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873140
SRNE
Sorrento Therapeutics, Inc.
false
Smaller Reporting Company
2013
10-Q
2013-09-30
0000850261
--12-31
Q3
8.00
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>New
Accounting Standards</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In July 2012,
the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update, or ASU, 2012-02, Intangibles—Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for
Impairment (the revised standard). The objective of this ASU is to
simplify how entities test indefinite-lived intangible assets other
than goodwill for impairment. The amendments in the ASU provide the
option to first assess qualitative factors to determine whether, as
a result of its qualitative assessment, that it is
more-likely-than-not (a likelihood of more than 50%) the asset is
impaired and it is necessary to calculate the fair value of the
asset in order to compare that amount to the carrying value to
determine the amount of the impairment, if any. If an entity
believes, as a result of its qualitative assessment, that it is not
more-likely-than-not (a likelihood of more than 50%) that the fair
value of an asset is less than its carrying amount, no further
testing is required. The revised standard includes examples of
events and circumstances that might indicate that the
indefinite-lived intangible asset is impaired. The approach in the
ASU is similar to the guidance for testing goodwill for impairment
contained in ASU 2011-08, intangibles—Goodwill and Other
(Topic 350): Testing Goodwill for Impairment. The revised standard,
which may be adopted early, is effective for annual and interim
impairment tests performed for fiscal years beginning after
September 15, 2012 and does not change existing guidance on
when to test indefinite-lived intangible assets for impairment. The
adoption of the provisions of this guidance is not expected to have
a material impact on the Company’s consolidated results of
operations, cash flows, and financial position.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Stock-based Compensation</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
accounts for stock-based compensation in accordance with FASB ASC
Topic 718, which establishes accounting for equity instruments
exchanged for employee services. Under such provisions, stock-based
compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an
expense, under the straight-line method, over the employee’s
requisite service period (generally the vesting period of the
equity grant).</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
accounts for equity instruments, including restricted stock or
stock options, issued to non-employees in accordance with
authoritative guidance for equity-based payments to non-employees.
Stock options issued to non-employees are accounted for at their
estimated fair value determined using the Black-Scholes
option-pricing model. The fair value of options granted to
non-employees is re-measured as they vest, and the resulting
increase in value, if any, is recognized as expense during the
period the related services are rendered. Restricted stock issued
to non-employees is accounted for at estimated fair value as they
vest.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Revenue
Recognition</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The
Company’s revenues are generated from the NIH and U.S.
Treasury grant awards and a feasibility study agreement, or the
Collaboration Agreement, that the Company entered into with a third
party in July 2010. The revenue from the NIH and U.S. Treasury
grant awards are based upon subcontractor and internal costs
incurred that are specifically covered by the grant, and where
applicable, a facilities and administrative rate that provides
funding for overhead expenses. These revenues are recognized when
expenses have been incurred by subcontractors or when the Company
incurs internal expenses that are related to the grant.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The revenue
from the Collaboration Agreement is derived from the completion of
certain development services and the reimbursement of certain
development costs incurred to provide such development services.
Revenue from upfront, nonrefundable service fees are recognized
when earned, as evidenced by written acknowledgement from the
collaborator, or other persuasive evidence that all service
deliverables have been achieved, provided that the service
deliverables are substantive and their achievability was not
reasonably assured at the inception of the Collaboration Agreement.
Any amounts received prior to satisfying the Company’s
revenue recognition criteria are recorded as deferred
revenue.</font></p>
</div>
Company completed a 1-for-25 reverse split of its common stock.
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Intangibles</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Patent rights
are stated at cost and depreciated on a straight-line basis over
the estimated useful lives of the assets, determined to be
approximately nineteen years from the date of transfer of the
rights to the Company in April 2013. The Company had no patent
rights as of December 31, 2012. Amortization expense for the
three and nine months ended September 30, 2013 was $1,250 and
$2,500, respectively, which has been included in intangibles
amortization.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">License rights
are stated at cost and depreciated on a straight-line basis over
the estimated useful lives of the assets, determined to be
approximately fifteen years from the date of acquisition of the
rights in September 2013. The Company had no licenses rights as of
December 31, 2012. Amortization expense for the three and nine
months ended September 30, 2013 was $110,839, which has been
included in intangibles amortization.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Liquidity</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">As reflected in
the accompanying consolidated financial statements, the Company has
incurred operating losses since its inception in 2006, and as of
September 30, 2013, had an accumulated deficit of $21,565,695.
At September 30, 2013, the Company had working capital of
$4,555,365.</font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
anticipates that it will continue to incur net losses into the
foreseeable future as it: (i) advances its
Cynviloq</font><font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">TM</sup></font>
<font style="FONT-FAMILY: Times New Roman" size="2">asset into a
registration trial (a single bioequivalence study) and pursues
other potential indications, (ii) acquires Sherrington
Pharmaceuticals, Inc., or Sherrington, and advances its pain drug
into clinical trials, (iii) continues to identify and advance
a number of fully human therapeutic antibody and ADC preclinical
drug candidates, (iv) acquires Concortis Biosystems, Corp., or
Concortis, and (v) expands its corporate infrastructure,
including the costs associated with being a public company. See
Note 7.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In September
2013, the Company entered into a $5,000,000 loan and security
agreement with two banks pursuant to which the lenders provided the
Company a term loan, which was funded at closing. Contemporaneously
with such closing, the Company repaid its then outstanding
equipment loan balance of $762,361. In October 2013, the Company:
(i) closed an underwritten public offering of 4,772,500 shares
of its common stock, including the Underwriters exercise of an
over-allotment of 622,500 shares of common stock, at $7.25 per
share and total gross proceeds of $34.6 million, and
(ii) issued an aggregate $1,850,000 principal amount of
Convertible Promissory Notes (the “Notes”) that bear
interest at 7% per annum. Such Notes and related accrued
interest automatically converted into 256,119 shares of common
stock at $7.25 per share effective in October 2013. Management
believes the Company has the ability to meet all obligations due
over the course of the next twelve months. See Note 7.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
plans to continue to fund its 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. The Company 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 the Company 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, the Company has the ability to offer up to
$65.4 million of additional securities. Pursuant to the Shelf
Registration Statement, the Company may offer such securities from
time to time and through one or more methods of distribution,
subject to market conditions and the Company’s 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, the
Company cannot be sure that such additional funds will be available
on reasonable terms, or at all. If the Company is unable to secure
adequate additional funding, the Company 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 the Company does not meet its payment
obligations to third parties as they come due, it may be subject to
litigation claims. Even if the Company is 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 the Company’s business, results of
operations, and future prospects.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">If the Company
raises additional funds by issuing equity securities, substantial
dilution to existing stockholders would result. If the Company
raises 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 the
Company’s ability to operate its business.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>4. Debt</b></font></p>
<!-- xbrl,body -->
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Equipment
Loan and Security Agreement</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In February
2013, the Company entered into an equipment loan and security
agreement with a bank pursuant to which the lender provided the
Company a loan in the principal amount of $875,888 to finance
certain equipment. Interest accrues on the outstanding advance at
the fixed rate of 5.15%. The Company granted the lender a security
interest in any equipment that is financed under the equipment loan
agreement. In September 2013, the equipment loan was paid in full,
the Company had no further obligations thereunder, and the bank
released its security interest in such assets.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Loan and
Security Agreement</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In September
2013, the Company entered into a $5,000,000 loan and security
agreement with two banks pursuant to which the lenders provided the
Company a term loan, or the Term Loan, which was funded at closing.
