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SRNE > SEC Filings for SRNE > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for SORRENTO THERAPEUTICS, INC.

Form 10-Q for SORRENTO THERAPEUTICS, INC.


14-Nov-2013

Quarterly Report


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, or 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

We are a biopharmaceutical company engaged in the discovery, acquisition, development and commercialization of proprietary drug therapeutics for addressing significant unmet medical needs in the United States, Europe and additional international markets. Our primary therapeutic focus is oncology but we are also developing therapeutic products for other indications, including inflammation, metabolic disorders, and infectious diseases.

Our proprietary G-MAB® fully-human antibody library platform was designed to facilitate the rapid identification and isolation of highly specific antibody therapeutic product candidates that bind to disease targets appropriate for antibody therapy. Our objective is to leverage our library to develop both First-in-Class, or FIC, and/or Best-in-Class, or BIC, antibody drug candidates that we expect will possess greater efficacy and fewer side effects as compared to existing drugs. Although we intend to retain ownership and control of some product candidates by advancing them further into preclinical development, we will also consider partnerships with pharmaceutical or biopharmaceutical organizations, with the appropriate experience and expertise, in order to balance the risks associated with drug discovery and development and maximize our stockholders' returns. Our partnering objectives include generating revenue through license fees, milestone related development fees and royalties by licensing rights to our development candidates.

Our goal is to deliver innovative, highly effective and safe treatment options to patients throughout the world. By working closely with scientists, doctors, patient organizations and other health care specialists, we are committed to improving the lives of patients and assisting their caregivers in the fight against cancer, inflammatory and autoimmune diseases and other unmet medical needs.

Recent Developments

IgDraSol Transactions, Cynviloq™ and Merger

On July 29, 2013, IgDraSol, Inc., or IgDraSol, received official meeting minutes from an End-of-Phase 2 meeting held on July 23, 2013 for Cynviloq™ (or IG-001) with the U.S. Food and Drug Administration, or FDA. Cynviloq™ (paclitaxel polymeric micelle) is initially under development for the treatment of metastatic breast cancer, or MBC, and non-small cell lung cancer, or NSCLC, in the U.S. The FDA Division of Oncology Products 1 agreed that the data available from: (i) the postmarketing surveillance studies conducted in ex-U.S. territories for MBC and NSCLC, (ii) Phase 1-3 studies for MBC, and (iii) Phase 1-2 studies in NSCLC,

Ovarian, Bladder, and Pancreatic cancers are sufficient to support pursuing the
505(b)(2) Bioequivalence (BE) regulatory submission pathway approach using Abraxane® and Taxol® as the Reference Listed Drugs. Abraxane® is an albumin-bound paclitaxel (nab-paclitaxel) product approved for MBC, NSCLC and pancreatic cancer indications. Taxol® is a cremophor-based paclitaxel product approved for these indications as well as other cancer indications. IgDraSol anticipates filing its BE protocol with the FDA by the end of 2013. Sufficiency of the data for approval will be a review issue after a New Drug Application, or NDA, filing.

On September 9, 2013, we exercised our previously disclosed option to acquire IgDraSol and pursuant to an agreement and plan of merger dated as of such date, we issued 3,006,641 shares of our common stock, to the IgDraSol stockholders. Upon the achievement of a certain regulatory milestone, we will be required to issue an additional 1,306,272 shares of common stock to former IgDraSol stockholders.

In connection with the merger, we appointed (i) Dr. Vuong Trieu, the former Chief Executive Officer of IgDraSol, as our Chief Scientific Officer and (ii) George Uy, the former Chief Commercial Officer of IgDraSol, as our Chief Commercial Officer. In addition, Dr. Trieu and Mr. Jaisim Shah were appointed to our board of directors.

Cynviloq™ is a micellar diblock copolymeric paclitaxel formulation drug product that is currently approved and marketed in several countries, including South Korea for MBC and NSCLC under the trade name Genexol-PM®. IgDraSol obtained exclusive distribution rights for Cynviloq™ in the U.S. and 27 countries of the European Union, or EU, from Samyang Biopharmaceuticals Corporation, a South Korean corporation.


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We entered into an initial services agreement dated March 7, 2013 with IgDraSol, wherein IgDraSol has provided certain product development and technology services related to antibody-based nanotherapeutics. In March 2013, IgDraSol was paid a non-refundable payment of $1,000,000 and the related services were completed prior to May 31, 2013. There are no further obligations under the initial services agreement.

In addition, we entered into an asset purchase agreement with IgDraSol whereby we agreed to purchase all documentation, equipment, information and other know-how related to micellar nanoparticle technology encompassing Tocosol® and related technologies for a purchase price of $1,210,000, which was paid in April 2013, which was recognized as in-process research and development expense. Also in April 2013, we entered into a development services agreement with IgDraSol related to the development of Tocosol® and related technologies. We will pay IgDraSol up to $3,000,000 for services provided.

