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EX-32.1 - EXHIBIT 32.1 - SELLAS Life Sciences Group, Inc.gale20170930ex321.htm
EX-31.1 - EXHIBIT 31.1 - SELLAS Life Sciences Group, Inc.gale20170930ex311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ________________________________
FORM 10-Q
 ________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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.)
2000 Crow Canyon Place, Suite 380, San Ramon, CA 94583
(855) 855-4253
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
  ________________________________
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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its 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  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
Smaller reporting company
 
ý
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    ¨  Yes    ý  No

As of November 9, 2017, Galena Biopharma, Inc. had outstanding 45,712,912 shares of common stock, $0.0001 par value per share, exclusive of treasury shares.
 



GALENA BIOPHARMA, INC.
FORM 10-Q - Quarterly Report
For the Quarter Ended September 30, 2017

TABLE OF CONTENTS
 
Part
No.
 
Item
No.
 
Description
Page
No.
I
 
 
 
 
 
 
1
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016
 
 
 
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017 and 2016
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity (unaudited) for the nine months ended September 30, 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
2
 
 
 
3
 
 
 
4
 
II
 
 
 
 
 
 
1
 
Legal Proceedings
 
 
1A
 
Risk Factors
 
 
2
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
EX-31.1
 
EX-32.1
 

1


NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information contained in this quarterly report may include forward-looking statements that reflect our current views with respect to our development programs, business strategy, business plan, business combination transactions, financial performance and other future events. These statements include forward-looking statements both with respect to us, specifically, and our industry, in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws and otherwise. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. There are or will be important factors that could cause actual results to differ materially from those indicated in these statements. These factors include, but are not limited to, statements about future expectations, plans and prospects for the completion of the Proposed Merger as defined in Note 1 of the condensed consolidated financial statements below, final agreements among the U.S. Attorney's Office of the District of New Jersey, or USAO NJ, and the Department of Justice, or the DOJ, and the Company, the settlement terms among USAO NJ, DOJ and the Company, the settlement of any claims that might be made by state agencies in the future, the settlement terms with federal agencies such as U.S. Department of Defense, the Office of the Personnel Management, the Office of the Inspector General for the U.S. Department of Health and Human Services, future expectations, plans and prospects of Galena’s clinical programs, the cash projections, and other future events. These factors also include, but are not limited to, those factors set forth in the sections entitled ” Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Controls and Procedures” in this quarterly report, all of which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this quarterly report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. If one or more of these or other risks or uncertainties materializes, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we anticipate. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this forward-looking statement.



2



PART I FINANCIAL INFORMATION
ITEM  1. FINANCIAL STATEMENTS

GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,914

 
$
18,083

Restricted cash
12,372

 
18,022

Prepaid expenses and other current assets
520

 
581

Current assets of discontinued operations
830

 
813

Total current assets
26,636

 
37,499

Equipment and furnishings, net
123

 
199

In-process research and development
9,300

 
12,864

GALE-401 rights
8,100

 
9,255

Goodwill
5,386

 
5,898

Deposits and other assets
50

 
96

Total assets
$
49,595

 
$
65,811

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
211

 
$
840

Accrued expenses and other current liabilities
3,186

 
4,292

Litigation settlement payable
1,300

 
950

Fair value of warrants potentially settleable in cash
4,395

 
1,860

Current portion of long-term debt
12,170

 
16,397

Current liabilities of discontinued operations
6,759

 
6,059

Total current liabilities
28,021

 
30,398

Deferred tax liability
5,661

 
5,661

Contingent purchase price consideration
1,277

 
1,095

Total liabilities
34,959

 
37,154

Commitments and contingencies

 

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

 

Common stock, $0.0001 par value; 350,000,000 shares authorized, 41,849,725 shares issued and 41,815,975 shares outstanding at September 30, 2017; 15,224,223 shares issued and 15,190,473 shares outstanding at December 31, 2016
4

 
2

Additional paid-in capital
347,610

 
335,436

Accumulated deficit
(329,129
)
 
(302,932
)
Less treasury shares at cost, 33,750 shares
(3,849
)
 
(3,849
)
Total stockholders’ equity
14,636

 
28,657

Total liabilities and stockholders’ equity
$
49,595

 
$
65,811


See accompanying notes to condensed consolidated financial statements.

3

GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Operating expenses:
 
 
 
 
 
 
 
Research and development
$
951

 
$
3,624

 
$
5,357

 
$
15,242

General and administrative
3,511

 
2,848

 
9,104

 
9,490

Total operating expenses
4,462

 
6,472

 
14,461

 
24,732

Operating loss
(4,462
)
 
(6,472
)
 
(14,461
)
 
(24,732
)
Non-operating income (expense):
 
 
 
 
 
 
 
Litigation settlements

 

 
(1,300
)
 
(1,800
)
Change in fair value of warrants potentially settleable in cash
4,115

 
3,652

 
7,822

 
14,172

Goodwill and intangible assets impairment loss
(5,231
)
 

 
(5,231
)
 

Interest expense, net
(565
)
 
(1,377
)
 
(2,225
)
 
(1,988
)
Change in fair value of the contingent purchase price liability
(50
)
 
(145
)
 
(182
)
 
5,182

Total non-operating income (expense), net
(1,731
)
 
2,130

 
(1,116
)
 
15,566

Loss from continuing operations
(6,193
)
 
(4,342
)
 
(15,577
)
 
(9,166
)
Income (loss) from discontinued operations
118

 
(2,587
)
 
(10,620
)
 
(8,867
)
Net loss
$
(6,075
)
 
$
(6,929
)
 
$
(26,197
)
 
$
(18,033
)
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted:
 
 
 
 
 
 
 
Basic and diluted net loss per share, continuing operations
$
(0.15
)
 
$
(0.41
)
 
$
(0.45
)
 
$
(0.97
)
Basic and diluted net income (loss) per share, discontinued operations
$

 
$
(0.25
)
 
$
(0.31
)
 
$
(0.93
)
Basic and diluted net loss per share
$
(0.15
)
 
$
(0.66
)
 
$
(0.76
)
 
$
(1.90
)
Weighted-average common shares outstanding, basic and diluted
39,250,419

 
10,465,164

 
34,406,397

 
9,515,316

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

4

GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
(Unaudited)

 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Treasury Stock
 
Total
 
Shares Issued
 
Amount
 
 
 
 
 
 
 
 
Balance at December 31, 2016
15,224,223

 
$
2

 
$
335,436

 
$
(302,932
)
 
$
(3,849
)
 
$
28,657

Issuance of common stock, net of $356 in issuance costs
17,000,000

 
2

 
15,522

 

 

 
15,524

Fair value of common stock warrants granted in connection with 2017 common stock offerings

 

 
(10,357
)
 

 

 
(10,357
)
Issuance of common stock as repayment of principal and interest on long-term debt
9,460,991

 

 
6,305

 

 

 
6,305

Issuance of common stock in connection with employee stock purchase plan
4,048

 

 
5

 

 

 
5

Stock-based compensation for directors and employees

 

 
576

 

 

 
576

Fair value of common stock issued in exchange for services
160,463

 

 
123

 

 

 
123

Net loss

 

 

 
(26,197
)
 

 
(26,197
)
Balance at September 30, 2017
41,849,725

 
$
4

 
$
347,610

 
$
(329,129
)
 
$
(3,849
)
 
$
14,636


See accompanying notes to condensed consolidated financial statements.

5

GALENA BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)


 
For the Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Cash flows from continuing operating activities:
 
 
 
Net loss from continuing operations
$
(15,577
)
 
$
(9,166
)
Adjustment to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
76

 
95

Non-cash accretion of debt issuance costs
1,423

 
1,280

Non-cash GALE-401 rights impairment charge
1,155

 

Non-cash In-process research and development impairment charge
3,564

 

Non-cash goodwill impairment charge
512

 

Issuance of common stock as repayment of interest on long-term debt
765

 

Non-cash stock-based compensation
576

 
1,830

Fair value of common stock issued in exchange for services
123

 

Fair value of common stock issued in connection with litigation settlements

 
2,650

Change in fair value of common stock warrants
(7,822
)
 
(14,172
)
Change in fair value of contingent consideration
182

 
(5,182
)
Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
107

 
381

Litigation settlement insurance recovery

 
21,700

Litigation settlement payable
350

 
(25,000
)
Accounts payable
(629
)
 
(703
)
Accrued expenses and other current liabilities
(1,106
)
 
(1,473
)
Net cash used in continuing operating activities
(16,301
)
 
(27,760
)
Cash flows from discontinued operating activities:
 
 
 
Net loss from discontinued operations
(10,620
)
 
(8,867
)
Changes in operating assets and liabilities attributable to discontinued operations
683

 
(288
)
Net cash used in discontinued operating activities
(9,937
)
 
(9,155
)
Net cash used in operating activities
(26,238
)
 
(36,915
)
Cash flows from investing activities:
 
 
 
Cash paid for purchase of equipment and furnishings

 
(6
)
Net cash used in continuing investing activities

 
(6
)
Selling costs paid for sale of commercial assets

 
(1,050
)
Net cash used in discontinued investing activities


(1,050
)
Net cash used in investing activities

 
(1,056
)
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common stock
15,524

 
31,804

Net proceeds from exercise of stock options

 
261

Proceeds from exercise of warrants

 
233

Proceeds from common stock issued in connection with Employee Stock Purchase Plan
5

 
95

Net proceeds from issuance of long-term debt

 
23,641

Change in restricted cash related to debt principal paid in common stock
5,650

 

Minimum cash covenant on long-term debt

 
(18,500
)
Principal payments on long-term debt
(110
)
 
(4,779
)
Net cash provided by financing activities
21,069

 
32,755

Net decrease in cash and cash equivalents
(5,169
)
 
(5,216
)
Cash and cash equivalents at the beginning of period
18,083

 
29,730

Cash and cash equivalents at end of period
$
12,914

 
$
24,514

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash received during the periods for interest
$
83

 
$
84

Cash paid during the periods for interest
$
102

 
$
636

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Fair value of warrants issued in connection with common stock recorded as issuance cost
$
10,357

 
$
9,866

Repayment of interest and principal on long-term debt
through issuance of common stock
$
6,305

 
$

Fair value of warrants issued in connection with long-term debt recorded as debt issuance costs
$

 
$
1,139

Reclassification of warrant liabilities upon exercise
$

 
$
324

See accompanying notes to condensed consolidated financial statements.

