SELLAS Life Sciences Group, Inc. - Quarter Report: 2012 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2012

OR

For the transition period from              to             

Commission File Number: 001-33958

Galena Biopharma, Inc.

(Exact name of registrant as specified in its charter)

310 N. State Street, Suite 208, Lake Oswego, OR 97034

(Address of principal executive office) (Zip code)

Registrant’s telephone number: (855) 855-4253

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 7, 2012, Galena Biopharma, Inc. had outstanding 67,627,320 shares of common stock, $0.0001 par value per share, exclusive of treasury shares.

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GALENA BIOPHARMA, INC.

FORM 10-Q — QUARTER ENDED SEPTEMBER 30, 2012

INDEX

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PART I

ITEM 1. FINANCIAL STATEMENTS

GALENA BIOPHARMA, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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Galena Biopharma, Inc.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF EXPENSES

(Amounts in thousands, except share and per share data)

(Unaudited)

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GALENA BIOPHARMA, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GALENA BIOPHARMA, INC.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Basis of Presentation

Galena Biopharma, Inc. (“we,” “us,” “our,” “Galena” or the “Company”) is a biopharmaceutical company focused on developing innovative, next-generation cancer immunotherapies which address major unmet medical needs to advance care. Galena is developing innovative, peptide antigen-based “off the shelf” cancer immunotherapies for potential application to treatment of large populations of Cancer Survivors. Peptide vaccines have several potential clinical advantages over existing cancer treatments including excellent safety profiles, long-lasting protection through immune system activation, as well as an acceptable mode of administration (intradermal injection). In addition, there are potential commercial advantages in that these are readily and reproducibly manufactured products that could have a very wide reach into the physicians’ office, with no special requirements for delivery to the office or to patients.

A key differentiator in Galena’s approach is a focus on “minimal residual disease” that may remain in Cancer Survivors. The strategy is to prevent recurrence in early stage patient groups who may harbor “occult” residual cancer cells that are not detectable by current imaging and biomarkers, and despite adjuvant therapy and radiation therapy will relapse in significant numbers over time.

Our lead product candidate, NeuVax™ (nelipepimut-S) is the immmunodominant nonapeptide derived from the extracellular domain of the HER2 protein, a well-established target for therapeutic intervention in breast cancer. The nelipepimut sequence stimulates specific CD8+ cytotoxic T lymphocytes (CTL) following binding to HLA-A2/A3 molecules on antigen presenting cells (APC). These activated specific CTLs recognize, neutralize and destroy through cell lysis HER2 expressing cancer cells, including occult cancer cells and micrometastatic foci. The nelipepimut immune response can also generate CTLs to other immunogenic peptides through inter- and intra-antigenic epitope spreading. Based on a successful Phase 2 trial, which achieved its primary endpoint of disease free survival (DFS), the Food and Drug Administration (FDA) granted NeuVax™ a Special Protocol Assessment (SPA) for its Phase 3 PRESENT (Prevention of Recurrence in Early-Stage, Node-Positive Breast Cancer with Low to Intermediate HER2 Expression with NeuVax Treatment) trial. The Phase 3 PRESENT trial is ongoing and additional information on the study can be found at www.neuvax.com. If the randomized, double-blinded, multinational, 700 patient PRESENT trial is successful, the Company intends to seek U.S. FDA commercial registration of NeuVax™.

Based on a pilot Phase 2a study and preclinical evidence suggesting enhanced efficacy of using NeuVax™ in combination with Herceptin ^® (trastuzumab: Genentech/Roche), NeuVax™ is also being developed in combination with Herceptin in a randomized Phase 2 clinical trial.

Our second product candidate, Folate Binding Protein (FBP), a targeted vaccine which consists of the E39 peptide over-expressed (20-80 fold) in more than 90% of ovarian and endometrial cancers, is currently in a Phase 1/2 clinical trial.

The Company was incorporated as Argonaut Pharmaceuticals, Inc., in Delaware, on April 3, 2006. The Company changed its name to RXi Pharmaceuticals Corporation on November 28, 2006.

We acquired our NeuVax™ product candidate in April 2011. Prior to that time, we were engaged primarily in conducting discovery research and preclinical development activities based on RNAi. In connection with our acquisition of NeuVax™, we reduced the scope of our RNAi activities.

