1,412		1,998
Acquired in-process research and development		—		127,650		—		127,650		218,430		—		218,430
Technology placed in service		15		21,940		5,851		16,089		21,940		4,754		17,186
Patent rights		15		32,720		12,918		19,802		32,720		11,283		21,437
Assembled workforce		5		605		434		171		605		343		262
Internally developed software		2		520		390		130		520		260		260
Acquired licenses		15		5,711		92		5,619		—		—		—
Total intangible assets			$	194,141	$	22,701	$	171,440	$	279,210	$	19,505	$	259,705

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Aggregate amortization expense was $1.1 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. Aggregate amortization expense was $3.2 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at September 30, 2022 is as follows (in thousands):


Years Ending December 31,	Amount
2022 (Remaining three months)	$	1,127
2023		4,416
2024		4,239
2025		4,214
2026		4,214
Thereafter		25,580
Total expected future amortization	$	43,790

6. Significant Agreements and Contracts

2022 Acquisitions

Romeg License Agreement

On June 14, 2022, the Company's majority-owned subsidiary, Scilex Holding, entered into a License Agreement (the “License Agreement”) with RxOmeg Therapeutics, LLC (a/k/a Romeg Therapeutics, Inc.) (“Romeg”). Pursuant to the License Agreement, among other things, Romeg granted Scilex Holding (a) a transferable license, with the right to sublicense, under the patents and know-how specified therein (with such license to know-how being exclusive for the limited purposes specified therein) to (i) commercialize the pharmaceutical product comprising liquid formulations of colchicine for the prophylactic treatment of gout in adult humans (the “Initial Licensed Product”) in the United States of America (including its territories) (the “Territory”), (ii) develop other products comprising the Initial Licensed Product as an active pharmaceutical ingredient (the “Licensed Products”) and commercialize any such products and (iii) manufacture Licensed Products anywhere in the world, solely for commercialization in the Territory; and (b) an exclusive, transferable license, with right to sublicense, to use the trademark GLOPERBA and logos, designs, translations, and modifications thereof in connection with the commercialization of the Initial Licensed Product solely in the Territory.

As consideration for the license under the License Agreement, Scilex Holding paid Romeg an up-front license fee of $2.0 million, and has agreed to pay Romeg (a) upon Scilex Holding's achievement of certain net sales milestones, certain milestone payments in the aggregate amount of up to $13.0 million, (b) certain royalties in the mid-single digit to low-double digit percentages based on annual net sales of the Licensed Product by Scilex Holding during the applicable royalty term under the License Agreement, and (c) a minimum quarterly royalty payment commencing on the first year anniversary of the effective date of the License Agreement and ending on the later of (i) expiration of the last to expire of the licensed patents covering the Licensed Products in the Territory or (ii) the tenth anniversary of the effective date of the License Agreement.

The transaction was accounted for as an asset acquisition since the Initial Licensed Product was approved and made available in the United States in 2020 and substantially all the value of the gross assets was concentrated in a single asset, which is the Initial Licensed Product. In connection with the License Agreement, Scilex Holding recorded an intangible asset for the acquired license of $5.7 million, which is comprised of the upfront license fee of $2.0 million and a deferred consideration of $3.7 million that is the present value of the future minimum royalty payments and immaterial transaction costs. The contingent sales milestones and sale volume-based future royalties were determined to meet a scope exception for derivatives under Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and not to be probable at either June 30 or September 30, 2022; therefore, they were not recognized as a liability or included in the fair value of the asset as of each of June 30 and September 30, 2022. The Company determined the useful life of the intangible asset to be 15 years, which approximates the life of the licensed patents covering the Initial Licensed Product.

Zhengzhou Fortune Bioscience Co., Ltd.

In May 2022, the Company completed an acquisition of 51% of the equity interests of Zhengzhou Fortune Bioscience Co., Ltd (“ZFB”) for $5.0 million in cash under a joint venture agreement and equity subscription agreement, as amended (collectively, the “ZFB Agreements”). ZFB is a manufacturer in China of lateral flow diagnostic tests, including COVISTIX, the Company’s COVID-19 virus rapid antigen detection test kit currently being sold in Mexico. Under the ZFB Agreements, the Company has the option to acquire from the minority equity holder the remaining 49% of the aggregate equity interests of ZFB for $50.0 million before

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December 31, 2022 (the “Subsequent Transaction”). If the Subsequent Transaction does not occur, the Company or ZFB may terminate the ZFB Agreements, and the Company’s 51% of equity interest in ZFB will be redeemed by ZFB for $5.0 million. In September 2022, the Company entered an amendment (the “Amendment”) to the ZFB Agreements, pursuant to which, among other things, the Company’s equity interest in ZFB was reduced from 51% to 49% through a transfer of 2% of the Company’s equity interest in ZFB to the other shareholder of ZFB for a payment of $0.2 million and the Company’s representation on ZFB’s board of directors was reduced from three out of five total directors to two out of five total directors. The transfer of the 2% of the equity interest of ZFB was completed, and the Company received $0.2 million from the other shareholder of ZFB in September 2022.

In May 2022, the Company determined that it holds a variable interest in ZFB at completion of the acquisition of 51% of the equity interest in ZFB, which is determined to be a variable interest entity (“VIE”). The Company further determined that it was the primary beneficiary of the VIE because the Company had control over ZFB through its control over ZFB’s board of directors, had ownership of a majority of voting equity interests and had other sole decision-making rights under the ZFB Agreements to direct the most important activities of ZFB. The Company accounted for the transaction as a business combination and applied the acquisition method of accounting. The initial purchase price of $0.2 million represented $5.0 million cash consideration, net of $4.8 million in pre-acquisition inter-company payables to ZFB that were preliminarily deemed settled upon acquisition. The preliminary allocation of the purchase price consisted of $10.4 million of fair value of assets acquired including $1.9 million of goodwill and intangibles and $5.5 million of liabilities assumed. The fair value of non-controlling interest of $4.8 million at acquisition date was derived from the $5.0 million consideration paid for the 51% equity interest in ZFB, which was deemed to approximate the fair value.

Upon execution of the Amendment and completion of the 2% equity interest transfer in September 2022, the Company determined that it is no longer the primary beneficiary of ZFB as a VIE because it lost control over ZFB. As a result of this assessment, the Company derecognized all of ZFB's assets and liabilities from the Company’s consolidated financial statements, recorded the Company’s 49% retained equity interest at its fair value of $4.8 million at September 30, 2022 and recorded a gain from the deconsolidation of $0.3 million in the three and nine month periods ended September 30, 2022. Upon deconsolidation, the Company also recorded a payable to ZFB of $5.3 million that was previously considered an intercompany payable at the time of the consolidation. Subsequent to the deconsolidation, the Company determined it has significant influence over ZFB’s operating and financial policies and recorded its 49% equity interest as an equity method investment at September 30, 2022.

Acquisition of Virex

On February 1, 2022, the Company completed the acquisition of Virex Health, Inc. (“Virex”), a developer of at-home diagnostic platforms based in Boston, Massachusetts. In accordance with Accounting Standards Codification Topic 805, the Company recorded consideration transferred totaling $11.4 million, including $6.8 million in cash, $0.1 million in transaction costs paid in cash and 1,281,662 shares of the Company's common stock, or $4.5 million of consideration based on the Company's closing share price on February 1, 2022. In connection with the acquisition of Virex, the Company may pay up to $10.0 million in contingent consideration in a combination of cash and stock subject to the achievement of certain regulatory milestones.

The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. No contingent consideration was recorded as of September 30, 2022. The Company fully expensed an amount of $11.7 million, representing the consideration transferred, net of short-term liabilities assumed, to acquired IPR&D.

2021 Acquisitions

Acquisition of ACEA

On June 1, 2021, the Company completed the acquisition of ACEA, which is developing multiple clinical and preclinical-stage new chemical entity compounds, including the late clinical drug candidate, Abivertinib. The final purchase price allocation was calculated based on an upfront consideration of $44.1 million, which was based on the Company’s closing share price on June 1, 2021, and resulted in separate and distinct intangible assets comprised of acquired IPR&D of $190.8 million, of which $90.8 million associated with Abivertinib for the treatment of hospitalized COVID-19 patients was deemed impaired and written off during the second quarter of 2022 (see Note 5 for details), goodwill of $36.0 million, fair value of debt assumed of approximately $32.1 million, deferred tax liabilities of $31.4 million and other net assets of approximately $2.9 million. Pursuant to the terms of the merger agreement entered into with ACEA, a portion of the upfront consideration equal to $38.1 million was used to repay certain existing indebtedness of ACEA, which amount was paid to the holders thereof in the form of shares of common stock of the Company and an aggregate of 5.5 million shares (“Indebtedness Shares”) of the Company’s common stock were issued in respect thereof based on a price per share equal to $6.8955. The Indebtedness Shares are subject to a true-up, as set forth in the merger agreement entered into with ACEA, if the price at which such shares were issued is greater than the closing price of the Company’s common stock on the date

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that is six months after June 1, 2021. The Company recorded $7.5 million associated with the true-up as a current liability at September 30, 2022.