Agreement and Plan of Merger with Sherrington

On October 9, 2013, the Company and SP Merger Sub, Inc., a wholly owned subsidiary of the Company, Sherrington Pharmaceuticals, Inc. ("Sherrington") and the stockholders of Sherrington (the "Sherrington Holders") entered into an Agreement and Plan of Merger and Reorganization (the "Agreement") pursuant to which the Company issued an aggregate of 200,000 shares of its common stock to the Sherrington Holders (the "Merger Shares") and SP Merger Sub was merged into Sherrington (the "Merger"). Pursuant to the Agreement, 29,350 of the Merger Shares are being held in escrow for any potential indemnification claims. The Company filed a resale registration statement on Form S-3 with the Securities and Exchange Commission on October 31, 2013 to register the Merger Shares.

Underwritten Public Offering and Nasdaq Uplisting

In October 2013, the Company closed an underwritten public offering of 4,150,000 shares, at $7.25 per share, and closed the full exercise of the over-allotment option granted to the representative of the underwriters to purchase an additional 622,500 shares of its common stock, with total gross proceeds of $34.6 million, before underwriting discounts and commissions and other offering expenses payable by us. The common stock began trading on The NASDAQ Capital Market on October 25, 2013 under the symbol "SRNE".

Convertible Promissory Notes

In October 2013, the Company issued an aggregate $1,850,000 principal amount of Notes that bear interest at 7% per annum. Concurrently with the closing of the public offering, such Notes and related accrued interest automatically converted into 256,119 shares of common stock.

Agreement of Merger - Concortis

On November 11, 2013, the Company and Catalyst Merger Sub, Inc., a wholly owned subsidiary of the Company, Concortis Biosystems, Corp. ("Concortis") and Dr. Zhenwei (David) Miao and Gang Chen entered into an Agreement of Merger pursuant to which, at the effective time of the merger, the Company will issue an aggregate of 1,331,978 shares of its common stock to the shareholders of Concortis (the "Concortis Merger Shares"), and Catalyst Merger Sub will merge into Concortis (the "Concortis Merger"). Pursuant to the merger agreement, 15% of the Concortis Merger Shares will be held by the Company for any potential indemnification claims.

In connection with the merger, the Company agreed to appoint Dr. Miao, the former President and Chief Scientific Officer of Concortis, as its Chief Technical Officer. In addition, Dr. Miao and certain other employees of Concortis are to receive annual supplemental cash bonus payments totaling $1,000,000 on December 31 of each of the years ending 2013, 2014, 2015, and 2016.

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 GAAP. The preparation of these consolidated 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 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.

During the quarter ended September 30, 2013, there were no significant changes to the items that we disclosed as our critical accounting policies and estimates in Note 2 to our financial statements for the year ended December 31, 2012 contained in our 2012 Form 10-K, as filed with the SEC.

Results of Operations

The following describes certain line items set forth in our statements of operations.


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Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenues. Revenues were $83,791 for the three months ended September 30, 2013, as compared to $134,506 for the three months ended September 30, 2012. The decrease is due to lower grant revenue of $50,715 due to decreased grant activities under one active grant award during 2013 as compared to two active grants during 2012.

In May 2010, we were awarded an Advanced Technology Small Business Technology Transfer Research grant to support our program to generate and develop novel antibody therapeutics and vaccines to combat Staph infections, including Methicillin-resistant Staph, or the Staph Grant award. The project period for this grant covered a two-year period which commenced in June 2010, and as of June 30, 2012, the entire Phase 1 grant of $600,000 had been awarded and recognized in grant revenues.

In July 2011, we were awarded a second Advanced Technology Small Business Technology Transfer Research grant to support our program to generate and develop antibody therapeutics and vaccines to combat C. difficile infections, or the C. difficile Grant award. The project period for the C. difficile Grant award covers a two-year period which commenced in June 2011, and as of June 30, 2013, the entire Phase 1 grant of $600,000 had been awarded. From July 2011 through September 30, 2013, $592,717 of the C. difficile Grant award had been recorded in grant revenues.

In June 2012, we were awarded a third Advanced Technology Small Business Technology Transfer Research grant, with an initial award of $300,000, to support our program to generate and develop novel human antibody therapeutics to combat Staph infections, including Methicillin-resistant Staph, or the Staph Grant II award. The project period for the phase I grant covers a two-year period which commenced in June 2012, with a potential annual award of $300,000 per year. From June 2012 through September 30, 2013, $344,328 of the Staph Grant II award had been recorded in grant revenues.

We had no other revenue during the three months ended September 30, 2013 and 2012. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the unpredictability of the timing and amount of grant awards, research and development reimbursements and other payments received under our strategic collaborations.

