Scilex Holding Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; amounts below are in millions of dollars unless stated otherwise.
Business context
Scilex develops and commercializes non-opioid pain products. Commercial products include ZTlido, launched in 2018; ELYXYB, launched in the U.S. in April 2023; and GLOPERBA, for which the company planned commercialization in 2024. Its pipeline includes SEMDEXA (Phase 3), SP-103 (Phase 2) and SP-104 (Phase 2 expected to begin in 2024). Sorrento Therapeutics, formerly Scilex’s controlling stockholder, filed for Chapter 11 in February 2023; Scilex was not a debtor in that proceeding.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $10.1 | $11.4 | $33.3 | $26.1 |
| Gross profit / gross margin | $6.7 / 66.5% | $7.8 / 68.3% | $22.1 / 66.5% | $19.8 / 75.9% |
| Operating loss | $(38.8) | $(10.6) | $(87.1) | $(30.9) |
| Net income (loss) | $(35.5) | $21.5 | $(92.9) | $(5.5) |
| Net loss per share, diluted | $(0.63) | $0.16 | $(1.03) | $(0.04) |
| Cash used in operating activities | Not separately reported | Not separately reported | $(15.3) | $(20.5) |
At September 30, cash and cash equivalents were $2.0 million; cash, cash equivalents and restricted cash totaled $2.0 million. Current assets were $25.5 million and current liabilities $228.6 million, resulting in negative working capital of $203.1 million. Total assets were $80.5 million, total liabilities $243.2 million, and stockholders’ deficit $162.7 million. Accumulated deficit was $468.8 million.
Debt and related obligations included the Oramed Note, with $101.9 million principal and $106.3 million reported fair value; $9.0 million of Convertible Debentures; and $6.9 million outstanding on the eCapital revolving facility. The filing reports total indebtedness, including Romeg deferred consideration, of $125.7 million. The Oramed Note is secured by substantially all company and subsidiary property and carries restrictive covenants. Nine-month financing cash inflows were $15.3 million.
Material changes versus comparable periods
- Q3 revenue decreased $1.3 million (about 11%) year over year, despite approximately 50% growth in gross ZTlido sales and ELYXYB sales beginning in April; higher rebates reduced reported net revenue. Nine-month revenue increased $7.2 million (about 27%), supported by roughly 56% higher gross ZTlido sales and the ELYXYB launch, partly offset by higher rebates.
- Q3 operating expenses rose $26.9 million to $48.9 million, principally from a $24.3 million increase in selling, general and administrative expense. The company cited advisory costs, personnel and stock compensation, marketing, legal and public-company expenses. Nine-month SG&A increased $54.8 million to $96.1 million.
- Q3 net results swung from $21.5 million income to a $35.5 million loss. The prior-year quarter included a $33.4 million gain on debt extinguishment; 2023 included a $4.2 million derivative-liability gain and $0.4 million fair-value expense on debt and liability instruments. Nine-month results also reflect the absence of a $28.6 million prior-year debt-extinguishment gain.
- For the first nine months, operating cash use improved to $15.3 million from $20.5 million, while ending cash remained low. Receivables declined, but payables and accrued rebates and fees increased materially; accrued rebates and fees reached $65.8 million.
- In September, Scilex repurchased from Sorrento 60.1 million common shares, all 29.1 million preferred shares and warrants, using a combination of assumed debt, a credit bid, $10.0 million cash and assumed legal fees. The common shares are held as treasury stock; the transaction contributed to a $162.7 million stockholders’ deficit. Scilex issued the Oramed Note in connection with the transaction.
Outlook, risks and unusual items
- Going concern: Management concluded that substantial doubt exists about Scilex’s ability to continue as a going concern for one year after issuance of the financial statements. Funding plans depend on additional financing and commercial growth; management cautioned that these plans rely on factors outside its control.
- Outlook: The filing provides no quantified revenue or earnings guidance. Management expects continued losses and substantial funding needs, and may reduce commercialization spending or delay, scale back or discontinue development if financing is inadequate. It anticipated GLOPERBA commercialization in 2024 and SP-104 Phase 2 initiation in 2024.
- Debt and dilution: The Oramed Note requires principal installments beginning December 2023, accrues interest in kind at a floating rate based on the greater of 4% or Term SOFR plus 8.5%, and includes default, prepayment and collateral provisions. The company also had equity purchase agreements with Yorkville and B. Riley, each with up to $500 million of stated capacity, subject to conditions. The October 11, 2023 amendment to the Yorkville debentures changed the default conversion-price floor and extended maturity to March 15, 2024.
- Supply and customer concentration: Three customers generated 84% of Q3 revenue and represented 89% of accounts receivable; one supplier provided inventory during the nine-month period. The company disclosed that its lidocaine suppliers could terminate agreements because product net profits had not exceeded 5% of sales, although neither had done so by September 30. Genzyme planned to end sodium-hyaluronate supply effective May 31, 2024; replacement sourcing was underway.
- Contingencies and litigation: The filing describes ongoing Sanofi/Hisamitsu advertising litigation, former-employee litigation and ZTlido patent litigation, with the latter two matters unresolved. After quarter-end, Takeda sued over a proposed GLOPERBA label revision; the resulting 30-month stay restricts sales under a revised label, but not the current label. The company also disclosed significant potential milestone obligations, including up to $280 million related to SEMDEXA, contingent on specified milestones.
- Financial reporting controls: Management said disclosure controls were not effective and that a previously identified material weakness involving revenue, debt, business-combination and derivative accounting had not been remediated by September 30, 2023.
- Timing inconsistency: The filing generally says GLOPERBA commercialization is planned for 2024, but a risk-factor passage refers to an expected fourth-quarter 2023 launch. The text does not reconcile these statements.
Important facts for investors to verify
- Whether Scilex can obtain sufficient funding and meet upcoming Oramed Note installments while maintaining operations; review the full debt terms, collateral and covenant compliance.
- Whether reported revenue growth translates into improved net revenue, margins and cash generation, given rebates, customer concentration and product-level commercialization progress.
- The actual GLOPERBA launch timeline, Takeda litigation implications, and progress on SEMDEXA, SP-103 and SP-104 development plans.
- Whether replacement supply for sodium hyaluronate is secured and whether the ZTlido/SP-103 supplier agreements remain in force.
- Progress in remediating the material weakness and the implications of the Sorrento repurchase, treasury shares, potential warrant exercises and equity financing for dilution and control.