6

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Business and Basis of Presentation

Overview

Galena Biopharma, Inc. ("Company," “we,” “us,” “our,” or “Galena”) is a biopharmaceutical company developing hematology and oncology therapeutics that address unmet medical needs. The Company’s pipeline consists of multiple mid- to late-stage clinical assets, including our hematology asset, GALE-401, and our novel cancer immunotherapy programs including NeuVax™ (nelipepimut-S), GALE-301 and GALE-302. GALE-401 is a controlled release version of the approved drug anagrelide for the treatment of elevated platelets in patients with myeloproliferative neoplasms. NeuVax is currently in multiple investigator-sponsored Phase 2 clinical trials in breast cancer. GALE-301 and GALE-302 have completed early stage trials in ovarian, endometrial and breast cancers.

On January 31, 2017, the Company announced that its Board of Directors had initiated a process to explore and review a range of strategic alternatives. As a result of this process, on August 7, 2017, the Company, SELLAS Life Sciences Group Ltd, a Bermuda exempted company (“SELLAS”), Sellas Intermediate Holdings I, Inc., a Delaware corporation and a wholly owned subsidiary of Galena (“Holdings I”), Sellas Intermediate Holdings II, Inc., a Delaware corporation and a wholly owned subsidiary of Holdings I (“Holdings II”) and Galena Bermuda Merger Sub, LTD., a Bermuda corporation and a wholly owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger and Reorganization, as amended on November 5, 2017 (the “Merger Agreement”) pursuant to which, among other things, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into SELLAS, and the separate existence of Merger Sub shall cease and SELLAS will continue its corporate existence as the surviving company of the merger (the "Proposed Merger" or "Merger"). As a result of the Proposed Merger, SELLAS will become a wholly owned indirect subsidiary of Galena. See below for more information regarding the Proposed Merger. 

If the Proposed Merger is completed, under the terms of the Merger Agreement, at the effective time of the Proposed Merger (the “Effective Time”), (a) each outstanding share of SELLAS (excluding shares held by Galena, Merger Sub or SELLAS, which will be canceled without conversion or payment) will be converted into the right to receive shares of Galena Common Stock based on an exchange ratio specified in the Merger Agreement and (b) each outstanding SELLAS stock option and restricted stock unit award will be assumed by Galena. No fractional shares will be issued in connection with the Proposed Merger and Galena will pay cash in lieu of any such fractional shares. Immediately following the Effective Time, (a) Galena stockholders immediately prior to the Effective Time are expected to own approximately 32.5% of the aggregate number of shares of Galena Common Stock, and (b) SELLAS shareholders immediately prior to the Effective Time are expected to own approximately 67.5% of the aggregate number of shares of Galena Common Stock, each calculated on a fully diluted basis for the combined company, except for the exclusion of 2,556,851 out-of-the money Galena warrants. Though the allocation percentage between SELLAS and Galena will remain the same, both SELLAS and Galena are subject to dilution from (i) any shares of Galena Common Stock issued in connection with a potential third party financing that SELLAS has consented to, and (ii) Galena Common Stock underlying certain Galena warrants (other than the warrants outstanding as of immediately prior to the Effective Time that were issued by Galena under the Warrant Agreement dated February 13, 2017). Upon closing of the Proposed Merger, the name of the combined company will become SELLAS Life Sciences Group, Inc. and shares of the combined company are expected to continue trading on the NASDAQ Capital Market under a new the ticker symbol, SLS.

If the Proposed Merger is completed, our three, Phase 2, investigator-sponsored clinical trials with NeuVax in breast cancer will remain ongoing. Our other development programs, GALE-401 and GALE-301/GALE-302 will be evaluated for potential internal development or strategic partnership by management of the continuing company post-Merger.





7

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Basis of Presentation and Significant Accounting Policies

The accompanying consolidated financial statements included herein have been prepared by Galena pursuant to the generally accepted accounting principles (GAAP). Unless the context otherwise indicates, references in these notes to the "Company," “we,” “us,” “our,” or “Galena” refer (i) to Galena, our wholly owned subsidiary, Apthera, Inc., or “Apthera,” and our wholly owned subsidiary, Mills Pharmaceuticals, Inc. or "Mills."

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and the notes hereto included in its Annual Report on Form 10-K for the year ended December 31, 2016, which was filed on March 15, 2017. The accompanying condensed financial statements at September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016, respectively, are unaudited, but include all adjustments, consisting of normal recurring entries, that management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of December 31, 2016 have been derived from the audited financial statements as of that date.

On October 31, 2016, we announced a reverse stock split of our shares of common stock at a ratio of 1-for-20 as approved by the Board of Directors on October 26, 2016. The reverse stock split was authorized by the Company’s stockholders at the Special Meeting of Stockholders held on October 21, 2016. The reverse stock split became effective on November 11, 2016 and the Company’s common stock commenced trading on a split-adjusted basis on Wednesday, November 14, 2016. Unless otherwise stated, all shares and price per share numbers set forth in the condensed consolidated financial statements for periods prior to November 11, 2016 are presented after giving effect to the reverse stock split.

Liquidity & Management's plan - At September 30, 2017, the Company’s capital resources consisted of cash and cash equivalents of $12.9 million. On January 31, 2017, the Company announced that its Board of Directors had initiated a process to explore and review a range of strategic alternatives. As a result of this process, on August 8, 2017 we announced the Proposed Merger. In light of the strategic alternatives process, the Company limited expenditures for its operations through headcount reductions and a general deferral of programs and operational items except that we continued to support the NeuVax investigator-sponsored immunotherapy trials and we have continued to advance activities related to GALE-401 manufacturing in preparation for potential future initiation of a Phase 3 trial. The Company intends to continue to operate at these reduced levels in order to preserve liquidity while completing the Proposed Merger.

Additional funding sources that in certain circumstances may be available to the Company, include 1) approximately $12.0 million of restricted cash associated with the outstanding principal balances as of September 30, 2017 of a debenture with original principal amount of $25.5 million that we sold in May 2016 to the extent we repay the debenture through issuance of common stock in accordance with the terms of the debenture, as detailed further in Note 5; 2) a Purchase Agreement with Lincoln Park Capital, LLC (LPC); 3) At The Market Issuance Sales Agreements (collectively, the ATM) with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC; and 4) amendments to the outstanding warrants; and 5) private or public offerings. See Note 7 below for current restriction on our ability to use the Purchase Agreement with LPC and the ATM with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC. In addition, there are certain restrictions on our ability to amend the outstanding warrants and engage in a private or public offering in the Merger Agreement.

The Company cannot provide assurances that its plans for sources and uses of cash will not change or that changed circumstances will not result in the depletion of its capital resources more rapidly than it currently anticipates. Whether or not we complete the Proposed Merger, we expect to need to raise additional capital to fund our operations, whether through a sale of equity or debt securities, a strategic business transaction, the establishment of other funding facilities, licensing arrangements, asset sales or other means, in order to continue the development of the Company's product candidates and to support its other ongoing activities. However, the Company cannot be certain that it will be able to raise additional capital on favorable terms, or at all, which raises substantial doubt about the Company’s ability to continue as a going concern. The Company is currently evaluating its capital requirements in light of both pursuing the Proposed Merger and funding the development of its clinical

8

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

programs. In addition, the Company is working with SELLAS to develop a comprehensive capital program to fund all product development programs currently prioritized by SELLAS and the Company subsequent to the Proposed Merger. For example, the Merger Agreement states that subsequent to the Merger the Company will use commercially reasonable best efforts to fund the NeuVax ongoing programs in the amount of up to $3 million through the December 31, 2019.

The current unrestricted cash and cash equivalents as of the date of this filing will fund the Company's operations for at least six months from the date that the unaudited condensed consolidated financial statements as of September 30, 2017 were issued. This projection is based on our current limited operations and estimates of resolution and legal expenses associated with the ongoing government investigation and legal matters pending against the Company, and is subject to changes in our operating plans, legal matters, uncertainties inherent in our business, transaction costs incurred at closing of the Proposed Merger, that could individually or in the aggregate cause us to need to seek to replenish our existing cash and cash equivalents sooner than we project and in greater amounts that we had projected. There is no guarantee that any debt, 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 or the Proposed Merger is not completed, we would be forced to scale back, or terminate, our operations and may not be able to consummate the Proposed Merger. The Company prepared the consolidated financial statements as of and for the three and nine months ended September 30, 2017 using the generally accepted accounting principles applicable to a going concern. These consolidate financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities amounts that may be necessary should the Company be unable to continue as going concern.

Reclassifications — The prior year amounts for outstanding common stock at par and related additional paid-in capital have been reclassified to correctly present those amounts. These reclassifications had no effect on total equity, or net loss per share.

Goodwill and Intangible Assets — Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment at the reporting unit level, or more frequently if events and circumstances indicate impairment may have occurred. Factors the company considers important that could trigger an interim review for impairment include, but are not limited to, the following:
Significant changes in the manner of its use of acquired assets or the strategy for its overall business;
Significant negative industry or economic trends;
Significant decline in stock price for a sustained period; and
Significant decline in market capitalization relative to net book value.

Intangible assets with indefinite lives are evaluated for impairment first by a qualitative assessment to determine the likelihood of impairment. If it is determined that impairment is more likely than not, the Company will then proceed to the two step impairment test. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the “Second Step”). Otherwise, if the fair value exceeds the carrying amount, the intangible asset is not considered to be impaired as of the measurement date. In its review of the carrying value of the indefinite-lived intangible assets, the Company determines fair values of its indefinite-lived intangible assets using the income approach.

Intangible assets not considered indefinite-lived are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. The Company’s policy is to identify and record impairment losses, if necessary, on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Refer to Note 2 of the condensed consolidated financial statements for the Company's preliminary interim impairment analysis on intangible assets.


9

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Goodwill is evaluated for impairment using the simplified test of goodwill impairment as defined by the FASB Accounting Standards Update No. 2017-04. Under the new guidance, goodwill impairment will be measured by the amount by which the carrying value of a reporting unit exceeds its fair value, without exceeding the carrying amount of goodwill allocated to that reporting unit. In its review of the carrying value of the goodwill for its single reporting unit and its indefinite-lived intangible assets, the Company determines fair values of its goodwill using the market approach. Refer to Note 2 of the condensed consolidated financial statements for the Company's preliminary interim impairment analysis on goodwill.

