SELLAS Life Sciences Group, Inc. quarterly report, Q1 FY2018

SELLAS Life Sciences Group, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. The interim financial statements are unaudited. SELLAS is a clinical-stage biopharmaceutical company developing cancer immunotherapies, led by galinpepimut-S (GPS). The December 2017 merger with Galena was accounted for as a reverse acquisition; accordingly, 2017 comparisons primarily reflect Private SELLAS and are not fully comparable with the post-merger company.

Key financial results

Metric	Q1 2018	Q1 2017
Revenue	None	None
Research and development expense	$1.8 million	$2.2 million
General and administrative expense	$3.9 million	$2.3 million
Operating loss	$5.7 million	$4.5 million
Net loss	$8.0 million	$4.6 million
Net loss attributable to common stockholders	$10.0 million	$4.6 million
Net loss per common share, basic and diluted	$1.67	$3.63
Net cash used in operating activities	$5.4 million	$3.8 million

There were no product-sale or collaboration revenues. Gross margin is not applicable. The $2.0 million difference between net loss and loss attributable to common stockholders reflects a non-cash deemed dividend from the Series A preferred stock’s beneficial conversion feature.

Financial position, liquidity and debt

• At March 31, cash and cash equivalents were $3.5 million and restricted cash was $8.6 million, versus $2.3 million and $10.4 million, respectively, at December 31, 2017. Total cash, including restricted amounts, was $12.1 million.
• Current assets were $13.1 million and current liabilities were $25.7 million, resulting in a working capital deficit of approximately $12.7 million. Total liabilities were $34.8 million; stockholders’ deficit was $1.3 million.
• Total debt was $9.7 million, including the JGB senior secured debenture and $0.9 million of short-term convertible notes. The debenture’s stated maturity is November 2018 and its annual interest rate is 9%. Debt declined from $11.0 million at year-end.
• Operating activities used $5.4 million; financing activities provided $4.7 million, mainly from the first closing of the Series A financing, partly offset by cash debt redemptions. Total cash, cash equivalents and restricted cash declined by $0.7 million during the quarter.
• The company reported an accumulated deficit of $62.2 million and stated that recurring losses and financing needs raise substantial doubt about its ability to continue as a going concern.

Material changes and unusual items

• G&A expense increased $1.6 million year over year, mainly due to legal, accounting, outside-service, personnel and insurance costs associated in part with operating as a public company. R&D expense decreased $0.4 million as the company evaluated financing and pipeline priorities; management expected R&D spending to increase as capital became available.
• Non-operating expense was $2.3 million, versus $0.1 million in the prior-year quarter. It included a $3.4 million increase in contingent consideration, a $0.7 million loss on warrant settlements, a $1.9 million non-cash gain from changes in warrant fair value, and $0.1 million of net interest expense. The contingent-consideration remeasurement reflected revised assumptions about NeuVax milestone prospects following positive interim trial data announced April 2, 2018.
• The March private placement provided $6.0 million gross proceeds in its first closing. The second closing added $4.7 million on May 1, 2018, bringing aggregate gross proceeds to approximately $10.7 million. Series A preferred shares carry cumulative 20% annual dividends and are initially convertible at $5.80 per share, subject to adjustment provisions.
• During 2018, JGB redemptions were satisfied partly with shares and partly with cash. The company disclosed that, as of May 15, it had not been able to release $1.5 million of cash that it said exceeded the debenture principal because JGB had not approved the transfer. JGB debt principal was reported at $6.9 million as of that date.

Outlook, risks and contingencies

• Management expected March 31 cash plus the May financing proceeds to fund planned operating expenses and capital expenditures through August 2018. Substantial additional funding was required thereafter; the company had no committed additional financing and cautioned that it might not obtain funding on acceptable terms.
• If funding is insufficient, SELLAS may delay, scale back or stop development programs, seek collaborations or other strategic alternatives, sell or merge the company, or cease operations. Management said liquidation was not then considered imminent.
• GPS Phase 3 trials for AML and malignant pleural mesothelioma were planned, subject to funding. The company also described development plans across additional indications. Following positive interim NeuVax combination-trial data, it planned to seek FDA guidance on further development in triple-negative breast cancer and was evaluating strategic options for legacy programs.
• JGB sued the company and certain current and former officers and directors, alleging contractual and securities-law violations. The company disputed the claims and intended to defend itself. An adverse outcome could affect liquidity, pledged assets, operations or Nasdaq listing. Other legacy Galena stockholder litigation remained ongoing; a separate proposed settlement included $1.3 million of consideration, largely in shares, subject to court processes.
• Disclosure controls and procedures were deemed ineffective due to a material weakness in financial-reporting expertise and staffing. The company reported adding finance personnel and engaging a consultant, with remediation targeted by its year-end 2018 assessment.
• Clinical, regulatory, financing, competition and commercialization risks remain substantial. The company has no approved product sales and cautioned that actual development timing, costs and outcomes may differ materially from plans.

Important facts for investors to verify

• Whether additional financing or partnerships were secured after the filing, and the actual cash runway and spending rate.
• The status and terms of the JGB dispute, restricted-cash release, debenture repayments and November 2018 maturity obligations.
• Potential dilution from Series A conversion, warrants, debt-related share issuances and other reserved equity; the cover reports 6,655,155 common shares outstanding at April 30, compared with 6,154,377 at March 31.
• Progress and regulatory direction for GPS and NeuVax, including the clinical evidence underlying the company’s development plans.
• Developments in legacy litigation and the proposed settlement, and progress in remediating the disclosed material weakness in internal controls.