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SRNE > SEC Filings for SRNE > Form 10-K on 1-Apr-2014All Recent SEC Filings

Show all filings for SORRENTO THERAPEUTICS, INC.

Form 10-K for SORRENTO THERAPEUTICS, INC.


1-Apr-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information that are included elsewhere in this Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the cautionary note regarding "Forward-Looking Statements" contained elsewhere in this Form 10-K. Additionally, you should read the "Risk Factors" section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a development stage biopharmaceutical company engaged in the discovery, acquisition, development and commercialization of proprietary drug therapeutics for addressing significant unmet medical needs in the U.S., Europe and additional international markets. Our primary therapeutic focus is oncology, including the treatment of chronic cancer pain, but we are also developing therapeutic products for other indications, including immunology and infectious diseases. We currently have two clinical development programs underway: (i) our lead oncology drug product candidate Cynviloq, is a micellar diblock copolymeric paclitaxel formulation, and (ii) RTX, a non-opiate, ultra potent and selective agonist of the TRPV-1 receptor for intractable pain in end-stage disease.

Our pipeline also includes preclinical fully human therapeutic antibodies, including our fully human anti-PD-L1 and anti-PD-1 monoclonal antibodies, or Abs, derived from our proprietary G-MAB® library platform, antibody drug conjugates, or ADCs, and recombinant intravenous immunoglobulin, or rIVIG. Our objective is to develop two classes of antibody drug products, therapeutic antibodies and ADCs: (i) FIC, and/or (ii) BIC, which may offer greater efficacy and/or fewer adverse events or side effects as compared to existing drugs.

Through December 31, 2013, we identified and further developed a number of potential drug product candidates across various therapeutic areas, and intend to select several lead product candidates to further advance into preclinical development activities in 2014. It is too early to assess which of these candidates, if any, will merit further evaluation in clinical trials. Our libraries were designed to facilitate the rapid identification and isolation of highly specific, antibody therapeutic product candidates that are fully-human and that bind to disease


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targets appropriate for antibody therapy. We built our initial antibody expression and production capabilities to enable us to make sufficient product material to conduct preclinical safety and efficacy testing in animal models.

Although we intend to retain ownership and control of some product candidates by advancing the development, we will also consider partnerships with pharmaceutical or biopharmaceutical companies 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 product candidates.

Recent Developments

Loan and Security Agreement. In September 2013, we entered into a $5,000,000 loan and security agreement with two banks pursuant to which the lenders provided us a term loan, which was funded at closing. The interest rate on the term loan is 7.95% per annum. We will make interest only payments on the outstanding amount of the loan on a monthly basis until November 1, 2014, after which equal monthly payments of principal and interest are due. The maturity date of the term loan is April 15, 2017 and is secured by a security interest in all of our assets except intellectual property, which is subject to a negative pledge. In connection with the loan, the lenders received a warrant to purchase an aggregate 31,250 shares of our common stock at an exercise price of $8.00 per share exercisable for seven years from the date of issuance. The value of the warrants, totaling $214,680, was recorded as debt discount and additional paid-in capital in September 2013. In March 2014, we entered into an amended and restated loan and security agreement, increasing the facility to $12,500,000, with the same two banks under substantially the same terms and security interest. See Note 11 of the Notes to the Consolidated Financial Statements.

Agreement and Plan of Merger with IgDraSol. On March 7, 2013, we entered into various agreements with IgDraSol, a private company focused on the development of Cynviloq, as follows: (i) an exclusive option agreement, (ii) an asset purchase agreement pursuant to which we agreed to purchase all documentation, equipment, information and other know-how related to micellar nanoparticle technology encompassing Tocosol® and related technologies, and (iii) an initial services agreement, pursuant to which, IgDraSol provided certain product development and technology services related to our antibody platform. On September 9, 2013, we exercised our option to acquire IgDraSol and IgDraSol became a wholly-owned subsidiary.