The interest rate on the Term Loan is 7.95% per annum. The
Company 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. The Term
Loan is secured by a security interest in all of the
Company’s assets except intellectual property. The
Company’s intellectual property is subject to a negative
pledge. In connection with the Term Loan, the Lenders received a
warrant to purchase an aggregate 31,250 shares of the
Company’s 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 the consolidated balance
sheet as of September 30, 2013.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">At the
Company’s option, it may prepay all of the outstanding
principal balance, subject to certain pre-payment fees ranging from
1% to 3% of the prepayment amount. In the event of a final payment
of the loans under the loan agreement, either in the event of
repayment of the loan at maturity or upon any prepayment, the
Company is obligated to pay a final fee of $200,000.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company is
also subject to certain affirmative and negative covenants under
the loan agreement, including limitations on its ability to:
undergo certain change of control events; convey, sell, lease,
license, transfer or otherwise dispose of any equipment financed by
loans under the loan agreement; create, incur, assume, guarantee or
be liable with respect to indebtedness, subject to certain
exceptions; grant liens on any equipment financed under the loan
agreement; and make or permit any payment on specified subordinated
debt. In addition, under the loan agreement, subject to certain
exceptions, the Company is required to maintain with the lender its
primary operating, other deposit and securities
accounts.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Future annual
principal payments under the loan agreement, as of
September 30, 2013, are as follows:</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="85%"></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2014</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2"> 303,406</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2015</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">1,907,040</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2016</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">2,064,298</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2017</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">725,256</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Debt discount</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">(214,680</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">) </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td valign="top">
<p style="MARGIN-TOP: 0px; TEXT-INDENT: -1em; MARGIN-BOTTOM: 1px; MARGIN-LEFT: 1em">
<font style="FONT-FAMILY: Times New Roman" size="2">Long-term
debt</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">4,785,320</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
2017-04-15
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Principles of Consolidation</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The financial
statements also include the accounts of the Company’s
wholly-owned subsidiaries, IgDraSol, Sorrento Therapeutics, Inc.
Hong Kong Limited, or Sorrento Hong Kong. Sorrento Hong Kong had no
operating activity through September 30, 2013. All
inter-company balances and transactions have been eliminated in
consolidation.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Reverse
Stock Split</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
July 30, 2013, the Company completed a 1-for-25 reverse split
of its common stock. All common shares and per common share amounts
in the financial statements and footnotes have been adjusted
retroactively to reflect the effects of this action.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Future annual
principal payments under the loan agreement, as of
September 30, 2013, are as follows:</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="85%"></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2014</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2"> 303,406</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2015</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">1,907,040</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2016</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">2,064,298</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">2017</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">725,256</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Debt discount</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">(214,680</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">) </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td valign="top">
<p style="MARGIN-TOP: 0px; TEXT-INDENT: -1em; MARGIN-BOTTOM: 1px; MARGIN-LEFT: 1em">
<font style="FONT-FAMILY: Times New Roman" size="2">Long-term
debt</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">4,785,320</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>1. Nature of Operations,
Summary of Significant Accounting Policies and Business
Activities</b></font></p>
<!-- xbrl,body -->
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Nature of
Operations and Basis of Presentation</i></b></font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Sorrento
Therapeutics, Inc., together with its wholly-owned subsidiaries
(collectively, the “Company”) is a biopharmaceutical
company focused on the discovery, acquisition, development and
commercialization of proprietary drug therapeutics for addressing
significant unmet medical needs in the United States, Europe and
additional international markets. The Company’s primary
therapeutic focus is oncology, including the treatment of chronic
cancer pain, but is also developing therapeutic products for other
indications, including inflammation, metabolic disorders, and
infectious diseases. The Company’s pipeline consists of its
lead oncology product candidate Cynviloq™, a micellar
paclitaxel formulation, resiniferatoxin, a non-opiate, ultra potent
and selective agonist of the TRPV-1 receptor, as well as fully
human therapeutic antibodies derived from our proprietary
G-MAB<font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">®</sup></font>
library platform and antibody drug conjugates, or ADCs, antibody
formulated drug conjugates, or AfDCs, and recombinant intravenous
immunoglobulin, or rIVIG. See Note 7.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Through
September 30, 2013, the Company had devoted substantially all
of its efforts to product development, acquiring companies and
in-licensing assets, raising capital and building infrastructure,
and had not realized revenues from its planned principal
operations. Accordingly, the Company is considered to be in the
development stage.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The
accompanying interim consolidated financial statements have been
prepared by the Company, without audit, in accordance with the
instructions to Form 10-Q and, therefore, do not necessarily
include all information and footnotes necessary for a fair
statement of its financial position, results of operations and cash
flows in accordance with generally accepted accounting principles
in the U.S., or GAAP.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The balance
sheet at December 31, 2012 is derived from the audited
consolidated balance sheet at that date which is not presented
herein.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In the opinion
of management, the unaudited financial information for the interim
periods presented reflects all adjustments, which are only normal
and recurring, necessary for a fair statement of financial
position, results of operations and cash flows. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended
December 31, 2012. Operating results for interim periods are
not expected to be indicative of operating results for the
Company’s 2013 fiscal year.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Reverse
Stock Split</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
July 30, 2013, the Company completed a 1-for-25 reverse split
of its common stock. All common shares and per common share amounts
in the financial statements and footnotes have been adjusted
retroactively to reflect the effects of this action.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Business
Activities</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
September 21, 2009, QuikByte Software, Inc., a shell company
(QuikByte) acquired Sorrento Therapeutics, Inc., a privately held
Delaware corporation (STI), in a reverse merger (the “Reverse
Merger”). Pursuant to the Reverse Merger, all of the issued
and outstanding shares of STI common stock were exchanged into an
aggregate of 6,775,032 shares of QuikByte common stock and STI
became a wholly owned subsidiary of QuikByte. The holders of
QuikByte’s common stock as of immediately prior to the
Reverse Merger held an aggregate of 2,228,332 shares of
QuikByte’s common stock. STI and QuikByte reincorporated in
Delaware in December 2009, and on December 4, 2009, STI merged
with and into QuikByte, the separate corporate existence of STI
ceased and QuikByte continued as the surviving corporation.
Contemporaneously, QuikByte Software, Inc. changed its name to
Sorrento Therapeutics, Inc. In connection with the Reverse Merger,
the Company received cash of $104,860.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In January
2013, the Company entered into an assignment agreement (the
“assignment agreement”) with Tien-Li Lee, M.D. and Jane
Wu Lee, M.D. as individuals (collectively, the “Lees”)
pursuant to which the Lees agreed to assign to the Company their
right, title and interest throughout the world in and to certain
inventions and patents that provide for the production of
recombinant intravenous immunoglobulins. See Note 2.</font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
March 7, 2013, the Company entered into various agreements
with IgDraSol, Inc. (“IgDraSol”) a private company
focused on the development of Cynviloq, an oncologic agent for the
treatment of metastatic breast cancer, or MBC, non-small cell lung
cancer, or NSCLC, and other cancers, as follows: (i) an
exclusive option agreement, (ii) an asset purchase agreement
pursuant to which the Company agreed to purchase all documentation,
equipment, information and other know-how related to micellar
nanoparticle technology encompassing Tocosol<font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">®</sup></font>
and related technologies, and (iii) an initial services
agreement, pursuant to which, IgDraSol is to provide certain
product development and technology services related to the
Company’s antibody platform. See Note 3.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Liquidity</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">As reflected in
the accompanying consolidated financial statements, the Company has
incurred operating losses since its inception in 2006, and as of
September 30, 2013, had an accumulated deficit of $21,565,695.