Recently Issued Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes or ASU 2015-17. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance will become effective for us beginning in the first quarter of 2017 and may be applied either prospectively or retrospectively. Early adoption is permitted. At the time of adoption, we will reclassify current deferred tax amounts on our Consolidated Balance Sheets as noncurrent. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation or ASU-2016-09. ASU 2016-09 includes several areas of simplification to stock compensation including simplifications to the accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows and forfeitures. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted this ASU on January 1, 2017. There was no impact to the Company’s consolidated financial statements upon adoption.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations or ASU 2017-01. ASU 2017-01 provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard will be effective for us on January 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the goodwill impairment test. Under the new guidance, goodwill impairment will be measured by the amount by which the carrying value of a reporting unit exceeds its fair value, without exceeding the carrying amount of goodwill allocated to that reporting unit. This guidance will be effective for us beginning in the first quarter of 2020 and is required to be adopted on a prospective basis. Early adoption is permitted. The Company adopted this ASU on September 30, 2017 and was used to determine the impairment loss to goodwill as of September 30, 2017.

In May 2017, the FASB issued Accounting Standard Update No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for us on January 1, 2018; however, early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.


10

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

2. Goodwill and Intangible Assets

Intangible assets include the Company’s GALE-401 rights asset and in-process research and development (IPR&D) asset which were acquired in business combinations and recorded at their respective fair values as of the acquisition date. IPR&D is related to the NeuVax asset. Intangible assets related to GALE-401 rights and IPR&D are considered indefinite-lived intangible assets and are assessed for impairment annually or more frequently if impairment indicators exist. If the associated research and development effort is abandoned, the related assets will be written-off and the Company will record a noncash impairment loss on its consolidated statements of operations. For those compounds that reach commercialization, the IPR&D assets will be amortized over their estimated useful lives.

The impairment test for indefinite-lived intangible assets is a one-step test, which compares the fair value of the intangible asset to its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on accounting standards, it is required that these assets be assessed at least annually for impairment unless a triggering event occurs between annual assessments which would then require an assessment in the period which a triggering event occurred.

The Company entered into the Merger Agreement on August 7, 2017 and the intangible assets were fair valued with the latest preliminary valuation as of October 26, 2017. The preliminary fair values of IPR&D and GALE-401 rights using the income approach. The preliminary interim valuation indicated that the carrying values for IPR&D and GALE-401 rights exceeded the respective carrying values and therefore, the Company recorded impairment losses were recorded to adjust the carrying values to approximate fair values. The impairment losses on GALE-401 rights and IPR&D are aggregated in the statement of operations in goodwill and intangible assets impairment loss.

The following table presents amounts presents the gross amounts of intangible assets and the impairment losses recognized to arrive at the carrying values that approximate fair values as of September 30, 2017 (in thousands):

 
December 31, 2016
 
Impairment Loss
 
September 30, 2017
GALE-401 rights
$
9,255

 
$
(1,155
)
 
$
8,100

In-process research and development
12,864

 
(3,564
)
 
9,300

Total other intangible assets
$
22,119

 
$
(4,719
)
 
$
17,400



Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company in the acquisition of Apthera, Inc. in 2011 with their sole product candidate, NeuVax. Goodwill is not amortized, but assessed for impairment on an annual basis or more frequently if impairment indicators exist. The impairment model prescribes a simplified goodwill impairment test. Under the new guidance, goodwill impairment will be measured by the amount by which the carrying value of a reporting unit exceeds its fair value, without exceeding the carrying amount of goodwill allocated to that reporting unit.

During the three and nine months ended September 30, 2017, the Company experienced a significant decline in our stock price, and our stock price continued to trend lower through September 30, 2017. Following the public announcement of the entry into the Merger Agreement on August 8, 2017, our stock price declined 27%. The Company determined that this event constituted substantive changes in circumstances that would more likely than not reduce the fair value of the Company's single reporting unit below its carrying amount. Accordingly, the Company tested its goodwill for impairment as of September 30, 2017.


11

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

In determining, the fair value of the Company's sole reporting unit, the estimated fair value of our reporting unit was determined utilizing a market-based approach, as the primary input in this approach was a quoted market price in an active market. Based on our interim impairment analysis we determined that our carrying value as of September 30, 2017 exceeded the market capitalization of the Company due to the declining stock price. Based on our interim impairment analysis, we recorded a goodwill impairment charge of $0.5 million in the third quarter of 2017 to adjust goodwill to its implied fair value. After recording the goodwill impairment loss, the fair value of equity approximates the carrying value of equity. The impairment loss on goodwill was recorded to adjust the carrying value to approximate fair value. The impairment losses on GALE-401 rights and IPR&D are aggregated in the statement of operations in goodwill and intangible assets impairment loss.

The following table presents amounts presents the gross amount of goodwill and the impairment losses recognized to arrive at the carrying values that approximate fair values as of September 30, 2017 (in thousands):

 
December 31, 2016
 
Impairment Loss
 
September 30, 2017
Goodwill
$
5,898

 
$
(512
)
 
$
5,386


The following table presents the impairment losses that aggregate in the statement of operations in goodwill and intangible assets impairment loss for the three and nine months ended September 30, 2017 and 2016, respectively (in thousands):

 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
GALE-401 rights impairment loss
$
(1,155
)
 
$

 
$
(1,155
)
 
$

In-process research and development impairment loss
(3,564
)
 

 
(3,564
)
 

Goodwill impairment loss
(512
)
 

 
(512
)
 

Goodwill and intangible assets impairment loss
$
(5,231
)
 
$

 
$
(5,231
)
 
$



12

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

3. Fair Value Measurements

The following tables present information about our assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets (in thousands):
 
Description
September 30, 2017
 
Quoted Prices In    
Active Markets
(Level 1)
 
Significant Other
Observable 
Inputs (Level 2)
 
Unobservable 
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
11,162

 
$
11,162

 
$

 
$

Restricted cash equivalents
12,093

 
12,093

 

 

Total assets measured and recorded at fair value
$
23,255

 
$
23,255

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Warrants potentially settleable in cash
$
4,395

 
$

 
$
4,395

 
$

Contingent purchase price consideration
1,277

 

 

 
1,277

Total liabilities measured and recorded at fair value
$
5,672

 
$

 
$
4,395

 
$
1,277


Description
December 31, 2016
 
Quoted Prices In    
Active Markets
(Level 1)
 
Significant Other
Observable 
Inputs (Level 2)
 
Unobservable 
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
16,192

 
$
16,192

 
$

 
$

Restricted cash equivalents
17,622

 
17,622

 

 

Total assets measured and recorded at fair value
$
33,814

 
$
33,814

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Warrants potentially settleable in cash
$
1,860

 
$

 
$
1,860

 
$

Contingent purchase price consideration
1,095

 

 

 
1,095

Total liabilities measured and recorded at fair value
$
2,955

 
$

 
$
1,860

 
$
1,095


The Company did not transfer any financial instruments into or out of Level 3 classification during the nine months ended September 30, 2017 and 2016. A reconciliation of the beginning and ending Level 3 liabilities for the nine months ended September 30, 2017 is as follows (in thousands):
 
 
Fair Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
Balance, January 1, 2017
$
1,095

Change in the estimated fair value of the contingent purchase price consideration
182

Balance at September 30, 2017
$
1,277



13

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The fair value of the contingent purchase price consideration is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model. The significant unobservable assumptions include the probability of achieving each milestone, the date we expect to reach the milestone, and a determination of present value factors used to discount future expected cash outflows. The decrease in the estimated fair value of the contingent purchase price consideration during the period reflects a lowering of the probability and lengthening of the timeline for the potential approval of NeuVax, as these assumptions are now based principally on our Phase 2 combination trial of trastuzumab and NeuVax with HER2 low-to-intermediate expressing patients. Previously, the valuation was based on the probability of achieving each milestone for our Phase 3 PRESENT trial, which was stopped in June 2016 and subsequently closed in the third quarter due to futility as recommended by the Independent Data Monitoring Committee ("IDMC").

See Note 8 for discussion of the Level 2 liabilities relating to warrants accounted for as liabilities.

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 
September 30, 2017
 
December 31, 2016
Clinical trial costs
$
324

 
$
3,088

Professional fees
1,827

 
229

Compensation and related benefits
1,035

 
975

Interest expense

 

Accrued expenses and other current liabilities
$
3,186

 
$
4,292



14

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

5. Long-Term Debt

On May 10, 2016, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), with JGB (Cayman) Newton Ltd. (the “Purchaser”) pursuant to which the Company sold to Purchaser, at a 6.375% original issue discount, a $25,530,000 Senior Secured Debenture (the “Initial Debenture”) and warrants to purchase up to 100,000 shares of the Company's common stock, $0.0001 par value per share (“Common Stock”). Net proceeds to the Company from sale of the Initial Debenture and warrants, after payment of commissions and legal fees, were approximately $23,400,000. The Initial Debenture contained no conversion features to shares of Common Stock.

The Initial Debenture carried an interest only period of six months following which the holder of the Initial Debenture had the right, at its option, to require the Company to redeem up to $1,100,000 of the outstanding principal amount of the Initial Debenture per calendar month. The Company is required to promptly, but in any event no more than three trading days after the holder delivers a redemption notice to the Company, pay the applicable redemption amount in cash or, at the Company’s election and subject to certain conditions, in shares of Common Stock. If the Company elects to pay the redemption amount in shares of Common Stock, then the shares will be delivered at the lesser of A) 7.5% discount to the average of the 3 lowest volume weighted average prices over the prior 20 trading days or B) a 7.5% discount to the prior trading day’s volume weighted average price (the “Stock Payment Price”). Pursuant to the Initial Debenture, the Company may only opt for payment in shares of Common Stock if certain equity conditions are met or waived, including, among others, that the volume weighted price of the Common Stock be at least $15.00 (the “Original Minimum Price Condition”).

The Initial Debenture was amended and restated in its entirety on August 22, 2016 (as so amended, the “Debenture”) pursuant to an Amendment Agreement, dated August 22, 2016, among the Company, the Purchaser and JGB Collateral LLC (the “Amendment Agreement”). As previously reported, interest on the Debenture is payable at the end of each month based on the outstanding principal. The Debenture matures on November 10, 2018, and accrues interest at 9% per year. In addition, on the maturity date of the Debenture (or such earlier date that the principal amount of the Debenture is paid in full by acceleration or otherwise) a fixed amount, which shall be deemed interest under the Debenture, equal to $765,900, will be due and payable to the holder of the Debenture on such date in, at the option of the Company, cash and, subject to the same conditions for the payment of interest in shares of Common Stock, shares of Common Stock or a combination of cash and Common Stock.

