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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-33958

 

 

Galena Biopharma, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-8099512
(State of incorporation)  

(I.R.S. Employer

Identification No.)

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):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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.

 

 

 


Table of Contents

GALENA BIOPHARMA, INC.

FORM 10-Q — QUARTER ENDED SEPTEMBER 30, 2012

INDEX

 

Part No.

  Item No.   

Description

   Page
No.
 
I     

FINANCIAL INFORMATION

  
  1   

Financial Statements (unaudited)

     1   
    

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

     1   
    

Condensed Consolidated Statements of Expenses for the three and nine months ended September 30, 2012 and 2011, and the cumulative period from January 1, 2003 (date of inception) to September 30, 2012

     2   
    

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 and the cumulative period from January 1, 2003 (date of inception) to September 30, 2012

     3   
    

Notes to Condensed Consolidated Financial Statements

     4   
  2   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   
  3   

Quantitative and Qualitative Disclosures About Market Risk

     17   
  4   

Controls and Procedures

     17   
II     

OTHER INFORMATION

  
  1   

Legal Proceedings

     17   
  1A   

Risk Factors

     18   
  2   

Unregistered Sales of Equity Securities and Use of Proceeds

     18   
  3   

Defaults Upon Senior Securities

     18   
  4   

Mine Safety Disclosures

     18   
  5   

Other Information

     18   
  6   

Exhibits

     19   

Index to Exhibits

  
Signatures      20   

EX-31.1

  

EX-31.2

  

EX-32.1

  


Table of Contents

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)

 

     September  30,
2012

(Unaudited)
    December 31,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 15,423      $ 11,433   

Restricted cash

     101        101   

Prepaid expenses

     801        276   
  

 

 

   

 

 

 

Total current assets

     16,325        11,810   
  

 

 

   

 

 

 

Equipment and furnishings, net

     31        393   

In-process research and development

     12,864        12,864   

Goodwill

     5,898        5,898   

Deposits

     74        3   
  

 

 

   

 

 

 

Total assets

   $ 35,192      $ 30,968   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,210      $ 2,155   

Accrued expenses and other current liabilities

     2,012        2,984   

Current maturities of capital lease obligations

     6        35   

Convertible notes payable

     —          500   

Fair value of warrants potentially settleable in cash

     4,904        3,746   

Current contingent purchase price consideration

     925        1,782   
  

 

 

   

 

 

 

Total current liabilities

     10,057        11,202   

Capital lease obligations, net of current maturities

     51        32   

Deferred tax liability, non-current

     5,053        5,053   

Contingent purchase price consideration, net of current portion

     5,866        4,569   
  

 

 

   

 

 

 

Total liabilities

     21,027        20,856   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.0001 par value; 125,000,000 shares authorized; 68,278,653 shares issued and 67,603,653 shares outstanding and 47,811,453 shares issued and 47,136,453 outstanding at September 30, 2012 and December 31, 2011, respectively

     7        5   

Additional paid-in capital

     116,453        81,184   

Deficit accumulated during the developmental stage

     (98,446     (67,228

Less treasury shares at cost, 675,000 shares

     (3,849     (3,849
  

 

 

   

 

 

 

Total stockholders’ equity

     14,165        10,112   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 35,192      $ 30,968   
  

 

 

   

 

 

 

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

 

1


Table of Contents

Galena Biopharma, Inc.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF EXPENSES

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

(Unaudited)

 

     For the Three
Months Ended
September 30,
2012
    For the Three
Months Ended
September 30,
2011
    For the Nine
Months Ended
September 30,
2012
    For the Nine
Months Ended
September 30,
2011
    Period from
January 1, 2003
(Date of Inception)
to September  30, 2012
 

Expenses:

          

Research and development expense

   $ 4,074      $ 1,332      $ 10,168      $ 1,798      $ 15,144   

Research and development employee stock-based compensation expense

     48        —          138        —          347   

Research and development non-employee stock-based compensation expense

     47        35        197        (41     6,189   

Fair value of common stock issued in exchange for research and development services

     —          —          50        —          50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total research and development expense

     4,169        1,367        10,553        1,757        21,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expense