On July 29, 2013, we received official meeting minutes from an End-of-Phase II meeting held on July 23, 2013 for Cynviloq (or IG-001) with the U.S. Food and Drug Administration, or FDA. Cynviloq is initially under development for the treatment of MBC and 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 I-III studies for MBC, and (iii) Phase I-II 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. We filed our BE protocol in 2013 and commenced the BE study in March 2014.

Agreement and Plan of Merger with Sherrington. On October 9, 2013, we acquired Sherrington for an aggregate of 200,000 shares of our common stock. Sherrington's sole asset was the license rights to resiniferatoxin. Upon acquisition, Sherrington became a wholly-owned subsidiary.

Underwritten Public Offering and Nasdaq Uplisting. In October 2013, we 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".


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Agreement and Plan of Merger with Concortis. On December 19, 2013, we completed our previously announced merger with Concortis, which providing us with a comprehensive technology platform to create a new generation of homogenous ADC's with site-specific toxin conjugation and consistent drug-antibody ratios. We issued 1,331,978 shares of our common stock to Concortis shareholders which were valued at $8.48 per share, the closing price per share of our common stock as of December 18, 2013.

License Agreement with OPKO Health, Inc. In June 2009, we entered into a limited license agreement, or the OPKO License, with OPKO pursuant to which we granted OPKO an exclusive, royalty-free, worldwide license under all U.S. and foreign patents and patent applications owned or controlled by us or any of our affiliates, or the STI Patents, to (i) develop, manufacture, use, market, sell, offer to sell, import and export certain products related to the development, manufacture, marketing and sale of drugs for ophthalmological indications, or the OPKO Field, and (ii) use and screen any population of distinct molecules covered by any claim of the STI Patents or which is derived by use of any process or method covered by any claim of the STI Patents to identify, select and commercialize certain products within the OPKO Field. In December 2013, we entered into a termination and release agreement with OPKO whereby we terminated the OPKO License in its entirety for a cash payment of $2,680,000.

Results of Operations

The following discussion of our operating results explains material changes in our results of operations for the years ended December 31, 2013 and 2012. The discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K.

Comparison of the Years Ended December 31, 2013 and 2012

Revenues. Revenues were $460,148 for the year ended December 31, 2013, as compared to $583,774 for the year ended December 31, 2012. The net decrease of $123,626 is due to decreased activities under two active grants received from the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health, or NIH, in the year ended December 31, 2013 as compared to three active grants for the year ended December 31, 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 the Phase 1 Staph Grant award covered a two-year period which commenced in June 2010 and ended in May 2012, with a total grant award of $600,000. We recorded revenue associated with the grant as the related costs and expenses were incurred. During the year ended December 31, 2013 and for the period from Inception through December 31, 2013, we recorded $0 and $600,000 of revenue associated with the Staph Grant award, respectively.

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 ended in June 2013, with a total grant award of $600,000. The C. difficile Grant award revenues for the years ended December 31, 2013 and 2012 and for the period from Inception through December 31, 2013 were $143,940, $335,579 and $592,717, respectively.

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 total grant award of $600,000. The Staph Grant II award revenues for the years ended December 31, 2013 and 2012, and for the period from Inception through December 31, 2013, were $307,833, $128,816 and $436,649, respectively.


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Sales and service revenues of $8,375 were derived from our Concortis subsidiary that was acquired in December 2013. We had no other revenue during the years ended December 31, 2013 and 2012 as we have not yet developed any product candidates for commercialization or earned any licensing or royalty payments.

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the unpredictability of the demand for products and services offered as well as the timing and amount of grant awards, research and development reimbursements and other payments received under any strategic collaborations.

