Business Context and Reporting Period
This Form 8-K was filed by SELLAS Life Sciences Group, Inc. on March 12, 2018, reporting events occurring on March 6, 2018, and March 7, 2018. The filing details a material definitive agreement for a private placement of equity securities and a change in the company's independent registered public accounting firm following a business combination completed in December 2017.
Key Financial Metrics and Capital Structure
- Private Placement Proceeds: The Company agreed to raise an aggregate of $10,700,000 through the sale of Series A 20% Convertible Preferred Stock and warrants.
- First Closing: On March 9, 2018, the Company received gross proceeds of $5,987,000 from the issuance of 5,987 shares of Series A Convertible Preferred and 774,186 warrants.
- Second Closing: The remaining $4,713,000 (4,713 shares of Preferred and 609,445 warrants) is contingent upon stockholder approval and expected within five business days of such approval.
- Security Terms:
- Preferred Stock: 20% annual cumulative dividends (payable in cash or stock); initial conversion price of $5.80 per share; anti-dilution protection applies until a Qualified Offering.
- Warrants: Initial exercise price of $6.59 per share; exercisable after six months; five-year term.
- Placement Agent Fees: Cantor Fitzgerald & Co. is entitled to a fee equal to 7% of gross proceeds from U.S.-based investors.
Material Changes and Corporate Actions
- Change in Auditor: The Company dismissed KPMG Audit Limited (KPMG Bermuda) effective March 6, 2018, and engaged Moss Adams LLP as its independent registered public accounting firm for the fiscal year ending December 31, 2017. This change followed the relocation of operations to New York and the business combination with Private SELLAS.
- Stockholder Approval Requirement: The Company must seek stockholder approval by May 7, 2018, to issue the full amount of securities due to Nasdaq listing rules regarding issuances exceeding 19.99% of outstanding common stock.
- Voting and Lock-Up Agreements: Directors, officers, and significant shareholders entered into voting agreements to support the issuance and lock-up agreements restricting equity transactions until September 9, 2018, or the closing of a Qualified Offering.
Outlook, Risks, and Contingencies
- Qualified Offering Definition: Defined as a public offering raising at least $20.0 million. If consummated, investors have the right to convert their Preferred Stock into the same securities on a $1.00 for $1.00 basis.
- Conversion Price Adjustment Risk: If a Qualified Offering is not consummated by September 9, 2018, the conversion price will be reduced to the lesser of the then-applicable price, $3.00, or the lowest VWAP in the five trading days following the adjustment date.
- Dividend Obligation: The Company bears a 20% annual dividend obligation on the Preferred Stock, payable semiannually, which ceases only upon a Qualified Offering.
- Issuance Restrictions: The Company is restricted from issuing additional common stock or equivalents prior to obtaining stockholder approval.
Investor Verification Checklist
- Verify the status of the stockholder approval vote required by May 7, 2018, to confirm the second closing of the $4.7 million tranche.
- Monitor the Company's ability to consummate a "Qualified Offering" ($20 million+) by September 9, 2018, to avoid automatic conversion price reductions to $3.00 or lower.
- Review the impact of the 20% cumulative dividend obligation on future cash flow and liquidity.
- Confirm the finalization of the transition from KPMG Bermuda to Moss Adams LLP and review any potential restatements or audit adjustments for the 2017 fiscal year.
- Assess the dilution impact of the 1,844,827 initial conversion shares and 1,383,631 warrant shares on existing common stockholders.