     1,090        1,441        4,137        4,972        31,496   

General and administrative employee stock-based compensation expense

     85        608        366        2,035        9,956   

Fair value of common stock warrants issued for general and administrative services

     96        19        342        106        2,744   

Fair value of common stock issued in exchange for general and administrative expense

     88        —          223        23        577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative expense

     1,359        2,068        5,068        7,136        44,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (5,528     (3,435     (15,621     (8,893     (66,503

Interest income (expense)

     —          (2     (35     (6     587   

Other income (expense) (Note 1)

     (733     (397     (13,918     1,723        (1,859
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (6,261     (3,834     (29,574     (7,176     (67,775

Loss from discontinued operations

     —          (1,641     (1,644     (5,898     (40,711
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (6,261   $ (5,475   $ (31,218   $ (13,074   $ (108,486
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share:

          

Basic and diluted loss per share, continuing operations

   $ (0.09   $ (0.09   $ (0.49   $ (0.21     N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share, discontinued operations

   $ —        $ (0.04   $ (0.03   $ (0.18     N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.09   $ (0.13   $ (0.52   $ (0.39     N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding-basic and diluted

     67,265,470        41,970,481        60,150,658        33,697,704        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

2


Table of Contents

GALENA BIOPHARMA, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

    For the Nine
Months Ended
September 30,
2012
    For the Nine
Months Ended
September 30,
2011
    Period from
January 1, 2003
(Date of Inception)
through
September 30, 2012
 

Cash flows from operating activities:

     

Net loss

  $ (31,218   $ (13,074   $ (108,486

Adjustments to reconcile net loss to net cash used in operating activities:

     

Depreciation and amortization expense

    47        126        711   

Loss on disposal of equipment

    —          7        19   

Non-cash rent expense

    —          —          29   

Accretion and receipt of bond discount

    —          —          35   

Non-cash share-based compensation

    801        2,801        19,659   

Change in fair value of shares mandatorily redeemable for cash upon exercise of warrants

    —          —          (785

Fair value of common stock warrants issued in exchange for services

    342        106        2,744   

Fair value of common stock issued in exchange for services

    267        23        627   

Change in fair value of common stock warrants issued in equity financings

    11,899        (1,042     721   

Fair value of common stock issued in exchange for licensing rights

    —          —          3,954   

Change in fair value of contingent purchase consideration

    2,019        (683     1,910   

Changes in assets and liabilities:

     

Prepaid expenses and other assets

    (662     (317     (911

Accounts payable

    875        (193     2,099   

Due to former parent

    —          —          (207

Accrued expenses and other current liabilities

    (165     1,747        3,308   
 

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

    (15,795     (10,499     (74,573
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

     

Change in restricted cash

    —          —          (101

Net cash received in acquisition

    —          168        168   

Purchase of short-term investments

    —          —          (37,532

Maturities of short-term investments

    —          —          37,497   

Cash paid for purchase of equipment and furnishings

    —          (53     (739

Disposal of equipment and furnishings

    —          —          (1

Cash paid for lease deposit

    —          —          (45

Net cash transferred in spin-off transaction

    (87     —          (87
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (87     115        (840
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

     

Net proceeds from issuance of common stock

    13,937        18,609        78,919   

Cash paid for repurchase of common stock warrants

    (266     —          (266

Cash paid for repurchase of common stock

    —          —          (3,849

Net proceeds from exercise of common stock options

    —          150        610   

Net proceeds from exercise of common stock warrants

    5,672        —          5,822   

Common stock issued in connection with ESPP

    39        —          54   

Net proceeds from issuance of convertible notes payable

    500        500        1,000   

Repayments of capital lease obligations

    (10     (73     (220

Cash advances from former parent company, net

    —          —          8,766   
 

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    19,872        19,186        90,836   
 

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

    3,990        8,802        15,423   

Cash and cash equivalents at the beginning of period

    11,433        6,891        —     
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 15,423      $ 15,693      $ 15,423   
 

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

     

Cash received during the period for interest

  $ —        $ 2     $ 727   
 

 

 

   

 

 

   

 

 

 

Cash paid during the period for interest

  $ —        $ —        $ 12   
 

 

