Scilex Holding Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results; dollar amounts below are in millions unless noted. Scilex commercializes non-opioid pain products and develops SEMDEXA (SP-102), SP-103 and SP-104. ELYXYB launched in the U.S. in April 2023; GLOPERBA commercialization was planned for 2023.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $12.6 | $7.9 | $23.2 | $14.7 |
| Cost of revenue | $4.2 | $1.5 | $7.8 | $2.7 |
| Gross margin, approximate | 66.8% | 80.7% | 66.5% | 81.9% |
| Operating expenses | $35.4 | $19.4 | $71.5 | $35.0 |
| Operating loss | $(22.8) | $(11.5) | $(48.3) | $(20.3) |
| Net loss | $(26.6) | $(17.8) | $(57.4) | $(27.0) |
| Basic and diluted loss per share | $(0.19) | $(0.13) | $(0.40) | $(0.20) |
Revenue rose about 59% in Q2 and 57% for the first half, driven mainly by higher ZTlido sales and ELYXYB’s launch, partly offset by increased rebates. Management reported gross ZTlido sales growth of approximately 81% for Q2 and 66% for the first half. Cost of revenue increased faster than net revenue, reflecting higher sales and royalties. SG&A rose to $27.0 million in Q2 and $55.7 million for the half, with higher legal, personnel and stock-based compensation, consulting, contracted services and marketing costs. R&D was $3.2 million in Q2 and $5.9 million for the half.
Cash, liquidity and debt
- Cash and cash equivalents were $34.1 million at June 30, 2023, versus $2.2 million at December 31, 2022; restricted cash was another $1.0 million.
- Six-month operating cash use was $21.2 million, compared with $23.1 million in 2022. Investing cash use was negligible. Financing provided $54.2 million, principally from convertible debentures, the revolving facility and equity purchase agreements.
- Current assets were $69.2 million and current liabilities $103.6 million, yielding negative working capital of $34.3 million. Accumulated deficit was $433.3 million.
- At quarter-end, the balance sheet included $15.9 million drawn under eCapital’s receivables-backed revolving facility (up to $30 million) and $18.4 million of convertible debentures measured at fair value. The debentures had $25.0 million aggregate principal issued, bear 7% interest, mature December 21, 2023, and include a $8.00 conversion price. Romeg deferred consideration was $3.7 million. Management’s indebtedness summary totaled $38.0 million including that deferred consideration.
- The eCapital facility bears interest at prime plus 1.5%, is secured by receivables and related collateral, and requires at least $1.0 million of cash in controlled accounts plus facility availability. A covenant required Scilex to issue at least $75 million of debt or equity by September 30, 2023; failure is an event of default.
Material changes, outlook and risks
- Losses widened substantially year over year as operating costs, particularly SG&A, increased. Noncash fair-value charges included $3.7 million on convertible debentures for Q2 and $5.3 million on derivative liabilities for the first half.
- Management stated that additional funding is needed and concluded that substantial doubt exists about the Company’s ability to continue as a going concern for one year after issuance of the financial statements. Plans rely on product sales and further equity, debt, collaboration or strategic financing; execution is not assured. No specific financial guidance was provided.
- Revenue and receivables are concentrated: three customers accounted for 88% of Q2 revenue and 85% for the first half; they represented 95% of quarter-end receivables. Itochu was the sole inventory supplier disclosed for the periods.
- ZTlido and SP-103 depend on licensed technology and supply arrangements with Itochu and Oishi. Because product net profits had not exceeded 5% of net sales as of June 30, those partners had a contractual termination right after the specified four-quarter condition; they had not exercised it. Genzyme notified Scilex that it would discontinue sodium hyaluronate supply effective May 31, 2024, requiring a replacement source for SEMDEXA supply needs.
- After quarter-end, Scilex provided Sorrento, its controlling stockholder and a Chapter 11 debtor, a junior DIP loan facility of up to $20 million plus fees, bearing 12% interest payable in kind and maturing no later than September 30, 2023. The loan is subordinated to senior financing. In August, a $100 million Replacement DIP Facility from Oramed was approved, with provisions concerning a potential sale of Sorrento’s Scilex equity interests; Scilex’s junior loan ranks behind that facility. Scilex also reported a $3.2 million fully reserved receivable from Sorrento and $1.0 million payable to it at quarter-end.
- Clinical and legal developments: the filing reports SP-103 Phase 2 top-line results received in August 2023, after quarter-end, as meeting safety, tolerability and preliminary-efficacy objectives; further analysis and FDA discussions were planned. SEMDEXA’s Phase 3 results had met stated endpoints, but FDA requirements and approval remain uncertain. ZTlido patent litigation against Apotex was scheduled for trial in June 2024; the generic-sale stay was expected to last no earlier than November 2024. Other disclosed litigation includes a false-advertising case scheduled for trial in June 2024 and a former-employee case awaiting decision.
- Disclosure controls were not effective as of June 30, 2023. The previously identified material weakness in revenue, debt, business-combination and derivative-liability controls remained unremediated; remediation was ongoing.
Investor verification priorities
- Assess near-term liquidity, the going-concern qualification and the ability to meet the $75 million financing covenant and debt maturities.
- Track product-level sales, rebate accruals, gross margins and customer concentration, including the commercial ramp of ELYXYB and planned GLOPERBA launch.
- Review the Sorrento DIP exposure, collateral priority, repayment prospects, and any sale of Sorrento’s Scilex shares or change in control.
- Verify the status of sole-source supply arrangements, especially the Itochu/Oishi termination provisions and replacement sodium hyaluronate supply for SEMDEXA.
- Monitor ZTlido litigation, pipeline trial and regulatory milestones, and progress in remediating the material weakness.