At September 30, 2013, the Company had working capital of
$4,555,365.</font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
anticipates that it will continue to incur net losses into the
foreseeable future as it: (i) advances its
Cynviloq</font><font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">TM</sup></font>
<font style="FONT-FAMILY: Times New Roman" size="2">asset into a
registration trial (a single bioequivalence study) and pursues
other potential indications, (ii) acquires Sherrington
Pharmaceuticals, Inc., or Sherrington, and advances its pain drug
into clinical trials, (iii) continues to identify and advance
a number of fully human therapeutic antibody and ADC preclinical
drug candidates, (iv) acquires Concortis Biosystems, Corp., or
Concortis, and (v) expands its corporate infrastructure,
including the costs associated with being a public company. See
Note 7.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In September
2013, the Company entered into a $5,000,000 loan and security
agreement with two banks pursuant to which the lenders provided the
Company a term loan, which was funded at closing. Contemporaneously
with such closing, the Company repaid its then outstanding
equipment loan balance of $762,361. In October 2013, the Company:
(i) closed an underwritten public offering of 4,772,500 shares
of its common stock, including the Underwriters exercise of an
over-allotment of 622,500 shares of common stock, at $7.25 per
share and total gross proceeds of $34.6 million, and
(ii) issued an aggregate $1,850,000 principal amount of
Convertible Promissory Notes (the “Notes”) that bear
interest at 7% per annum. Such Notes and related accrued
interest automatically converted into 256,119 shares of common
stock at $7.25 per share effective in October 2013. Management
believes the Company has the ability to meet all obligations due
over the course of the next twelve months. See Note 7.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
plans to continue to fund its 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. The Company 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 the Company 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, the Company has the ability to offer up to
$65.4 million of additional securities. Pursuant to the Shelf
Registration Statement, the Company may offer such securities from
time to time and through one or more methods of distribution,
subject to market conditions and the Company’s 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, the
Company cannot be sure that such additional funds will be available
on reasonable terms, or at all. If the Company is unable to secure
adequate additional funding, the Company 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 the Company does not meet its payment
obligations to third parties as they come due, it may be subject to
litigation claims. Even if the Company is 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 the Company’s business, results of
operations, and future prospects.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">If the Company
raises additional funds by issuing equity securities, substantial
dilution to existing stockholders would result. If the Company
raises 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 the
Company’s ability to operate its business.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Principles of Consolidation</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The financial
statements also include the accounts of the Company’s
wholly-owned subsidiaries, IgDraSol, Sorrento Therapeutics, Inc.
Hong Kong Limited, or Sorrento Hong Kong. Sorrento Hong Kong had no
operating activity through September 30, 2013. All
inter-company balances and transactions have been eliminated in
consolidation.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Use of
Estimates</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The preparation
of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the
reporting period. Management believes that these estimates are
reasonable; however, actual results may differ from these
estimates. Such adjustments could include, for example, appropriate
estimates for Company bonus plans normally determined or settled at
year-end.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Cash and
Cash Equivalents</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The
Company minimizes its credit risk associated with cash and cash
equivalents by periodically evaluating the credit quality of its
primary financial institution. The balance at times may exceed
federally insured limits. The Company has not experienced any
losses on such accounts.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Fair
Value of Financial Instruments</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The
Company’s financial instruments consist of cash and cash
equivalents, grants receivable, prepaid expenses and other assets,
accounts payable and accrued expenses. Fair value estimates of
these instruments are made at a specific point in time, based on
relevant market information. These estimates may be subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. As of
September 30, 2013 and December 31, 2012, the carrying
amount of cash and cash equivalents, grants receivable, prepaid
expenses and other assets, accounts payable and accrued liabilities
are generally considered to be representative of their respective
fair values because of the short-term nature of those
instruments.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Grants
Receivable</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Grants
receivable at September 30, 2013 and December 31, 2012
represent amounts due under federal contracts with the
National Institute of Allergy and Infectious Diseases, or NIAID, a
division of the National Institutes of Health (“NIH”),
collectively, the NIH Grants. The Company considers the grants
receivable to be fully collectible; accordingly, no allowance for
doubtful amounts has been established. If amounts become
uncollectible, they are charged to operations.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Property
and Equipment</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Property and
equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. Such lives
vary from three to five years. Leasehold improvements are amortized
over the lesser of the life of the lease or the life of the
asset.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Intangibles</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Patent rights
are stated at cost and depreciated on a straight-line basis over
the estimated useful lives of the assets, determined to be
approximately nineteen years from the date of transfer of the
rights to the Company in April 2013. The Company had no patent
rights as of December 31, 2012. Amortization expense for the
three and nine months ended September 30, 2013 was $1,250 and
$2,500, respectively, which has been included in intangibles
amortization.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">License rights
are stated at cost and depreciated on a straight-line basis over
the estimated useful lives of the assets, determined to be
approximately fifteen years from the date of acquisition of the
rights in September 2013. The Company had no licenses rights as of
December 31, 2012. Amortization expense for the three and nine
months ended September 30, 2013 was $110,839, which has been
included in intangibles amortization.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Impairment of Long-Lived Assets</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
evaluates its long-lived assets with definite lives, such as
property and equipment, patent and license rights, for impairment
by considering competition by products prescribed for the same
indication, the likelihood and estimated future entry of
non-generic and generic competition with the same or similar
indication and other related factors. The factors that drive the
estimate of the life are often uncertain and are reviewed on a
periodic basis or when events occur that warrant review.
Recoverability is measured by comparison of the assets’ book
value to future net undiscounted cash flows that the assets are
expected to generate. There have not been any impairment losses of
long-lived assets through September 30, 2013.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Income
Taxes</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The provisions
of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 740-10,
Uncertainty in Income Taxes, address the determination of whether
tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. Under ASC 740-10,
the Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by taxing authorities, based on
the technical merits of the position. The Company has determined
that it has no uncertain tax positions.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
accounts for income taxes using the asset and liability method to
compute the differences between the tax basis of assets and
liabilities and the related financial amounts, using currently
enacted tax rates.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company has
deferred tax assets, which are subject to periodic recoverability
assessments. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount that more likely than
not will be realized. The Company evaluates the recoverability of
the deferred tax assets annually.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Revenue
Recognition</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The
Company’s revenues are generated from the NIH and U.S.
Treasury grant awards and a feasibility study agreement, or the
Collaboration Agreement, that the Company entered into with a third
party in July 2010. The revenue from the NIH and U.S. Treasury
grant awards are based upon subcontractor and internal costs
incurred that are specifically covered by the grant, and where
applicable, a facilities and administrative rate that provides
funding for overhead expenses. These revenues are recognized when
expenses have been incurred by subcontractors or when the Company
incurs internal expenses that are related to the grant.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The revenue
from the Collaboration Agreement is derived from the completion of
certain development services and the reimbursement of certain
development costs incurred to provide such development services.
Revenue from upfront, nonrefundable service fees are recognized
when earned, as evidenced by written acknowledgement from the
collaborator, or other persuasive evidence that all service
deliverables have been achieved, provided that the service
deliverables are substantive and their achievability was not
reasonably assured at the inception of the Collaboration Agreement.
Any amounts received prior to satisfying the Company’s
revenue recognition criteria are recorded as deferred
revenue.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Research
and Development Costs and Collaborations</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Research and
development costs are charged to expense as incurred. Such costs
primarily consist of discovery research, pre-clinical activities,
manufacture of drug supply, lab supplies, contract and acquired
services, stock-based compensation expense, salaries and related
benefits, depreciation and allocated and direct facility
expenses.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
evaluates its collaborative agreements for proper income statement
classification based on the nature of the underlying activity. If
payments to collaborative partners are not within the scope of
other authoritative accounting literature, the income statement
classification for these payments is based on a reasonable,
rational analogy to authoritative accounting literature that is
applied in a consistent manner. Amounts due to collaborative
partners related to development activities are reflected as a
research and development expense.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Acquired
In-Process Research and Development Expense</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company has
acquired and may continue to acquire the rights to develop and
commercialize new drug candidates. The up-front payments to acquire
a new drug compound, as well as future milestone payments, are
immediately expensed as acquired in-process research and
development provided that the drug has not achieved regulatory
approval for marketing and, absent obtaining such approval, has no
alternative future use.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Stock-based Compensation</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
accounts for stock-based compensation in accordance with FASB ASC
Topic 718, which establishes accounting for equity instruments
exchanged for employee services. Under such provisions, stock-based
compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an
expense, under the straight-line method, over the employee’s
requisite service period (generally the vesting period of the
equity grant).</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
accounts for equity instruments, including restricted stock or
stock options, issued to non-employees in accordance with
authoritative guidance for equity-based payments to non-employees.
Stock options issued to non-employees are accounted for at their
estimated fair value determined using the Black-Scholes
option-pricing model. The fair value of options granted to
non-employees is re-measured as they vest, and the resulting
increase in value, if any, is recognized as expense during the
period the related services are rendered. Restricted stock issued
to non-employees is accounted for at estimated fair value as they
vest.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Net Loss
per Share</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Net loss per
share is presented as both basic and diluted net loss per share.