In addition to the Closing Consideration, the Company may pay the ACEA equityholders contingent consideration of (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. See Note 3 for details.

7. Debt

2018 Purchase Agreements and Indenture for Scilex Pharmaceuticals Inc. (“Scilex Pharma”)

On September 7, 2018, Scilex Pharma entered into Purchase Agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and the Company. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex 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 the Company. Pursuant to the Indenture, the Company agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.

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, the Company recorded the increase of $28.0 million in principal and non-operating expense at December 31, 2021. Pursuant to the Indenture, if actual cumulative net sales of ZTlido for the period from October 1, 2022 through September 30, 2023 do not equal or exceed 80% of a predetermined target sales threshold for such period, the aggregate principal amount shall also be increased on November 15, 2023 by an amount equal to an amount to be determined by reference to the amount of such deficiency. In accordance with ASC Topic 815, Derivatives and Hedging, the Company accounted for this feature as an embedded derivative (the “Scilex Notes Derivative”) that is required to be bifurcated from the Scilex Notes and measured at fair value in each reporting period (see Note 3 for details).

Effective February 14, 2022, Scilex Pharma issued to the Company a draw notice under the irrevocable standby letter of credit issued by the Company to Scilex Pharma as required under the terms of the Indenture because actual cumulative net sales of ZTlido from the issue date of the Scilex Notes through December 31, 2021 were less than a specified sales threshold for such period. As a result of the draw notice being issued, the Company paid to Scilex Pharma $35.0 million in a single lump-sum amount as a subordinated loan. In February 2022, Scilex Pharma repurchased Scilex Notes from the holders thereof on a pro rata basis in an aggregate amount equal to $20.0 million.

On June 2, 2022, the Company and Scilex Pharma entered into a Consent Under and Amendment No. 4 to Indenture (the “Indenture Amendment”) with U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association) and the Scilex Note Purchasers. Pursuant to the Indenture Amendment, (1) on June 3, 2022, Scilex Pharma repurchased approximately $41.4 million of the aggregate principal amount of the outstanding Scilex Notes at 100% of the principal amount thereof, (2) the Scilex Note Purchasers agreed that Scilex Pharma can repurchase the remaining principal amount of the Scilex Notes at any time on or before September 30, 2022 for $41.4 million (subject to reduction for any quarterly royalty payments) and upon such repurchase the Scilex Note Purchasers will forgive and discharge $28.0 million of the aggregate principal amount of the Scilex Notes (the “Early Paydown Provision”), (3) the minimum cash requirement under the Indenture was reduced to $5.0 million in aggregate unrestricted cash equivalents at the end of each calendar month, and (4) the maximum aggregate principal amount of that certain Intercompany Promissory Note issued by Scilex Pharma to the Company on October 5, 2018 was increased from up to $25.0 million to up to $50.0 million. The Company concluded that the Indenture Amendment was a troubled debt restructuring for accounting purposes. The future undiscounted cash flows of the Scilex Notes were higher than the carrying value of the Scilex Notes at the time of the entry into the Indenture Amendment, and accordingly, no gain was recognized in the quarter ended June 30, 2022. Due to a decrease of $30.4 million in the fair value of the Scilex Notes Derivative caused by the Indenture Amendment, the carrying value of the Scilex Notes was increased by $30.4 million, totaling $74.9 million at June 30, 2022.

In September 2022, Scilex Pharma exercised the Early Paydown Provision to fully extinguish the Scilex Notes. In August and September 2022, the Company made principal payments towards the outstanding Scilex Notes totaling $1.7 million and $39.7 million, respectively. Pursuant to the Indenture Amendment, $28.0 million of principal amount on the Scilex Notes was forgiven by the Scilex Note Purchasers and the Scilex Notes were fully extinguished in September 2022. The Company recorded a gain on debt

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extinguishment of $33.4 million during the three months ended September 30, 2022. There are no derivative liabilities as of September 30, 2022.

Borrowings of the Scilex Notes consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Principal	$	—	$	133,998
Unamortized debt discount		—		(30,601	)
Unamortized debt issuance costs		—		(2,235	)
Carrying value	$	—	$	101,162
Estimated fair value	$	—	$	115,400

The Company made principal payments of $106.0 million and $44.2 million during the nine months ended September 30, 2022 and 2021, respectively. The amount of debt discount and debt issuance costs included in interest expense for the three months ended September 30, 2022 and 2021 was approximately $0.1 million and $1.9 million, respectively. The amount of debt discount and debt issuance costs included in interest expense for the nine months ended September 30, 2022 and 2021 was approximately $3.1 million and $5.9 million, respectively. The Company recorded a gain on debt extinguishment of $28.6 million and a loss on debt extinguishment of $14.0 million in connection with its repayments of principal made during the nine months ended September 30, 2022 and 2021, respectively.

Bridge Loan Agreements

On September 30, 2022, the Company entered into a Bridge Loan Agreement (the “September Bridge Loan Agreement”) pursuant to which the Company borrowed $41.6 million in the form of a bridge loan (the “September Bridge Loan”), which bears interest at 6% per annum and will mature on January 31, 2023. Upon the occurrence and during the continuance of an “Event of Default” under the September Loan Agreement includes, among other things, the Company’s failure to pay any principal of, or interest on, the September Bridge Loan when such principal or interest becomes due and payable or to otherwise perform or observe the terms of the September Bridge Loan Agreement (subject to cure periods), a material inaccuracy of the Company’s representations and warranties under the September Bridge Loan Agreement, a failure by the Company to generally pay its debts as they become due or a bankruptcy, insolvency or similar event involving the Company. The Company received proceeds of $41.2 million net of transaction fees of $0.4 million and paid approximately $1.3 million in advisory fees. The Company recorded a $1.7 million debt discount as of September 30, 2022. The Company repaid $10.0 million of the September Bridge Loan in October 2022.

On February 16, 2022, the Company entered into a Bridge Loan Agreement pursuant to which the Company borrowed $45.0 million in the form of a bridge loan (the “February Bridge Loan”), which bore no interest and matured on June 16, 2022. The amount of debt discount and debt issuance costs included in interest expense for the nine months ended September 30, 2022 was $0.9 million. The Company recorded a loss on debt extinguishment of $0.9 million in connection with its repayments of principal made during the nine months ended September 30, 2022. The Company fully repaid the February Bridge Loan during the nine months ended September 30, 2022.

ACEA Significant Debt Arrangements

Borrowings under significant debt arrangements assumed in connection with the Company’s acquisition of ACEA consisted of the following (in thousands):


	September 30, 2022			December 31, 2021
Principal	$	25,942		$	29,048
Unamortized debt discount		(8,142	)		(10,642	)
Carrying value	$	17,800		$	18,406
Estimated fair value	$	13,400		$	17,100

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8. Stockholders’ Equity

At-the-Market Sales Agreement

On December 3, 2021, the Company entered into an amended and restated sales agreement, which was amended on December 22, 2021 (as amended, the “ATM Sales Agreement”), pursuant to which the Company may issue and sell shares of its 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, through Cantor Fitzgerald & Co., B. Riley Securities, Inc. and H.C. Wainwright & Co., LLC, as sales agents. During the nine months ended September 30, 2022, the Company sold an aggregate of 151,148,373 shares of its common stock pursuant to the ATM Sales Agreement for aggregate net proceeds to the Company of approximately $340.0 million. Subsequent to September 30, 2022 and through November 4, 2022, the Company sold an aggregate of 3,589,340 shares of its common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to the Company of approximately $5.5 million.

9. Stock Based Compensation

2019 Stock Incentive Plan (“2019 Plan”)

Total stock-based compensation expense under the 2019 Plan was $6.9 million and $6.3 million for the three months ended September 30, 2022 and 2021, respectively, and $20.7 million and $21.7 million for the nine months ended September 30, 2022 and 2021, respectively. The total unrecognized compensation expense related to unvested stock option grants as of September 30, 2022 was $40.0 million, with a weighted average remaining vesting period of 2.3 years. Total unrecognized compensation expense related to unvested restricted stock unit (“RSU”) grants as of September 30, 2022 was $25.9 million, with a weighted average remaining vesting period of 3.5 years.

A summary of stock option activity under the 2019 Plan for the nine months ended September 30, 2022 is as follows:


	Options Outstanding			Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2021		22,515,513		$	6.19	$	—
Options Granted		550,000			1.61
Options Canceled		(1,757,233	)		6.36
Options Exercised		(24,332	)		2.32
Outstanding at September 30, 2022		21,283,948		$	6.06	$	27

A summary of RSU activity under the 2019 Plan for the nine months ended September 30, 2022 is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Outstanding at December 31, 2021		3,433,896		$	9.50
RSUs Granted		4,855,500			1.72
RSUs Released		(768,531	)		9.53
RSUs Canceled		(593,337	)		8.45
Outstanding at September 30, 2022		6,927,528		$	4.13

Scilex Holding Company

Under the Scilex Holding Company 2019 Stock Option Plan, total stock-based compensation expense was $1.2 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively, and $4.0 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively. The total unrecognized compensation expense related to unvested stock option grants as of September 30, 2022 was $3.9 million, with a weighted average vesting period of 1.4 years.