On September 26, 2011, the Company changed its name to Galena Biopharma, Inc. from RXi Pharmaceuticals Corporation in connection with the Company’s separation into two companies: (i) Galena, a late-stage oncology drug development company; and (ii) RXi, which continues to develop novel RNAi-based therapies utilizing our historical RNAi assets. RXi was initially incorporated as RNCS, Inc. and assumed the name RXi Pharmaceuticals Corporation in conjunction with the change in the Company’s name to Galena. On April 27, 2012, Galena completed the partial spin-off of RXi. (See Note 4)

The Company has not generated any revenue from inception through September 30, 2012 and is considered a development-stage company for accounting purposes. The Company may not generate product revenue in the foreseeable future, if ever. The Company expects to incur significant operating losses as it advances its product candidates through the drug development and regulatory process. The Company expects to continue to devote a substantial portion of its resources to research and development programs. As a result of the costs expected to be incurred in connection with our recently commenced clinical trials of NeuVax™ and FBP, the Company expects that our research and development expense will increase significantly from historic levels for the foreseeable future. The Company will need to generate significant revenue to achieve profitability and might never do so. In the absence of product revenue, our potential sources of operational funding are expected to be the proceeds from equity financings, funded research and development payments and payments received under partnership and collaborative agreements. There is no guarantee that additional funding will be available to the Company on acceptable terms, or at all. If the Company fails to obtain additional funding when needed, it would be forced to scale back or terminate operations or to seek to merge with or to be acquired by another company.

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Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from these estimates.

Derivative Financial Instruments

The Company does not enter into any derivative contracts for speculative purposes. From time to time, the Company issues warrants or options to purchase our common stock to vendors as consideration to perform services. The Company may also issue warrants as part of financing transactions. The Company recognizes all derivatives, including warrants, as assets or liabilities measured at fair value, with changes in fair value of derivatives reflected as current period income or loss unless the derivatives qualify for hedge accounting and are accounted for as such. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815-40, “ Derivatives and Hedging — Contracts in Entity’s Own Stock ” the value of some of our warrants is required to be recorded as a liability, since the holders have an option to put the warrants back to the Company in specified events (see Note 10).

Principles of Consolidation

The consolidated financial statements include the accounts of Galena and its consolidated subsidiary. All material intercompany accounts have been eliminated in consolidation.

Other Income (Expense)

Other income (expense) consists of the following (in thousands):

Comprehensive Loss

The Company’s comprehensive loss is equal to its net loss for all periods presented.

2. Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets, a new accounting pronouncement intended to simplify how entities test indefinite-lived intangible assets other than goodwill for impairment. The new standard permits an entity to first assess qualitative factors to determine whether it is “more likely than not” (defined as having a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired, in order to determine whether further impairment testing is necessary. The new standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The new standard is not expected to have a material impact on the Company’s consolidated financial statements.

3. NeuVax™ Acquisition

On April 13, 2011, in concert with the decision by the Company’s Board of Directors to diversify its development programs and to become a late stage clinical development company, the Company acquired its late stage product candidate NeuVax™ through a merger acquisition of Apthera, Inc., a Delaware corporation (“Apthera”), with Apthera surviving as a wholly-owned subsidiary of the Company. At the closing of the merger, the Company issued to Apthera’s stockholders approximately 5.0 million shares of common stock of the Company and agreed to pay to the former Apthera shareholders future contingent consideration of up to $32 million based on the achievement of specified development and commercial milestones relating to the Company’s NeuVax™ product candidate. The contingent consideration is payable, at the election of the Company, in cash or in additional shares of common stock.

The goodwill associated with the acquisition is not deductible for tax purposes.

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The purchase price consideration and allocation of purchase price were as follows:

The Company recorded the estimated fair value of the contingent consideration at $6.5 million based on the expected probability of achieving the specified development and commercial milestones relating to the Company’s NeuVax™ product candidate and then applying a discount rate, based on a corporate debt interest rate index publicly issued, to the expected future payments. The expected timing and probability of achieving each milestone and the discount rates applied are reviewed quarterly using the most current information to measure the contingent considertation as of the reporting date. On January 19, 2012, the first milestone was achieved, and the Company issued into escrow in favor of the former Apthera shareholders $1,000,000, or 1,315,849 shares, of common stock in payment of the related contingent consideration. The number of shares was based on the $0.76 closing price of the Company’s common stock as reported on The NASDAQ Capital Market on January 18, 2012, the day prior to achievement of the first milestone. In September 2012, the escrowed shares were released to the former Apthera shareholders from escrow, and the Company paid to the former Apthera shareholders cash of $35,016, representing an interest factor of ten percent (10%) per annum on the $1,000,000 amount of the milestone payment from February 10, 2012 through the day immediately prior to the release of the escrowed shares. During the nine months ended September 30, 2012, the Company recorded additional other expense of $579,000 related to the change in the fair value of the escrowed shares up to the date of release from escrow.

The increase in the fair value of the contingent liability during the nine months ended September 30, 2012 was $2,019,000, which is included in other income (expense) in the accompanying condensed consolidated statements of expenses. The fair value of the contingent liability at September 30, 2012 was $6,791,000. Of this amount, $925,000 is recorded as a current contingent liability.