Basic net loss per share excludes any dilutive effects of options,
shares subject to repurchase and warrants. Diluted net loss per
share includes the impact of potentially dilutive securities. No
dilutive effect was calculated for the three or nine months ended
September 30, 2013 and 2012 as the Company reported a net loss
for each respective period and the effect would have been
anti-dilutive. The Company had outstanding common share equivalents
of 551,850 and 460,668 at September 30, 2013 and 2012,
respectively. The Company excludes the potential issuance of common
shares contingently issuable to the Lees or IgDraSol as there is no
guarantee that such shares will be issued in the future. See Notes
2 and 3.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>New
Accounting Standards</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In July 2012,
the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update, or ASU, 2012-02, Intangibles—Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for
Impairment (the revised standard). The objective of this ASU is to
simplify how entities test indefinite-lived intangible assets other
than goodwill for impairment. The amendments in the ASU provide the
option to first assess qualitative factors to determine whether, as
a result of its qualitative assessment, that it is
more-likely-than-not (a likelihood of more than 50%) the asset is
impaired and it is necessary to calculate the fair value of the
asset in order to compare that amount to the carrying value to
determine the amount of the impairment, if any. If an entity
believes, as a result of its qualitative assessment, that it is not
more-likely-than-not (a likelihood of more than 50%) that the fair
value of an asset is less than its carrying amount, no further
testing is required. The revised standard includes examples of
events and circumstances that might indicate that the
indefinite-lived intangible asset is impaired. The approach in the
ASU is similar to the guidance for testing goodwill for impairment
contained in ASU 2011-08, intangibles—Goodwill and Other
(Topic 350): Testing Goodwill for Impairment. The revised standard,
which may be adopted early, is effective for annual and interim
impairment tests performed for fiscal years beginning after
September 15, 2012 and does not change existing guidance on
when to test indefinite-lived intangible assets for impairment. The
adoption of the provisions of this guidance is not expected to have
a material impact on the Company’s consolidated results of
operations, cash flows, and financial position.</font></p>
<!-- xbrl,n -->
</div>
13303581
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>5. Stockholders’
Equity</b></font></p>
<!-- xbrl,body -->
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Common Stock and Related
Party Transaction</b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In December
2011, the Company entered into a Stock Purchase Agreement, or the
Stock Purchase Agreement, and issued 500,000 shares of common stock
in a private placement transaction at $4.00 per share, for
aggregate gross proceeds of $2,000,000. In May 2012, the Company
entered into an Amended and Restated Stock Purchase Agreement, and
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. Two hundred and fifty thousand of the shares were
purchased by an investor, Hongye SD Group, LLC, of which
Dr. Henry Ji, the Company’s Chief Executive Officer and
President, is a managing director.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In January
2013, the Company entered into the assignment agreement and issued
10,000 shares of common stock valued at $40,000.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In March 2013,
the Company entered into a Stock Purchase Agreement and issued
1,426,406 shares of common stock, in a private placement
transaction, at $4.50 per share for aggregate gross proceeds of
$6,418,495.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In April 2013,
Company’s stockholders approved, among other items, three
amendments to the Company’s Certificate of Incorporation, as
follows: (i) increased the number of shares of common stock
authorized to be issued by the Company from 500,000,000 to
750,000,000, (ii) authorized the Company’s Board of
Directors, or the Board, to effect a reverse stock split of the
Company’s common stock by a ratio of not less than 1-for-2
and not more than 1-for-150, with the Board having the discretion
as to whether or not the reverse split is to be effected at any
time prior to April 26, 2014, and (iii) authorized the
Board, in the event a reverse stock split is approved, in its
discretion, to reduce the number of shares of common stock
authorized to be issued by the Company in proportion to the
percentage decrease in the number of outstanding shares of common
stock resulting from the reverse split (or a lesser decrease in
authorized shares of common stock as determined by the Board in its
discretion). See Note 1.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Stock
Incentive Plans</i></b></font></p>
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><i>2009 Equity
Incentive Plan</i></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In February
2009, prior to the Merger, the Company’s Board of Directors
approved the 2009 Equity Incentive Plan, or the EIP, under which
400,000 shares of common stock were reserved for issuance to
employees, non-employee directors and consultants of the Company.
In March 2009, the Company issued 296,155 restricted common stock
awards to certain consultants for aggregate gross proceeds of $291,
of which the Company repurchased 44,166 unvested shares of
restricted common stock for $43 in January 2011. The restricted
shares vested monthly over four years and all remaining shares were
fully vested as of September 30, 2013. No further shares are
available for grant under the EIP.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><i>2009
Non-Employee Director Grants</i></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In September
2009, prior to the adoption of the 2009 Stock Incentive Plan, the
Company’s Board of Directors approved the reservation and
issuance of 8,000 nonstatutory stock options to the Company’s
non-employee directors. The outstanding options vested on the one
year anniversary of the vesting commencement date in October 2010.
Such options are exercisable on the two year anniversary of the
grant date and are generally exercisable for up to 10 years from
the grant date. No further shares may be granted under this plan
and, as of September 30, 2013, 3,200 options were
outstanding.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><i>2009 Stock
Incentive Plan</i></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In October
2009, the Company’s stockholders approved the 2009 Stock
Incentive Plan. In April 2013, the Company’s stockholders
approved, among other items, the amendment and restatement of the
2009 Stock Incentive Plan, or the Stock Plan, to increase the
number of common stock authorized to be issued pursuant to the
Stock Plan to 1,360,000. Such shares of the Company’s common
stock are reserved for issuance to employees, non-employee
directors and consultants of the Company. In addition, this amount
will be automatically increased annually on the first day of each
fiscal year by the lesser of: (i) 1% of the aggregate number
of shares of the Company’s common stock outstanding on the
last day of the immediately preceding fiscal year,
(ii) 200,000 shares, or (iii) an amount approved by the
administrator of the Stock Plan. The Stock Plan provides for the
grant of incentive stock options, non-incentive stock options,
stock appreciation rights, restricted stock awards, unrestricted
stock awards, restricted stock unit awards and performance awards
to eligible recipients. Recipients of stock options shall be
eligible to purchase shares of the Company’s common stock at
an exercise price equal to no less than the estimated fair market
value of such stock on the date of grant. The maximum term of
options granted under the Stock Plan is ten years. Employee option
grants will generally vest 25% on each anniversary of the original
vesting date over four years. The vesting schedules for grants to
non-employee directors and consultants will be determined by the
Company’s Compensation Committee. Stock options are generally
not exercisable prior to the applicable vesting date, unless
otherwise accelerated under the terms of the applicable stock plan
agreement. Unvested shares of the Company’s common stock
issued in connection with an early exercise however, may be
repurchased by the Company upon termination of the optionee’s
service with the Company.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">During the nine
months ended September 30, 2013 and 2012, the Company’s
Board of Directors awarded 110,200 and 325,200 options to certain
employees and consultants and 833,400 and 147,800 shares were
available for grant under the Stock Plan, respectively.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
uses the Black-Scholes valuation model to calculate the fair value
of stock options. Stock based compensation expense is recognized
over the vesting period using the straight-line method. The fair
value of employee stock options was estimated at the grant date
using the following assumptions:</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="76%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="78%"></td>
<td valign="bottom" width="7%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="7%"></td>
<td></td>
</tr>
<tr>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1">  </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" colspan="5" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>Nine months ended September 30,</b></font></td>
</tr>
<tr>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1">  </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" colspan="2" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>2013</b></font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>2012</b></font></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Dividend yield</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">—  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2">—  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Volatility</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">109</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">% </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2">102%</font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Risk-free interest
rate</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">1.19</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">% </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2"><font style="WHITE-SPACE: nowrap">0.71% - 1.11%</font></font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Expected life of
options</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">6.1 years</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2">5.6 years</font></td>
</tr>
<!-- End Table Body --></table>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The weighted
average grant date fair value per share of employee stock options
granted during the nine months ended September 30, 2013 and
2012 was $4.78 and $3.25, respectively.</font></p>
<p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The assumed
dividend yield was based on the Company’s expectation of not
paying dividends in the foreseeable future. Due to the
Company’s limited historical data, the estimated volatility
incorporates the historical and implied volatility of comparable
companies whose share prices are publicly available. The risk-free
interest rate assumption was based on the United States
Treasury’s rates for U.S. Treasury zero-coupon bonds with
maturities similar to those of the expected term of the award being
valued. The weighted average expected life of options was estimated
using the average of the contractual term and the weighted average
vesting term of the options.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The total
employee stock-based compensation recorded as operating expenses
was $157,853, $20,685 and $873,140 for the three months ended
September 30, 2013 and 2012 and for the period from Inception
through September 30, 2013, respectively. The total employee
stock-based compensation recorded as operating expenses was
$454,324 and $75,350 for the nine months ended September 30,
2013 and 2012, respectively.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">As of
September 30, 2013, unrecognized compensation cost related to
the options was $1,654,334 which will be recognized over 2.9
years.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
records equity instruments issued to non-employees as expense at
their fair value over the related service period as determined in
accordance with the applicable authoritative guidance and
periodically revalues the equity instruments as they vest.
