Scilex pany(SCLX) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Scilex's unaudited financial statements, showing increased net loss from higher expenses and a 'going concern' warning Condensed Consolidated Balance Sheets Assets slightly decreased to $86.1 million, while liabilities significantly increased to $75.0 million, reducing equity to $11.1 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $5,069 | $2,184 | | Total current assets | $31,104 | $29,608 | | Goodwill | $13,481 | $13,481 | | Total assets | $86,051 | $86,527 | | Liabilities & Equity | | | | Accrued rebates and fees | $35,629 | $30,893 | | Convertible debentures | $9,600 | $0 | | Total current liabilities | $64,602 | $44,842 | | Total liabilities | $74,975 | $50,288 | | Total stockholders' equity | $11,076 | $36,239 | Condensed Consolidated Statements of Operations Net revenue increased to $10.6 million, but net loss significantly widened to $30.8 million due to higher SG&A and derivative liability loss Statement of Operations Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net revenue | $10,582 | $6,812 | | Cost of revenue | $3,591 | $1,144 | | Selling, general and administrative | $28,701 | $10,908 | | Loss from operations | $(25,473) | $(8,806) | | Loss (gain) on derivative liability | $5,253 | $(7,500) | | Net loss | $(30,753) | $(9,143) | | Net loss per share | $(0.22) | $(0.07) | Condensed Consolidated Statements of Cash Flows Net cash used in operations improved to $7.7 million, with financing providing $10.6 million, increasing cash to $5.1 million Cash Flow Highlights (in thousands) | Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash used for operating activities | $(7,744) | $(10,731) | | Net cash proceeds from financing activities | $10,629 | $39,960 | | Net change in cash and cash equivalents | $2,885 | $29,229 | | Cash and cash equivalents at end of period | $5,069 | $33,567 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail operations, liquidity, and financing, highlighting a 'going concern' doubt due to significant losses and reliance on equity and debenture funding - The company is an innovative revenue-generating company focused on acquiring, developing and commercializing non-opioid pain management products. Its commercial products include ZTlido, GLOPERBA, and ELYXYB[26][27] - Management has concluded that conditions such as negative working capital ($33.5 million), operating losses ($25.5 million for the quarter), and an accumulated deficit ($406.7 million) raise substantial doubt about the Company's ability to continue as a going concern[44][46] - In February 2023, the company acquired the rights to ELYXYB (celecoxib oral solution) for the acute treatment of migraine in the U.S. and Canada. The company launched ELYXYB in the U.S. in April 2023[27][52][53] - In March 2023, the company entered into a securities purchase agreement to issue up to $25.0 million in convertible debentures. As of March 31, 2023, $10.0 million in principal amount had been issued for net proceeds of $9.6 million[43][67] - The company has two standby equity purchase agreements with Yorkville and B. Riley, each allowing the company to sell up to $500.0 million of its common stock, subject to certain conditions[41] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting increased revenue but a widened net loss due to higher expenses, and addresses liquidity concerns with new financing Overview Scilex focuses on non-opioid pain management with commercial products and a pipeline, but faces significant losses and requires substantial funding - Commercial products include ZTlido, GLOPERBA (planned 2023 launch), and ELYXYB (launched April 2023)[118] - The development pipeline includes SEMDEXA (Phase 3), SP-103 (Phase 2), and SP-104 (Phase 2 expected in 2023). Both SEMDEXA and SP-103 have received FDA Fast Track designation[119] - The company had a net loss of $30.8 million for Q1 2023 and an accumulated deficit of $406.7 million as of March 31, 2023[122] Results of Operations Net revenue increased to $10.6 million, but operating loss grew to $25.5 million and net loss to $30.8 million, primarily due to higher SG&A Comparison of Results of Operations (in thousands) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net revenue | $10,582 | $6,812 | $3,770 | | Cost of revenue | $3,591 | $1,144 | $2,447 | | Research and development | $2,736 | $2,631 | $105 | | Selling, general and administrative | $28,701 | $10,908 | $17,793 | | Loss from operations | $(25,473) | $(8,806) | $(16,667) | | Net loss | $(30,753) | $(9,143) | $(21,610) | - The $3.8 million increase in net revenue was driven by a 49% increase in gross product sales of ZTlido, offset by higher rebates[142] - SG&A expenses increased by $17.8 million, primarily due to higher legal expenses ($5.1M), personnel costs ($4.2M), consulting fees ($3.3M), and a bad debt reserve for a receivable from Sorrento ($1.4M)[146] - R&D expenses increased slightly by $0.1 million to $2.7 million, attributed to costs for SP-103, SP-104, GLOPERBA, and ELYXYB, offset by a decrease in SP-102 costs[145] Liquidity and Capital Resources The company had $5.1 million cash and $406.7 million accumulated deficit, raising substantial doubt about its going concern ability, relying on equity and debenture funding - As of March 31, 2023, the company had cash and cash equivalents of approximately $5.1 million and an accumulated deficit of $406.7 million[122][151] - The company has concluded there is substantial doubt about its ability to continue as a going concern due to recurring losses, negative cash flows, and substantial cumulative net losses[168][218] - The company has entered into two Standby Equity Purchase Agreements (with Yorkville and B. Riley), each providing the right to sell up to $500.0 million of common stock[158][159] - In March and April 2023, the company issued a total of $25.0 million in convertible debentures to Yorkville to provide liquidity[124][125][161] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk occurred during the first quarter of 2023 compared to the Annual Report on Form 10-K - There have been no material changes in the company's market risk during the first quarter of 2023[182] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were ineffective due to a material weakness in accounting resources, with remediation efforts ongoing - Management concluded that as of March 31, 2023, the company's disclosure controls and procedures were not effective at a reasonable assurance level[183] - The ineffectiveness is due to a material weakness identified as of December 31, 2022, related to a lack of sufficient accounting resources with appropriate experience and technical expertise[184] - Remediation efforts, including hiring personnel and engaging consultants, are ongoing, but the material weakness has not been fully remediated as of March 31, 2023[185] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in material legal proceedings, including false advertising, non-compete, and patent infringement lawsuits - Sanofi-Aventis & Hisamitsu Litigation: Scilex sued two manufacturers of OTC lidocaine patches for false advertising and unfair competition. The trial is scheduled for December 2023[103] - Former Employee Litigation: Scilex sued its former President, Anthony Mack, and his new company, Virpax, for breach of a non-compete agreement. The case has been tried and is awaiting a court decision[104] - ZTlido Patent Litigation: Scilex sued Apotex for infringing on ZTlido patents after Apotex filed an ANDA for a generic version. A 30-month stay prevents Apotex from selling a generic version until at least November 2024, with a trial scheduled for June 2024[105] Item 1A. Risk Factors Outlines significant risks including limited operating history, substantial losses, going concern doubt, reliance on ZTlido, supply chain, clinical trials, IP, regulation, and Sorrento's bankruptcy Risks Related to Limited Operating History, Financial Condition and Capital Requirements The company faces substantial risks from limited operating history, significant losses, going concern doubt, dependence on ZTlido, and a material weakness in financial reporting - The company has a limited operating history, is heavily dependent on the commercial success of ZTlido, and has incurred significant losses, with an accumulated deficit of $406.7 million as of March 31, 2023[201][204][208] - Recurring losses, negative cash flows, and substantial net losses raise substantial doubt about the company's ability to continue as a going concern[218] - A material weakness in internal control over financial reporting was identified, related to a lack of sufficient accounting resources, which could lead to failure to timely and accurately report financial results[221][222] Risks Related to Commercial Operations and Product Development Significant operational risks include reliance on single-source suppliers, third-party clinical trials, uncertain regulatory approval, intense competition, and challenges in securing payor coverage - The company relies on sole or single-source suppliers and manufacturers for its products, including an exclusive reliance on Oishi and Itochu for ZTlido and SP-103. Loss of these suppliers would be detrimental[225][227] - The company relies on third parties to conduct clinical trials, and if these parties do not perform, it could delay or prevent regulatory approval for product candidates[241] - The company faces significant competition from other prescription patches, generic products, and OTC lidocaine patches[269] - Failure to obtain or maintain adequate coverage and reimbursement from third-party payors for ZTlido, GLOPERBA, and ELYXYB could significantly decrease the ability to generate revenue[276] Risks Related to Intellectual Property Business heavily relies