The Company’s obligations under the Debenture are secured under a Security Agreement by a senior lien on all of the Company’s assets, including all of the Company’s interests in its consolidated subsidiaries. Under the subsidiary guarantee agreement, each subsidiary guarantees the performance of the Company of the Purchase Agreement, Debenture and related agreements.


15

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

After giving effect to the Amendment Agreement, the Debenture contains the following modified and/or additional terms, among others:

With respect to interest accruing on the outstanding principal amount under the Debenture for the period prior to November 10, 2016, the Company was permitted to satisfy such interest payments in kind by adding such amount to the outstanding principal.

The Purchaser can from time to time during the term of the Debenture require the Company to prepay in cash all or a portion of the outstanding principal plus accrued and unpaid interest (the “Outstanding Amount”) on written notice to the Company, provided, that such prepayment amount shall not exceed the lesser of $18,500,000 and the Outstanding Amount. If the holder elects such prepayment of the Debenture, then the number of shares subject to the warrants issued to the holder will be reduced in proportion to the percentage of principal and accrued interest required to be prepaid by the Company. In addition, the Company shall have the right to prepay in cash all (but not less than all) of the Outstanding Amount (1) at any time after November 10, 2017, or (2) upon a “change of control” (as such term is used in the Debenture), in each case with a 10% premium on the Outstanding Amount.

The Purchaser shall continue to have the right, which commenced on November 10, 2016, to require the Company to redeem the Outstanding Amount, except that the maximum monthly amount of such redemptions was increased from $1,100,000 to $1,500,000; provided, that if the trading price of Common Stock is at least $8.00 per share (as may be further adjusted appropriately for stock splits, combinations or similar events) during such calendar month, then such monthly maximum redemption amount may be increased to $2,200,000 at the Purchaser’s election and if the Company has already elected to satisfy such redemptions in shares of Common Stock. In addition, notwithstanding the foregoing limitations on the monthly redemption amount, the Purchaser may elect up to three times in any 12-month period to increase the monthly maximum to $2,500,000.

Among the various conditions that must be satisfied (or waived) in order for the Company to be able to elect to satisfy the monthly redemption amounts in shares of Common Stock, the Original Minimum Price Condition of $15.00 was decreased to a volume-weighted average price of $4.00 per share (the “Amended Minimum Price Condition”).

Following November 10, 2016, the Purchaser may elect to convert any portion of the Outstanding Amount into shares of Common Stock at a fixed price of $12.00 per share (as adjusted appropriately for stock splits, combinations or similar events).

Under the Initial Debenture, the Company was required to maintain a minimum of $24,000,000 of unencumbered cash in a restricted account as security for its obligations under the Initial Debenture. Such minimum amount has been reduced to the lesser of $18,500,000 or the Outstanding Amount.

In addition, in accordance with the terms of the Amendment Agreement, the exercise price of the Series A Warrant was reduced from $30.20 per share to $8.60 per share (as may be further adjusted appropriately for stock splits, combinations or similar events).


16

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

On December 14, 2016, the Company and the Purchaser entered into a waiver (the “First Waiver”) pursuant to which, as contemplated by the Debenture, the Purchaser waived with respect to the calendar months of December 2016, January 2017, February 2017 and March 2017 (collectively, the “First Specified Months”) the Amended Minimum Price Condition, provided that, among other things, with respect to the First Specified Months, the volume weighted average price of the Common Stock was not less than $1.00 and the Company’s cash on hand exceeded the outstanding principal amount of the Debenture by $10 million. Furthermore, the First Waiver set out a monthly amount to be redeemed for each of the First Specified Months equal to $1,500,000 and amended the Debenture to require the Company to withdraw all cash and/or cash equivalents in excess of $18,500,000 from certain accounts and deposit such funds into an account in a form acceptable to the Purchaser, to be executed by the Company, U.S. Bank, N.A. and SVB Asset Management such that the Company requires the prior written consent of the Purchaser for certain withdrawals. The First Waiver amends the Debenture to grant the Purchaser the right to redeem any portion of the outstanding principal amount of the Debenture in Common Stock if the price per share of Common Stock on a principal trading market at any point in time of any trading day exceeds the closing price per share of the Common Stock on the immediately preceding trading day by more than 25%.

On April 1, 2017, the Company and Purchaser entered into a waiver (the “Second Waiver”) pursuant to which, as contemplated by the Debenture, the Purchaser waived with respect to the calendar months of April 2017, May 2017, June 2017, July 2017, August 2017 and September 2017 (collectively, the “Second Specified Months”) the Amended Minimum Price Condition, provided that, among other things, with respect to the Second Specified Months, the volume weighted average price of the Common Stock is not less than $0.30 and the Company’s cash on hand exceeds the outstanding principal amount of the Debenture by $10 million.

On May 1, 2017, the Purchaser, the Company and the guarantors of the Company’s obligations under the Debenture entered into an amendment agreement (the “2017 Amendment Agreement”) pursuant to which the Purchaser may, from time to time, at the Purchaser’s option waive the Amended Minimum Price Condition; provided, however, the Purchaser cannot waive the Amended Minimum Price Condition to the extent that the resulting Stock Payment Price would be less than $0.35 per share as a result of any such waiver (the “Minimum Stock Payment Price Condition”). The 2017 Amendment Agreement further provides that, in the event of any Equity Conditions Failure (as such term is defined in the Debenture) that is not, or cannot be as a result of the 2017 Amendment Agreement, waived by the Purchaser, the Company shall honor the holder redemption amounts in cash or, at the Company’s election, with the prior written consent of the Purchaser, deliver aggregate consideration in shares of Common Stock and cash in satisfaction of the applicable holder redemption amount as follows: (i) the number of shares of Common Stock equal to the quotient obtained by dividing such holder redemption amount and $0.35 (each such share having a deemed value per share at the Stock Payment Price that would have been in effect but for the Minimum Stock Payment Price Condition of $0.35 per share) and (ii) cash equal to the difference between the holder redemption amount and the aggregate deemed value of the shares of Common Stock delivered in clause (i).

As of May 1, 2017 pursuant to the 2017 Amendment Agreement, the Company estimated that the maximum number of shares of Common Stock that the Company could issue pursuant to the terms of the Debenture subsequent to May 1, 2017 was 45,000,000. As of November 9, 2017, the date of issuance of the Company's condensed consolidated financial statements for the quarter ended September 30, 2017, the Company had issued 8,102,082 shares since the 2017 Amendment Agreement.

On July 10, 2017, the Purchaser, the Company and the guarantors of the Company’s obligations under the Debenture entered into an amendment agreement (the “July 2017 Amendment Agreement”) pursuant to which the definition of “Stock Payment Price” in the Debenture was amended and restated to be the lower of (a) 80% (previously 92.5%) of the VWAP for the Trading Day immediately prior to, as the case may be, the applicable Interest Payment Date, the applicable Advance Date or, with respect to any redemption pursuant to Section 6(a) of the Debenture, the date of the applicable Holder Redemption Notice (the “Prior Day VWAP”) and (b) 80% (previously 92.5%) of the average of the three lowest VWAPs during the 20 consecutive Trading Day period immediately preceding, as the case may be, the applicable Interest Payment Date, the applicable Advance Date or, with respect to any redemption pursuant to Section 6(a) of the Debenture, the date of the applicable Holder Redemption Notice (the “Twenty Day VWAP”); provided, however, to the extent that, on any given Trading Day, the price per share of Common Stock on such Trading Day on the Principal Market equals or exceeds 115% of the Prior Day VWAP or Twenty Day VWAP, then for the such Trading Day, and such Trading Day only, each reference to eighty percent (80%) shall be deemed, for such Trading Day only, to be ninety two and one-half percent (92.5%).

17

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The effect of the July 2017 Amendment Agreement is to increase the discount to the Prior Day VWAP and the Twenty Day VWAP granted to the Holder with respect to redemption of, or the payment of interest on, the Debenture in shares of Common Stock from 7.5% to 20%, unless the on any given Trading Day, the price per share of Common Stock on such Trading Day on the Principal Market equals or exceeds 115% of the Prior Day VWAP or Twenty Day VWAP. However, the maximum number of shares of Common Stock issuable pursuant to the Debenture was not changed by the July 2017 Amendment Agreement.

On August 7, 2017, the Company and Purchaser entered into a consent to the Debenture in which the Purchaser consented to the Company’s entry into the Merger Agreement and the Merger as well as an amendment to the Debenture in which: (a) the Company shall not prepay all or any portion of the Debenture prior to the first anniversary of the consummation of the Merger, (b) the Purchaser may increase the dollar amount of the monthly allowance up to the outstanding principal balance of the Debenture by written notice to the Company and may deliver an unlimited number of redemption notices during any calendar month, and (c) to the extent commercially reasonable under the circumstances the Purchaser shall limit the redemption amounts for any given trading day to fifteen percent (15%) of the greater of (1) the daily dollar trading volume for our common stock for such trading day and (2) the average daily dollar trading volume for our common stock for the five (5) consecutive trading days preceding such trading day.

As of September 30, 2017, the outstanding principal balance of the Debenture was $11,971,702. The current portion of long-term debt as of September 30, 2017 of $12,170,059 is net of unamortized discounts and debt issuance costs of $198,357. During the nine months ended September 30 2017, the holder of the Debenture redeemed $5,650,000 of principal, which the Company satisfied with 7,806,708 shares of our common stock. As of December 31, 2016, the outstanding principal balance of the Debenture was $17,621,702. The current portion of long-term debt of $16,397,030 as of December 31, 2016 is net of unamortized discounts and debt issuance costs of $1,224,672. Subsequent to September 30, 2017 and prior to November 9, 2017, the date of issuance of the Company's condensed consolidated financial statements for the quarter ended September 30, 2017, the holder of the Debenture redeemed an additional $1,150,000 of principal, which the Company satisfied with 3,285,711 shares of our common stock.