Stock-based compensation expense related to non-employee
consultants recorded as operating expenses was $34,254, $66,130 and
$1,215,270 for the three months ended September 30, 2013 and
2012 and for the period from Inception through September 30,
2013, respectively. Stock-based compensation expense related to
non-employee consultants recorded as operating expenses was
$167,447 and $214,722 for the nine months ended September 30,
2013 and 2012, respectively.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Property
and Equipment</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Property and
equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. Such lives
vary from three to five years. Leasehold improvements are amortized
over the lesser of the life of the lease or the life of the
asset.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Cash and
Cash Equivalents</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The
Company minimizes its credit risk associated with cash and cash
equivalents by periodically evaluating the credit quality of its
primary financial institution. The balance at times may exceed
federally insured limits. The Company has not experienced any
losses on such accounts.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>3. IgDraSol Transactions
and Acquisition</b></font></p>
<!-- xbrl,body -->
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
March 7, 2013, the Company entered into an exclusive option
agreement with IgDraSol, a private company focused on the
development of oncologic agents for the treatment of MBC, NSCLC,
and other cancers. IgDraSol granted the Company an irrevocable
option to acquire IgDraSol by means of an agreement and plan of
merger, and was paid a non-refundable lump sum payment of $200,000
in April 2013. Such payment was capitalized and amortized in full
over the life of the option period as intangibles amortization as
of September 30, 2013.</font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
entered into an initial services agreement dated March 7, 2013
with IgDraSol, wherein IgDraSol provided certain product
development and technology services related to antibody-based
nanotherapeutics. In March 2013, IgDraSol was paid a non-refundable
payment of $1,000,000 and the related services were completed prior
to May 31, 2013. In addition, the Company entered into an
asset purchase agreement with IgDraSol whereby it agreed to
purchase all documentation, equipment, information and other
know-how related to micellar nanoparticle technology encompassing
Tocosol<font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">®</sup></font>
and related technologies for a purchase price of $1,210,000. The
purchase price was paid in April 2013 and was recognized as
acquired in-process research and development expense. Also in April
2013, the Company entered into a development services agreement
with IgDraSol related to the development of Tocosol<font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">®</sup></font>
and related technologies. For the three and nine months ended
September 30, 2013, the Company recorded $875,133 and
$1,721,193, respectively, of operating expenses associated with the
development services agreement.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
September 9, 2013, the Company exercised its option to acquire
IgDraSol whereby IgDraSol became a wholly-owned subsidiary.
Pursuant to the merger agreement, the Company issued 3,006,641
shares of common stock to IgDraSol stockholders and paid $0.4
million in cash. Upon the later achievement of a specified
regulatory milestone, the Company will issue an additional
1,306,272 shares of common stock to former IgDraSol
stockholders.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The following
tables summarize the consideration transferred to acquire IgDraSol
and the amounts of identified assets acquired and liabilities
assumed at the acquisition date.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The purchase
price is summarized as follows:</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="84%"></td>
<td valign="bottom" width="8%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1">  </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" colspan="2" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>(in thousands)</b></font></td>
<td valign="bottom"><font size="1"> </font></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Cash buyout of certain
holders of IgDraSol common stock options and warrants</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">356.1</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Market value of shares of
Sorrento common stock issued in exchange for IgDraSol common
stock</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">27,811.4</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Transaction fees, including
separation and bonus payments of $771,000 made to IgDraSol
employees</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">937.8</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Total purchase
price</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,105.3</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<!-- End Table Body --></table>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The purchase
price has been allocated based on the fair value of assets acquired
and liabilities assumed ($ in thousands):</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="86%"></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Assets
acquired:</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Cash</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">125.8</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Prepaid expenses &
other</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">44.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">PP&E</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">120.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Intangible license
rights</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,105.3</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Total
assets</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,396.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Liabilities
assumed:</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Accounts payable</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">167.7</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Accrued expenses</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">123.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Total
liabilities</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">291.6</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Total purchase
price</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,105.3</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<!-- End Table Body --></table>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The intangible
license rights will be amortized through fiscal 2028 at an annual
rate of $1,900,093.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<!-- xbrl,n --></div>
-9278452
-0.80
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>7. Subsequent
Events</b></font></p>
<!-- xbrl,body -->
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Agreement and Plan of
Merger – Sherrington</b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
October 9, 2013, the Company and SP Merger Sub, Inc., a wholly
owned subsidiary of the Company, Sherrington Pharmaceuticals, Inc.
and the stockholders of Sherrington (the “Sherrington
Holders”) entered into an Agreement and Plan of Merger and
Reorganization (the “Agreement”) pursuant to which the
Company issued an aggregate of 200,000 shares of its common stock
to the Sherrington Holders (the “Merger Shares”) and SP
Merger Sub was merged into Sherrington (the “Merger”).
Pursuant to the Agreement, 29,350 of the Merger Shares are being
held in escrow for any potential indemnification claims. The
Company filed a resale registration statement on Form S-3 with the
Securities and Exchange Commission on October 31, 2013 to
register the Merger Shares.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Underwritten Public
Offering and Nasdaq Uplisting</b></font></p>
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><i>Underwritten Public
Offering of Common Stock</i></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On October 30,
2013, the Company closed an underwritten public offering of
4,150,000 shares of common stock, 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 the Company. The common stock
began trading on The NASDAQ Capital Market on October 25, 2013
under the symbol “SRNE”.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><i>Purchase
Warrants</i></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Concurrent with
the offering, the Company agreed to issue and sell to the
underwriters a warrant (“Underwriters Warrant”) for the
purchase of an aggregate of 182,600 shares of Common Stock,
representing 4.4% of the Firm Shares, for an aggregate purchase
price of $100. The Underwriters Warrant agreement is exercisable,
in whole or in part, commencing on a date which is one
(1) year after the effective date of the Registration
Statement and expiring on the five-year anniversary of the
effective date of the Registration Statement at an initial exercise
price per share of Common Stock of $9.0625, which is equal to 125%
of the initial public offering price of the Firm Shares.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Convertible Promissory
Notes</b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In October
2013, the Company issued an aggregate $1,850,000 principal amount
of Notes that bear interest at 7% per annum. Concurrently with
the closing of the public offering, such Notes and related accrued
interest automatically converted into 256,119 shares of common
stock.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Agreement of Merger
– Concortis</b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On November 11,
2013, the Company and Catalyst Merger Sub, Inc., a wholly owned
subsidiary of the Company, Concortis Biosystems, Corp.