on in-licensed IP for ZTlido, SP-103, and GLOPERBA, facing risks of patent challenges, invalidation, and costly litigation to enforce or defend IP rights - The business is substantially dependent on intellectual property in-licensed from Oishi and Itochu for ZTlido and SP-103. The licensors have the right to terminate the agreement under certain conditions, which could cause Scilex to lose all rights to these products[341][344] - The company is party to a license agreement with Romeg for GLOPERBA, and termination of this agreement would harm its ability to commercialize the product[345] - The company may not be able to obtain or maintain sufficient patent protection for its products, and existing patents may be challenged, invalidated, or held unenforceable, particularly by generic drug manufacturers[350][353] - The company may become involved in expensive and time-consuming lawsuits to protect its patents (like the current ZTlido patent litigation) or defend against claims that it infringes on third-party IP[364][376] Risks Related to Government Regulations The company faces lengthy, costly, and unpredictable FDA approval processes, ongoing regulatory review, and risks from healthcare reform and complex fraud and abuse laws - The FDA regulatory approval process is lengthy, time-consuming, and unpredictable. There is no guarantee that product candidates like SEMDEXA will be approved[425] - The company may seek approval for its candidates via the 505(b)(2) pathway, but if the FDA disagrees or requirements change, the approval process could be longer and more costly[429] - Approved products are subject to continuous and extensive regulatory review, and failure to comply can result in fines, recalls, or withdrawal of approval[432][433] - The company is subject to federal and state healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act), and violations can lead to substantial civil and criminal penalties[459] Risks Related to our Relationship with Sorrento Scilex faces significant risks from its majority shareholder, Sorrento, including conflicts of interest, impacts from Sorrento's Chapter 11 bankruptcy, and potential liquidation of its controlling stake - Certain directors and officers have positions with both Scilex and its majority shareholder, Sorrento, creating potential conflicts of interest[488][489] - Scilex is controlled by Sorrento, which holds approximately 51.9% of the voting power. Sorrento's interests may differ from those of other public stockholders[496] - On February 13, 2023, Sorrento filed for Chapter 11 bankruptcy protection. While Scilex is not a debtor, this may impair the relationship and limit Scilex's operational flexibility due to Bankruptcy Court oversight[503][504] - If Sorrento's case is converted to Chapter 7, it may be required to liquidate its assets, which includes its ownership stake in Scilex[506] Risks Related to Ownership of our Common Stock Ownership of common stock involves high risk, including potential price decline from future share sales, no expected dividends, worthless warrants, and reduced reporting due to 'emerging growth' and 'controlled company' status - Future sales of a substantial number of shares, including those from the dividend by Sorrento, may cause the stock price to decline once lock-up restrictions end[516][517] - The company's warrants, with an exercise price of $11.50, may expire worthless if the stock price remains below this level. The terms of the warrants can also be amended with majority holder approval[558][559] - The company is a 'controlled company' under Nasdaq rules due to Sorrento's majority ownership, qualifying it for exemptions from certain corporate governance requirements[546] - The company is an 'emerging growth company' and may take advantage of reduced reporting requirements, which could make its stock less attractive to some investors[543] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On February 13, 2023, the company issued 4,000,000 common shares to Paul Hastings LLP as a retainer for legal services, exempt from registration - On February 13, 2023, Scilex issued 4,000,000 shares of Common Stock to law firm Paul Hastings LLP as a retainer for legal services[563] - The issuance was an unregistered sale, relying on the exemption from registration provided by Section 4(a)(2) of the Securities Act[563] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[564] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[565] Item 5. Other Information The company reported no other information for this item - None[566] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including business combination, financing agreements, and officer certifications - Lists various agreements including the Amended and Restated Standby Equity Purchase Agreement and the Securities Purchase Agreement with Yorkville[567] - Includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[570]