Research and Development Expenses. Research and development expenses for the three months ended September 30, 2013 and 2012 were $2,082,252 and $950,823, respectively. Research and development expenses include the costs to identify, isolate and advance human antibody drug candidates derived from our libraries, preclinical testing expenses, costs incurred under the IgDraSol initial and development services agreements, and the expenses associated with fulfilling our development obligations related to the Staph and C. difficile Grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel -related expenses, stock-based compensation expense, laboratory supplies, consulting costs and other expenses. The increase of $1,131,429 is primarily attributable to costs incurred under the initial and development services agreements with IgDraSol, as well as higher salary and lab supply costs incurred in connection with our expanded research and development activities. We expect research and development expenses to increase in absolute dollars as we:
(i) advance our CynviloqTM asset into a registration trial (a single bioequivalence study) and pursue other potential indications, including expenses incurred under agreements with CROs and investigative sites that conduct their clinical trials, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to advance a number of potential drug candidates into preclinical development activities, (ii) acquire Sherrington and advance its pain drug into clinical trials, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates, (iv) acquire Concortis, and (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of the Company's programs.

We evaluate our collaborative agreements for proper income statement classification based on the nature of the underlying activity. If payments to our collaborative partners are not within the scope of other authoritative accounting literature, the statement of operations classification for these payments is based on a reasonable, rational analogy to authoritative accounting literature that is applied in a consistent manner. Amounts due to our collaborative partners related to development activities are reflected as a research and development expense.

Acquired In-Process Research and Development Expenses. Acquired research and development expenses for the three months ended September 30, 2013 and 2012 was $0.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2013 and 2012 were $1,114,621 and $427,030, respectively. General and administrative expenses consist primarily of costs incurred under the IgDraSol initial and development services agreements, salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation, professional fees, infrastructure expenses, legal and accounting, and other general corporate expenses. The increase of $687,591 is primarily attributable to increases in costs incurred under the initial and development services agreement with IgDraSol, stock-based compensation, salaries and consulting expenses with the addition of our full time Chief Financial Officer and part-time Chief Business Officer in the second half of 2012, and higher legal and compliance costs associated with our public reporting obligations. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, compliance with our public reporting obligations, (ii) assume all of the costs associated with the merger with IgDraSol and IgDraSol's ongoing operating expenses, and (iii) incur costs related to the Sherrington and Concortis mergers and integrate their operations.


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Intangibles Amortization. Intangibles amortization for the three months ended September 30, 2013 and 2012 was $193,755 and $0, respectively. Our amortization expense is higher due to the IgDraSol option agreement and acquisition in September 2013 and the entering into of the assignment agreement in January 2013.

Interest Income and Interest Expense. Interest income and interest expense for the three months ended September 30, 2013 and 2012 was nominal. We expect interest expense to increase in absolute dollars as we incur incremental costs associated with the loan and security agreement entered into in September 2013.

Net Loss. Net loss for the three months ended September 30, 2013 and 2012 was $3,356,445 and $1,241,229, respectively. The increase in net loss is mainly attributable to the expanded general and administrative and research and development activities, including the costs associated with the IgDraSol Transactions and the IgDraSol and Sherrington mergers.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended 30, 2012

Revenues. Revenues were $359,451 for the nine months ended September 30, 2013, as compared to $461,790 for the nine months ended September 30, 2012. The decrease is due to lower grant revenue of $102,339 due to decreased grant activities under two grant awards during 2013 as compared to three active grants during 2012.

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of grant awards and when the related costs and expenses are incurred, and timing of any other payments received under our strategic collaborations.

Research and Development Expenses. Research and development expenses for the nine months ended September 30, 2013 and 2012 were $5,621,969 and $2,667,347, respectively. Research and development expenses include the costs to identify, isolate and advance human antibody drug candidates derived from our libraries, preclinical testing expenses, costs incurred under the IgDraSol initial and development services agreements, and the expenses associated with fulfilling our development obligations related to the Staph and C. difficile Grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, laboratory supplies, consulting costs and other expenses. The increase of $2,954,622 is attributable to costs incurred under the initial and development services agreements with IgDraSol, as well as higher salary and lab supply costs incurred in connection with our expanded research and development activities. We expect research and development expenses to increase in absolute dollars as we:
(i) advance our CynviloqTM asset into a registration trial (a single bioequivalence study) and pursue other potential indications, including expenses incurred under agreements with CROs and investigative sites that conduct their clinical trials, the cost of acquiring, developing and manufacturing clinical trial materials, and other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to advance a number of potential drug candidates into preclinical development activities, (ii) acquire Sherrington and advance its pain drug into clinical trials, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates, (iv) acquire Concortis, and (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of the Company's programs.