 

   

 

 

   

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

     

Settlement of corporate formation expenses in exchange for common stock

  $ —        $ —        $ 978   
 

 

 

   

 

 

   

 

 

 

Fair value of warrants issued in connection with common stock recorded as a cost of equity

  $ —        $ 13,232      $ 18,038   
 

 

 

   

 

 

   

 

 

 

Issuance of common stock in exchange for outstanding warrants

  $ —        $ —        $ 3,120   
 

 

 

   

 

 

   

 

 

 

Fair value of shares mandatorily redeemable for cash upon the exercise of warrants

  $ —        $ —        $ 785   
 

 

 

   

 

 

   

 

 

 

Net liabilities distributed in spin-off transaction, net of cash transferred

  $ 2,246      $ —        $ 2,246   
 

 

 

   

 

 

   

 

 

 

Issuance of common stock in payment of contingent purchase price consideration milestone

  $ 1,579      $ —        $ 1,579   
 

 

 

   

 

 

   

 

 

 

Reclassification of warrant liability upon exercise

  $ 10,741      $ 102      $ 10,741   
 

 

 

   

 

 

   

 

 

 

Allocation of management expenses

  $ —        $ —        $ 551   
 

 

 

   

 

 

   

 

 

 

Fair value of stock options modified

  $        $ 674      $ 674   
 

 

 

   

 

 

   

 

 

 

Equipment and furnishings exchanged for common stock

  $ —        $ —        $ 48   
 

 

 

   

 

 

   

 

 

 

Equipment and furnishings acquired through capital lease

  $ —        $ 80      $ 277   
 

 

 

   

 

 

   

 

 

 

Value of restricted stock units and common stock issued in lieu of bonuses included in accrued expenses

  $ —        $ 427      $ 634   
 

 

 

   

 

 

   

 

 

 

Non-cash lease deposit

  $ —        $ —        $ 50   

NeuVax™ (Apthera, Inc.) Acquisition:

     

Fair value of shares issued at closing

  $ —        $ 6,367      $ 6,367   

Fair value of contingent purchase price consideration

      6,460        6,460   
 

 

 

   

 

 

   

 

 

 

Net assets acquired, excluding cash of $168

  $ —        $ 12,827      $ 12,827   
 

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

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):

 

     For the Three
Months Ended
September 30,
2012
    For the Three
Months Ended
September 30,
2011
    For the Nine
Months Ended
September 30,
2012
    For the Nine
Months Ended
September 30,
2011
 

Change in the fair value of warrants potentially settleable in cash

   $ (262   $ (1,052   $ (11,899   $ 1,042   

Change in the fair value of contingent purchase price consideration

     (471     655       (2,019     683   

Miscellaneous other expense

     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (733   $ (397   $ (13,918   $ 1,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

     (in 000’s)  

Calculation of allocable purchase price:

  

Fair value of shares issued at closing including escrowed shares expected to be released

   $ 6,367 (i)

Estimated value of contingent consideration

     6,460   
  

 

 

 

Total allocable purchase price

   $ 12,827   
  

 

 

 

Allocation of purchase price:

  

Cash

   $ 168   

Prepaid expenses and other current assets

     14   

Equipment and furnishings

     11   

Goodwill

     5,898   

In-process research and development

     12,864   

Accounts payable

     (931 )

Accrued expenses and other current liabilities

     (143 )

Notes payable

     (1 )

Deferred tax liability, non-current

     (5,053 )
  

 

 

 
   $ 12,827   
  

 

 

 

 

(i) The value of the Company’s common stock was based upon a per share value of $1.28, the closing price of the Company’s common stock as reported on The NASDAQ Capital Market on April 13, 2011.