(“Concortis”) and Zhenwei Miao and Gang Chen entered
into an Agreement of Merger pursuant to which, at the effective
time of the merger, the Company will issue an aggregate of
1,331,978 shares of its common stock to the shareholders of
Concortis (the “Concortis Merger Shares”) and Catalyst
Merger Sub will merge into Concortis (the “Concortis
Merger”). Pursuant to the merger agreement, 15% of the
Concortis Merger Shares will be held by the Company for any
potential indemnification claims.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In connection
with the merger, the Company agreed to
appoint Dr. Zhenwei (“David”) Miao, the
former President and Chief Scientific Officer of Concortis, as its
Chief Technical Officer. In addition, Dr. Miao and certain other
employees of Concortis are to receive annual supplemental cash
bonus payments totaling $1,000,000 on December 31 of each of the
years ending 2013, 2014, 2015, and 2016.</font></p>
<!-- /xbrl,ns -->
</div>
P2Y10M24D
<div>
<p style="margin-top:18px;margin-bottom:0px"><font style="font-family:Times New Roman" size="2"><b>6. Income
Taxes</b></font></p>
<p style="margin-top:6px;margin-bottom:0px; text-indent:4%">
<font style="font-family:Times New Roman" size="2">The Company
maintains deferred tax assets that reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. These deferred tax assets include net
operating loss carryforwards, research credits and capitalized
research and development. The net deferred tax asset has been fully
offset by a valuation allowance because of the Company’s
history of losses. Utilization of operating losses and credits may
be subject to substantial annual limitation due to ownership change
provisions of the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before
utilization.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Acquired
In-Process Research and Development Expense</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company has
acquired and may continue to acquire the rights to develop and
commercialize new drug candidates. The up-front payments to acquire
a new drug compound, as well as future milestone payments, are
immediately expensed as acquired in-process research and
development provided that the drug has not achieved regulatory
approval for marketing and, absent obtaining such approval, has no
alternative future use.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Research
and Development Costs and Collaborations</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Research and
development costs are charged to expense as incurred. Such costs
primarily consist of discovery research, pre-clinical activities,
manufacture of drug supply, lab supplies, contract and acquired
services, stock-based compensation expense, salaries and related
benefits, depreciation and allocated and direct facility
expenses.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
evaluates its collaborative agreements for proper income statement
classification based on the nature of the underlying activity. If
payments to collaborative partners are not within the scope of
other authoritative accounting literature, the income statement
classification for these payments is based on a reasonable,
rational analogy to authoritative accounting literature that is
applied in a consistent manner. Amounts due to collaborative
partners related to development activities are reflected as a
research and development expense.</font></p>
</div>
31250
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Impairment of Long-Lived Assets</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
evaluates its long-lived assets with definite lives, such as
property and equipment, patent and license rights, for impairment
by considering competition by products prescribed for the same
indication, the likelihood and estimated future entry of
non-generic and generic competition with the same or similar
indication and other related factors. The factors that drive the
estimate of the life are often uncertain and are reviewed on a
periodic basis or when events occur that warrant review.
Recoverability is measured by comparison of the assets’ book
value to future net undiscounted cash flows that the assets are
expected to generate. There have not been any impairment losses of
long-lived assets through September 30, 2013.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Use of
Estimates</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The preparation
of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the
reporting period. Management believes that these estimates are
reasonable; however, actual results may differ from these
estimates. Such adjustments could include, for example, appropriate
estimates for Company bonus plans normally determined or settled at
year-end.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Net Loss
per Share</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Net loss per
share is presented as both basic and diluted net loss per share.
Basic net loss per share excludes any dilutive effects of options,
shares subject to repurchase and warrants. Diluted net loss per
share includes the impact of potentially dilutive securities. No
dilutive effect was calculated for the three or nine months ended
September 30, 2013 and 2012 as the Company reported a net loss
for each respective period and the effect would have been
anti-dilutive. The Company had outstanding common share equivalents
of 551,850 and 460,668 at September 30, 2013 and 2012,
respectively. The Company excludes the potential issuance of common
shares contingently issuable to the Lees or IgDraSol as there is no
guarantee that such shares will be issued in the future. See Notes
2 and 3.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The fair value
of employee stock options was estimated at the grant date using the
following assumptions:</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="76%" align="center">
<tr>
<td width="78%"></td>
<td valign="bottom" width="7%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="7%"></td>
<td></td>
</tr>
<tr>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1">  </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" colspan="5" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>Nine months ended September 30,</b></font></td>
</tr>
<tr>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1">  </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" colspan="2" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>2013</b></font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>2012</b></font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Dividend yield</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">—  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2">—  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Volatility</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">109</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">% </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2">102%</font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Risk-free interest
rate</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">1.19</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">% </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2"><font style="WHITE-SPACE: nowrap">0.71% - 1.11%</font></font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Expected life of
options</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" nowrap="nowrap" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">6.1 years</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom" nowrap="nowrap" align="center"><font style="FONT-FAMILY: Times New Roman" size="2">5.6 years</font></td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Fair
Value of Financial Instruments</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The
Company’s financial instruments consist of cash and cash
equivalents, grants receivable, prepaid expenses and other assets,
accounts payable and accrued expenses. Fair value estimates of
these instruments are made at a specific point in time, based on
relevant market information. These estimates may be subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. As of
September 30, 2013 and December 31, 2012, the carrying
amount of cash and cash equivalents, grants receivable, prepaid
expenses and other assets, accounts payable and accrued liabilities
are generally considered to be representative of their respective
fair values because of the short-term nature of those
instruments.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Income
Taxes</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The provisions
of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 740-10,
Uncertainty in Income Taxes, address the determination of whether
tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. Under ASC 740-10,
the Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by taxing authorities, based on
the technical merits of the position. The Company has determined
that it has no uncertain tax positions.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company
accounts for income taxes using the asset and liability method to
compute the differences between the tax basis of assets and
liabilities and the related financial amounts, using currently
enacted tax rates.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company has
deferred tax assets, which are subject to periodic recoverability
assessments. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount that more likely than
not will be realized. The Company evaluates the recoverability of
the deferred tax assets annually.</font></p>
</div>
P19Y
359451
348421
40000
-43196
800
621771
7000
5669
359451
-10538090
511065
47650
-10615396
6354409
359327
5000000
0
3752233
11361409
35324
5000000
313339
125835
621771
1338400
-477452
82975
824878
6354409
-744557
5621969
7000
637648
1210000
454324
10897541
P7Y
1.25
<div>
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Nature of
Operations and Basis of Presentation</i></b></font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Sorrento
Therapeutics, Inc., together with its wholly-owned subsidiaries
(collectively, the “Company”) is a biopharmaceutical
company focused on the discovery, acquisition, development and
commercialization of proprietary drug therapeutics for addressing
significant unmet medical needs in the United States, Europe and
additional international markets. The Company’s primary
therapeutic focus is oncology, including the treatment of chronic
cancer pain, but is also developing therapeutic products for other
indications, including inflammation, metabolic disorders, and
infectious diseases. The Company’s pipeline consists of its
lead oncology product candidate Cynviloq™, a micellar
paclitaxel formulation, resiniferatoxin, a non-opiate, ultra potent
and selective agonist of the TRPV-1 receptor, as well as fully
human therapeutic antibodies derived from our proprietary
G-MAB<font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">®</sup></font>
library platform and antibody drug conjugates, or ADCs, antibody
formulated drug conjugates, or AfDCs, and recombinant intravenous
immunoglobulin, or rIVIG. See Note 7.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Through
September 30, 2013, the Company had devoted substantially all
of its efforts to product development, acquiring companies and
in-licensing assets, raising capital and building infrastructure,
and had not realized revenues from its planned principal
operations. Accordingly, the Company is considered to be in the
development stage.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The
accompanying interim consolidated financial statements have been
prepared by the Company, without audit, in accordance with the
instructions to Form 10-Q and, therefore, do not necessarily
include all information and footnotes necessary for a fair
statement of its financial position, results of operations and cash
flows in accordance with generally accepted accounting principles
in the U.S., or GAAP.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The balance
sheet at December 31, 2012 is derived from the audited
consolidated balance sheet at that date which is not presented
herein.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In the opinion
of management, the unaudited financial information for the interim
periods presented reflects all adjustments, which are only normal
and recurring, necessary for a fair statement of financial
position, results of operations and cash flows. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended
December 31, 2012. Operating results for interim periods are
not expected to be indicative of operating results for the
Company’s 2013 fiscal year.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The purchase
price has been allocated based on the fair value of assets acquired
and liabilities assumed ($ in thousands):</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="86%"></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Assets
acquired:</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Cash</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">125.8</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Prepaid expenses &
other</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">44.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">PP&E</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">120.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Intangible license
rights</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,105.3</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Total
assets</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,396.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Liabilities
assumed:</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Accounts payable</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">167.7</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2">Accrued expenses</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">123.9</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 3em"><font style="FONT-FAMILY: Times New Roman" size="2"><b>Total
liabilities</b></font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">291.6</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Total purchase
price</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,105.3</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<!-- End Table Body --></table>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Grants
Receivable</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Grants
receivable at September 30, 2013 and December 31, 2012
represent amounts due under federal contracts with the
National Institute of Allergy and Infectious Diseases, or NIAID, a
division of the National Institutes of Health (“NIH”),
collectively, the NIH Grants. The Company considers the grants
receivable to be fully collectible; accordingly, no allowance for
doubtful amounts has been established. If amounts become
uncollectible, they are charged to operations.</font></p>
</div>
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 2%">
<font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Business
Activities</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
September 21, 2009, QuikByte Software, Inc., a shell company
(QuikByte) acquired Sorrento Therapeutics, Inc., a privately held
Delaware corporation (STI), in a reverse merger (the “Reverse
Merger”). Pursuant to the Reverse Merger, all of the issued
and outstanding shares of STI common stock were exchanged into an
aggregate of 6,775,032 shares of QuikByte common stock and STI
became a wholly owned subsidiary of QuikByte. The holders of
QuikByte’s common stock as of immediately prior to the
Reverse Merger held an aggregate of 2,228,332 shares of
QuikByte’s common stock. STI and QuikByte reincorporated in
Delaware in December 2009, and on December 4, 2009, STI merged
with and into QuikByte, the separate corporate existence of STI
ceased and QuikByte continued as the surviving corporation.