18

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

6. Legal Proceedings, Commitments and Contingencies
Legal Proceedings

Settled Matters

On December 16, 2015, Galena received a subpoena issued by the U.S. Attorney’s Office for the District of New Jersey, or USAO NJ, requesting the production of a broad range of documents pertaining to Galena’s marketing and promotional practices for Abstral. Through its communications with the USAO NJ and the DOJ, Galena came to understand that the investigation being undertaken by the USAO NJ and DOJ was a criminal investigation in addition to a civil investigation that could ultimately involve Galena as well as one or more former employees. Pursuant to Galena’s charter, Galena was reimbursing certain former employees’ attorney’s fees with respect to the investigation but stopped on May 1, 2017. Galena cooperated with the civil, and is continuing to cooperate with the criminal, investigations, and on September 8, 2017, DOJ announced a settlement agreement with Galena regarding the USAO NJ’s and DOJ’s investigation. The settlement agreement involves a non-criminal resolution and a civil payment in equal installments over twelve months of approximately $7.6 million, plus interest accrued since the date of reaching an agreement in principle, in return for a release of government claims in connection with the investigation. The $7.6 million civil payment is payable over four equal quarterly installments, with the first payment being made in the third quarter of 2017, and is presented in discontinued operations in the statement of operations. As set forth in that settlement agreement, for a release of all claims against Galena and its officers and directors and dismissal with prejudice of the qui tam lawsuit described below, the relator received a portion of the civil payment to the federal government. Upon payment of the settlement amount, the federal government and the relator will dismiss with prejudice their claims against Galena in the qui tam lawsuit.

In addition, there is a qui tam action pending in the U.S. District Court of the District of New Jersey related to the investigation by USAO NJ and DOJ. On September 18, 2017, the Company executed a settlement agreement with the attorneys for the relator in the qui tam action to settle their statutorily mandated attorney fees award by payment of $100,000 in cash and $200,000 in Galena Common Stock subject to court approval, which amounts were accrued during the second quarter 2017. Galena also obtained the consent of SELLAS under the terms of the Merger Agreement. However on November 7, 2017, attorneys for the qui tam relator agreed to have Galena pay the $200,000 in cash. We also obtained the consent of SELLAS under the terms of the Merger Agreement. The Company paid the $300,000 in cash for the statutorily mandated attorney fees award in the fourth quarter of 2017.

Open Matters

On October 13, 2016, Galena filed a complaint in the Circuit Court for the County of Multnomah for the State of Oregon against Aon Risk Insurance Services West, Inc. (Aon) where Galena is seeking attorney’s fees, costs and expenses incurred by Galena related to its coverage dispute with a certain insurer and for amounts Galena was required to contribute to the settlements of In re Galena Biopharma, Inc. Derivative Litigation and In re Galena Biopharma, Inc. Securities Litigation as a direct result of certain insurer’s failure to pay its full policy limits of liability and other relief. Galena and Aon are currently engaged in written discovery.

On February 13, 2017, a putative shareholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey captioned, Miller v. Galena Biopharma, Inc., et al. On February 15, 2017, a putative shareholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey entitled, Kattuah v Galena Biopharma, Inc., et al. The actions assert that the defendants failed to disclose that Galena's promotional practices for Abstral® (fentanyl sublingual tablets were allegedly improper and that the Company may be subject to civil and criminal liability, and that these alleged failures rendered the Company’s statements about its business misleading. Two groups of shareholders and one individual shareholder filed three motions to be appointed lead plaintiff on April 14, 2017 and April 17, 2017. Subsequently, one of the shareholders groups withdrew its motion for lead plaintiff status and the individual shareholder notified the court that he does not object to the appointment of the remaining shareholder group, GALE investor group, as lead plaintiff. On July 17, 2017, the Court approved the GALE investor group as named lead plaintiff and its counsel as lead and liaison counsel. The Court also consolidated both actions. An amended complaint was filed on October 6, 2017. It is expected that Galena and former officers and current and former employees will respond to the amended complaints through an appropriate pleading or motion.

19

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

On March 16, 2017, a complaint captioned Keller v. Ashton et al., CA No. 2:17-cv-01777 was filed in the U.S. District Court for the District of New Jersey against the Company's current directors and the Company, as a nominal defendant. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena's behalf against its directors based on substantially similar facts as alleged in the putative shareholder securities class action complaints mentioned above. The Company's response to the complaint was due on June 1, 2017; however, the Court on May 21, 2017, entered a stay of the proceedings pending resolution of motions to dismiss in the securities litigations described above.
Galena also received a stockholder demand dated April 14, 2017, pursuant to 8 Del. C. Sec. 220, from a shareholder (Albert Zhang) demanding access to Galena’s books and records relating to its sales of Abstral and the U.S. Attorney’s investigation into Galena’s sale of Abstral in order for Mr. Zhang to determine, among other things, whether to file a derivative lawsuit against Galena’s management and directors. Galena has responded to the demand and Mr. Zhang has indicated that he will file a derivative complaint soon.

On April 27, 2017, a putative shareholder class action was filed in the Chancery Court of Delaware captioned Patel vs. Galena Biopharma, Inc. et. al, CA No. 2017-0325 alleging breaches of Section 225 of the Delaware General Corporate Law (DGCL) and breaches of fiduciary duties by the Galena Board of Directors regarding the voting results of authorized shares and the reverse stock split proposals in the proxy statements for the July 2016 and October 2016 stockholder meetings. On June 2, 2017, an amended verified complaint was filed along with a motion to expedite the proceedings. On June 5, 2017, Galena filed a verified petition under Section 205 of the DGCL and a motion to expedite the proceedings. On June 8, 2017, the court denied a request by the plaintiff to schedule a preliminary injunction motion and ordered a prompt trial on both the plaintiff and Galena’s claims. On June 20, 2017, the court consolidated the claims into In re Galena Biopharma, Inc., C. A. No. 2017-0423-JTL. On July 10, 2017, the court ordered that the trial of the claims be held on August 28, 30 and 31, 2017. On July 24, 2017, Galena entered into a binding settlement term sheet, which the parties will use to enter into a Stipulation of Settlement that is intended to settle the litigation currently pending in the Court of Chancery of the State of Delaware, captioned In re Galena Biopharma, Inc., C. A. No. 2017-0423-JTL. The settlement resolves the putative stockholder class action claims against Galena and/or certain of its current and former officers and directors, as well as Galena’s petition to validate certain corporate actions. The settlement will not become effective until approved by the Court. Due to the decline in the price of the Galena Common Stock, the plaintiff has demanded to renegotiate the binding settlement term sheet. On September 7, 2017, Galena moved to enforce the binding settlement term sheet. The parties have filed supporting briefs and the hearing will be held on November 30, 2017.

Under the terms of the settlement, the class will receive a settlement payment of $1.3 million, in addition to attorney fees in an amount to be approved. The settlement payment of $1.3 million consists of $50,000 in cash to be paid by the Defendants or their insurers and $1,250,000 in unrestricted shares of the Company’s common stock (“Settlement Stock”), which valuation will be based on the volume-weighted average closing price for the 20 trading days immediately preceding the day before the transfer of the Settlement Stock to the settlement fund pursuant to the terms and conditions of the settlement. The Company anticipates that the Settlement Stock will be issued, pursuant to the terms of the Stipulation of Settlement, in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 3(a)(10) of the Securities Act. Any amounts awarded by the Court for attorneys’ fees will be paid in part by the settlement fund and in part by the Company’s insurance carriers. Upon the effectiveness of the proposed settlement, the Defendants will be released from the claims that were asserted or could have been asserted in the class action by class members participating in the settlement.

On July 6, 2017, a complaint captioned Jacob v. Schwartz et al., Case No. C17-01222, was filed in the Superior Court of California, County of Contra Costa against the Company's current and former directors and the Company, as a nominal defendant. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena's behalf against its directors based on substantially similar facts as alleged in the derivative complaint mentioned above. The Company's response to the complaint was due on July 7, 2017; however, the court on September 5, 2017, entered a stay of the proceedings pending resolution of motions to dismiss in the securities litigations described above.


20

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

On November 7, 2017, a written demand was made on the Company by a shareholder requesting that additional financial projections and valuation analyses be made in the Company’s Form S-4 relating to the Merger, which was declared effective on November 6, 2017. The demand stated, among other thing, that, if such disclosures are not made within a reasonable period of time, the shareholder intends to file a securities class action lawsuit in federal court. The Company will review the demand letter and make the appropriate response




21

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

7. Stockholders’ Equity

Preferred Stock — The Company has authorized up to 5,000,000 shares of preferred stock, $0.0001 par value per share, for issuance. The preferred stock will have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Company’s Board of Directors upon its issuance. To date, the Company has not issued any preferred shares.

Common Stock — The Company has authorized up to 350,000,000 shares of common stock, $0.0001 par value per share, for issuance.

November 2014 Purchase Agreement with Lincoln Park Capital, LLC - On November 18, 2014, the Company entered into a purchase agreement (LPC Agreement) with Lincoln Park Capital, LLC (LPC), pursuant to which the Company has the right to sell to LPC up to $50 million in shares of the Company's common stock, subject to certain limitations and conditions over the 36-month term of the LPC Agreement. Pursuant to the purchase agreement, LPC initially purchased 125,000 shares of the Company's common stock at $40.00 per share and the Company issued 31,561 shares of common stock to LPC as a commitment fee, which was recorded as a cost of capital. As a result of this initial issuance, the Company received initial net proceeds of $4.9 million, after deducting commissions and other offering expenses. The Company did not sell any shares of our common stock under the LPC Agreement during the nine months ended September 30, 2017. On February 6, 2017, the LPC Agreement was amended to decrease the total value of common stock that the Company may sell to LPC from $55,000,000 to $15,600,000. Except as noted below, the Company has $2.1 million of remaining availability under the LPC Agreement. Use of the purchase agreement with LPC is not currently available to the Company because the Company is not currently eligible to use a Form S-3 registration statement, and it does not expect to be eligible to use a Form S-3 registration statement until May 1, 2018 at the earliest.

At-The-Market Issuance Sales Agreements - On May 24, 2013, the Company entered into At-The-Market Issuance Sales Agreements (ATM) with FBR & Co. (formerly MLV & Co. LLC) and Maxim Group LLC (the Agents). From time to time during the term of the ATM, we may issue and sell through the Agents, shares of our common stock, and the Agents collect a fee equal to 3% of the gross proceeds from the sale of shares, up to a total limit of $20 million in gross proceeds. Except as noted below, the ATM is available to the Company until it is terminated by the Agents, or the Company. The Company did not sell any shares of our common stock under the ATM during the nine months ended September 30, 2017. On December 4, 2015 we replenished the ATM limit up to $20 million in gross proceeds available for future sales of our common stock. Except as noted below, the Company has $19.1 million of remaining availability under the ATM. Use of the ATM is not currently available to the Company because the Company is not currently eligible to use a Form S-3 registration statement, and it does not expect to be eligible to use a Form S-3 registration statement until May 1, 2018 at the earliest.