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):

 

     For the Three
Months Ended
September 30, 2011
    For the Nine
Months Ended
September 30, 2011
 

Net loss from continuing operations

   $ (4,194 )   $ (8,533 )

Net loss from discontinued operations

   $ (1,641 )   $ (5,898 )

Net loss per common share, continuing operations

   $ (0.10 )   $ (0.24

Net loss per common share, discontinued operations

   $ (0.04 )   $ (0.17

Net loss per common share

   $ (0.14 )   $ (0.41 )

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):

 

     April 27,
2012
    December 31,
2011
 

Assets

    

Cash and cash equivalents

   $ 87      $ 556   

Other current assets

     66        783   

Equipment and furnishings

     315        355   

Liabilities

    

Accounts payable and accrued liabilities

     (1,607 )     (1,747 )

Convertible notes

     (1,000 )     (500 )

Capital lease obligations

     (20 )     (34 )
  

 

 

   

 

 

 

Net liabilities

   $ (2,159 )   $ (587 )
  

 

 

   

 

 

 

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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Table of Contents

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):

 

Description    September 30,
2012
     Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets:

           

Cash equivalents

   $ 14,746       $ 14,746       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 14,746       $ 14,746       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Warrants potentially settleable in cash

   $ 4,904       $ —         $ 4,904       $ —     

Contingent purchase price consideration

     6,791         —           —           6,791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 11,695       $ —         $ 4,904       $ 6,791   
  

 

 

    

 

 

    

 

 

    

 

 

 
Description    December 31,
2011
     Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Assets:

           

Cash equivalents

   $ 11,433       $ 11,433       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 11,433       $ 11,433       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Warrants potentially settleable in cash

   $ 3,746       $ —         $ 3,746       $ —     

Contingent purchase price consideration

     6,351         —           —           6,351   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 10,097       $ —         $ 3,746       $ 6,351   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

    3 Months
Ended
September 30,
2012
     9 Months
Ended
September 30,
2012
 

Balance, beginning of period

  $ 6,320       $ 6,351   

Payment of contingent purchase price consideration milestone

    —           (1,579

Changes in the estimated fair value of contingent acquisition purchase price consideration

    471         2,019   
 

 

 

    

 

 

 

Balance at September 30, 2012

  $ 6,791       $ 6,791   
 

 

 

    

 

 

 

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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Table of Contents

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:

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2012     2011     2012     2011  

Weighted average risk-free interest rate

     0.85 %     1.03 %     1.06 %     1.59 %

Weighted average expected volatility

     75.35     98.94 %     75.67     103.27

Weighted average expected lives (years)

     6.25        5.34        6.13        5.49   

Weighted average expected dividend yield

     0.00 %     0.00 %     0.00 %     0.00 %

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:

 

     Total
Number of
Shares
    Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2012

     6,163,137      $ 3.03       $ —     

Granted

     1,650,000        0.92         —     

Exercised

     (11,250     0.76         10,463   

Cancelled

     (261,816     3.51         —     
  

 

 

      

Outstanding at September 30, 2012

     7,540,071      $ 2.55       $ 3,386,718   
  

 

 

      

Options exercisable at September 30, 2012

     5,535,205      $ 3.08       $ 1,928,425   
  

 

 

      

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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Table of Contents

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):

 

     April
2011
Warrants
    March
2011
Warrants
    March
2010
Warrants
    August
2009
Warrants
     Consultant
Warrants
     Total  

Warrants outstanding, January 1, 2012

     9,470        2,400        540        978         733         14,121   

Warrants issued

     —          —          —          —           400         400   

Warrants exercised

     (6,595     (1,999     (180     —           —           (8,774
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Warrants outstanding, September 30, 2012

     2,875        401        360        978         1,133         5,747   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Expiration

    
 
April
2017
  
  
   
 
March
2016
  
  
   
 
March
2016
  
  
   
 
August
2014
  
  
    
 
January
2014
  
  
  

Warrants consist of liability-classified warrants and equity-classified warrants.

Warrants classified as liabilities

Liability-classified warrants consist of warrants issued in connection with equity financings in April 2011, March 2011, March 2010, and March 2009. These warrants were determined not to be indexed to the Company’s own stock as they are potentially settleable in cash.