Employee Stock Purchase Plan

Total stock-based compensation recorded as operating expense for the Company’s 2020 Employee Stock Purchase Plan was $0.1 million and $0.3 million for the three and nine months ended September 30, 2022, respectively.

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CEO Performance Award

Total stock-based compensation recorded as operating expense for the 10-year CEO performance award that was granted to the Company’s chief executive officer in 2020 and tied solely to the Company achieving market capitalization milestones (the “CEO Performance Award”) was $10.3 million and $32.7 million during the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, the Company had approximately $55.0 million of total unrecognized stock-based compensation expense remaining under the CEO Performance Award.

10. Commitments and Contingencies

Litigation

In the normal course of business, the Company may be named as a defendant in one or more lawsuits. Other than as set forth below, the Company is not a party to any outstanding material litigation and management is currently not aware of any legal proceedings that, individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.

On April 3, 2019, the Company filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. Specifically, the Company has filed:

•

An arbitration demand with the American Arbitration Association in Los Angeles, California against NantPharma, LLC (“NantPharma”) and Chief Executive Officer Patrick Soon-Shiong, related to alleged fraud and breaches of the Stock Sale and Purchase Agreement, dated May 14, 2015, entered into between NantPharma and the Company, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2015. On May 24, 2019, NantCell, Inc., Dr. Soon-Shiong and Immunotherapy NANTibody LLC (“NANTibody”) General Counsel Charles Kim filed a motion in the Los Angeles Superior Court to stay or dismiss the Company’s arbitration demand. On October 9, 2019, the Los Angeles Superior Court denied the motion to stay or dismiss the arbitration demand, and the arbitration is ongoing against NantPharma (“NantPharma Arbitration”). On March 5, 2020, the Company filed a legal action against Dr. Soon-Shiong in Los Angeles Superior Court, asserting claims for fraudulent inducement and common law fraud, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The action alleges that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq™ for the purpose of halting its progression to the market. In connection with filing this civil action in the Los Angeles Superior Court, where the Company will have the right to a jury trial against Dr. Soon-Shiong, the Company has dismissed Dr. Soon-Shiong from the related, ongoing arbitration against NantPharma; and

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•

An action in the Los Angeles Superior Court derivatively on behalf of NANTibody against NantCell, Inc., NANTibody Board Member and NantCell, Inc. Chief Executive Officer Patrick Soon-Shiong, and NANTibody officer Charles Kim, related to several breaches of the June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between the Company and NantCell, Inc. The suit also alleges breaches of fiduciary duties and seeks, inter alia, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring the Company’s equity method investment in NANTibody to its invested amount as of June 30, 2017 of $40.0 million. On May 24, 2019, NantCell, Inc. and Dr. Soon-Shiong filed a cross-complaint against the Company and its President, Chief Executive Officer and Chairman of the Board of Directors, Dr. Henry Ji, Ph.D., seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Exclusive License Agreement for certain antibodies (dated June 11, 2015 and entered into between NANTibody, LLC and the Company), and alleged tortious interference with contract. On May 24, 2019, NANTibody and NantPharma filed a new complaint in the action against the Company and Dr. Ji, seeking unspecified damages, as well as additional punitive damages and specific performance, related to alleged fraud, alleged breaches of the Stock Sale and Purchase Agreement, alleged breaches of the Exclusive License Agreement for certain antibodies (dated April 21, 2015 and entered into between NantCell, Inc. and the Company), and alleged tortious interference with contract. On July 8, 2019, the Company and Dr. Ji filed motions to compel the cross-complaint and new action to arbitration. On October 9, 2019, the Los Angeles Superior Court granted the motions to compel to arbitration all of the claims brought by NANTibody, NantCell, Inc. and NantPharma, and denied the motions to compel as to the claims brought by Dr. Soon-Shiong. Subsequently, NANTibody, NantCell, Inc., and NantPharma re-filed their claims in arbitration with the American Arbitration Association. On May 4, 2020, the Company filed counterclaims against NANTibody and NantPharma related to breaches of the April 21, 2015 and June 11, 2015 Exclusive License Agreements. With the counterclaims, the Company is seeking money damages in an amount yet to be determined. On August 2, 2022, Sorrento, NantCell and NANTibody presented closing arguments in the arbitration concerning the parties’ claims and counterclaims under the April 21, 2015 and June 11, 2015 Exclusive License Agreements, a decision on which is currently pending. The claims asserted in the NantPharma Arbitration have been submitted to the arbitrator for a decision. The Los Angeles Superior Court claims against Dr. Soon-Shiong have been stayed pending resolution of the claims filed in arbitration. The original derivative action is no longer stayed, and the parties are currently engaged in discovery in the suit.

On May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-00966-AJB-DEB, against the Company, Dr. Ji, and its SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D. The action alleges that the Company, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public by publicly issuing false and/or misleading statements regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection and that such statements violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The suit seeks to recover damages caused by the alleged violations of federal securities laws, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On June 11, 2020, Jeannette Calvo filed a second putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-01066-JAH-WVG, against the same defendants alleging the same claims and seeking the same relief. On February 12, 2021, the U.S. District Court for the Southern District of California issued an order consolidating the cases and appointing a lead plaintiff, Andrew Zenoff (“Plaintiff”), and lead counsel. On April 5, 2021, Plaintiff filed a consolidated amended complaint in accordance with the U.S. District Court for the Southern District of California’s scheduling order. Pursuant to that scheduling order, the defendants filed a motion to dismiss on May 20, 2021 and Plaintiff filed its opposition to the motion on July 2, 2021. The defendants’ reply was filed on August 4, 2021. On or about November 18, 2021, the U.S. District Court for the Southern District of California issued an order granting the motion to dismiss with leave to amend. On November 30, 2021, Plaintiff filed a first amended consolidated complaint. On December 30, 2021, the defendants filed a motion to dismiss the first amended consolidated complaint. Pursuant to a stipulated scheduling order, Plaintiff filed its opposition to the motion on February 7, 2022, and the defendants filed their reply on February 28, 2022. On April 11, 2022, the U.S. District Court for the Southern District of California issued an order granting the motion to dismiss with leave to file an amended complaint by April 22, 2022. Plaintiff did not file an amended complaint by April 22, 2022. On June 2, 2022, the U.S. District Court for the Southern District of California directed the clerk of the court to enter judgment in favor of defendants and close the case. On June 3, 2022, judgment was entered in favor of defendants, and the case was closed. On June 30, 2022, Plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit (Case No. 22-55641). On October 3, 2022, Plaintiff/Appellant filed an opening brief. The defendants/appellees’ answering brief is due on December 2, 2022. Appellant may also file an optional reply brief within 21 days of appellees’ answering brief. The Company is defending these matters vigorously.

On July 26, 2021, Sachin Chaudhari filed a verified stockholder derivative complaint in the U.S. District Court for the Southern District of California, Case No. 0723211, against Dr. Ji, Dr. Brunswick, and the Company’s Board of Directors as defendants, and

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against the Company as a nominal defendant. The action alleges, among other things, that defendants breached their fiduciary duties, violated Section 20(a) of the Securities Exchange Act of 1934, as amended, engaged in waste and were unjustly enriched in connection with the alleged false and misleading statements referenced above. The suit seeks to recover on behalf of the Company those damages caused by the alleged breaches of duty and related claims, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On July 27, 2021, Michael Sabatina filed a verified stockholder derivative complaint in the Delaware Chancery Court, Case No. 2021-0654 against Dr. Ji and Dr. Brunswick as defendants and against the Company as a nominal defendant alleging the same general claims and seeking the same general relief. Both of these derivative cases have been stayed by their respective courts pending resolution of the motion to dismiss the federal securities class action described above. The Company is defending these matters vigorously.

Operating Leases

Supplemental quantitative information related to leases includes the following ($ in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	3,615		$	3,208		$	9,761		$	8,081
ROU assets obtained in exchange for new and amended operating lease liabilities	$	1,505		$	39,967		$	3,567		$	40,141
Weighted average remaining lease term in years	14.2			15.5			14.2			15.5
Weighted average discount rate		12.8	%		12.8	%		12.8	%		12.8	%

Maturities of lease liabilities were as follows (in thousands):


Years ending December 31,	Operating leases
2022 (Remaining three months)	$	3,673
2023		14,871
2024		14,851
2025		13,904
2026		13,574
2027		13,788
Thereafter		152,715
Total lease payments		227,376
Less imputed interest		(129,870	)
Total lease liabilities as of September 30, 2022	$	97,506

11. Income Taxes

The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, research credits and temporary differences. In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, management has determined that it is appropriate to maintain a valuation allowance against the Company’s U.S. federal and state deferred tax assets, with the exception of an amount equal to schedulable deferred tax liabilities.

The Company’s income tax benefit of $0.6 million and $0.5 million reflect an effective tax rate of 0.2% in both periods for the nine months ended September 30, 2022 and 2021, respectively. The Company’s income tax benefit of $1.0 million and income tax expense of $0.4 million reflect effective tax rates of 1.1% and 0.3% for the three months ended September 30, 2022 and 2021, respectively.