February 2017 Underwritten Public Offering - On February 13, 2017, the Company closed an underwritten public offering of 17,000,000 shares of common stock and warrants to purchase 17,000,000 shares of common stock priced at $1.00 per share and accompanying warrant (February 2017 Offering). The warrants are immediately exercisable with a strike price of $1.10 and will expire on the fifth anniversary of the date of issuance. The shares of common stock and the warrants were issued separately and were separately transferable immediately upon issuance. The net proceeds of the February 2017 Offering were $15.5 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company. The fair value of the warrants to purchase shares of our common stock issued in connection with the February 2017 Offering was $10.4 million recorded as an issuance cost.


22

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Shares of common stock for future issuance are reserved for as follows (in thousands):

 
As of September 30, 2017
Warrants outstanding
19,557

Stock options outstanding
443

Options reserved for future issuance under the Company’s 2016 Incentive Plan
457

Shares reserved for future issuance under the Employee Stock Purchase Plan
17

Total reserved for future issuance
20,474


8. Warrants

The following is a summary of warrant activity for the nine months ended September 30, 2017 (in thousands):
 
Warrant Issuance
Outstanding, December 31, 2016
 
Granted
 
Exercised
 
Expired
 
Outstanding, September 30 2017
 
Expiration
February 2017

 
17,000

 

 

 
17,000

 
February 2022
July 2016
700

 

 

 

 
700

 
January 2022
January 2016
682

 

 

 

 
682

 
January 2021
March 2015
700

 

 

 

 
700

 
March 2020
September 2013
199

 

 

 

 
199

 
September 2018
December 2012
152

 

 

 

 
152

 
December 2017
April 2011
13

 

 

 
(13
)
 

 
April 2017
Other
124

 

 

 

 
124

 
November 2021
 
2,570

 
17,000

 

 
(13
)
 
19,557

 
 

Warrants consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.


23

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Warrants classified as liabilities

Liability-classified warrants consist of warrants to purchase common stock issued in connection with equity financings in February 2017, July 2016, January 2016, March 2015, September 2013, December 2012, and April 2011. These warrants are potentially settleable in cash and were determined not to be indexed to our common stock.

Most of our warrants have a provision allowing the holders of warrants to require us to make a cash payment in the event we engage in a Fundamental Transaction. The term Fundamental Transaction is defined in each warrant agreement governing the applicable class of warrants. The cash payment is based upon a Black-Scholes analysis of the remaining value of the warrant at the time the Fundamental Transaction is effectuated.  In August 2017, two holders of warrants under the warrant agreement dated February 13, 2017 asserted that the Proposed Merger constitutes a Fundamental Transaction. The Company is in process of determining the merit of this assertion.

The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the condensed consolidated statement of operations as other income (expense). The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:
 
As of September 30, 2017
 
 
 
 
 
 
 
 
 
 
Warrant Issuance
Outstanding (in thousands)
 
Strike price (per share)
 
Expected term (years)
 
Volatility %
 
Risk-free rate %
February 2017
17,000

 
$
1.10

 
4.37
 
129.64
%
 
1.83
%
July 2016
700

 
$
13.00

 
3.79
 
128.32
%
 
1.74
%
January 2016
682

 
$
28.40

 
3.28
 
132.02
%
 
1.66
%
March 2015
700

 
$
41.60

 
2.47
 
145.73
%
 
1.54
%
September 2013
199

 
$
50.00

 
0.97
 
179.71
%
 
1.30
%
December 2012
152

 
$
10.32

 
0.23
 
75.45
%
 
1.05
%
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
Warrant Issuance
Outstanding (in thousands)
 
Strike price (per share)
 
Expected term (years)
 
Volatility %
 
Risk-free rate %
July 2016
700

 
$
13.00

 
4.54
 
117.82
%
 
1.82
%
January 2016
682

 
$
28.40

 
4.03
 
120.38
%
 
1.71
%
March 2015
700

 
$
41.60

 
3.22
 
131.46
%
 
1.52
%
September 2013
199

 
$
50.00

 
1.72
 
164.01
%
 
1.10
%
December 2012
152

 
$
31.60

 
0.98
 
204.55
%
 
0.84
%
April 2011
13

 
$
13.00

 
0.31
 
103.79
%
 
0.53
%

The expected volatility assumptions are based on the Company's implied volatility in combination with the 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 valuation. The dividend yield used in the pricing model is zero, because the Company has no present intention to pay cash dividends.


24

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The changes in fair value of the warrant liability for the nine months ended September 30, 2017 were as follows (in thousands):
 
Warrant Issuance
Warrant liability, December 31, 2016
 
Fair value of warrants granted
 
Change in fair value of warrants
 
Warrant liability, September 30, 2017
February 2017
$

 
$
10,357

 
$
(6,101
)
 
$
4,256

July 2016
753

 

 
(680
)
 
73

January 2016
529

 

 
(489
)
 
40

March 2015
432

 

 
(406
)
 
26

September 2013
81

 

 
(81
)
 

December 2012
65

 

 
(65
)
 

April 2011

 

 

 

 
$
1,860

 
$
10,357

 
$
(7,822
)
 
$
4,395


Warrants classified as equity

Equity-classified warrants consist of warrants issued in connection with consulting services provided to us. On May 8, 2013 as a part of a previous loan financing, we granted Oxford Financial LLC warrants to purchase 9,109 shares of common stock at an exercise price of $49.40 per share, which equaled the 20-day average market price of our common stock prior to the date of the grant. The warrants were valued using the Black Scholes model. The fair value assumptions for the grant included a volatility of 75.34%, expected term of seven years, risk free rate of 1.20%, and a dividend rate of 0.00%. The fair value of the warrants granted was $38.60 per share. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.

In 2016, the Company issued warrants to purchase 100,000 shares of common stock to the holder of the Debenture. The holder received 50,000 warrants upon the closing on the sale of the Debenture at an exercise price of $30.20, maturing 5 years from issuance, and in accordance with the terms of the amendment agreement, the exercise price of the warrant was reduced to $8.60 per share. The fair value assumptions for the grant included a volatility of 77.13%, expected term of 5.5 years, risk free rate of 1.26%, and a dividend rate of 0.00%. Additionally, the holder received 50,000 warrants upon the Company's public announcement of the interim analysis on June 29, 2016 at an exercise price of $8.60. The fair value assumptions for the grant included a volatility of 106.63%, expected term of 5.5 years, risk free rate of 1.35%, and a dividend rate of 0.00%.

In addition to the warrants issued to the holder of the Debenture there are 15,000 outstanding warrants issued to service providers with a weighted average exercise price of $79.40 as of September 30, 2017 and December 31, 2016. These warrants are recorded in equity at fair value upon issuance, and not as liabilities, and are not subject to adjustment to fair value in subsequent reporting periods.


25

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

9. Stock-Based Compensation

Options to Purchase Shares of Common Stock

The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016, respectively (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Research and development
$
34

 
$
50

 
$
106

 
$
285

General and administrative
118

 
483

 
470

 
1,545

Total stock-based compensation from continuing operations
$
152

 
$
533

 
$
576

 
$
1,830


The Company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Risk free interest rate
%
 
1.23
%
 
1.87
%
 
1.25
%
Volatility
%
 
102.77
%
 
116.41
%
 
98.91
%
Expected lives (years)
0.00

 
5.47

 
5.92

 
5.58

Expected dividend yield
%
 
%
 
%
 
%

There were no stock options granted during the three months ended September 30, 2017. The weighted-average grant date fair value of options granted during nine months ended September 30, 2017 was $1.15 per share. The weighted-average fair value of options granted during the three and nine months ended September 30, 2016 were $9.00 per share and $10.20 per share, respectively

The Company’s expected common stock price volatility assumption is based upon the Company's own implied volatility in combination with the implied volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10, which averages the contractual term of the Company’s options of ten years with the average vesting term of four years for an average of six years. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero, because the Company has never paid cash dividends and presently has no intention to do so. 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% for options granted to its employees, 8% for options granted to senior management and zero for non-employee 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.

As of September 30, 2017, there was $600,000 of unrecognized compensation cost related to outstanding stock options that is expected to be recognized as a component of the Company’s operating expenses over a weighted-average period of 2.19 years.

As of September 30, 2017, an aggregate of 1,325,000 shares of common stock were reserved for issuance under the Company’s 2016 Incentive Plan, including 443,000 shares subject to outstanding common stock options granted under the plan. There are 457,000 shares available for future grants based on adjustments in the 2016 Incentive Plan. The administrator of the plan determines the terms when a stock option may become exercisable. Vesting periods of stock options granted to date have not exceeded four years. The stock options will expire, unless previously exercised, no later than ten years from the grant date.

26

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The following table summarizes stock option activity of the Company for the nine months ended September 30, 2017:

 
Total
Number of
Shares
(In Thousands)
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
(In Thousands)
Outstanding at January 1, 2017
561

 
$
41.50

 


Granted
105

 
1.35

 


Exercised

 

 
$

Canceled
(223
)
 
43.01

 
$

Outstanding at September 30, 2017
443

 
$
31.23

 
$

Options exercisable at September 30, 2017
285

 
$
43.76

 
$


The aggregate intrinsic values of outstanding and exercisable stock options at September 30, 2017 were calculated based on the closing price of the Company’s common stock as reported on the NASDAQ Capital Market on September 30, 2017 of $0.35 per share. The aggregate intrinsic value equals the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying stock options.

10. Net Loss Per Share

The following table sets forth the potentially dilutive common shares excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive (in thousands):
 
 
 Three and Nine Months Ended September 30,
 
2017
 
2016
Warrants to purchase common stock
19,557

 
2,570

Options to purchase common stock
443

 
518

Total
20,000

 
3,088



27

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

11. Discontinued Operations

During the fourth quarter of 2015, the Company sold its rights to its commercial products Abstral® (fentanyl) Sublingual Tablets and Zuplenz® (ondansetron) Oral Soluble Film.