The following presents the pro forma net loss and pro forma net loss per common share for the three and nine months ended September 30, 2011 (amounts in thousands, except per share data):

4. RXi Spin-Off

Contribution Agreement

On September 24, 2011, the Company entered into a contribution agreement with RXi pursuant to which we assigned and contributed to RXi substantially all of the Company’s RNAi-related technologies and assets. The contributed assets consist primarily of our novel RNAi compounds and licenses relating to our RNAi technologies, as well as the lease of our Worcester, Massachusetts laboratory

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facility, fixed assets and other equipment located at the facility and our employment arrangements with certain scientific, corporate and administrative personnel who became employees of RXi. The Company also contributed $1.5 million of cash to the capital of RXi.

Pursuant to the contribution agreement, RXi assumed certain accrued expenses of our RXI-109 development program and all subsequent obligations under the contributed licenses, employment arrangements and other agreements. RXi also has agreed to make future milestone payments to us of up to $45 million, consisting of two one-time payments of $15 million and $30 million, respectively, if RXi achieves annual net sales equal to or greater than $500 million and $1 billion, respectively, of any covered products that may be developed with the contributed RNAi technologies.

In the contribution agreement, the Company made customary representations and warranties to RXi regarding the contributed assets and other matters, and agreed to indemnify RXi against losses arising from a breach of its representations, warranties and covenants set forth in the contribution agreement.

Securities Purchase Agreement

On September 24, 2011, the Company also entered into a securities purchase agreement with RXi and two institutional investors, pursuant to which the investors agreed to purchase a total of $9,500,000 of Series A Preferred Stock of RXi (“RXi Preferred Stock”) at the closing of the spin-off of RXi, and to lend up to $1,500,000 to RXi to fund its operations between signing and closing (the “Bridge Loan”). The outstanding principal and accrued interest from the Bridge Loan was converted into RXi Preferred Stock at the closing of the spin-off of RXi and represents a portion of the $9,500,000 total investment in RXi Preferred Stock.

The RXi Preferred Stock will be convertible by a holder at any time into shares of RXi common stock, except to the extent that the holder would own more than 9.999% of the shares of RXi common stock outstanding immediately after giving effect to such conversion. Without regard to this conversion limitation, the shares of the RXi Preferred Stock to be held by the Investors upon completion of the RXi financing and the spin-off of RXi will be convertible into shares of RXi common stock representing approximately 83% of the shares of RXi common stock that would be outstanding, assuming the conversion in full of the RXi Preferred Stock, which we refer to as the “as-converted common stock.”

Spin-Off

The Company agreed in the securities purchase agreement to distribute to our stockholders on a share-for-share basis approximately 8% of the as-converted common stock of RXi, which distribution was completed on April 27, 2012. The Company distributed a total of 66,959,894 RXi shares to its shareholders on April 27, 2012. The Company retained 32,734,235 shares of common stock of RXi, which are subject to a one-year lock up period. For accounting purposes, RXi’s historical carrying amounts at the date of the spin-off are used as the basis for recording the Company’s retained ownership in RXi. Since RXi’s liabilities exceeded its assets at the spin-off date, Galena’s investment in RXi is carried at zero. The value of RXi shares held by the Company at September 30, 2012 was $0.11 per share or approximately $3,600,000, based on the average of high and low bid prices of RXi shares as reported in the OTC Bulletin Board.

The Company classified the RXi activities, including for previously reported periods, as discontinued operations in the accompanying condensed consolidated statements of expenses. The net assets of RXi were removed from the condensed consolidated balance sheet as of the date of the spin-off, and were recorded as an equity distribution. Summarized balance sheet information related to the net assets distributed in the spin-off are as follows (in thousands):

Purchase Agreement Terms and Conditions

In the securities purchase agreement, the parties made customary representations and warranties to the other parties and agreed to indemnify each other against losses arising from a breach of their respective representations, warranties and covenants. In accordance with the securities purchase agreement, on April 27, 2012, RXi reimbursed the Company and the Investors $300,000 and $100,000, respectively, for transaction costs relating to the contribution agreement, the securities purchase agreement and the transactions called for by the agreements.

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RXi Convertible Promissory Notes

Pursuant to the securities purchase agreement, the RXi investors purchased $1,000,000 of secured convertible promissory notes of RXi, the proceeds of which were used to fund RXi’s operations pending the spin-off of RXi. The RXi convertible notes bore interest at a rate of 7% per annum and were converted into shares of RXi Preferred Stock at a conversion price of $1,000 per share in conjunction with the completion of the spin-off.