Contemporaneously, QuikByte Software, Inc. changed its name to
Sorrento Therapeutics, Inc. In connection with the Reverse Merger,
the Company received cash of $104,860.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In January
2013, the Company entered into an assignment agreement (the
“assignment agreement”) with Tien-Li Lee, M.D. and Jane
Wu Lee, M.D. as individuals (collectively, the “Lees”)
pursuant to which the Lees agreed to assign to the Company their
right, title and interest throughout the world in and to certain
inventions and patents that provide for the production of
recombinant intravenous immunoglobulins. See Note 2.</font></p>
<p style="PADDING-BOTTOM: 0px; MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">On
March 7, 2013, the Company entered into various agreements
with IgDraSol, Inc. (“IgDraSol”) a private company
focused on the development of Cynviloq, an oncologic agent for the
treatment of metastatic breast cancer, or MBC, non-small cell lung
cancer, or NSCLC, and other cancers, as follows: (i) an
exclusive option agreement, (ii) an asset purchase agreement
pursuant to which the Company agreed to purchase all documentation,
equipment, information and other know-how related to micellar
nanoparticle technology encompassing Tocosol<font style="FONT-FAMILY: Times New Roman" size="1"><sup style="POSITION: relative; BOTTOM: 0.8ex; VERTICAL-ALIGN: baseline">®</sup></font>
and related technologies, and (iii) an initial services
agreement, pursuant to which, IgDraSol is to provide certain
product development and technology services related to the
Company’s antibody platform. See Note 3.</font></p>
</div>
200000
<div>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b>2. Significant
Agreements and Contracts</b></font></p>
<!-- xbrl,body -->
<p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>License Agreement
with OPKO Health, Inc.</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In June 2009,
the Company entered into a limited license agreement, or the OPKO
License, with OPKO Health, Inc., or OPKO, pursuant to which the
Company granted OPKO an exclusive, royalty-free, worldwide license
under all U.S. and foreign patents and patent applications owned or
controlled by the Company or any of its 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.
Subject to certain limitations, OPKO will have the right to
sublicense the foregoing rights granted under the OPKO License.
Additionally, pursuant to the OPKO License, OPKO has granted the
Company an exclusive, royalty-free, worldwide license to any patent
or patent application owned or controlled by OPKO or any of its
affiliates to develop, use, make, market, sell and distribute
certain products in any field of use, other than the OPKO Field, or
the OPKO Patents.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The Company has
retained all rights to the STI Patents outside of the OPKO Field
and has agreed not to practice the OPKO Patents or the STI Patents
outside the STI current field of use. Unless otherwise terminated
in accordance with its terms, the License Agreement will expire
upon the expiration of the last to expire patent within the STI
Patents and OPKO Patents on a country-by-country basis.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>License Agreement
with The Scripps Research Institute</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In January
2010, the Company entered into a license agreement, or the TSRI
License, with The Scripps Research Institute, or TSRI. Under the
TSRI License, TSRI granted the Company an exclusive, worldwide
license to certain TSRI patent rights and materials based on quorum
sensing for the prevention and treatment of Staphylococcus aureus
(“Staph”) infections, including Methicillin-resistant
Staph. In consideration for the license, the Company:
(i) issued TSRI a warrant for the purchase of common stock,
(ii) agreed to pay TSRI a certain annual royalty commencing in
the first year after certain patent filing milestones are achieved,
(iii) agreed to pay a royalty on any sales of licensed
products by the Company or its affiliates and a royalty for any
revenues generated by the Company through its sublicense of patent
rights and materials licensed from TSRI under the TSRI License. The
TSRI License requires the Company to indemnify TSRI for certain
breaches of the agreement and other matters customary for license
agreements. The parties may terminate the TSRI License at any time
by mutual agreement. In addition, the Company may terminate the
TSRI License by giving 60 days notice to TSRI and TSRI may
terminate the TSRI License immediately in the event of certain
breaches of the agreement by the Company or upon the
Company’s failure to undertake certain activities in
furtherance of commercial development goals. Unless terminated
earlier by either or both parties, the term of the TSRI License
will continue until the final expiration of all claims covered by
the patent rights licensed under the agreement. For the three
months ended September 30, 2013 and 2012 and for the period
from inception (January 25, 2006) (“Inception”) through
September 30, 2013, the Company recorded $13,418, $5,293 and
$147,570 in patent prosecution and maintenance costs associated
with the TSRI License, respectively. For the nine months ended
September 30, 2013 and 2012, the Company recorded $20,225 and
$27,861 in patent prosecution and maintenance costs associated with
the TSRI License, respectively. All such costs have been included
in general and administrative expenses.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px">
 </p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>License Agreement
with B.G. Negev Technologies and Applications
Ltd.</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In
July 2013, the Company entered into an exclusive option
agreement with B.G. Negev Technologies and Applications Ltd.