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The difference between the expected statutory federal tax rate of 21% and the 0.2% effective tax rate for the nine months ended September 30, 2022 was primarily attributable to income tax expense associated with return to provision adjustments and shortfalls on stock-based compensation, offset by income tax benefits associated with changes in valuation allowance.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2007 and later are subject to examination by the U.S. and state tax authorities due to the existence of the net operating loss and research credit carryforwards.

12. Net Loss Per Share

For the three and nine months ended September 30, 2022 and 2021, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.

The following table sets forth the reconciliation of basic and diluted loss per share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Numerator
Net loss attributable to the Company	$	(89,576	)	$	(119,803	)	$	(349,151	)	$	(283,908	)
Net loss used for diluted earnings per share	$	(89,576	)	$	(119,803	)	$	(349,151	)	$	(283,908	)

Denominator for loss income per share		451,621			299,276			397,601			290,029
Denominator for diluted loss per share		451,621			299,276			397,601			290,029
Basic loss per share	$	(0.20	)	$	(0.40	)	$	(0.88	)	$	(0.98	)
Diluted loss per share	$	(0.20	)	$	(0.40	)	$	(0.88	)	$	(0.98	)

Shares of common stock issuable pursuant to stock options and warrants that were excluded because the effect is anti-dilutive consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Anti-dilutive shares for outstanding options and RSUs		22,145		4,736		22,719		2,892

13. Segment Information

The Company operates in two operating and reportable segments, Sorrento Therapeutics and Scilex. With the exception of unrestricted cash balances, the Company’s Chief Operating Decision Maker does not regularly review asset information by reportable segment and, therefore, it does not report asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.

The following table presents information about the Company’s reportable segments for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,
	2022									2021
	Sorrento Therapeutics			Scilex			Total			Sorrento Therapeutics			Scilex			Total
External revenues	$	6,023		$	11,377		$	17,400		$	4,537		$	7,525		$	12,062
Operating expenses		104,849			21,994			126,843			97,766			15,683			113,449
Operating loss		(98,826	)		(10,617	)		(109,443	)		(93,229	)		(8,158	)		(101,387	)
Unrestricted cash		68,152			2,534			70,686			35,380			4,355			39,735

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	Nine Months Ended September 30,
	2022									2021
(in thousands)	Sorrento Therapeutics			Scilex			Total			Sorrento Therapeutics			Scilex			Total
External revenues	$	21,130		$	26,115		$	47,245		$	17,515		$	22,313		$	39,828
Operating expenses		324,208			57,725			381,933			278,195			48,475			326,670
Operating loss		(303,078	)		(31,610	)		(334,688	)		(260,680	)		(26,162	)		(286,842	)
Unrestricted cash		68,152			2,534			70,686			35,380			4,355			39,735

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. (collectively, “Sorrento,” the “Company,” “we,” “us,” and “our”) is a clinical and commercial stage biopharmaceutical company developing next generation treatments for three major therapeutic areas: cancer, infectious disease and pain.

Cancer. Our best-in-category strategy is enabled by combining our fully human G-MAB™ antibody library with our ability to rapidly screen for highly potent and targeted treatments and to enhance the target product profile for these antibodies 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-model 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), COVITRACK, a LAMP-based pathogen nucleic acid detection assay, and the VIREX™ platform, which leverages existing worldwide manufacturing infrastructure for glucometers and glucose strip tests to provide affordable and highly scalable, next-generation diagnostic solutions for infectious diseases, liver cancer and other biomarkers. We are also focused on bringing forward effective therapeutic solutions, including a next generation protease inhibitor antiviral pill, COVISHIELD™ IN (neutralizing antibody nasal drops) and variant agnostic rescue therapies, FUJOVEE ™ (Abivertinib) and OQORY™ (mesynstromal stem cells).

Pain. We are focusing our efforts on non-opioid and non-addictive pain treatments. The flagship product of our pain programs, ZTlido®, is being marketed by Scilex Pharmaceuticals Inc. (“Scilex Pharma”), our majority-owned subsidiary. ZTlido was launched in October of 2018 as a prescription lidocaine topical product and has demonstrated superior adhesion and bioavailability compared to current lidocaine patches. Scilex Pharma has now built a full commercial organization, which includes sales, marketing, market access and medical affairs, and will leverage 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. We announced positive final results for the Phase 3 trial for SEMDEXA™ in March 2022.

We are also developing Resiniferatoxin (“RTX”), a naturally occurring and 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.

Significant Developments in the Quarter Ended September 30, 2022

•

In September 2022, Scilex Pharma repurchased all of its remaining senior secured notes as described below.

•

In September 2022, we completed enrollment of our Phase 2 clinical study of RTX for treating moderate-to-severe osteoarthritis of the knee pain.

•

In September 2022, we completed our first Phase 1b proof of concept study using the Sofusa Lymphatic Drug Delivery System.

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•

In August 2022, Scilex Holding received fast track designation from the U.S. Food and Drug Administration (“FDA”) for its investigational drug and device product candidate, SP-103 (Lidocaine Topical System) 5.4%, the next generation triple strength formulation of ZTlido®, for the treatment of acute low back pain.

•

In August 2022, we announced significant positive pivotal trial results as assessed by an independent review committee with matured long-term (over three years) follow-up data of Abivertinib for the treatment of Advanced Non-Small Cell Lung Cancer.

•

In August 2022, we received China National Medical Products Administration clearance to initiate a Phase 1 study of our oral main viral protease (Mpro) inhibitor, STI-1558, in subjects with COVID-19 in a multiple ascending doses study in China.

•

In July 2022, we received FDA clearance to initiate a Phase 1 study of our oral main viral protease (Mpro) inhibitor, STI-1558, in patients with impaired renal and hepatic function.

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. For further information, refer to Part, II, Item 1A of this Quarterly Report on Form 10-Q and “Part I –Item 1A - Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.

Results of Operations

Comparison of the three and nine months ended September 30, 2022 and 2021

Revenues.


Dollars in thousands	Three Months Ended September 30,				Increase (decrease)
Sorrento Therapeutics segment	2022		2021		$			%
Product revenues	$	2,273	$	37	$	2,236		6043%
Service revenues		3,750		4,500		(750	)	(17%)
Total revenues	$	6,023	$	4,537	$	1,486		33%
Scilex segment
Product revenues	$	11,377	$	7,525	$	3,852		51%
Total revenues	$	17,400	$	12,062	$	5,338		44%


Dollars in thousands	Nine Months Ended September 30,				Increase (decrease)
Sorrento Therapeutics segment	2022		2021		$			%
Product revenues	$	6,116	$	126	$	5,990		4754%
Service revenues		15,014		17,389		(2,375	)	(14%)
Total revenues	$	21,130	$	17,515	$	3,615		21%
Scilex segment
Product revenues	$	26,115	$	22,313	$	3,802		17%
Total revenues	$	47,245	$	39,828	$	7,417		19%

The increase in revenues in our Sorrento Therapeutics segment (“Sorrento segment”) during the three months ended September 30, 2022 was attributed to $0.7 million in COVISTIX™ product sales, $1.5 million in other product sales and $1.0 million in other service revenues. Contract manufacturing service revenues were $1.8 million lower compared to the same period of the prior year.

The increase in revenues in our Sorrento segment during the nine months ended September 30, 2022 was attributed to $3.9 million in COVISTIX™ product sales, $2.1 million in other product sales, $1.8 million in other service revenues associated with Celularity Inc. (“Celularity”) and $1.0 million in other service revenues. Contract manufacturing service revenues were $5.2 million lower compared to the same period of the prior year.

For the three and nine months ended September 30, 2022, the increase in revenues in our Scilex segment were driven by higher sales volumes of ZTlido compared to the same periods in the prior year.

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Cost of Revenues.


	Three Months Ended September 30,				Increase
Dollars in thousands	2022		2021		$		%
Sorrento segment	$	4,658	$	2,215		2,443	110%
Scilex segment		3,611		1,172		2,439	208%
Total cost of revenues	$	8,269	$	3,387	$	4,882	144%


	Nine Months Ended September 30,				Increase
Dollars in thousands	2022		2021		$		%
Sorrento segment	$	13,447	$	7,345	$	6,102	83%
Scilex segment		6,284		2,549		3,735	147%
Total cost of revenues	$	19,731	$	9,894	$	9,837	99%

Cost of revenues 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.

For the three months ended September 30, 2022, the increase in cost of revenues in our Sorrento segment was driven by approximately $2.6 million in inventory reserve associated with COVISTIX™ product as compared to the same period of the prior year.

For the nine months ended September 30, 2022, the increase in cost of revenues in our Sorrento segment was driven by a higher share of product sales and approximately $3.7 million in inventory reserve associated with COVISTIX™ product as compared to the same period of the prior year.

For the three and nine months ended September 30, 2022, the increases 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 same period of the prior year.

Research and Development (“R&D”) Expenses.