Cost of revenues. Cost of revenues relate to sales and services costs totaling $4,440. The costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Research and Development Expenses. Research and development expenses for the years ended December 31, 2013 and 2012 were $9,016,623 and $3,830,404, respectively. Research and development expenses include the costs to identify, isolate and advance human antibody drug candidates derived from our libraries, costs to initiate and/or conduct our bioequivalence, or BE, registration trial related to Cynviloq and prepare for our New Drug Application filing anticipated in 2015, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards, collectively the NIH Grants. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, preclinical testing, clinical development expenses, laboratory supplies, consulting costs, depreciation and other expenses. The increase of $5,186,219 is primarily attributable to salaries and compensation related expense, preclinical testing, depreciation, consulting and lab supply costs incurred in connection with our expanded research and development activities, our BE registration trial and receipt of the two NIH Grant awards in July 2011 and June 2012, respectively. We expect research and development expenses to increase in absolute dollars as we:
(i) advance our Cynviloq BE 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, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical drug candidates, (iv) 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 in-process research and development expenses for the years ended December 31, 2013 and 2012 were $5,985,542 and $0, respectively. Acquired in-process research and development expenses include: (i) the costs associated with entering into a termination and release agreement with OPKO whereby we terminated the OPKO License in its entirety, (ii) the purchase price of Tocosol, and (iii) the purchase price of the license rights to RTX.

General and Administrative Expenses. General and administrative expenses for the years ended December 31, 2013 and 2012 were $6,317,157 and $1,605,978, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $4,711,179 is primarily attributable to higher salaries and related compensation expenses, stock-based compensation, legal costs related general corporate and IP matters, consulting and business development expenses and higher 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 ongoing operating costs associated with the mergers of IgDraSol, Sherrington and Concortis, and integrate their operations.

Intangible Amortization. Intangible amortization for the years ended December 31, 2013 and 2012 was $804,070 and $0, respectively. The increase resulted primarily from the acquisition and amortization of


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intangible license rights from IgDraSol, from the amortization of our exclusive irrevocable option agreement to acquire IgDraSol, and from acquired technology and customer relationships from Concortis.

Interest Expense. Interest expense for the years ended December 31, 2013 and 2012 was $253,194 and $0, respectively. The increase in interest expense resulted from borrowings under the equipment loan entered into in February 2013 and from borrowings under the loan and security agreement entered into in September 2013.

Interest Income. Interest income for the years ended December 31, 2013 and 2012 was $9,615 and $7,300, respectively. The increase in interest income resulted from higher average cash balances in 2013 as compared to 2012. We expect that continued low interest rates will significantly limit our interest income in the near term.

Net Loss. Net loss for the years ended December 31, 2013 and 2012 was $21,911,263 and $4,845,308, respectively. The increase in net loss is mainly attributable to the expanded research and development, in-process research and development, and general and administrative activities.

Liquidity and Capital Resources

As of December 31, 2013 and 2012, we had $31,666,732 and $5,091,312 in cash and cash equivalents, respectively. The increase in cash is primarily attributable to: (i) the closing of our underwritten public offering in October 2013 and the closing of a private placement in March 2013 with aggregate gross proceeds of $41,000,000, (ii) net borrowings under our $5,000,000 loan and security agreement, and (iii) the issuance of $1,850,000 of convertible promissory notes, which automatically converted into 256,119 shares of our common stock upon the closing of the underwritten public offering.

Cash Flows from Operating Activities. Net cash used for operating activities was $16,489,614 for 2013 and is primarily attributable to our net loss of $21,908,863, which was partially offset by $4,951,264 in non-cash activities relating to stock-based compensation, acquired in-process research and development, depreciation and amortization expense. Net cash used for operating activities was $3,797,476 for 2012 and primarily reflects a net loss of $4,845,308, which was partially offset by $1,156,429 in non-cash activities relating primarily 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 expand and support our clinical and preclinical development and research activities.

Cash Flows from Investing Activities. Net cash used for investing activities was $503,480 for 2013 as compared to $547,884 for 2012. The net cash used related primarily to equipment acquired for research and development activities and the purchase of intangible assets partially offset by cash acquired in connection with the mergers of IgDraSol and Concortis.

