SELLAS Life Sciences Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Unless stated otherwise, financial figures below are in U.S. dollars. SELLAS is a late-stage biopharmaceutical company developing cancer immunotherapies and had no product-sales revenue. Following its December 2017 merger with Galena Biopharma, the company reports as a reverse acquisition, with Private SELLAS as the accounting predecessor.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $1.592 million | $1.827 million | $3.396 million | $4.011 million |
| General and administrative expense | $4.909 million | $3.841 million | $8.789 million | $6.128 million |
| Operating loss | $6.501 million | $5.668 million | $12.185 million | $10.139 million |
| Net loss | $6.062 million | $5.913 million | $14.057 million | $10.514 million |
| Net loss attributable to common stockholders | $8.530 million | $5.913 million | $18.493 million | $10.514 million |
| Basic and diluted loss per common share | $1.26 | $4.50 | $2.89 | $8.14 |
There were no revenues from product sales or collaboration and licensing agreements in the periods. Profitability and revenue margins are therefore not meaningful. Common-stockholder losses include non-cash deemed dividends of $2.468 million in Q2 and $4.436 million for the six months, associated with the Series A preferred-stock beneficial conversion feature.
- Cash and liquidity at June 30: $1.349 million unrestricted cash and $8.646 million restricted cash, or $9.995 million combined. Operating cash use was $11.702 million for the six months, versus $6.852 million in 2017. Financing provided $8.947 million; combined cash and restricted cash declined $2.755 million.
- Assets and liabilities at June 30: Total assets were $31.973 million and total liabilities $34.456 million, leaving a $2.483 million stockholders’ deficit. Accounts payable and accrued expenses totaled approximately $17.1 million.
- Debt: Reported debt was $7.779 million, including the JGB senior secured debenture and short-term notes. The debenture matures November 10, 2018, bears 9% annual interest and includes $0.8 million of additional interest due at maturity. Its outstanding principal was approximately $6.9 million as of August 14.
Changes versus the prior comparable period
- Q2 net loss increased by $0.149 million. Higher operating loss was largely offset by a $0.602 million net non-operating gain, including a $1.218 million gain from lower warrant-liability fair value and a $0.452 million expense from increased contingent consideration.
- Six-month net loss increased by $3.543 million, reflecting a $2.046 million increase in operating loss and a $1.451 million increase in net non-operating expense. The latter included a $3.863 million increase in contingent consideration, partly offset by a $3.099 million warrant-liability fair-value gain.
- R&D expense declined year over year, mainly due to lower licensing and manufacturing costs; management said spending had been constrained while it evaluated liquidity and resource allocation. G&A rose, primarily due to legal, outside-service, accounting, public-company compliance and insurance costs. Lower stock-based compensation partly offset those increases.
- Operating cash use increased by $4.850 million year over year. The reported loss-per-share comparison is affected by substantially different weighted-average share counts.
Funding, outlook, risks and unusual items
- Subsequent financing: On July 16, 2018, SELLAS closed a public offering of common shares and warrants, generating approximately $21.6 million in net proceeds before any warrant exercises. Series A holders exchanged $7.871 million of stated value and accrued dividends for 3,748,184 common shares and warrants; the exercise price of the Series A warrants was reduced from $6.59 to $2.10. These transactions occurred after quarter-end.
- Management expected June 30 cash plus the July offering proceeds to fund operating expenses and capital requirements through February 2019. It stated that substantial additional financing would be needed thereafter and that no further funding commitments existed. The filing identifies substantial doubt about the company’s ability to continue as a going concern; management said liquidation was not then considered imminent.
- At June 30, stockholders’ deficit did not meet Nasdaq’s continued-listing minimum. The company reported that the July offering restored equity above the minimum on a pro forma basis.
- Restricted cash dispute: The debenture terms called for $1.6 million of cash exceeding principal to be released from restriction. As of August 14, JGB had not approved the transfer, and the company could not access those funds. JGB litigation and the company’s counterclaims concern, among other issues, contractual obligations, shares and release of collateral.
- Pipeline and development: GPS is the lead candidate, with planned Phase 3 trials in AML and malignant pleural mesothelioma dependent on funding; AML is the stated priority. SELLAS also described early-stage GPS programs and other inherited candidates. A NeuVax/Herceptin Phase 2b study reported positive interim findings, including in a TNBC cohort, and was terminated early after key objectives were met; the company planned to seek regulatory guidance on further development.
- Other risks and unusual items: Potential clinical, regulatory, financing and commercialization risks remain significant. The company carries contingent consideration of $5.157 million tied to potential NeuVax milestones, with a maximum of up to $32 million. Several inherited securities and derivative lawsuits remain pending; management said it could not predict their outcomes and that other disclosed matters were not expected to materially affect results, financial position or cash flows.
- Controls: Management concluded disclosure controls were not effective at quarter-end because of a material weakness involving insufficient GAAP and SEC financial-reporting expertise and staffing. SELLAS reported hiring three finance and accounting personnel, including a CFO, and targeted remediation by December 31, 2018.
Important facts for investors to verify
- Whether the July offering proceeds and any warrant or pre-funded warrant exercises support operations beyond the stated February 2019 runway, and what additional financing or partnerships are secured.
- Whether the $1.6 million restricted-cash release was resolved, and the status and repayment terms of the JGB debenture due November 2018.
- Clinical and regulatory plans, funding requirements and subsequent progress for GPS and NeuVax, including the proposed TNBC development path.
- Potential dilution from the July offering, Series A exchange, warrants and other reserved shares; also confirm share counts after these transactions.
- Developments in JGB and legacy shareholder litigation, the contingent-consideration valuation, and remediation of the disclosed internal-control material weakness.