(“BGN”). Pursuant to the terms of the option agreement,
BGN granted the Company an option to receive an exclusive
sub-licensable worldwide license in and to certain licensed patent
rights to develop and commercialize the licensed products. Licensed
patent rights refers to any rights arising out of or resulting from
any patent application filed by the Company for certain BGN
technology relating to a group of defined fully human antibodies
that bind to a Hep. C protease enzyme.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>NIH
Grants</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In May 2010,
the NIAID awarded the Company an Advanced Technology Small Business
Technology Transfer Research grant to support the Company’s
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 Staph Grant award covers a two-year period which
commenced in June 2010, with a potential award of $300,000 per
year. As of December 31, 2012, the entire Phase 1 grant of
$600,000 had been awarded and recognized as revenue. The Company
records revenue associated with the grant as the related costs and
expenses are incurred. During the three and nine months ended
September 30, 2012, and for the period from Inception through
September 30, 2013, the Company recorded $0, $119,379 and
$600,000 of revenue associated with the Staph Grant award,
respectively.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In July 2011,
the NIAID awarded the Company a second Advanced Technology Small
Business Technology Transfer Research grant, with an initial award
of $300,000, to support the Company’s 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 as of September 30, 2012, the
entire Phase 1 grant of $600,000 had been awarded. During the three
months ended September 30, 2013 and 2012, and for the period
from Inception through September 30, 2013, the Company
recorded $0, $94,707 and $592,717 of revenue associated with the C.
difficile Grant award, respectively. During the nine months ended
September 30, 2013 and 2012, the Company recorded $143,940 and
$265,811 of revenue associated with the C. difficile Grant award,
respectively.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In June 2012,
the NIAID awarded the Company a third Advanced Technology Small
Business Technology Transfer Research grant, with an initial award
of $300,000, to support the Company’s 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 potential
annual award of $300,000 per year. During the three months ended
September 30, 2013 and 2012, and for the period from Inception
through September 30, 2013, the Company recorded $83,791,
$39,799 and $344,328, respectively, of revenue associated with the
Staph Grant II award. During the nine months ended
September 30, 2013 and 2012, the Company recorded $215,512 and
$39,799 of revenue associated with the Staph Grant II award,
respectively.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Collaboration
Agreement</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In July 2010,
the Company entered into the Collaboration Agreement with a third
party. Under the terms of the Collaboration Agreement, the Company
provided certain antibody screening services for an upfront cash
fee of $200,000 and was reimbursed for certain costs and expenses
associated with providing the services, or the Development Costs.
The upfront fee and reimbursable Development Costs were accounted
for as separate units of accounting. The Company recorded the gross
amount of the reimbursable Development Costs as revenue and the
costs associated with these reimbursements are reflected as a
component of research and development expense.</font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">Any amounts
received by the Company pursuant to the Collaboration Agreement
prior to satisfying the Company’s revenue recognition
criteria are recorded as deferred revenue. All agreed upon services
under the Collaboration Agreement were delivered in March 2011. For
the period from Inception through September 30, 2013, the
Company recognized $223,453 in revenue.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>U.S. Treasury
Grants</i></b></font></p>
<p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">During 2010,
the U.S. Treasury awarded the Company grants totaling $394,480 for
investments in qualifying therapeutic discovery projects under
section 48D of the Internal Revenue Code. The proceeds from this
grant are classified in “Revenues – Grant”
for the period from Inception through September 30,
2013.</font></p>
<p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"><font style="FONT-FAMILY: Times New Roman" size="2"><b><i>Assignment
Agreement</i></b></font></p>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">In January
2013, the Company entered into the assignment agreement, pursuant
to which the Lees agreed to assign to the Company their right,
title and interest throughout the world in and to certain
inventions and patents that provide for the production of
recombinant intravenous immunoglobulin. As consideration for the
assignment by the Lees under the assignment agreement, the Company:
(i) issued the Lees 10,000 shares of the Company’s
common stock upon execution of the assignment agreement,
(ii) paid the Lees $50,000 in five monthly installments of
$10,000 beginning on February 1, 2013, and (iii) agreed
to issue the Lees up to 80,000 shares of the Company’s common
stock based upon the achievement of certain milestone events
described in the assignment agreement. Unless otherwise terminated
in accordance with its terms, the assignment agreement will expire
upon the expiration of the last to expire patent within the
assigned patent rights.</font></p>
</div>
167447
P60D
P5Y
0.04
<div>
<p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px">
<font style="FONT-FAMILY: Times New Roman" size="2">The purchase
price is summarized as follows:</font></p>
<p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px; FONT-SIZE: 12px">
 </p>
<table style="BORDER-COLLAPSE: collapse" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<!-- Begin Table Head -->
<tr>
<td width="84%"></td>
<td valign="bottom" width="8%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td valign="bottom"><font size="1"> </font></td>
<td valign="bottom"><font size="1">  </font></td>
<td style="BORDER-BOTTOM: #000000 1px solid" valign="bottom" colspan="2" align="center"><font style="FONT-FAMILY: Times New Roman" size="1"><b>(in thousands)</b></font></td>
<td valign="bottom"><font size="1"> </font></td>
</tr>
<!-- End Table Head --><!-- Begin Table Body -->
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Cash buyout of certain
holders of IgDraSol common stock options and warrants</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">356.1</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Market value of shares of
Sorrento common stock issued in exchange for IgDraSol common
stock</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">27,811.4</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Transaction fees, including
separation and bonus payments of $771,000 made to IgDraSol
employees</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2"> </font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">937.8</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr>
<td height="8"></td>
<td height="8" colspan="4"></td>
</tr>
<tr>
<td valign="top">
<p style="TEXT-INDENT: -1em; MARGIN-LEFT: 1em"><font style="FONT-FAMILY: Times New Roman" size="2">Total purchase
price</font></p>
</td>
<td valign="bottom"><font size="1">  </font></td>
<td valign="bottom"><font style="FONT-FAMILY: Times New Roman" size="2">$</font></td>
<td valign="bottom" align="right"><font style="FONT-FAMILY: Times New Roman" size="2">29,105.3</font></td>
<td valign="bottom" nowrap="nowrap"><font style="FONT-FAMILY: Times New Roman" size="2">  </font></td>
</tr>
<!-- End Table Body --></table>
</div>
214680
64086
4.50
8.25
30000
9.25
3006641
P5Y
P3Y
143940
215512
20225
10000
2000
1426406
1
143
-10615396
39999
621771
7000
6354266
214680
3006641
1306272
29105300
356100
27811400
771000
1721193
0.0119
1.09
P6Y1M6D
Employee option grants will generally vest 25% on each anniversary of the original vesting date over four years.
P4Y
P2Y
P10Y
P1Y
4.78
110200
In addition, this amount will be automatically increased annually on the first day of each fiscal year by the lesser of: (i) 1% of the aggregate number of shares of the Company's common stock outstanding on the last day of the immediately preceding fiscal year, (ii) 200,000 shares, or (iii) an amount approved by the administrator of the Stock Plan.
200000
0.01
P10Y
0.25
P4Y
6775032
2500
P15Y
110839
2028
762361
11210899
-2468243
-0.28
461790
36947
24838
800
5346
461790
-3095819
-3090473
491096
890262
5938231
290072
2978892
15119
169786
5934031
-491096
2667347
4200
209038
75350
3557609
214722
0.0111
0.0071
265811
119379
39799
27861
1.02
P5Y7M6D
3.25
325200
-18070952
2154977
457815
36564
5600
34563
1931524
-21517283
511065
47650
-21565695
223453
2081043
5000000
8323626
26862077
35324
313339
230695
2088410
6429712
-252773
82975
1001824
21805860
-2361413
13825295
56217
1116337
1210000
23672260
1215270
223453
592717
600000
344328
147570
1331978
0.15
Company's common stock by a ratio of not less than 1-for-2 and not more than 1-for-150
200000
P2Y
300000
300000
P2Y
300000
200000
200000
44166
300000
P2Y
10000
40000
10000
5
80000
10000
40000
100000000
256119
622500
34600000
296155
291
1426406
6418495
1210000
1000000
1500000
6000000
250000
500000
2000000
-75801
400
4077493
408
-75801
-8
-16302
-16302
54524
-942266
291
-168767
10
100386
2000000
1.12
1785375
179
1999821
30
10
291
25999
2274001
0.98
2360611
236
2273765
-30
296155
30
40775
4
442958
44
-942266
54524
261
-168767
36
100342
250954
-1808386
30
159905
3440495
3.50
1028686
102
3440393
394480
30
-1808386
250954
298034
13125
-3236491
43
80039
28999
1971001
4.00
500000
50
1970951
6000
-44166
1
5
-3236491
298034
13124
38
80039
-25745
-25745
863127
36092
-4845308
65969
5934031
4.00
1500000
150
5933881
10800
1
-4845308
863127
36091
0
11963699
-0.10
134506
2118
134506
-1243347
-1241229
427030
950823
20685
1377853
66130
94707
0
39799
5293
14135261
-0.24
83791
1677
83791
-3306837
-3356445
1114621
193755
51285
2082252
157853
3390628
34254
0
83791
13418
875133
1250
110839
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