Business context and reporting period
This is Galena Biopharma, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017—not a filing by SELLAS Life Sciences Group, Inc. SELLAS is discussed because Galena entered into a proposed merger agreement with SELLAS on August 7, 2017, after the reporting period. Galena was a clinical-stage biopharmaceutical company; its programs included NeuVax, GALE-401, GALE-301 and GALE-302. It reported no revenue for the periods presented.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| R&D expense | $2.044 million (2017); $6.175 million (2016) | $4.406 million (2017); $11.618 million (2016) |
| G&A expense | $2.867 million (2017); $3.117 million (2016) | $5.593 million (2017); $6.642 million (2016) |
| Operating loss | $4.911 million (2017); $9.292 million (2016) | $9.999 million (2017); $18.260 million (2016) |
| Net income (loss) | $(8.404) million (2017); $5.389 million (2016) | $(20.122) million (2017); $(11.104) million (2016) |
| Basic net income (loss) per share | $(0.22) (2017); $0.59 (2016) | $(0.63) (2017); $(0.30) (2016) |
Margins are not meaningful because the company reported no revenue. Lower operating expenses reflected the 2016 discontinuation of the PRESENT Phase 3 trial, reduced staffing and spending controls. Period-to-period net results were also affected by non-cash warrant and contingent-consideration revaluations: Q2 2016 included substantial gains, while Q2 2017 recorded a net non-operating expense.
At June 30, 2017, cash and cash equivalents were $18.073 million and restricted cash was $13.597 million; total assets were $60.554 million and current liabilities were $34.539 million. The debenture’s outstanding principal was $13.172 million (current carrying amount, net of discounts, $13.025 million). The company reported $19.964 million of net cash used in operating activities in the first half, including $12.476 million from continuing operations and $7.488 million from discontinued operations. Financing provided $19.979 million, principally from a February stock-and-warrant offering that yielded $15.524 million net and $4.450 million of debt redemptions paid in shares. Cash and cash equivalents were nearly unchanged from year-end.
Material changes, outlook and risks
- First-half net loss increased to $20.122 million from $11.104 million a year earlier, mainly because discontinued operations included a $7.5 million accrual for an anticipated civil settlement with the U.S. Attorney’s Office for New Jersey and the Department of Justice. The company also accrued $300,000 for a qui tam attorneys’ fee settlement, subject to court approval.
- Management estimated existing unrestricted cash would fund reduced operations for at least eight months from issuance of the financial statements. It also stated that substantial doubt existed about the company’s ability to continue as a going concern without additional funding or completion of the proposed merger. No assurance was given that financing would be available on acceptable terms or at all.
- The proposed merger was subject to approvals and other closing conditions. If completed, legacy Galena holders were expected to own approximately 32.5% of the combined company and SELLAS holders approximately 67.5%, subject to dilution and the agreement’s stated exceptions. The combined company was expected to use the SELLAS name and trade under ticker SLS. The agreement contemplated commercially reasonable best efforts to fund $3 million for ongoing NeuVax programs through the 2019 budget; this is not a general operating forecast.
- Legal and contingent exposures include securities and derivative litigation, the government investigation and related potential claims, and a disputed claim over expired Zuplenz inventory for which Midatech asserted a $1.5 million amount. A warrant holder asserted that the proposed merger could constitute a “Fundamental Transaction,” potentially requiring a cash payment; applicability and amount were unresolved.
- The licensor of GALE-401 alleged a material breach over development efforts; Galena disputed the allegation. Galena also reported that disclosure controls and procedures were ineffective, although internal control over financial reporting was assessed as effective at June 30, 2017.
- Galena was unable to use its LPC and at-the-market equity facilities because it was not then eligible to use Form S-3 registration statements. It also faced NASDAQ’s $1 minimum-bid-price requirement and warned that delisting could impair financing and merger prospects. The merger itself, if completed, was expected to require meeting initial NASDAQ listing standards.
- Clinical commentary: the NeuVax Phase 2b trial’s DSMB reported no safety concern or futility and recommended continued study; enrollment completion was expected in Q3 2017 and interim efficacy analysis in Q1 2018. GALE-401 Phase 3 preparation remained conditional on manufacturing and other work. These are company expectations, not assured outcomes.
Most important facts to verify
- Confirm the filing entity: the 10-Q is Galena Biopharma’s, while SELLAS appears as the proposed merger counterparty.
- Review the merger agreement, closing conditions, expected ownership split, potential dilution, and the disputed warrant “Fundamental Transaction” claim.
- Reconcile the eight-month cash-runway estimate with operating cash use, restricted cash, debt terms, legal costs and any funding availability.
- Track the government settlement and other legal matters, including the $7.5 million accrual, the $1.5 million disputed inventory claim and insurance recoveries.
- Assess the debenture’s share-settlement terms and potential dilution, alongside the company’s ineffective disclosure controls and NASDAQ listing status.