The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. The change in the estimated fair value of the warrant liability is recorded in the condensed consolidated statement of expenses as other income (expense). The fair value of the warrants is estimated using the Black-Scholes option pricing model with the following inputs:

 

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     As of September 30, 2012  
     April 2011
Warrants
    March 2011
Warrants
    March 2010
Warrants
    August 2009
Warrants
 

Strike price

   $ 0.65      $ 0.65      $ 2.50      $ 4.50   

Expected term

     4.56        3.43        3.50        1.80   

Volatility

     78.93     67.96     68.18     62.59

Risk free rate

     0.55     0.38     0.39     0.22
     As of December 31, 2011  
     April 2011
Warrants
    March 2011
Warrants
    March 2010
Warrants
    August 2009
Warrants
 

Strike price

   $ 0.65      $ 0.65      $ 2.50      $ 4.50   

Expected term

     5.30        0.03        4.80        2.60   

Volatility

     98.91     98.91     98.91     98.91

Risk free rate

     0.83     0.02     0.83     0.31

The Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the time of issuance. The dividend yield used in the pricing model is zero, because the Company has no present intention to pay cash dividends.

The change in fair value of the warrant liability during the three months ended September 30, 2012 was as follows (in thousands):

 

     April 2011
Warrants
    March 2011
Warrants
    March 2010
Warrants
    August 2009
Warrants
    Total  

Warrant liability, June 30, 2012

   $ 3,736      $ 1,013      $ 305      $ 175      $ 5,229   

Fair value of warrants exercised

     (25     (562     —          —          (587

Change in fair value of warrants

     286        54        (55     (23     262   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Warrant liability, September 30, 2012

   $ 3,997      $ 505      $ 250      $ 152      $ 4,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The change in fair value of the warrant liability during the nine months ended September 30, 2012 was as follows (in thousands):

 

     April 2011
Warrants
    March 2011
Warrants
    March 2010
Warrants
    August 2009
Warrants
     Total  

Warrant liability, January 1, 2012

   $ 3,154      $ 412      $ 116      $ 64       $ 3,746   

Fair value of warrants exercised

     (8,086     (2,401     (254     —           (10,741

Change in fair value of warrants

     8,929        2,494        388        88         11,899   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Warrant liability, September 30, 2012

   $ 3,997      $ 505      $ 250      $ 152       $ 4,904   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The change in fair value of the warrant liability during the three months ended September 30, 2011 was as follows (in thousands):

 

     April 2011
Warrants
    March 2011
Warrants
     March 2010
Warrants
     August 2009
Warrants
    Total  

Warrant liability, June 30, 2011

   $ 12,320      $ 1,310       $ 324       $ 300      $ 14,254   

Fair value of warrants exercised

     (80     —           —           —          (80

Change in fair value of warrants

     903        162         —           (13     1,052   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Warrant liability, September 30, 2011

   $ 13,143      $ 1,472       $ 324       $ 287      $ 15,226   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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The change in fair value of the warrant liability during the nine months ended September 30, 2011 was as follows (in thousands):

 

     April 2011
Warrants
     March 2011
Warrants
    March 2010
Warrants
    August 2009
Warrants
    Total  

Warrant liability, January 1, 2011

   $ —         $ —        $ 1,195      $ 1,943      $ 3,138   

Fair value of warrants issued

     11,438         1,794        —          —          13,232   

Fair value of warrants exercised

     —           (102     —          —          (102

Change in fair value of warrants

     1,705         (220     (871     (1,656     (1,042
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Warrant liability, September 30, 2011

   $ 13,143       $ 1,472      $ 324      $ 287      $ 15,226   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Warrants classified as equity

Equity-classified warrants consist of warrants issued in connection with consulting services. These warrants are recorded in equity at fair value upon issuance, and are not reported as liabilities on the balance sheet.

11. Subsequent Events

The Company evaluated all events or transactions that occurred after September 30, 2012 up through the date these financial statements were issued. The Company did not have any material recognizable or unrecognizable subsequent events.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition as of September 30, 2012 and results of operations for the three months and nine months ended September 30, 2012 and 2011, respectively, should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011 which was filed with the SEC on March 28, 2012.