We expect to increase our investment in equipment as we seek to expand and progress our research and development capabilities.

Cash Flows from Financing Activities. Net cash provided by financing activities for 2013 and 2012 was $43,568,514 and $5,970,123, respectively, which were primarily derived from the sale of our common stock in an underwritten public offering and private placement transactions. In addition, cash was provided by increases in net borrowings under our $5,000,000 loan and security agreement and the issuance of $1,850,000 of convertible promissory notes.

Future Liquidity Needs. From inception through December 31, 2013, we have principally financed our operations through an underwritten public offering and private equity financings with aggregate net proceeds of $53,152,820, as we have not generated any product related revenue from operations to date, and do not expect to


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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 plans for clinical and preclinical trials and new product development, as well as to fund operations generally. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings, or through corporate collaboration 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.

In March 2014, we entered into an amended and restated loan and security agreement, increasing the September 2013 facility from $5,000,000 to $12,500,000, with two banks. The amended and restated loan was funded in March 2014, and bears interest at 7.95% per annum. We will make interest only payments on the outstanding amount of the loan on a monthly basis until October 1, 2014, after which equal monthly payments of principal and interest are due until the loan maturity date of September 30, 2017. In the event we raise $30 million of net equity or proceeds from a collaboration, if any, the interest only period will be extended by six months. Such loan is secured by a security interest in substantially all of our assets, excluding intellectual property, which is subject to a negative pledge. In connection with the amended and restated loan and security agreement, the Lenders received a warrant to purchase an aggregate 34,642 shares of our common stock at an exercise price of $12.99 per share, which is exercisable for seven years from the date of issuance. (See Note 11 of the Notes to the Consolidated Financial Statements).

We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) conduct our BE registration trial related to Cynviloq and prepare for our New Drug Application filing anticipated in 2015, (ii) advance RTX into clinical trials and potentially pursue other human or veterinary indications, (iii) continue to identify and advance a number of potential mAb and ADC drug candidates into preclinical and clinical development activities,
(iv) continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, and (v) expand our corporate infrastructure, including the costs associated with being a NASDAQ public company. We believe we have the ability to meet all obligations due over the course of the next twelve months.

We plan to continue to fund our losses from operations and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. We filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"), which was declared effective by the SEC in July 2013. The Shelf Registration Statement provides us with the ability to offer up to $100 million of securities, including equity and other securities as described in the registration statement. After the October 2013 underwritten offering, we now have the ability to offer up to $65.4 million of additional securities. Pursuant to the Shelf Registration Statement, we may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at the time of any offering. However, we cannot be sure that such additional funds will be available on reasonable terms, or at all. If we are unable to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. Any of these actions could materially harm our business, results of operations, and future prospects.

If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise 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 our ability to operate our business.


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Related Party Transactions. In May 2012, pursuant to the December 2011 Stock Purchase Agreement, as amended and restated, we issued 1,500,000 shares of common stock, in a private placement transaction, at $4.00 per share for aggregate gross proceeds of $6,000,000. 250,000 of the shares were purchased by an investor, Hongye SD Group, LLC, of which Dr. Henry Ji, our Chief Executive Officer and President, is a managing director.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe the following accounting policies and estimates are most critical to aid in understanding and evaluating our reported financial results.

Cash and Cash Equivalents. We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. We minimize our credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of our primary financial institution. The balance at times may exceed federally insured limits. As of December 31, 2013, we have not experienced any losses on such accounts.

Stock-Based Compensation. We account for stock-based compensation in accordance with authoritative guidance for stock-based compensation, which requires us to measure the cost of employee services received in exchange for equity incentive awards, including stock options, based on the grant date fair value of the award. The fair value is estimated using the Black-Scholes option pricing model. The resulting cost is recognized over the period during which the employee is required to provide services in exchange for the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the consolidated statements of operations based on the department to which the related employee . . .

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