SELLAS Life Sciences Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; financial statements are unaudited. SELLAS is a late-stage biopharmaceutical company developing cancer immunotherapies. It reported no product or collaboration revenue. Following the December 2017 reverse merger with Private SELLAS, the financial statements reflect Private SELLAS as the accounting acquirer.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development | $1.7 million | $1.1 million | $5.1 million | $5.1 million |
| General and administrative | $1.3 million | $3.2 million | $10.1 million | $9.4 million |
| Net loss | $0.3 million | $4.5 million | $14.3 million | $15.0 million |
| Net loss attributable to common stockholders | $9.4 million | $4.5 million | $27.9 million | $15.0 million |
| Net loss per common share, basic and diluted | $0.53 | $2.27 | $2.75 | $4.56 |
At September 30, 2018, cash and cash equivalents were $10.0 million and restricted cash was $0.1 million. The balance sheet also included a $6.6 million JGB settlement receivable and a $0.5 million litigation insurance recovery receivable; both were subsequently received. Current liabilities were $12.0 million, including $7.2 million accounts payable and $4.7 million accrued expenses. Total debt was $0.1 million; the former senior secured debenture was no longer outstanding following the November settlement. Total assets were $38.5 million, total liabilities $20.0 million, and stockholders’ equity $18.5 million.
For the nine months, operating cash use was $25.9 million versus $9.2 million in 2017; financing provided $23.2 million versus $5.7 million. Cash, cash equivalents and restricted cash declined by $2.7 million to $10.1 million. Operating cash use included working-capital effects, notably the $6.6 million settlement receivable and lower accounts payable. Gross margin and other revenue-based margins are not applicable because the company had no revenue.
Material changes and unusual items
- Q3 operating expenses fell $1.2 million year over year, mainly as G&A declined $1.9 million, including lower legal fees and stock-based compensation; R&D rose $0.7 million with clinical and regulatory work.
- Nine-month operating expenses increased $0.8 million. R&D was broadly unchanged, while G&A rose $0.8 million, including higher public-company, insurance, personnel and professional-service costs.
- Reported net loss attributable to common stockholders included non-cash deemed dividends: $8.7 million in Q3 and nine months for the preferred-stock exchange, plus $0.5 million from warrant anti-dilution adjustments. The nine-month figure also included a $4.4 million beneficial conversion feature deemed dividend.
- Non-operating results included a $5.3 million nine-month gain from lower warrant fair value, partly offset by a $4.0 million increase in contingent consideration fair value; Q3 included a $2.2 million warrant fair-value gain. The $0.8 million gain on debt extinguishment reflected forgiven additional interest under the JGB settlement. These items were non-cash.
- Financing included $21.6 million net proceeds from the July public offering and $9.6 million net proceeds from the Series A preferred/warrant placement, partly offset by $7.5 million in debt principal payments. The preferred holders exchanged their remaining preferred interests for common shares and warrants in July; this materially increased share count and potential dilution.
Outlook, risks and controls
- Management expected the September 30 cash balance, together with October and November receipts, to fund operating and capital needs through March 2019. The company stated substantial additional financing would be needed thereafter and that it had no committed funding; management disclosed substantial doubt about its ability to continue as a going concern, though liquidation was not considered imminent.
- If financing or partnerships are unavailable, SELLAS may delay, scale back or discontinue programs, pursue strategic alternatives, or cease operations. Future results depend on clinical success, regulatory approval, partnerships and market acceptance.
- GPS Phase 3 trials in AML and mesothelioma were planned, subject to funding; AML was the priority. The company reported positive final TNBC-cohort results for the investigator-sponsored NPS/trastuzumab Phase 2b study after the quarter and planned to seek regulatory guidance. The study had been terminated early in June after key objectives and other considerations were reviewed.
- R&D expenses were expected to rise as programs advanced. The filing describes substantial clinical-development uncertainty, including enrollment, trial outcomes, costs and approval risks.
- JGB litigation was settled November 5, 2018: JGB paid $6.6 million, and the debenture and related security agreements were terminated. The securities class action and derivative litigation remained pending as described in the filing.
- Disclosure controls were not effective at quarter-end because of a material weakness in financial-reporting expertise and staffing. SELLAS had added finance personnel and engaged consultants, targeting remediation by December 31, 2018.
Important facts for investors to verify
- Whether SELLAS secured financing or licensing/partnership proceeds beyond its stated March 2019 cash runway.
- Current cash, operating cash burn, and any subsequent financing, as the filing’s runway estimate included post-quarter settlement and insurance receipts.
- Clinical and regulatory progress for GPS and NPS, including the next steps following the reported TNBC findings.
- Potential dilution from outstanding warrants, pre-funded warrants, options and other reserved shares; 19.2 million warrants were outstanding at September 30, 2018.
- Whether the material weakness was remediated as planned and how pending litigation and contingent consideration evolve.