SELLAS Life Sciences Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a separate Q4 filing. The 10-K was filed April 13, 2018. Amounts below are U.S. dollars unless noted.
Business context and reporting period
SELLAS is a clinical-stage biopharmaceutical company developing cancer immunotherapies, with galinpepimut-S (GPS), a WT1-targeting candidate, as its lead program. Phase 2 studies were completed for acute myeloid leukemia (AML) and malignant pleural mesothelioma (MPM); Phase 3 studies were planned, subject to funding. Other programs included NeuVax, GALE-301/302 and GALE-401.
On December 29, 2017, Galena Biopharma merged with private SELLAS. Although Galena was the legal acquirer, the transaction was accounted for as a reverse acquisition, so the financial statements principally reflect private SELLAS. The merger and the predecessor-company transition limit comparability with 2016.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $6.1 million | $11.4 million |
| General and administrative expense | $15.1 million | $4.6 million |
| Severance expense | $1.9 million | None reported |
| Net loss | $23.8 million | $17.7 million |
| Net cash used in operating activities | $11.0 million | $11.9 million |
| Cash and cash equivalents at year-end | $2.3 million | $6.0 million |
2017 loss attributable to common stockholders was $24.4 million, including a $0.7 million deemed dividend on conversion of a note; basic and diluted loss per share was $10.44. No meaningful operating margin is applicable because the company had no revenue and incurred operating losses.
At December 31, 2017, restricted cash was $10.4 million, total current assets were $13.1 million, current liabilities were $24.6 million, total liabilities were $31.5 million, and stockholders’ equity was $2.1 million. Debt was approximately $11.0 million, principally the JGB senior secured debenture, bearing 9% interest and maturing November 2018. The restricted funds supported the debenture covenant and were not freely available for operations. Accounts payable and accrued expenses totaled approximately $14.9 million.
Operating cash use was partly offset by non-cash expenses and an $8.4 million increase in accounts payable; the filing says payables were extended while the company sought financing. Financing activities provided $5.5 million in 2017, versus $16.5 million in 2016. No product sales or collaboration revenue was reported.
Material changes versus 2016
- Net loss increased by $6.1 million, about 34%, to $23.8 million.
- R&D expense declined $5.3 million, primarily as SELLAS reduced spending while pursuing liquidity options and focusing on the merger.
- G&A expense rose $10.5 million, including $5.7 million of merger costs and higher stock compensation and personnel costs; merger costs were described as non-recurring.
- The company recorded $1.9 million of severance related to former Galena employees. Net interest expense fell by $0.7 million as convertible debt declined.
- Year-end cash fell by $3.6 million. The balance sheet also included $17.6 million of acquired in-process R&D intangible assets and $1.9 million of goodwill from the merger.
Outlook, risks, contingencies and unusual items
- Funding and going concern: Management and the auditor reported substantial doubt about the company’s ability to continue as a going concern. Management estimated year-end cash plus the first $6.0 million tranche of a March 2018 preferred-stock financing would fund planned operations through June 2018; a further $4.7 million tranche was expected, subject to stockholder approval. Additional financing was needed thereafter. The company also had a contractual obligation under its MSK license to raise $25 million by December 31, 2018, or face potential license termination or an equity remedy.
- Development plans: GPS Phase 3 trials in AML and MPM, and a GPS/pembrolizumab combination trial with Merck, were planned but expressly dependent on funding. The Merck trial was anticipated to start in Q3 2018. The filing provides no assured approval timeline or product revenue guidance.
- Post-year-end clinical update: An April 2, 2018 announcement reported interim Phase 2b NeuVax-plus-trastuzumab results. The TNBC subgroup showed a reported hazard ratio of 0.26 (p=0.023); the overall study showed a clinically meaningful DFS difference, but the filing did not report a statistically significant overall-population result. Management planned to seek FDA guidance. These are interim trial findings, not regulatory approval or established commercial efficacy.
- Debt and dilution: JGB held a senior secured debenture with stock-settlement provisions and a discount-based share payment formula. After year-end, principal redemptions reduced the balance to $7.0 million as of April 6, 2018, including redemptions settled partly in shares. The March preferred financing carries a 20% annual dividend and conversion and warrant terms that may dilute common shareholders; certain price-protection provisions also apply.
- Legal matters: Galena’s Abstral investigation was resolved through a $7.55 million civil payment, paid by December 29, 2017, plus attorney fees. Legacy shareholder litigation and derivative matters remained, including a proposed settlement involving $1.25 million of stock and $50,000 cash, subject to court processes. JGB filed suit in April 2018 seeking, among other relief, 2,483,500 shares and damages; SELLAS disputes the allegations.
- Controls and reporting: Disclosure controls were deemed ineffective because of a material weakness involving insufficient financial-reporting personnel and expertise. Management had not completed its internal-control assessment at year-end and planned an initial assessment for December 31, 2018.
- Other key risks: Clinical and regulatory failure, dependence on third-party manufacturers and CROs, reliance on licensed IP, patient-enrollment and reimbursement uncertainty, competition, further financing needs, and potential litigation costs. Management was evaluating whether to develop, partner or otherwise rationalize GALE-301, GALE-302 and GALE-401.
Important facts for investors to verify
- Whether the second $4.7 million preferred-stock tranche closed and whether subsequent financing extended the stated June 2018 runway.
- Current unrestricted cash, restricted cash, JGB debt balance and maturity-related obligations, including any share issuances or amendments.
- Whether SELLAS met the MSK $25 million financing requirement by December 31, 2018 and preserved the GPS license.
- Progress, funding, trial initiation and subsequent data for the planned GPS AML and MPM Phase 3 programs and the Merck combination study.
- Full follow-up and regulatory feedback on the NeuVax interim results, particularly the TNBC subgroup and overall trial population.
- Updates on the JGB action, legacy shareholder litigation, settlement stock issuance and any resulting cash, dilution or insurance exposure.
- Whether the identified material weakness was remediated and whether later filings report effective disclosure and financial controls.