	Three Months Ended September 30,				Increase (decrease)
Dollars in thousands	2022		2021		$			%
Sorrento segment	$	66,752	$	47,554	$	19,198		40%
Scilex segment		1,237		1,894		(657	)	(35%)
Total research and development expenses	$	67,989	$	49,448	$	18,541		37%


	Nine Months Ended September 30,				Increase (decrease)
Dollars in thousands	2022		2021		$			%
Sorrento segment	$	173,724	$	140,756	$	32,968		23%
Scilex segment		6,458		7,031		(573	)	(8%)
Total research and development expenses	$	180,182	$	147,787	$	32,395		22%

R&D expenses include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our COVID-19, SP-102, SP-103, RTX, oncolytic virus, 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. We track external development costs by program; however, we do not allocate laboratory supplies, 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 three months ended September 30, 2022 and 2021:

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	Three months ended September 30,				Increase (decrease)
Type of expense	2022		2021		$			%
Third party clinical and pre-clinical R&D expenses by program
Abivertinib	$	4,387	$	1,250	$	3,137			251	%
Resiniferatoxin (“RTX”)		5,744		2,463		3,281			133	%
COVID-19 therapies and diagnostics, excluding Abivertinib		5,307		6,553		(1,246	)		-19	%
Immuno-oncology and other programs		12,925		6,159		6,766			110	%
Total third party clinical and pre-clinical R&D expenses by program		28,363		16,425		11,938			73	%
Laboratory supplies and R&D materials expenses		7,047		4,765		2,282			48	%
Salary, consulting and other personnel costs		17,127		13,833		3,294			24	%
Non-cash share-based compensation expenses		3,014		3,663		(649	)		-18	%
Facility, depreciation and other expenses		11,201		8,868		2,333			26	%
Total research and development expenses - Sorrento segment		66,752		47,554		19,198			40	%
Total research and development expenses - Scilex segment		1,237		1,894		(657	)		-35	%
Total research and development expenses	$	67,989	$	49,448	$	18,541			37	%

The following table summarizes our research and development expenses, for the nine months ended September 30, 2022 and 2021:


	Nine months ended September 30,				Increase (decrease)
Type of expense	2022		2021		$			%
Third party clinical and pre-clinical R&D expenses by program
Abivertinib	$	8,769	$	1,682	$	7,087			421	%
Resiniferatoxin (“RTX”)		7,876		6,802		1,074			16	%
COVID-19 therapies and diagnostics, excluding Abivertinib		19,348		30,673		(11,325	)		-37	%
Immuno-oncology and other programs		27,500		18,255		9,245			51	%
Total third party clinical and pre-clinical R&D expenses by program		63,493		57,412		6,081			11	%
Laboratory supplies and R&D materials expenses		19,327		14,766		4,561			31	%
Salary, consulting and other personnel costs		47,948		32,725		15,223			47	%
Non-cash share-based compensation expenses		9,150		11,549		(2,399	)		-21	%
Facility, depreciation and other expenses		33,806		24,304		9,502			39	%
Total research and development expenses - Sorrento segment		173,724		140,756		32,968			23	%
Total research and development expenses - Scilex segment		6,458		7,031		(573	)		-8	%
Total research and development expenses	$	180,182	$	147,787	$	32,395			22	%

Third party clinical and pre-clinical R&D expenses for our Sorrento 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.

Acquired In-process Research and Development (“IPR&D”) Expenses. Acquired IPR&D 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 and $0.9 million related to investments in various licensing arrangements entered into during the period.

Acquired IPR&D expenses during the nine months ended September 30, 2022 totaled $12.6 million, which included $11.7 million related to our acquisition of Virex.

Acquired IPR&D expenses during the nine months ended September 30, 2021 totaled $23.6 million and related to an asset purchase agreement entered into with Aardvark Therapeutics, Inc. (“Aardvark”) whereby we acquired Aardvark’s Delayed Burst Release Low Dose Naltrexone (DBR-LDN) asset and intellectual property rights during the period and the entry into an exclusive license agreement with Icahn School of Medicine at Mount Sinai (“Mount Sinai”) whereby we acquired a worldwide, exclusive, sublicensable license to certain of Mount Sinai’s patents and monoclonal antibodies as well as certain related technical information during the period. Additionally, $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period and $0.9 million related to investments in various licensing arrangements entered into during the period.

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Selling, General and Administrative (“SG&A”) Expenses.


	Three Months Ended September 30,				Increase (decrease)
Dollars in thousands	2022		2021		$			%
Sorrento segment	$	34,039	$	36,806	$	(2,767	)	(8%)
Scilex segment		16,120		11,683		4,437		38%
Total sales, general and administrative expenses	$	50,159	$	48,489	$	1,670		3%


	Nine Months Ended September 30,				Increase (decrease)
Dollars in thousands	2022		2021		$			%
Sorrento segment	$	100,786	$	106,184	$	(5,398	)	(5%)
Scilex segment		42,087		36,092		5,995		17%
Total sales, general and administrative expenses	$	142,873	$	142,276	$	597		0%

SG&A expenses relate to 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 segment during the three months ended September 30, 2022 was attributed to lower professional fees, including a decrease in legal and consulting costs by approximately $5.3 million and lower stock-based compensation expenses of $1.8 million. Personnel costs and infrastructure-related expenses increased by $3.1 million and $1.2 million, respectively, compared to the same period of the prior year.

The decrease in SG&A expenses in our Sorrento segment during the nine months ended September 30, 2022 was attributed to lower professional fees, including a decrease in legal and consulting costs, by approximately $10.2 million and lower stock-based compensation expenses of $7.5 million. Personnel costs and infrastructure-related expenses increased by $10.0 million and $2.2 million, respectively, compared to the same period of the prior year.

For the three and nine months ended September 30, 2022, the increases in SG&A expenses in our Scilex segment were attributed to increases in legal expenses compared to the same periods of the prior year.

Increase (decrease) on contingent consideration. Gain on contingent consideration for the three months ended September 30, 2022 was $0.7 million and was attributed to the decrease in fair value of the contingent consideration associated with our acquisition of ACEA.

Gain on contingent consideration for the nine months ended September 30, 2022 was $67.1 million and was attributed to the decrease in fair value of the contingent consideration associated with our acquisition of ACEA 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.

Loss on impairment of intangible assets. Loss on impairment of assets for the nine months ended September 30, 2022 was $90.8 million and was attributed to the impairment of IPR&D assets acquired from ACEA in 2021, 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.

Gain (loss) on Derivative Liabilities. Gain on derivative liabilities for the three months ended September 30, 2022 was $0.5 million compared to a loss on derivative liabilities of $1.8 million for the three months ended September 30, 2021 and was attributed to the change in fair value of the derivatives ascribed to those certain senior secured notes due 2026 issued by Scilex Pharma in September 2018 (the “Scilex Notes”) 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 derivative liabilities for the nine months ended September 30, 2022 was $5.3 million compared to $0.1 million for the nine months ended September 30, 2021 and was also attributed to the change in fair value of the derivatives ascribed to the Scilex Notes 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 for the three and nine months ended September 30, 2022 was $16.1 million and $43.0 million, respectively, and reflects unrealized losses related to the change in fair value of our shares of Celularity.

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During the three months ended September 30, 2021, we recorded $6.4 million of realized losses from the sale of our shares of ImmunityBio, Inc. and $7.7 million in unrealized losses related to the change in fair value of our shares of Celularity. We also recorded approximately $0.7 million in unrealized gains related to other investments during the period.

During the nine months ended September 30, 2021, we recorded $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. We also recorded approximately $0.7 million in unrealized gains related to other investments during the period.

Gain (loss) on debt extinguishment, net. During the three months ended September 30, 2022, we recorded a gain on debt extinguishment of $33.4 million related to the repayment of the outstanding principal on the Scilex Notes as described below.

During the nine months ended September 30, 2022, we recorded a net gain on debt extinguishment of $27.7 million, which was attributed to $28.6 million related to repurchases of the aggregate principal amount of the Scilex Notes as described below and a loss of debt extinguishment of $0.9 million attributed to repayments made on the Bridge Loan during the nine months ended September 30, 2022.

Loss on debt extinguishment during 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.

Interest Expense, net. Interest expense, net for the three months ended September 30, 2022 and 2021 was $0.8 million and $2.0 million, respectively. The decrease resulted from the Scilex Notes as a result of the repurchases of aggregate principal as further described in Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Interest expense, net for the nine months ended September 30, 2022 and 2021 was $6.4 million and $7.3 million, respectively. The decrease in interest expense was attributed to the Scilex Notes as a result of the repurchases of aggregate principal. We recorded an increase in interest expense related to the ACEA significant debt arrangements and the Bridge Loan as discussed below.

Income Tax Expense/Benefit. Income tax benefit for the three months ended September 30, 2022 was $1.0 million as compared to income tax expense of $0.4 million for the three months ended September 30, 2021. The decrease in income tax expense was primarily attributable to a one-time income tax payment in the prior year, offset by the impact of our valuation allowance on earnings in the current period.