The discussion and analysis below includes certain forward-looking statements related to future operating losses and our potential for profitability, the sufficiency of our cash resources, our ability to obtain additional equity or debt financing, possible partnering or other strategic opportunities for the development of our products, as well as other statements related to the progress and timing of product development, present or future licensing, collaborative or financing arrangements or that otherwise relate to future periods, which are all forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and/or assumptions underlying or judgments concerning the future financial performance and other matters discussed in this document. The words “may,” “will,” “should,” “plan,” “believe,” “estimate,” “intend,” “anticipate,” “project,” and “expect” and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve certain risks, uncertainties and other factors described elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2011, that could cause our actual results of operations, performance, financial position and business prospects and opportunities for this quarter and the periods that follow to differ materially from those expressed in, or implied by, those forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise forward-looking statements.

Overview

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 carcinoma. 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) study. The Phase 3 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 FDA commercial registration for 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.

 

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The Company 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 from RXi Pharmaceuticals Corporation to Galena Biopharma, Inc. in connection with the Company’s separation into two companies: (i) Galena, a late-stage oncology drug development company; and (ii) RXi Pharmaceuticals Corporation, or RXi, which continues to develop novel RNAi-based therapies utilizing our historical RNAi assets.

RXi was formed by Galena in agreement with two institutional investors. On September 24, 2011, Galena contributed to RXi substantially all of our RNAi-related technologies and assets and entered into a number of agreements relating to RXi’s ongoing business and operations. RXi will focus on developing and commercializing therapeutic products based on RNAi technologies for the treatment of human diseases, including its lead anti-scarring and anti-fibrosis product candidate, RXI-109. On April 27, 2012, Galena completed the partial spin-off of RXi.

We have have not generated any revenues since inception nor are any revenues expected for the foreseeable future. We expect to incur significant operating losses for the foreseeable future while we advance our future product candidates from discovery through pre-clinical studies and clinical trials and seek regulatory approval and potential commercialization. In addition to these increasing research and development expenses, we expect general and administrative costs to increase as we hire additional management and administrative personnel. We will need to generate significant revenues to achieve profitability and may never do so.

Results of Operations

For the Three Months and Nine Months Ended September 30, 2012 and September 30, 2011

For the three months ended September 30, 2012, we realized a net loss of approximately $6,261,000 compared with a net loss of approximately $5,475,000 for the three months ended September 30, 2011. The reasons for the increase in net loss of $786,000, or approximately 14%, are discussed below.

For the nine months ended September 30, 2012, our net loss was approximately $31,218,000 compared with a net loss of $13,074,000 for the nine months ended September 30, 2011. The reasons for the increase in net loss of $18,144,000, or approximately 139%, are discussed below.

Research and Development Expense

Research and development expense consists primarily of compensation-related costs for our employees dedicated to research and development activities and for our Scientific Advisory Board (“SAB”) members, as well as clinical trial expenses, licensing fees and patent prosecution costs. We expect research and development expenses to increase as we expand our clinical development activities.

Total research and development expenses from continuing operations were approximately $4,169,000 for the three months ended September 30, 2012, compared with $1,367,000 for the three months ended September 30, 2011. The increase of $2,802,000, or 205%, was due primarily to an increase of $2,742,000 related to the ramp up of our Phase 3 PRESENT clinical trial for NeuVax™ and an increase of $48,000 and $12,000 related to higher expenses for research and development related employee stock based compensation and non-employee stock based compensation, respectively, primarily related to timing of grants and changes in our Black-Scholes assumptions.

Total research and development expenses from continuing operations were approximately $10,553,000 for the nine months ended September 30, 2012, compared with $1,757,000 for the nine months ended September 30, 2011. The increase of $8,796,000, or 501%, was due to an increase of $8,370,000 related to the ramp up of our Phase 3 PRESENT clinical trial for NeuVax™ and an increase of $138,000 and $288,000 related to higher expenses for research and development related employee stock based compensation and non-employee stock based compensation, respectively, primarily related to timing of grants and changes in our Black-Scholes assumptions.

General and Administrative Expense

General and administrative expense includes compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses.

General and administrative expense from continuing operations was approximately $1,359,000 for the three months ended September 30, 2012, compared with $2,068,000 for the three months ended September 30, 2011. The decrease of approximately $709,000, or 34%, was due to a $351,000 decrease in personnel related costs and professional and outside services, along with a $523,000 decrease in employee share based compensation expense, which was primarily related to the timing of grants and changes in our Black-Scholes assumptions. These decreases were partially offset by an increase of $165,000 related to common stock and warrants issued for business advisory services.