5. Fair Value Measurements

The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) for the Company’s financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and are re-measured and reported at fair value at least annually using a fair value hierarchy that is broken down into three levels. Level inputs are as defined as follows:

Level 1 — quoted prices in active markets for identical assets or liabilities.

Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

The Company categorized its cash equivalents as a Level 1 hierarchy. The valuation for Level 1 was determined based on a “market approach” using quoted prices in active markets for identical assets. Valuations of these assets do not require a significant degree of judgment. The Company categorized its warrants potentially settled in cash as a Level 2 hierarchy. The warrants are measured at fair market value on a recurring basis and are marked to market each quarter-end until they are settled. The contingent purchase price consideration is categorized as a Level 3 hierarchy and is measured at its estimated fair value on a recurring basis and is adjusted at each quarter-end until it is completely settled. The contingent price consideration is valued based on the expected timing of milestones, the expected probability of success for each milestone and the updated discount rates based on a corporate debt interest rate index publicly issued.

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The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, respectively, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

A reconciliation of the beginning and ending Level 3 liabilities for the nine months ended September 30, 2012 is as follows (in thousands):

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheet for cash, accounts payable, capital leases and convertible notes payable approximate their fair values due to their short-term nature and market rates of interest.

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6. Stock-Based Compensation

The Company follows the provisions of the FASB ASC Topic 718, “ Compensation — Stock Compensation ” (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based payments and awards, including stock options and warrants made to employees, non-employee directors, and consultants. In accordance with the provisions of ASC 718, stock-based compensation expense based on the grant date fair value of the underlying stock is recognized as an expense over the requisite service period.

Stock-based compensation for services rendered by non-employees is recognized as compensation expense in accordance with the requirements of FASB ASC Topic 505-50, “ Equity Based Payments to Non-Employees.”

Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting, the value of these options, as calculated using the Black-Scholes option-pricing model, will be re-measured using the fair value of the Company’s common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.

The Company is currently using the Black-Scholes option-pricing model to determine the fair value of all its option grants. For option grants in the three and nine months ended September 30, 2012 and 2011, the following assumptions were used:

The weighted average fair values of options granted during the nine-month period ended September 30, 2012 and 2011 were $0.59 and $0.91 per share, respectively.

The weighted average fair values of options granted during the three-month period ended September 30, 2012 and 2011 were $1.23 and $0.66 per share, respectively.

The Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption of zero is based upon the fact that the Company has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The Company has estimated an annualized forfeiture rate of 15.0% for options granted to its employees, 8.0% for options granted to senior management and no forfeiture rate for the directors. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.

The following table summarizes stock option activity from January 1, 2012 through September 30, 2012:

The aggregate intrinsic values of outstanding and exercisable options at September 30, 2012 were calculated based on the closing price of the Company’s common stock as reported on The NASDAQ Capital Market on September 28, 2012 of $1.78 per share less the exercise price of the options. The aggregate intrinsic values of options exercised was calculated based on the difference between the exercise price of the options and the market price of the Company’s common stock on the date of exercise.

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7. Net Loss Per Share

The Company accounts for and discloses net loss per common share in accordance with FASB ASC Topic 260 “ Earnings per Share.” Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. Because the inclusion of potential common shares would be anti-dilutive for all periods presented diluted net loss per common share is the same as basic net loss per common share.

For the three and nine months ended September 30, 2012, 7,540,000 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive. For the three months ended September 30, 2012, 5,747,000 shares of common stock issuable upon the exercise of warrants were excluded from the computation of diluted earnings per share for the same reason.

For the three and nine months ended September 30, 2011, 6,452,000 shares of common stock issuable upon the exercise of stock options were excluded from the computation of diluted earnings per share because the effect would be antidilutive. For the three and nine months ended September 30, 2011, 20,051,000 shares of common stock issuable upon the exercise of warrants were excluded from the computation of dilutive earnings per share for the same reason.

8. License Agreements

As part of its business, the Company enters into licensing agreements that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of product sales.

Individual milestone payments may be material, and multiple milestones may be reached in the same period. The aggregate payments associated with the milestones could adversely affect the results of operations or affect the comparability of our period-to-period results. In addition, these license arrangements often give the Company the discretion to unilaterally terminate development of the product candidate and avoid making the contingent payments; however, the Company is unlikely to cease development if the product candidate achieves clinical testing objectives. The Company’s contractual obligations relating to minimum annual maintenance fees and milestone payments have not changed significantly from December 31, 2011.

9. Stockholders’ Equity

On April 13, 2012, the Company completed an underwritten public offering of 9,751,000 shares of common stock for gross proceeds of $14,626,500, resulting in approximately $13,937,000 of net proceeds to the Company after deducting the underwriting discounts and commissions and offering expenses.

10. Warrants

The following is a summary of warrant activity for the nine months ended September 30, 2012 (in thousands):