Income Tax Expense / Benefit. Income tax benefit for the nine months ended September 30, 2022 was $0.6 million as compared to $0.5 million for the nine months ended September 30, 2021. The increase in income tax benefit was primarily attributable to the impact of our valuation allowance against current net loss and a decrease in shortfalls on stock-based compensation benefits, offset by a one-time payment in the prior year.

Net Loss. Net loss for the three months ended September 30, 2022 and 2021 was $90.6 million and $120.0 million, respectively. Net loss for the nine months ended September 30, 2022 and 2021 was $350.6 million and $284.3 million, respectively.

Liquidity and Capital Resources

As of September 30, 2022, we had $70.7 million in cash and cash equivalents. We have principally financed our operations through the liquidation of our short-term investments, underwritten public offerings, at-the-market facilities 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 the liquidation of our marketable investments, 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,

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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, (iv) incur our share of joint venture and collaboration costs, and (v) expand our business through the acquisition of new businesses, technologies and license agreements.

Marketable Investments

As of September 30, 2022, we owned 20,422,124 shares of Class A Common Stock of Celularity (Nasdaq: CELU).

Equity Offerings

In December 2021, we amended the amended and restated sales agreement (as amended, the “ATM Sales Agreement”) whereby we may issue and sell 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, through Cantor Fitzgerald & Co., B. Riley Securities, Inc. and H.C. Wainwright & Co., LLC, as sales agents, to increase the amount of shares of our common stock that we may sell thereunder by an additional $5.0 billion in shares of our common stock. During the nine months ended September 30, 2022, we sold an aggregate of 151,148,373 shares of our common stock pursuant to the ATM Sales Agreement for aggregate net proceeds to us of approximately $340.0 million. Subsequent to September 30, 2022 and through November 4, 2022, we sold an aggregate of 3,589,340 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to us of approximately $5.5 million.

Scilex Notes

On June 2, 2022, we and Scilex Pharma entered into a Consent Under and Amendment No. 4 to Indenture (the “Indenture Amendment”) with U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee (the “Trustee”) and collateral agent (the “Agent”), and the beneficial owners of those certain senior secured notes due 2026 issued by Scilex Pharma in September 2018 (the “Scilex Notes”) listed on the signature pages thereto (the “Holders”), which amended that certain Indenture, dated September 7, 2018, by and among Scilex Pharma, us, the Trustee and the Agent, as amended (the “Indenture”).

Pursuant to the Indenture Amendment, (1) on June 3, 2022, Scilex Pharma repurchased approximately $41.4 million of the aggregate principal amount of the outstanding Scilex Notes at 100% of the principal amount thereof, (2) the Holders agreed that Scilex Pharma can repurchase the remaining principal amount of the Scilex Notes at any time on or before September 30, 2022 for $41.4 million (subject to reduction for any quarterly royalty payments) and upon such repurchase the Holders will forgive and discharge $28.0 million of the aggregate principal amount of the Scilex Notes, (3) the minimum cash requirement under the Indenture was reduced to $5.0 million in aggregate unrestricted cash equivalents at the end of each calendar month, and (4) the maximum aggregate principal amount of that certain Intercompany Promissory Note issued by Scilex Pharma to us on October 5, 2018 was increased from up to $25.0 million to up to $50.0 million.

In August 2022, we made principal payments towards the outstanding Scilex Notes totaling $1.8 million. 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.

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 will mature 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. The Company repaid $10.0 million of the September Bridge Loan in October 2022.

On February 16, 2022, we entered into a bridge loan pursuant to which we had borrowed $45.0 million. As of September 30, 2022, the Bridge Loan has been fully repaid.

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ACEA Significant Debt Arrangements

The outstanding principal amount under ACEA significant debt arrangements assumed in connection with our 2021 acquisition of ACEA was $25.9 million as of September 30, 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.

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. 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


	September 30, 2022			September 30, 2021
	(in thousands)
Net cash provided by (used by)
Operating activities	$	(225,519	)	$	(209,684	)
Investing activities		(23,484	)		82,052
Financing activities		286,638			110,475

Use of Cash

Cash Flows from Operating Activities. 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 $23.5 million, of which $6.5 million was related to our acquisition of Virex consideration paid in cash, approximately $9.1 million was primarily attributed to expenditures on laboratory equipment, and $7.8 million related to other acquisitions and investments.

Cash Flows from Financing Activities. During the nine months ended September 30, 2022, we received $340.0 million from sales of shares of our common stock pursuant to the ATM Sales Agreement, proceeds from short-term debt of $98.6 million and proceeds of $0.8 million from common stock option exercises. We repaid an aggregate of $106.0 million of the principal of the Scilex Notes, of which $84.8 million was attributed to principal included within financing activities and $21.2 million was attributed to effective interest included in operating activities. We also repaid $68.0 million in other short-term debt.

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, 2021, filed with the SEC on March 11, 2022, and there have been no material changes during the three months ended September 30, 2022.

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Material Cash Requirements

As of September 30, 2022, there were no material changes outside of the ordinary course of business, in our outstanding material contractual obligations from those disclosed under the heading “Material Cash Requirements” 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, 2021, filed with the SEC on March 11, 2022.

New Accounting Pronouncements

None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk during the three months ended September 30, 2022 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022, other than as described below.

Concentration Risk. During the fiscal years ended December 31, 2021, 2020 and 2019 and the three months ended March 31, 2022, Cardinal Health 105, LLC (“Cardinal Health”), which was the third-party logistics distribution provider for Scilex Pharma, was the sole customer of Scilex Pharma and sales to Cardinal Health represented 100% of the net revenue of Scilex Pharma. We obtain our commercial supply of ZTlido and our clinical supply of SP-103 exclusively from Oishi Koseido Co., Ltd. and ITOCHU CHEMICAL FRONTIER Corporation in Japan. This exposes us to concentration of customer and supplier risk. We monitor the financial condition of our customers, limit our credit exposure by setting credit limits, and have not experienced any credit losses for the years ended December 31, 2021, 2020 and 2019 or the three or nine months ended September 30, 2022. As we continue to expand the commercialization of ZTlido, we are not limited to the current customer and have elected to expand our distribution network. On April 2, 2022, Scilex Holding announced the expansion of its direct distribution network to national and regional wholesalers and pharmacies. Cardinal Health will continue to provide traditional third-party logistics functions for Scilex Pharma but was no longer the sole customer of Scilex Pharma during the three or nine months ended September 30, 2022.

Beginning on April 1, 2022, Scilex Pharma began selling ZTlido directly to three large distributors, McKesson Corporation, Cardinal Health, and AmerisourceBergen Corporation, as well as to numerous pharmacies. If we are unable to maintain a favorable relationship with Cardinal Health (or with any of its other two distributors), we expect that our revenue would decline and our business would be harmed as a result. We may be unable to control the timing of the delivery of ZTlido to distributors, and any financial uncertainty or loss of key logistic employees of Cardinal Health, as our only third-party logistics provider, may negatively impact our sales.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such terms are defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance. As a result, management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, management has concluded that as of September 30, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level. However, we believe the consolidated financial statements included in this Form 10-Q for the three and nine months ended September 30, 2022 present, in all material respects, our financial position, results of operations, comprehensive loss and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.

As described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022, as a result of our former Chief Financial Officer`s passing in early 2022 as well as other considerations, management concluded that we did not employ sufficient accounting resources with appropriate experience and technical expertise to effectively execute controls over certain judgmental accounting areas. As a result, we identified certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities and leases did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represents a material weakness in our internal control over financial reporting as of December 31, 2021.

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To remediate the material weakness described above and to prevent similar deficiencies in the future, we have been implementing additional controls and procedures including:

• engaging additional independent third-party technical consultants to assist in performing the accounting analysis of complex transactions in the above mentioned accounting areas;

• recruiting and employing personnel with appropriate experience and technical expertise to enhance management’s review significant activities in the above-mentioned accounting areas; and

• conducting additional training for staff involved in the transactions in the above-mentioned accounting areas.

Our management will continue to improve the respective process and controls over the accounting areas affected by the identified material weakness. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q. Except for the implementation of additional controls and procedures as described above, there has been no change to our internal control over financial reporting during our most recent fiscal quarter that our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The information under the caption “Litigation” set forth in Note 10 in the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022, in Part I –Item 1A, Risk Factors, describes important risk factors that could cause our business, financial condition, results of operations and growth prospects to differ materially from those indicated or suggested by forward-looking statements made in this Quarterly Report on Form 10-Q or presented elsewhere by management from time to time. Except as set forth below, there have been no material changes in our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.

Risks Related to Our Financial Position and Capital Requirements

We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.