The following table presents amounts related to the discontinued operations in the balance sheets (in thousands):
 
September 30, 2017
 
December 31, 2016
Carrying amounts of current assets of discontinued operations:
Accounts receivable
$
830

 
$
813

Total current assets of discontinued operations
830

 
813

 
 
 
 
Carrying amounts of current liabilities of discontinued operations:
Accounts payable
$
57

 
$
3,115

Accrued expenses and other current liabilities
6,702

 
2,944

Total current liabilities of discontinued operations
$
6,759

 
$
6,059


The following table represents the components attributable to the commercial operations that are presented in the condensed consolidated statements of operations as discontinued operations (in thousands):
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Additional channel obligations
(496
)
 
(520
)
 
$
(923
)
 
$
(2,186
)
Selling, general, and administrative
614

 
(2,067
)
 
(1,897
)
 
(6,681
)
Settlements associated with USAO NJ and DOJ and the qui tam action (Note 6)

 

 
(7,800
)
 

Loss from discontinued operations
$
118

 
$
(2,587
)
 
$
(10,620
)
 
$
(8,867
)

Additional channel obligations included in discontinued operations is comprised of larger than anticipated returns of product expiring throughout 2016 and rebates of Abstral sales for which we are responsible through the end of the first quarter of 2016. The increase in returns and rebates was driven by larger than expected volumes through these returns and rebate channels and additional price protection provisions over which the Company has no control. During the third quarter of 2017, the Company incurred $0.5 million in additional channel obligations related to a settlement agreement and mutual release entered into with a former customer to resolve disputes over a product swap agreement of one of our former commercial products, Zuplenz.

28

GALENA BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Selling, general and administrative expense included in discontinued operations consists of all other expenses of our commercial operations that were required in order to market and sell our marketed products prior to our sales of the rights to these commercial products. These expenses include all personnel related costs, marketing, data, consulting, legal, and other outside services necessary to support the commercial operations. During the three and nine months ended September 30, 2017 and 2016, the majority of the costs incurred in selling, general, and administrative expense in discontinued operations related to legal fees from Company's external counsel and four former employees' counsel associated with the Company's cooperation with the USAO NJ and DOJ's investigation of the sales and marketing practices of Abstral. The settlement recorded in the second quarter of 2017 relates to the oral agreement with the attorneys for the relator in the qui tam action to settle the statutorily mandated attorney fees award. These legal proceedings are disclosed in Note 6. On September 7 2017, the Company entered into a written settlement agreement, with the primary D&O liability insurance carrier regarding reimbursement of these attorneys’ fees of the four former employees’ counsel associated with the USAO NJ and DOJ's investigation of the sales and marketing practices of Abstral. Under the settlement, the Company received a payment of $685,000 to reimburse the prior payments of the attorneys’ fees of the four former employees' counsel through May 1, 2017. In addition, such insurance carrier will advance the attorneys’ fees of four former employees to the extent they incur attorneys' fees as a result of the USAO NJ and DOJ investigation from May 1, 2017 forward.

12. Subsequent Events

The Company evaluated all events or transactions that occurred after September 30, 2017 up through the date these financial statements were issued. Other than as disclosed elsewhere in the notes to the condensed consolidated financial statements and below, the Company did not have any material subsequent events.




29


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

In this section, "Galena," “we,” “our,” the “Company” or “us” refer to Galena Biopharma, Inc. and its consolidated subsidiaries, Apthera, Inc., or “Apthera,” and Mills Pharmaceuticals, LLC, or "Mills."

This management’s discussion and analysis of financial condition as of September 30, 2017 and results of operations for the three and nine months ended September 30, 2017 and 2016, 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, 2016 which was filed with the SEC on March 15, 2017 and our other public reports filed with the SEC.


30


Overview

Galena is a biopharmaceutical company developing hematology and oncology therapeutics that address unmet medical needs. Galena’s pipeline consists of multiple mid- to late-stage clinical assets, including Galena’s hematology asset, GALE-401, and Galena’s novel cancer immunotherapy programs including NeuVax (nelipepimut-S), GALE-301 and GALE-302. NeuVax is currently in multiple investigator-sponsored Phase 2 clinical trials in breast cancer that will continue if the Merger is completed. GALE-301 and GALE-302 have completed early stage trials in ovarian, endometrial and breast cancers. GALE-401 is a controlled release version of the approved drug anagrelide for the treatment of elevated platelets in patients with myleoproliferative neoplasms, or MPNs, and Galena has completed a Phase 2 clinical trial in patients with essential thrombocythemia, or ET. If the Merger is completed, GALE-401 and GALE-301/GALE-302 will be evaluated for potential internal development or strategic partnership by management of the continuing company post-Merger.

On January 31, 2017, the Company announced that its Board of Directors had initiated a process to explore and review a range of strategic alternatives. As a result of this process, on August 7, 2017, the Company entered into the Merger Agreement further described in Note 1 to the condensed consolidated financial statements.

The chart below summarizes the current status of our clinical development pipeline but as we have noted above in Note 1 to the condensed consolidated financial statements if the Proposed Merger is completed, our three, NeuVax investigator-sponsored clinical trials will remain ongoing and our other development programs, GALE-401 and GALE-301/GALE-302 will be evaluated for potential internal development or strategic partnership by the continuing company:

s4pipelinecopy.jpg


31


Hematology

GALE-401 (anagrelide controlled release (CR))
GALE-401 contains the active ingredient anagrelide, an FDA-approved product, for the treatment of patients with MPNs to lower abnormally elevated platelet levels. The currently available immediate release, or IR, version of anagrelide causes adverse reactions that are believed to be dose and plasma concentration dependent. According to the Highlights section of the FDA-approved prescribing information for AGRYLIN® (anagrelide hydrochloride) capsules, for oral use (as revised in July 2015), the most common adverse reactions (incidence ≥ 5%) are headache, palpitations, diarrhea, asthenia, edema, nausea, abdominal pain, dizziness, pain, dyspnea, cough, flatulence, vomiting, fever, peripheral edema, rash, chest pain, anorexia, tachycardia, malaise, paresthesia, back pain, pruritus and dyspepsia and may limit the use of the IR version of the drug. Therefore, reducing the maximum concentration or Cmax and increasing the half-life of the drug is hypothesized to reduce the adverse reactions, while preserving the efficacy, potentially allowing a broader use of the drug.
Multiple Phase 1 studies in 98 healthy subjects have shown GALE-401 reduces the Cmax of anagrelide and increases the half-life following oral administration, appears to be well tolerated at the doses administered, and may be capable of reducing platelet levels. The Phase 1 program provided the desired PK/PD (pharmacokinetic/pharmacodynamic) profile to enable the initiation of the Phase 2 proof-of-concept trial. The Phase 2, open label, single arm, proof-of concept trial enrolled 18 patients in the United States for the treatment of thrombocytosis, or elevated platelet counts, in patients with MPNs. Final safety and efficacy data from this Phase 2 trial were presented in December 2015. There is currently no timeline for beginning a Phase 3 trial. As discussed above, if the Merger is completed, GALE-401 will be evaluated for potential internal development or strategic partnership by management of the continuing company post-Merger.
 
ET is a myeloproliferative blood disorder, and is characterized by the overproduction of platelets in the bone marrow. Elevated platelets alter the normal process of blood coagulation and can lead to thromboembolic events. About a third of patients are asymptomatic at the time of diagnosis. However, many patients develop symptoms during the course of the disease that affect their quality of life.
Galena has analyzed the data from the trials and the treatment landscape for MPNs, with a current focus on ET. Subject to completion of the manufacturing of the new formulation and other internal work to prepare the Phase 3 for initiation, GALE-401 could be advanced into a Phase 3 clinical trial in ET patients who are intolerant or resistant to hydroxyurea. The Phase 3 trial is designed to compare GALE-401 (drug arm) versus best available therapy to include a sizable population of patients treated with anagrelide IR. A productive meeting with the FDA in December 2016 confirmed that the GALE-401 development program is appropriate for a new drug application, or NDA, filing using the 505(b)(2) regulatory pathway.

32


On April 27, 2017, Galena received a notice from BioVascular, Inc., which is referred to herein as BVI, the licensor of GALE-401, of an alleged material breach of Galena’s Exclusive License Agreement with BVI, dated December 20, 2013, which is referred to herein as the BVI License Agreement. On May 31, 2017, Galena received a notice of termination of the BVI License Agreement from BVI pursuant to which BVI purported to terminate the BVI License Agreement. BVI maintained that Galena had not used “Commercially Reasonable Efforts” to start the Phase 3 trial of GALE-401. On September 5, 2017, Mills Pharmaceuticals, LLC, or Mills, a wholly owned subsidiary of Galena, and BVI entered into an amendment, or the BVI License Amendment, of the BVI License Agreement, pursuant to which parties agreed to resolve their outstanding disputes over the BVI License Agreement and to modify certain terms of the BVI License Agreement, including but not limited to, (i) eliminating the 3% royalty rate on annual net sales of under $50 million and making the 4% royalty rate applicable to annual net sales of up to $100 million, (ii) making an advance payment of $350,000 for the milestone related to the initiation of the Phase 3 clinical trial payable in two tranches with the first payment of $200,000 payable on or before October 31, 2017 and the second payment of $150,000 payable thirty days after the effective time of the Merger but no later than December 31, 2017, (iii) adding a payment for a sublicense by Mills to a third party of 25% of any cash received for upfront fees or milestone payments if the sublicense is executed prior to first patient enrolled in the Phase 3 clinical trial and 17.5% of any cash received for upfront fees or milestone payments if the sublicense is executed after the first patient is enrolled in the Phase 3 clinical trial, and (iv) if the first patient is not enrolled in the Phase 3 clinical trial by December 31, 2018, BVI shall have the right to terminate the License Agreement and the advance payment shall not be repaid to Mills. Under the terms of a consent among Comerica Bank, BVI and Mills dated September 5, 2017, Comerica Bank shall receive $100,000 of the $350,000 advance payment from Mills. BVI also withdrew its notice of termination as of September 5, 2017.