General and administrative expense from continuing operations was approximately $5,068,000 for the nine months ended September 30, 2012, compared with $7,136,000 for the nine months ended September 30, 2011. The decrease of approximately $2,068,000, or 29%, was due to a $835,000 decrease in personnel related costs, professional costs and outside services along with a $1,669,000 decrease in employee share based compensation expense, which was primarily related to the timing of grants and changes in our Black-Scholes assumptions. These decreases were partially offset by an increase of $436,000 related to common stock and warrants issued for business advisory services.

 

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Interest Income (Expense)

Interest income (expense) from continuing operations was negligible for each of the three and nine months ended September 30, 2012 and 2011. The key objectives of our investment policy are to preserve principal and ensure sufficient liquidity, so our invested cash may not earn as high a level of income as longer-term or higher-risk securities, which generally have less liquidity and more volatility.

Other Income (Expense)

Other expense from continuing operations was $733,000 for the three months ended September 30, 2012, compared with other expense of $397,000 for the three months ended September 30, 2011. Other expense primarily represents an increase in the fair value of warrants accounted for as a liability, as well as warrants settled during the three months ended September 30, 2012 of $262,000 and an increase in the fair value of the contingent purchase price consideration liability of $471,000. Changes in the fair value of the warrant liabilities for the three months ended September 30, 2011 were a function of a change in the number of warrants outstanding and in the market price of our common stock as compared to the strike price of the warrants and other Black Scholes pricing model assumptions used to the value warrant liability. The change in the fair value of the contingent purchase price liability was a function of a change to the underlying discount rate affecting the time value of money as well as the expected timing for achieving certain milestones.

Other expense from continuing operations was $13,918,000 for the nine months ended September 30, 2012 compared with other income of $1,723,000 for the nine months ended September 30, 2011. Other expense primarily represents an increase in the fair value of warrants accounted for as a liability, as well as warrants settled during the nine months ended September 30, 2012 of $11,899,000 and an increase in the fair value of a contingent purchase price consideration liability of $2,019,000. Changes in the fair value of the warrant liabilities from the nine months ended September 30, 2011 were a function of changes in the number of warrants outstanding, and in the market price of our common stock as compared to the strike price of the warrants and other Black Scholes pricing model assumptions used to the value warrant liability. Changes in the fair value of the contingent purchase price liability were a function of changes to the underlying discount rates affecting the time value of money as well as the timing as to when we expect to achieve certain milestones.

Loss from Discontinued Operations

There was no loss from discontinued operations for the three months ended September 30, 2012, compared to loss from discontinued operations of $1,641,000 for the three months ended September 30, 2012. There were no corresponding RXi expenses for the three months ended September 30, 2012, because RXi has operated as a separate entity following the completion of its spin-off from Galena on April 27, 2012.

Loss from discontinued operations was $1,644,000 for the nine months ended September 30, 2012, compared to loss from discontinued operations of $5,898,000 for the nine months ended September 30, 2012. The decrease of $4,254,000, or 72%, was primarily due to the decreased level of activity by RXi in 2012 compared to 2011 and to the fact that there were no RXi expenses included in Galena’s results of operations after the completion of the spin-off of RXi on April 27, 2012.

Liquidity and Capital Resources

We had cash and cash equivalents of approximately $15.4 million as of September 30, 2012, compared with $11.4 million as of December 31, 2011. We have not generated revenue to date and may not generate product revenue in the foreseeable future, if ever. We expect to incur significant operating losses as we advance our product candidates through the drug development and regulatory process. In addition to increasing research and development expenses, we expect general and administrative costs to increase as we hire additional management and administrative personnel. We will need to generate significant revenues to achieve profitability and might never do so.

We believe that our existing cash and cash equivalents and other current working capital should be sufficient to fund our operations through at least the third quarter of 2013. In the future, we will be dependent on obtaining funding from third parties, such as proceeds from the sale of equity, funded research and development payments and payments under partnership and collaborative agreements, in order to maintain our operations and meet our obligations to licensors. There is no guarantee that additional equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations or to seek to merge with or to be acquired by another company.