As of September 30, 2022 and December 31, 2021, we had an accumulated deficit of $1,735.8 million and $1,386.6 million, respectively. We continue to incur significant research and development and other expenses related to our ongoing operations. We have incurred operating losses since our inception, expect to continue to incur significant operating losses for the foreseeable future, and we expect these losses to increase as we: (i) advance RTX, STI-6129 (anti-CD38 ADC), STI-1492 (anti-CD38 DAR-T), STI-6643 (anti-CD47 antibody), SP-103, SEMDEXATM and our other product candidates, including our COVID-19 related product candidates, STI-2099 (COVIDROPS), STI-9167 (COVISHIELD), STI-8282 (COVI-MSC) and STI-5656 (Abivertinib), into further clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) conduct further studies for our preclinical COVID-19 related product candidates to advance to clinical trials and seek regulatory approval; (iii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iv) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, (vi) invest in our joint ventures, collaborations or other third party agreements, (vii) incur expenses in conjunction with defending and enforcing our rights in various litigation matters, (viii) expand our corporate, development and manufacturing infrastructure, and (ix) support our subsidiaries, including Bioserv Corporation, Levena Biopharma US Inc., Scilex Holding Company (“Scilex Holding”) and SmartPharm Therapeutics, Inc., in their clinical trial, development and commercialization efforts. As such, we are subject to all risks incidental to the development of new biopharmaceutical products and related companion diagnostics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

Risks Related to our Business and Industry

We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.

We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. For example, on April 3, 2019, we filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from our company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. As an additional example, on May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action against us, our President, Chief Executive Officer and Chairman of the Board of Directors, Henry Ji, Ph.D., and our SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D., alleging that we, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection. A second putative federal securities class action was filed in the U.S. District Court for the Southern District of California against the same defendants alleging the same claims and seeking the same relief. In general, claims made by or against us in disputes and other legal or regulatory proceedings can be expensive and time consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. While we intend to pursue any claims made by us, or defend against any claims brought against us, vigorously,

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we cannot predict the outcomes of such claims. Any failure to prevail in any claims made by us or any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations.

Price controls may be imposed, which may adversely affect our future profitability.

In some countries, including member states of the European Union (the “EU”), the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take a significant amount of time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various EU member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices, and in certain instances render commercialization in certain markets infeasible or disadvantageous from a financial perspective. In some countries, we or our collaborators may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product and/or our product candidates to other available products in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third party payors or government authorities may lead to further pressure on the prices or reimbursement levels. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, the commercial launch of our product and/or product candidates could be delayed, possibly for lengthy periods of time, we or our collaborators may not launch at all in a particular country, we may not be able to recoup our investment in one or more product candidates, and there could be a material adverse effect on our business.

Recently, there has been considerable public and government scrutiny in the United States of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. There have also been several recent state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices or price increases. Adoption of new legislation at the federal or state level could affect demand for, or pricing of, our product candidates, if approved, and could diminish our ability to establish what we believe is a fair price for our products, ultimately diminishing our revenue for our products if they are approved.

In addition, on August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, includes policies that are designed to have a direct impact on drug prices and reduce drug spending by the federal government, which shall take effect in 2023. Under the Inflation Reduction Act of 2022, Congress authorized Medicare beginning in 2026 to negotiate lower prices for certain costly single-source drug and biologic products that do not have competing generics or biosimilars. This provision is limited in terms of the number of pharmaceuticals whose prices can be negotiated in any given year and it only applies to drug products that have been approved for at least 9 years and biologics that have been licensed for 13 years. Drugs and biologics that have been approved for a single rare disease or condition are categorically excluded from price negotiation. Further, the new legislation provides that if pharmaceutical companies raise prices in Medicare faster than the rate of inflation, they must pay rebates back to the government for the difference. The new law also caps Medicare out-of-pocket drug costs at an estimated $4,000 a year in 2024 and, thereafter beginning in 2025, at $2,000 a year.

Our plan to complete the transaction contemplated by the business combination agreement between Scilex Holding Company and Vickers Vantage Corp. I is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all and may not achieve the intended benefits, and will involve significant time, expense and management attention, any of which could negatively impact our businesses, financial condition and results of operations.

While we have previously announced that our majority owned subsidiary, Scilex Holding Company, entered into an agreement and plan of merger (the “Business Combination Agreement”) with Vickers Vantage Corp. I, a Cayman Islands exempted company (“Vickers”) and Vantage Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Vickers, there is no assurance that the transaction will be consummated. If the transactions contemplated by the Business Combination Agreement are not completed on favorable terms or at all, or during the prescribed time period set forth in the Business Combination Agreement, we may experience negative reactions from the financial markets and from our stockholders. Moreover, even if the business combination is ultimately completed, there is no assurance that we will realize the intended benefits from such transaction. Further, we will be required to devote significant management and employee attention and resources to matters relating to the business combination. These matters have the potential to disrupt us from conducting business operations or pursuing other business strategies and could adversely affect our business, financial condition, results of operations and cash flows.

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Impairment charges pertaining to goodwill, identifiable intangible assets or other long-lived assets from our mergers and acquisitions could have an adverse impact on our financial condition and results of operations.

The total purchase price pertaining to our acquisitions in recent years have been allocated to net tangible assets, identifiable intangible assets, in-process research and development and goodwill. We evaluate goodwill and indefinite-lived intangible assets for impairment annually in our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. We evaluate finite-lived intangible assets and long-lived assets for impairment if events or changes in circumstances indicate that the carrying value of the long-lived asset may not be recoverable. The assessment of impairment involves significant judgment and projections about future performance.

Future declines in the results of our acquisitions and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the risk that we may be required to perform another goodwill impairment analysis, which could result in an impairment of up to the entire balance of our goodwill based on the quantitative assessment performed.

Moreover, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets become impaired, we will be required to incur material charges relating to the impairment. For example, in June 2022, we decided to put on hold for future evaluation the development of Abivertinib, which was acquired from ACEA Therapeutics, Inc. in 2021, for the treatment of hospitalized COVID-19 patients, which resulted in us determining that approximately $90.8 million associated with the acquired in-process research and development assets had been impaired and recorded within the loss on impairment of intangible assets in our consolidated statement of operations for the three months ended June 30, 2022. See Note 6 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. Any other impairment charges could have a material adverse impact on our results of operations and the market value of our common stock.

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Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

There is an increasing focus from certain investors, employees, regulators and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance (“ESG”) factors. Some investors and investor advocacy groups may use these factors to guide investment strategies and, in some cases, investors may choose not to invest in our company if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance, and a variety of organizations currently measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. Investors, particularly institutional investors, use these ratings to benchmark companies against their peers and if we are perceived as lagging with respect to ESG initiatives, certain investors may engage with us to improve ESG disclosures or performance and may also make voting decisions, or take other actions, to hold us and our board of directors accountable. In addition, the criteria by which our corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. In addition, the SEC has announced proposed rules that, among other matters, will establish a framework for reporting of climate-related risks. To the extent the proposed rules impose additional reporting obligations, we could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege our existing climate disclosures are misleading or deficient.

We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, stockholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third-party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation and on our business, share price, financial condition, or results of operations, including the sustainability of our business over time.

The market opportunity for our products and product candidates or any we develop may be smaller than we estimate.

The potential market opportunity for our products and product candidates is difficult to precisely estimate. Our estimates of the potential market opportunity for our products and product candidates include several key assumptions of the current market size and current pricing for commercially available products and are based on industry and market data obtained from industry publications, studies conducted by us, our industry knowledge, third-party research reports and other surveys. While we believe our estimates are reasonable and reliable, they may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of diseases and disorders. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for any product or product candidate we develop may be limited or may not be amenable to treatment with such product candidate, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business.

Unstable market and economic conditions, including any that may be created by the conflict between Russia and Ukraine, may have serious adverse consequences on our business and financial condition.

Our business, financial condition and results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. For example, the COVID-19 pandemic resulted in businesses suspending or terminating global operations and travel, self-imposed or government-mandated quarantines, and an overall slowdown of economic activity in many areas. In addition, U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine, and the adoption of comprehensive sanctions in response thereto by, among others, the EU, the U.S., and the UK, which sanctions restrict a wide range of trade and financial dealings with Russia and Russian persons, as well as certain regions in Ukraine. A severe or prolonged economic downturn could result in a variety of risks to our business, including our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, service providers, manufacturers or other partners and there is a risk that one or more would not survive or be able to meet their commitments to us under such circumstances. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

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Previously enacted state laws in California seek to impose gender and diversity quotas for boards of directors of public companies headquartered in California.

In September 2018, California enacted Senate Bill 826 (“SB 826”), which generally required public companies with principal executive offices in California to have at least two female directors on its board of directors if the company has at least five directors, and at least three female directors on its board of directors if the company has at least six directors. On May 13, 2022, the Los Angeles Superior Court declared SB 826 unconstitutional and, although the California Secretary of State has directed counsel to file an appeal of decision, the State of California is currently precluded from enforcing SB 826.

Additionally, on September 30, 2020, California enacted Assembly Bill 979 (“AB 979”), which generally required public companies with principal executive offices in California to include specified numbers of directors from “underrepresented communities”. A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. By December 31, 2021, each public company with principal executive offices in California was required to have at least one director from an underrepresented community. By December 31, 2022, a public company with more than four but fewer than nine directors would be required to have a minimum of two directors from underrepresented communities, and a public company with nine or more directors would need to have a minimum of three directors from underrepresented communities. On April 1, 2022, the Los Angeles Superior Court declared AB 979 unconstitutional and, although the California Secretary of State has filed a notice of appeal in the case, the State of California is currently precluded from enforcing AB 979.