Acquired In-Process Research and Development Expenses. Acquired research and development expenses for the nine months ended September 30, 2013 and 2012 was $1,210,000 and $0, respectively. Acquired research and development expenses include the costs of acquiring the Tocosol® and related technologies in April 2013.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2013 and 2012 were $3,752,233 and $890,262, respectively. General and administrative expenses consist primarily of costs incurred under the IgDraSol initial and development services agreements, salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation, professional fees, infrastructure expenses, legal and accounting, and other general corporate expenses. The increase of $2,861,971 is primarily attributable to increases in costs incurred under the initial and development services agreement with IgDraSol, stock-based compensation, salaries and consulting expenses with the addition of our full time Chief Financial Officer and part-time Chief Business Officer in the second half of 2012, and higher legal and compliance costs associated with our public reporting obligations. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, compliance with our public reporting obligations, (ii) assume all of the costs associated with the merger with IgDraSol and IgDraSol's ongoing operating expenses, and (iii) incur costs related to the Sherrington and Concortis mergers and integrate their operations.

Intangibles Amortization. Intangibles amortization for the nine months ended September 30, 2013 and 2012 was $313,339 and $0, respectively. Our amortization expense is higher due to the IgDraSol option agreement and acquisition in September 2013 and the entering into of the assignment agreement in January 2013.


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Interest Income and Interest Expense. Interest income and interest expense for the nine months ended September 30, 2013 and 2012 were nominal. We expect interest expense to increase in absolute dollars as we incur incremental costs associated with the loan and security agreement entered into in September 2013.

Net Loss. Net loss for the nine months ended September 30, 2013 and 2012 was $10,615,396 and $3,090,473, respectively. The increase in net loss is mainly attributable to the expanded general and administrative and research and development activities, including the costs associated with the IgDraSol Transactions. The increase in net loss is mainly attributable to the expanded general and administrative and research and development activities, including the costs associated with the IgDraSol Transactions and the IgDraSol and Sherrington mergers.

Liquidity and Capital Resources

As of September 30, 2013, we had $6,429,712 in cash and cash equivalents, attributable primarily to the closing of our private placement of our common stock for aggregate gross proceeds of $6,418,495 in March 2013, as well as the $5,000,000 loan and security agreement with the banks that was funded in September 2013.

Cash Flows from Operating Activities. Net cash used for operating activities was $9,278,452 for the nine months ended September 30, 2013 and is primarily attributable to our net loss of $10,615,396, which was offset by $1,294,743 in non-cash activities relating primarily to stock-based compensation, amortization and depreciation expense. Net cash used for operating activities was $2,468,243 for the nine months ended September 30, 2012 and was primarily attributable to our net loss of $3,090,473, a net increase of $123,120 in working capital balances, partially offset by $499,110 in non-cash activities relating to stock-based compensation and depreciation expense.

We expect to continue to incur substantial and increasing losses and have negative net cash flows from operating activities as we seek to: (i) advance our CynviloqTM asset into a registration trial (a single bioequivalence study) and pursue other potential indications, (ii) incur incremental expenses associated with our efforts to advance a number of potential drug candidates into preclinical development activities, (ii) acquire Sherrington and advance its pain drug into clinical trials, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates,
(iv) acquire Concortis, (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of the Company's programs,
(vi) comply with our public reporting obligations, and (vii) incur costs related to the Sherrington and Concortis mergers and integrate their operations.

Cash Flows from Investing Activities. Net cash used for investing activities was $744,557 for the nine months ended September 30, 2013 as compared to $491,096 for the nine months ended September 30, 2012. The net cash used related primarily to equipment acquired for research and development activities as well as the rights acquired under the assignment agreement and IgDraSol merger costs.

We expect to increase our investment in laboratory equipment and furnishings as we seek to expand and progress our research and development activities and integrate our acquired assets.

Cash Flows from Financing Activities. Cash flows from financing activities for the nine months ended September 30, 2013 of $11,361,409 was derived from:
(i) the issuance of 1,426,333 shares of common stock, in a private placement transaction, at $4.50 per share for aggregate gross proceeds of $6,418,495 in March 2013, and (ii) entering into a $5,000,000 loan and security agreement in September 2013. Cash flows from financing activities for the nine months ended September 30, 2012 of $5,938,231 was derived from the sale of $6,000,000 of our common stock in a private placement transaction in May 2012.

Future Liquidity Needs. From inception through September 30, 2013, we have principally financed our operations through private equity and debt financings with aggregate net proceeds of $26,862,077, as we have not generated any product related revenue from operations to date, and do not expect to generate significant revenue for several years, if ever. 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 long-term plans for preclinical trials and new product development, as well as to fund operations generally. As . . .

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