Net Cash Flow from Operating Activities

Net cash used in operating activities was approximately $15,795,000 for the nine months ended September 30, 2012 compared with $10,499,000 for the nine months ended September 30, 2011. The increase of approximately $5,296,000 resulted primarily from a net loss of $31,218,000 for the nine months ended September 30, 2012 as compared to $13,074,000, as described above. These net loss amounts were adjusted for non-cash items of $15,375,000 and $1,338,000 for the nine months ended September 30, 2012 and 2011, respectively, which primarily includes the change in the fair value of the warrants, changes in the fair value of contingent purchase price consideration, and the changes to non-cash stock based compensation expense, and was also adjusted for changes in working capital accounts of $48,000 and $1,237,000, respectively.

Net Cash Flow from Investing Activities

Net cash used in investing activities was $87,000 for the nine months ended September 30, 2012 compared with cash provided by investing activities of $115,000 for the nine months ended September 30, 2011. The change was primarily due to cash transferred to RXi in the spin-off of $87,000 during the nine months ended September 30, 2012, as compared to $168,000 received as part of the NeuVax (Apthera, Inc.) acquisition, partially offset by $53,000 used to purchase furnishing and fixtures during the nine months ended September 30, 2011.

 

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Net Cash Flow from Financing Activities

Net cash provided by financing activities was $19,872,000 for the nine months ended September 30, 2012 compared with $19,186,000 for the nine months ended September 30, 2011. The increase was primarily due to $5,672,000 received from the exercise of warrants and $500,000 from the issuance of convertible notes during the nine months ended September 30, 2012, which did not occur during the nine months ended September 30, 2011, and offset by $4,672,000 less cash received from the issuance of common stock during the current nine-month period.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet financing arrangements, other than operating leases.

Critical Accounting Policies and Estimates

In our Annual Report on Form 10-K for the year ended December 31, 2011, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no changes to these policies since December 31, 2011. Readers are encouraged to review these disclosures in conjunction with the review of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and our Principal Financial Officer (the “Certifying Officers”) evaluated the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. Based on these evaluations, the Certifying Officers have concluded, that, as of the end of the period covered by this Quarterly Report on Form 10-Q:

 

(a) our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

 

(b) our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

 

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ITEM 1.A RISK FACTORS

You should read and consider the risk factors included under Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 28, 2012 with the SEC, and in our Quarterly Report on Form 10-Q for the six months ended June 30, 2012, filed on August 14, 2012 with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

 

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ITEM 6. EXHIBITS

EXHIBIT INDEX

 

Exhibit
Number

  

Description

  10.1    Employment letter agreement, effective July 16, 2012, between Galena Biopharma, Inc. and Ryan M. Dunlap (1) *
  31.1    Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer.**
  31.2    Sarbanes-Oxley Act Section 302 Certification of Principal Financial Officer.**
  32.1    Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer and Principal Financial Officer.**
  101    The following financial information from the Quarterly Report on Form 10-Q of Galena Biopharma, Inc. for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (1) Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011; (2) Condensed Consolidated Statements of Expenses for the three months and nine months ended September 30, 2012 and 2011 and for the period from January 1, 2003 (inception) to September 30, 2012; (3) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 and for the cumulative period from January 1, 2003 (inception) to September 30, 2012; and (4) Notes to Condensed Consolidated Financial Statements. (2)

 

(1) Previously filed as an Exhibit to the Company’s Form 10-Q filed on August 14, 2012 (File No. 001-33958) and incorporated by reference herein.
(2) In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections, is not part of any registration statement or prospectus to which it relates and is not incorporated by reference into any registration statement, prospectus or other document.
* Indicates a management contract or compensatory plan or arrangement
** Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

GALENA BIOPHARMA, INC.

By:

 

/s/ Mark J. Ahn

  Mark J. Ahn, Ph.D.
  President and Chief Executive Officer
  Date: November 13, 2012

By:

 

/s/ Ryan M. Dunlap

  Ryan M. Dunlap
  Director of Finance (Principal Financial and Accounting Officer)
  Date: November 13, 2012

 

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