If the State of California successfully appeals the court decisions regarding SB 826 or AB 979, we cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender or diversity quotas as previously required by SB 826 or AB 979, and our board of directors does not currently satisfy the quota previously required under SB 826 and, as currently constituted, would not satisfy the quota previously required under AB 979 by December 31, 2022. A failure to comply with any such quota requirement could result in fines from the California Secretary of State, and our reputation may be adversely affected.

Risks Related to Ownership of Our Common Stock

The market price of our common stock may fluctuate significantly, and investors in our common stock may lose all or a part of their investment.

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The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. For example, from January 3, 2022 to October 31, 2022, our closing stock price ranged from $1.24 to $4.90 per share. The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:

• actual or anticipated adverse results or delays in our clinical trials;

• our failure to commercialize our product candidates, if approved;

• unanticipated serious safety concerns related to the use of any of our product candidates;

• adverse regulatory decisions;

• changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals;

• legal disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our product candidates, government investigations and the results of any proceedings or lawsuits, including, but not limited to, patent or stockholder litigation;

• our decision to initiate a clinical trial, not initiate a clinical trial or to terminate an existing clinical trial;

• our dependence on third parties, including CROs;

• announcements of the introduction of new products by our competitors;

• market conditions in the pharmaceutical and biotechnology sectors;

• announcements concerning product development results or intellectual property rights of others;

• future issuances of common stock or other securities;

• the addition or departure of key personnel;

• failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;

• actual or anticipated variations in quarterly operating results;

• our failure to meet or exceed the estimates and projections of the investment community;

• overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies;

• conditions or trends in the biotechnology and biopharmaceutical industries;

• introduction of new products offered by us or our competitors;

• announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

• issuances of debt or equity securities;

• sales of our common stock by us or our stockholders in the future;

• trading volume of our common stock;

• ineffectiveness of our internal controls;

• publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

• failure to effectively integrate the acquired companies’ operations;

• general political and economic conditions;

• effects of natural or man-made catastrophic events;

• effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic; and

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• other events or factors, many of which are beyond our control.

Further, the equity markets in general have recently experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility of our common stock might worsen if the trading volume of our common stock is low. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our common stock.

Our investors could experience substantial dilution of their investments as a result of subsequent exercises of our outstanding options, including the CEO Performance Award, or the grant of future equity awards by us.

As of September 30, 2022, 75.2 million shares of our common stock were reserved for issuance under our equity incentive plans, of which 21.3 million shares of our common stock were subject to options outstanding at such date at a weighted-average exercise price of $6.06 per share, 6.9 million shares of our common stock were subject to outstanding restricted stock units, 38.9 million shares of our common stock were reserved for issuance pursuant to our 2019 Stock Incentive Plan and 6.7 million shares of our common stock were reserved for issuance pursuant to our 2020 Employee Stock Purchase Plan. In addition, 24,935,882 shares of our common stock are subject to the 10-year CEO performance award granted to Dr. Ji that is tied solely to achieving market capitalization milestones and has an exercise price of $17.30 per share. To the extent outstanding options are exercised, our existing stockholders may incur dilution.

We rely on equity awards to motivate current employees and to attract new employees. The grant of future equity awards by us to our employees and other service providers may further dilute our stockholders.

We have identified a material weakness in our internal control over financial reporting, and our financial controls and procedures may not in the future be sufficient to ensure timely and reliable reporting of financial information, which could, if not remediated, result in a material misstatement in our financial statements and could adversely affect our future results of operations, our stock price, and our ability to raise capital.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

As previously disclosed on our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2022, our former Chief Financial Officer passed away unexpectedly on January 6, 2022. Due in large part to the unexpected passing of our former Chief Financial Officer, our management has identified that we did not employ sufficient accounting resources with appropriate experience and technical expertise to effectively execute controls over certain judgmental accounting areas. As a result, certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities and leases did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represented a material weakness in our internal control over financial reporting as of December 31, 2021. The material weakness did not result in a restatement of previously issued annual consolidated financial statements or condensed interim consolidated financial statements.

As a result of the material weakness, we are in the process of implementing remediation measures including, but not limited to, (1) engaging additional independent third-party technical consultants to assist in performing the accounting analysis of complex transactions in the above mentioned accounting areas; (2) recruiting and employing personnel with appropriate experience and technical expertise to enhance management’s review significant activities in the above-mentioned accounting areas; and (3) conducting additional training for staff involved in the transactions in the above-mentioned accounting areas. We believe that our remediation measures, if effectively implemented, will provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). We cannot assure you that the measures we have taken to date or any measures we may take in response to the material weakness in the future will be sufficient to remediate such material weakness or to avoid potential future material weaknesses. Any failure to implement these improvements to our internal control over financial reporting would result in a continued material weakness in our internal control and could impact our ability to produce reliable financial reports, effectively manage the company or prevent fraud, and could potentially harm our business and our performance. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate. If we experience future material weaknesses or deficiencies in internal controls and we are unable to correct them in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC, will be adversely affected. Any such failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

EXHIBIT INDEX


Exhibit No.		Description

2.1*^		Agreement and Plan of Merger, dated January 14, 2022, by and among Sorrento Therapeutics, Inc., VH Merger Sub I, Inc., VH Merger Sub II, LLC, Virex Health, Inc. and Fortis Advisors LLC, as representative of the stockholders of Virex Health, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 17, 2022).

2.2*		Agreement and Plan of Merger, dated as of March 17, 2022, by and among Vickers Vantage Corp. I, Vantage Merger Sub Inc. and Scilex Holding Company (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 18, 2022).

2.3*		Amendment No. 1 to Agreement and Plan of Merger, dated as of September 12, 2022, by and among Vickers Vantage Corp. I, Vantage Merger Sub Inc. and Scilex Holding Company (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 14, 2022).

3.1		Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2013).

3.2		Certificate of Amendment of the Restated Certificate of Incorporation of Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 1, 2013).

3.3		Amended and Restated Bylaws of Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 15, 2019).

4.1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 23, 2009).

4.2		Voting Agreement, dated as of April 29, 2016, by and between Sorrento Therapeutics, Inc. and Yuhan Corporation (incorporated by reference to Exhibit 4.12 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.3		Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of December 11, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2017).

4.4		Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).

4.5		Registration Rights Agreement, dated June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).

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4.6		Form of Warrant, dated November 7, 2018, issued by Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

4.7		Registration Rights Agreement, dated November 7, 2018, by and among Sorrento Therapeutics, Inc. and the parties identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

4.8		Agreement and Consent, dated November 7, 2018, by and among Sorrento Therapeutics, Inc. and the Warrant Holders party thereto (incorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

4.9		Form of Warrant, dated May 3, 2019, issued by Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 3, 2019).

4.10		Amendment No. 1 to the Registration Rights Agreement, dated as of May 3, 2019, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 3, 2019).

4.11		Form of Series A Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2019).

4.12		Form of Series C Warrant (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2019).

4.13		Form of Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 8, 2019).

4.14		Amendment No. 2 to the Registration Rights Agreement, dated as of December 6, 2019, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 9, 2019).

4.15		Registration Rights Agreement, dated as of March 4, 2021, by and between Sorrento Therapeutics, Inc. and the Icahn School of Medicine at Mount Sinai (incorporated by reference to Exhibit 4.19 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on April 9, 2021).

10.1*		Contribution and Satisfaction of Indebtedness Agreement, dated as of September 12, 2022, by and among Sorrento Therapeutics, Inc., Scilex Holding Company and Scilex Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 14, 2022).

10.2		Stockholder Agreement, dated as of September 12, 2022, by and among Sorrento Therapeutics, Inc. and Vickers Vantage Corp. I (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 14, 2022).

10.3		Amendment No. 1 to Sponsor Support Agreement, dated as of September 12, 2022, by and among Vickers Vantage Corp. I, Scilex Holding Company and each of the Persons set forth on Schedule I attached thereto (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 14, 2022).

10.4†		Bridge Loan Agreement, dated as of September 30, 2022, by and between Sorrento Therapeutics, Inc. and B. Riley Commercial Capital, LLC.

31.1		Certification of Henry Ji, Ph.D., Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

31.2		Certification of Elizabeth Czerepak, Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

32.1†		Certification of Henry Ji, Ph.D., Principal Executive Officer, and Elizabeth Czerepak, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

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101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File, formatted in Inline Extensible Business Reporting Language (iXBRL) (embedded within the Inline XBRL document)

* Non-material schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.

+ Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.

^ Certain identified information has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) information that the Registrant treats as private or confidential. The Registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by the SEC.

# Management contract or compensatory plan.

† Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Sorrento Therapeutics, Inc.

Date:	November 8, 2022	By:	/s/ Henry Ji, Ph.D.
			Henry Ji, Ph.D.
			Chairman of the Board of Directors, Chief Executive Officer, President
			(Principal Executive Officer)




Date:	November 8, 2022	By:	/s/ Elizabeth Czerepak
			Elizabeth Czerepak
			Executive Vice President & Chief Financial Officer
			(Principal Financial Officer)