SELLAS Life Sciences Group, Inc. quarterly report, Q2 FY2016

Business context and reporting period

Galena Biopharma, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The request metadata names SELLAS Life Sciences Group, Inc., but the filing itself is for Galena Biopharma, Inc. Galena had divested its commercial products and was focused on clinical development, including GALE-401, NeuVax, GALE-301 and GALE-302.

Financial results and liquidity

Q2 net income included substantial non-cash gains: $14.4 million from remeasuring warrant liabilities and $5.5 million from remeasuring contingent purchase consideration. For the first half, the corresponding gains were $10.5 million and $5.3 million. These gains do not reflect operating cash generation.

At June 30, cash and cash equivalents were $19.6 million, plus $24.4 million of restricted cash subject to a debt covenant. Total current assets were $45.3 million and current liabilities were $47.2 million. Total assets were $73.8 million, total liabilities $53.5 million, and stockholders’ equity $20.3 million. The balance sheet reported $23.2 million of current long-term debt, net of unamortized discounts. The May debentures had $25.53 million face value, bore 9% interest, were secured by a senior lien on company assets and included a $24.0 million minimum-cash covenant.

Material changes versus the prior comparable period

• Q2 net income of $5.4 million compared with a $15.7 million net loss in Q2 2015, largely due to non-cash fair-value gains; operating loss remained broadly similar ($9.3 million versus $9.1 million).
• First-half net loss narrowed to $11.1 million from $26.2 million, also primarily reflecting non-cash revaluation gains. Operating loss was nearly unchanged from the prior year.
• R&D expense declined 14% in Q2 and 11% for the first half, principally due to reduced PRESENT trial enrollment activity. G&A rose 65% in Q2 and 34% for the first half, mainly due to legal and professional costs, stock compensation and personnel expenses.
• Cash and cash equivalents fell $10.1 million from year-end 2015. First-half operating cash use was $24.7 million; financing provided $15.6 million, including equity proceeds and debt financing, offset by debt repayments and the minimum-cash covenant.

Outlook, commentary and risks

• The independent monitoring committee recommended stopping the Phase 3 PRESENT NeuVax trial for futility in June; Galena halted and moved to close the study. Management said the trial data showed a non-statistically significant separation, with the control arm performing better than expected. Trial closeout was estimated to cost $2.5–$3.5 million in the second half of 2016.
• Management planned to reduce R&D spending as PRESENT closed, reduce headcount and concentrate on other clinical programs. It planned to discuss GALE-401 pivotal-trial design and the proposed regulatory pathway with the FDA by year-end.
• On July 13, 2016, after quarter-end, Galena raised approximately $11.7 million net from a registered direct stock offering and concurrent warrant placement. The filing said available unrestricted cash, including this financing, was expected to fund operations for at least six months; it also stated the company would need to replenish cash before year-end and disclosed substantial doubt about its ability to continue as a going concern.
• The debenture holder had a limited right, following the PRESENT recommendation, to demand early cash repayment. As of the filing, the holder had not exercised that right; the restricted cash was tied to the minimum-cash covenant. Monthly principal redemptions could begin after the six-month interest-only period.
• Settlements of the federal securities class action and derivative litigation received court approval. The company also disclosed shareholder opt-out settlements and continuing SEC, federal and regulatory investigations relating to investor-relations activity and Abstral marketing and promotion. Galena said it was cooperating and, to its knowledge, was not a target in the physician prosecution; potential outcomes and costs remained uncertain.
• Galena warned of possible Nasdaq delisting if its share price failed to meet the $1.00 minimum bid requirement, dilution from future equity financing, and funding uncertainty. It reported no material change in internal controls and no off-balance-sheet financing arrangements other than operating leases.

Important facts for investors to verify

• Whether the debenture holder exercised its prepayment right, whether the $24.0 million cash covenant was amended, and the timing and amount of any required principal redemptions.
• Post-quarter financing proceeds, cash runway, subsequent cash burn and the company’s ability to obtain additional capital on acceptable terms.
• Results and implications of the PRESENT trial investigation, and the status, budgets and milestones of remaining clinical programs.
• Costs and outcomes of the SEC and Abstral-related investigations, opt-out claims and any further legal proceedings.
• Potential dilution, including outstanding warrants and options, the July financing securities, and the increase in authorized common shares.