Scilex Holding Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Amounts are in U.S. dollars. Scilex is a revenue-generating, majority-owned subsidiary of Sorrento Therapeutics and focuses on non-opioid pain products. Its November 2022 business combination with Vickers was accounted for as a reverse recapitalization.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net revenue | $10.6 million | $6.8 million |
| Cost of revenue | $3.6 million | $1.1 million |
| Gross profit and approximate gross margin | $7.0 million; 66% | $5.7 million; 83% |
| Research and development | $2.7 million | $2.6 million |
| Selling, general and administrative | $28.7 million | $10.9 million |
| Operating loss | $25.5 million | $8.8 million |
| Net loss | $30.8 million | $9.1 million |
| Basic and diluted loss per share | $0.22 | $0.07 |
| Cash used in operating activities | $7.7 million | $10.7 million |
Revenue was entirely from ZTlido sales. Management attributed the increase to approximately 49% growth in gross product sales, partly offset by higher rebates. Cost of revenue rose with sales and included $2.1 million of royalty expense. Approximate gross margins are calculated from reported revenue less cost of revenue.
SG&A increased by $17.8 million, including higher legal costs ($5.1 million), personnel and stock-based compensation ($4.2 million), consulting ($3.3 million), contracted services ($1.8 million), and a $1.4 million bad-debt reserve for the Sorrento receivable. The quarter also included a $5.3 million loss from remeasurement of derivative liabilities; the prior-year quarter included a $7.5 million derivative gain and $4.8 million debt-extinguishment loss.
| Balance-sheet or liquidity metric | March 31, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $5.1 million | $2.2 million |
| Current assets | $31.1 million | $29.6 million |
| Current liabilities | $64.6 million | $44.8 million |
| Working capital | Negative $33.5 million | Not stated here |
| Total liabilities | $75.0 million | $50.3 million |
| Stockholders’ equity | $11.1 million | $36.2 million |
| Accumulated deficit | $406.7 million | $375.9 million |
Q1 financing cash inflows were $10.6 million, mainly $9.6 million net proceeds from convertible debentures and $1.7 million from standby equity purchase agreements, partly offset by transaction costs. The company reported $13.3 million of total indebtedness, including $9.6 million carrying value of convertible debentures and $3.7 million of deferred GLOPERBA consideration. The debentures had $10.0 million principal issued in March, carry 7% interest, mature December 21, 2023, and are convertible at $8 per share.
Material changes and business developments
- ZTlido gross sales grew approximately 49%, but higher rebates and royalties contributed to lower gross margin.
- In February 2023, Scilex acquired U.S. and Canadian rights to ELYXYB, an FDA-approved migraine treatment; it launched in the U.S. in April, after quarter-end.
- Scilex planned to commercialize GLOPERBA in 2023. Its license includes minimum quarterly royalties beginning after the first anniversary of the agreement.
- Development programs include Phase 3 SEMDEXA for sciatica, Phase 2 SP-103 for acute low back pain, and SP-104 for fibromyalgia, for which a Phase 2 trial was expected to begin in 2023.
- Common shares outstanding increased to 145.8 million from 141.3 million at year-end. Q1 stock-based compensation was $3.7 million; 31.8 million options were outstanding at quarter-end.
Outlook, risks and unusual items
- Going concern: Management concluded substantial doubt exists about Scilex’s ability to continue as a going concern for at least one year after issuance of the financial statements. It expects continued losses and says available cash and potential financing may not fund operations for the next 12 months. Funding plans include equity, debt, collaborations or other strategic transactions, but depend on factors outside the company’s control.
- Financing and dilution: Yorkville and B. Riley agreements each provide for up to $500 million of share purchases, subject to conditions and limitations. In April, Scilex issued a further $15 million principal amount of debentures for $14.4 million net proceeds; Yorkville converted $5 million of principal and accrued interest into 632,431 shares at $8 per share.
- Customer and supplier concentration: Three customers generated 82% of Q1 revenue and represented 93% of accounts receivable. Itochu was the sole inventory supplier during the quarter. Genzyme notified Scilex that it intends to stop supplying sodium hyaluronate, an SEMDEXA ingredient, effective May 31, 2024; Scilex was seeking and certifying alternatives.
- ZTlido license and supply risk: Scilex disclosed that its net profits for ZTlido and SP-103 had not exceeded 5% of net sales as of March 31. Under its agreement, Itochu and Oishi may have termination rights if the threshold condition persists for four or more consecutive quarters and concerns are not resolved. Neither had exercised its right as of quarter-end.
- Sorrento-related risk: Sorrento filed for Chapter 11 on February 13, 2023; Scilex is not a debtor in that case. Scilex’s $3.2 million receivable from Sorrento was fully reserved. Sorrento’s bankruptcy and majority voting control may affect Scilex’s relationship, governance and access to shared services.
- Legal matters: Scilex is pursuing litigation involving alleged false advertising of OTC lidocaine patches, a former employee and ZTlido patents. The ZTlido patent case against Apotex was scheduled for trial in June 2024; a 30-month stay was expected to prevent generic sales no earlier than November 2024. Outcomes are uncertain.
- Controls: Management said disclosure controls were not effective as of March 31, 2023. A material weakness in controls over revenue, debt, business combinations and derivative liabilities remained unremediated; remediation efforts were ongoing.
- No quantified financial guidance: The filing provides no specific revenue or earnings forecast. Management expects continued net losses and increased investment in commercialization and product development; commercialization success and access to financing are key uncertainties.
Investor facts to verify
- Cash runway, near-term obligations and whether proposed financing is available on usable terms.
- Actual sales, rebates, gross margin and launch progress for ZTlido, ELYXYB and GLOPERBA.
- Convertible-debenture repayment, conversion and share-dilution effects, alongside use of the Yorkville and B. Riley facilities.
- Progress in qualifying a replacement sodium hyaluronate supplier and the status of the Itochu/Oishi agreement.
- Updates on Sorrento’s bankruptcy, the reserved receivable and Scilex’s independence from Sorrento-provided services.
- Remediation of the material weakness and developments in the disclosed litigation and product pipeline.