SELLAS Life Sciences Group, Inc. quarterly report, Q3 FY2017

Business context and reporting period

This is Galena Biopharma, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017—not a filing under the later SELLAS Life Sciences Group name. Galena was developing oncology and hematology candidates. It had agreed to merge with SELLAS Life Sciences Group Ltd.; the transaction was pending at the reporting date. The proposed combined company was expected to be named SELLAS Life Sciences Group, Inc.

Financial performance and position

Margins are not meaningful because the company reported no revenue. For the nine months, operating cash use was $16.3 million from continuing operations and $9.9 million from discontinued operations, for total operating cash use of $26.2 million, versus $36.9 million in the prior-year period. Financing provided $21.1 million, including $15.5 million net proceeds from the February equity offering and debt redemptions paid in shares. Cash and cash equivalents declined by $5.2 million over the nine months.

The secured debenture bore 9% annual interest and matured November 10, 2018. Outstanding principal was $12.0 million at September 30. During the nine months, $5.65 million of principal was redeemed using 7.81 million common shares; after quarter-end, a further $1.15 million was redeemed with 3.29 million shares. The debt terms and share-based repayment mechanism expose shareholders to further dilution.

Material changes versus the prior comparable period

• Q3 operating loss narrowed 31% year over year, mainly following reduced research and development spending after the Phase 3 PRESENT trial was stopped. Q3 net loss narrowed 12%, despite a $5.2 million noncash impairment charge.
• Nine-month operating loss narrowed 42%, but net loss increased from $18.0 million to $26.2 million. The comparison reflects the prior year’s $14.2 million noncash warrant-valuation gain and $5.2 million gain from revaluing contingent purchase consideration, as well as 2017 costs tied to the government settlement.
• Research and development expense fell 65% for the nine months to $5.4 million. General and administrative expense was $9.1 million, down 4% for the nine months, but rose 23% in Q3 as merger-related legal costs increased.
• Galena recorded $5.23 million of noncash impairment charges in Q3: $1.16 million for GALE-401 rights, $3.56 million for NeuVax in-process research and development, and $0.51 million for goodwill.
• Common shares issued increased from 15.2 million at December 31, 2016 to 41.8 million at September 30, 2017; 45.7 million were outstanding as of November 9, 2017.

Outlook, management commentary, risks and unusual items

Management said unrestricted cash at the filing date was expected to fund the company’s reduced operations for at least six months from November 9, 2017. It also stated that additional capital would be needed and that substantial doubt existed about the company’s ability to continue as a going concern. Failure to obtain funding or complete the merger could require Galena to scale back or terminate operations. Management’s runway estimate depended on limited operations and estimates for legal and transaction costs.

The proposed merger contemplated SELLAS shareholders owning approximately 67.5% and existing Galena securityholders approximately 32.5% of the combined company on a fully diluted basis, subject to specified exclusions and adjustments. The merger remained subject to conditions. Galena warned that failure to close could lead to further financing difficulties or liquidation; completion also entailed dilution, integration, financing, listing and execution risks.

Product development remained uncertain. Galena’s Phase 3 PRESENT NeuVax trial had been stopped for futility in 2016. Two NeuVax combination trials completed enrollment in Q3 2017; the company expected an interim efficacy analysis for one in Q1 2018 and primary endpoint results for both in Q4 2019. A NeuVax DCIS study remained open for enrollment. No Phase 3 start date was set for GALE-401. Under an amended license agreement, the licensor could terminate if the first Phase 3 patient was not enrolled by December 31, 2018.

Galena recorded an approximately $7.6 million civil payment under its September 2017 settlement with the DOJ, payable in installments over 12 months; the settlement was reported in discontinued operations. The filing also describes ongoing securities and derivative litigation and a proposed Delaware settlement involving $1.25 million in unrestricted shares and $50,000 in cash, subject to court approval. Galena reported a $1.3 million litigation settlement payable at quarter-end.

The company’s financing options were constrained: it could not then use its LPC purchase agreement or ATM facilities because it was ineligible to use Form S-3, which it did not expect to regain eligibility to use before May 1, 2018. Galena also faced Nasdaq’s minimum bid-price requirement, with an extension to March 19, 2018 to regain compliance. A reverse stock split might be needed, but the filing cautioned it might not secure compliance. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

• Whether and on what terms the proposed merger closed, and the actual ownership, financing and share-count effects for Galena and SELLAS holders.
• Cash runway, access to financing, and the availability or release conditions for restricted cash; confirm the company’s ability to meet debt and settlement obligations.
• Debenture principal, redemption activity and future share issuance, including the dilution implied by the amended stock-payment terms.
• Status and results of the ongoing NeuVax trials, and whether GALE-401 proceeds to Phase 3 before the licensor’s December 31, 2018 deadline.
• Final government-settlement payments and resolution of remaining lawsuits and the proposed Delaware settlement.
• Nasdaq listing compliance and any reverse stock split or other actions taken to maintain the listing.