SELLAS Life Sciences Group, Inc. quarterly report, Q3 FY2014

Business context and reporting period

This is Galena Biopharma, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014; the filing is not under the SELLAS Life Sciences name stated in the request metadata. Galena developed oncology therapeutics and sold Abstral, while NeuVax was in an international Phase 3 trial. The company licensed U.S. commercial rights to Zuplenz in July 2014 and was developing GALE-301 and GALE-401.

Financial results and position

Revenue was from Abstral. Cost of revenue, excluding acquired-intangible amortization, was 15% of revenue in both the quarter and nine-month period (an approximately 85% gross margin on that basis). Operating expenses remained far above revenue.

Cash and cash equivalents were $24.65 million at September 30, down from $47.79 million at December 31, 2013. Current assets were $28.52 million and current liabilities $31.59 million. Total debt was $9.26 million, including $4.16 million current and $5.10 million long-term; the loan carried an 8.45% fixed coupon and was scheduled to mature in November 2016. Total liabilities were $48.63 million.

Changes versus prior comparable periods

• Quarterly revenue rose 38% from $1.17 million; nine-month revenue rose to $6.12 million from $1.17 million, reflecting the 2013 launch of Abstral and increased sales.
• Quarterly net loss narrowed by about $3.1 million from $9.29 million. Nine-month net loss increased about $0.5 million from $28.18 million.
• Quarterly and nine-month R&D expense increased 99% and 58%, respectively, mainly due to the Phase 3 PRESENT trial. SG&A rose 76% and 183%, respectively, reflecting commercial build-out, stock compensation and legal costs.
• Net cash used in operations increased to $32.13 million from $20.44 million. Financing cash inflow fell to $14.41 million from $48.26 million, as the prior-year period included a $37.5 million equity offering and $9.9 million debt proceeds.
• A $13.17 million nine-month non-cash gain from the decrease in fair value of liability-classified warrants materially reduced reported net loss; it is not operating cash generation. Cash-settleable warrant liabilities fell from $48.97 million to $8.77 million, partly due to warrant exercises.

Outlook, risks and unusual items

• Management forecast 2014 revenue of $8 million–$10 million and expected Abstral revenue to recover in the fourth quarter after customer-order timing and changes to patient assistance processes affected sales. It planned to begin Zuplenz commercialization by December 31, 2014.
• Management estimated existing working capital and Abstral revenue would fund operations into the second quarter of 2015, but said the estimate depended on plans and revenue assumptions. No financing commitments were in place; additional financing might not be available on acceptable terms, or at all. The company expected continued operating losses and could need to reduce or terminate operations or pursue a merger or acquisition if financing were unavailable.
• Zuplenz required a further $2.5 million cash or stock payment in the fourth quarter, alongside ongoing launch and marketing costs. Its agreement also included royalties and contingent milestones. Abstral carried royalties and future sales milestones.
• Shareholder derivative and securities class actions alleged misconduct involving company statements and insider stock sales. The company said it could not estimate potential loss and had recorded no material liability. Insurers reserved coverage rights. The company also disclosed that it was cooperating with an SEC investigation concerning the use of outside investor-relations professionals.
• Other notable items include issuance of 3 million shares for a GALE-401 development milestone, significant customer concentration, and a $1.5 million gross Abstral order in the second quarter that management said may have shifted orders away from the third quarter. Management reported disclosure controls were effective and no material change in internal control over financial reporting.

Important facts for investors to verify

1. Confirm the entity and period: the supplied filing is Galena Biopharma’s 2014 Q3 10-Q, not a SELLAS filing.
2. Track cash burn, available financing, and whether the stated runway into Q2 2015 and 2014 revenue guidance were achieved.
3. Check Abstral sales trends, customer-order concentration, gross-to-net deductions, and Zuplenz launch performance and obligations.
4. Assess clinical trial progress, costs, and outcomes for NeuVax, GALE-301, and GALE-401; development and approval remain uncertain.
5. Monitor litigation, SEC inquiry, insurance coverage, and any resulting costs or liabilities.
6. Review dilution from outstanding warrants, options, milestone shares and potential future equity financing.