Novel Cancer Immunotherapies
Our targeted cancer immunotherapy approach is currently based upon two key areas: preventing secondary recurrence of cancer, which is becoming increasingly important as the number of cancer survivors continues to grow; and, primary prevention intended to prevent ductal carcinoma in situ (DCIS) from becoming invasive breast cancer. Once a patient’s tumor becomes metastatic, the outcome is often fatal, making the prevention of recurrence a potentially critical component of overall patient care. Our secondary recurrence programs primarily target patients in the adjuvant (after-surgery) setting who have relatively healthy immune systems, but may still have residual disease. Minimal residual disease, or micrometastasis, that are undetectable by current radiographic scanning technologies, can result in disease recurrence.
Our therapies utilize an immunodominant peptide combined with the immune adjuvant, recombinant human granulocyte macrophage-colony stimulating factor (rhGM-CSF or GM-CSF), and work by harnessing the patient’s own immune system to seek out and attack any residual cancer cells. Using peptide immunogens has many potential clinical advantages, including a favorable safety profile, since these drugs may lack the toxicities typical of most cancer therapies. They also have the potential to induce immunologic memory and provide long-lasting protection with a convenient, intradermal mode of delivery.

NeuVax™ (nelipepimut-S)
NeuVax™ (nelipepimut-S) is a cancer immunotherapy targeting human epidermal growth factor receptor (HER2) expressing cancers. NeuVax is the immunodominant nonapeptide derived from the extracellular domain of the HER2 protein, a well-established and validated target for therapeutic intervention in breast and gastric carcinomas. The NeuVax vaccine is combined with GM-CSF for injection under the skin, or intradermal administration. Data has shown that an increased presence of circulating tumor cells (CTCs) may predict reduced Disease Free Survival (DFS) and Overall Survival (OS) suggesting a presence of isolated micrometastases, not detectable clinically, but, over time, can lead to recurrence of cancer, most often in distant sites. After binding to the specific HLA molecules on antigen presenting cells, the nelipepimut-S sequence stimulates specific cytotoxic T lymphocytes, or CTLs, causing significant clonal expansion. These activated 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.

33


Breast Cancer: According to the National Cancer Institute (NCI), over 230,000 women in the U.S. are diagnosed with breast cancer annually. While improved diagnostics and targeted therapies have decreased breast cancer mortality in the U.S., metastatic breast cancer remains incurable. Approximately 75% to 80% of breast cancer patients have tissue test positive for some increased amount of the HER2 receptor, which is associated with disease progression and decreased survival. Only approximately 20% to 30% of all breast cancer patients-those with HER2 immunohistochemistry (IHC) 3+ disease, or IHC 2+ and fluorescence in situ hybridization (FISH) amplified-have a HER2 directed, approved treatment option available after their initial standard of care. This leaves the majority of breast cancer patients with low-to-intermediate HER2 expression (IHC 1+, 2+) ineligible for therapy and without an effective targeted treatment option to prevent cancer recurrence.
We currently have two investigator-sponsored trials (IST) ongoing with NeuVax in combination with trastuzumab (Herceptin®; Genentech/Roche). The combination of trastuzumab and NeuVax has been shown pre-clinically and in a pilot study to be synergistic. Our Phase 2b clinical trial is a randomized, multicenter, investigator-sponsored study with 300 enrolled patients HER2 1+ and 2+, HLA A2+, A3+, A24 and/or A26, node positive, and high-risk node negative patients. Eligible patients are randomized to receive NeuVax + GM-CSF + trastuzumab or trastuzumab + GM-CSF alone. Genentech/Roche is providing the trastuzumab and partial funding for this trial. Data presented in October 2016 demonstrated that this novel combination of trastuzumab and NeuVax with HER2 low-expressing patients is well tolerated and the cardiac effects of trastuzumab are not impacted by the addition of NeuVax. In February 2017, the Data Safety Monitoring Board (DSMB) reported that there were no safety concerns with the trial and the trial is not futile. The recommendation from the DSMB was to continue the trial with one revision to the statistical analysis plan regarding the timing of the pre-specified interim analysis. Given the lengthy duration of enrollment for the trial, the DSMB determined that the pre-specified interim efficacy analysis be moved up from 12 months to 6 months after the last patient is enrolled. Enrollment was completed in the third quarter of 2017; therefore, the DSMB expects to perform the interim efficacy analysis in the first quarter of 2018. The primary endpoint of the study is disease-free survival after 24-months and is expected in the fourth quarter of 2019.
Our second combination IST is a Phase 2 in HER2 3+ breast cancer patients who have completed neoadjuvant therapy with an approved regimen that includes trastuzumab and fail to achieve a pathological complete response, meaning they have microscopic evidence of residual disease and are therefore at an increased risk of disease recurrence. This multi-center, prospective, randomized, single-blinded Phase 2 trial has enrolled approximately 100 patients with a diagnosis of HER2 3+ breast cancer who are HLA A2+ or HLA A3+ and are determined to be at high-risk for recurrence. High-risk is defined as having received neoadjuvant therapy with an approved regimen that includes trastuzumab but not obtaining a pathological complete response at surgery, or those who undergo surgery as a first intervention and are found to be pathologically node-positive. These high-risk patients are known to have higher recurrence rates than other HER2 3+ breast cancer patients. Eligible patients are randomized to receive NeuVax + GM-CSF + trastuzumab or trastuzumab + GM-CSF alone. Funding for this trial was awarded through the Congressionally Directed Medical Research Program, funded through the Department of Defense, via a Breast Cancer Research Program Breakthrough Award. In February 2017, the DSMB reported that there were no safety concerns with the trial and the trial is not futile. The pre-specified interim safety analysis was completed on n=50 patients and a poster presentation in April 2017 demonstrated that the agent is well tolerated with no increased cardiotoxicity associated with giving NeuVax in combination with trastuzumab. The recommendation from the DSMB was to continue the HER2 3+ trial unmodified. Enrollment was completed in the third quarter of 2017. The primary endpoint of the study is disease-free survival after 24-months and is expected in the fourth quarter of 2019.
A Phase 2 IST with NeuVax as a single agent in patients with ductal carcinoma in situ, or DCIS, is open for enrollment. The trial is entitled, VADIS: Phase 2 trial of the nelipepimut-S peptide vaccine in women with DCIS of the breast. The trial is being run in collaboration with the National Cancer Institute, or NCI, and the University of Texas MD Anderson Cancer Center Phase I and II Chemoprevention Consortium, potentially positioning NeuVax as a treatment for earlier stage disease. The trial has an immunological endpoint evaluating NeuVax peptide-specific cytotoxic T lymphocyte (CTL; CD8+ T-cell) response in vaccinated patients. DCIS is defined by the NCI as a noninvasive condition in which abnormal cells are found in the lining of a breast duct and have not spread outside the duct to other tissues in the breast. DCIS is the most common type of breast cancer. In some cases, DCIS may become invasive cancer and spread to other tissues, and at this time, there is no way to know which lesions could become invasive. Current treatment options for DCIS include breast-conserving surgery and radiation therapy with

34


or without tamoxifen, breast-conserving surgery without radiation therapy, or total mastectomy with or without tamoxifen. According to the American Cancer Society, in 2015 there were over 60,000 diagnoses of DCIS.
A Phase 3 PRESENT (Prevention of Recurrence in Early-Stage, Node- Positive Breast Cancer with Low to Intermediate HER2 Expression with NeuVax Treatment) study enrolled 758 HER2 1+/2+ patients who were node-positive and HLA A2 or A3 positive. On June 27, 2016, the Independent Data Monitoring Committee, or IDMC, recommended that the Phase 3 PRESENT clinical trial be stopped for futility. The PRESENT trial was stopped, and Galena initiated an investigation into the causes of the recommendation. Galena’s analysis of the data showed that there was a separation of the curves, albeit not statistically significant, with the control arm performing better than expected and the NeuVax arm performing consistent with Galena’s protocol assumptions for the control group. Because the study was deemed futile, Galena closed the PRESENT trial, and expects to present the data at a future medical conference.

Gastric Cancer: According to the NCI, gastric (stomach) cancer is a disease in which malignant (cancer) cells form in the lining of the stomach. Gastric cancer is often diagnosed at an advanced stage because there are no early signs or symptoms, and is the second-most common cancer among males and third-most common among females in Asia and worldwide with over 63,000 new cases a year in India. Overexpression of the HER2 receptor occurs in approximately 20% of gastric and gastro-esophageal junction adenocarcinomas, predominantly those of the intestinal type. Overall, without regard to the stage of cancer, only approximately 28% of patients with stomach cancer live at least five years following diagnosis and new adjuvant treatments are needed to prevent disease recurrence. Galena currently has an agreement with Dr. Reddy’s Laboratories to conduct a Phase 2 investigational study in gastric cancer in India, but Dr. Reddy’s has previously indicated that it would require additional data before proceeding with the Phase 2 trial.

GALE-301 and GALE-302
Our second immunotherapy franchise targets folate binding protein (FBP) receptor-alpha. FBP is a well-validated therapeutic target that is highly over-expressed in ovarian, endometrial and breast cancers, and is the source of immunogenic peptides that can stimulate cytotoxic T lymphocytes (CTLs) to recognize and destroy FBP-expressing cancer cells. Current treatments after surgery for these diseases are principally with platinum based chemotherapeutic agents. These patients suffer a high recurrence rate and most relapse with an extremely poor prognosis. GALE-301 and GALE-302 are immunogenic peptides that consist of a peptide derived from FBP combined with GM-CSF for the prevention of cancer recurrence in the adjuvant setting. GALE-301 is the E39 peptide, while GALE-302 is an attenuated version of this peptide, known as E39’. Two early stage clinical trials have been completed with our FBP peptides in ovarian, endometrial, and breast cancers. In June 2016, the U.S. Food and Drug Administration (FDA) granted two orphan-drug designations for the treatment (including prevention of recurrence) of ovarian cancer: one for GALE-301 (E39), and one for GALE-301 (E39) and GALE-302 (E39’).
 Ovarian Cancer: According to the NCI Surveillance, Epidemiology, and End Results (SEER) Program, new cases of ovarian cancer occur at an annual rate of 11.9 per 100,000 women in the U.S., with an estimated 22,280 new cases and 14,240 deaths in 2016. Only 46.2% of ovarian cancer patients are expected to survive five years after diagnosis. Approximately 1.3% of women will be diagnosed with ovarian cancer at some point during their lifetime (2011 - 2013 data). The prevalence data from 2013 showed an estimated 195,767 women living with ovarian cancer in the United States. Due to the lack of specific symptoms, the majority of ovarian cancer patients are diagnosed at later stages of the disease, with an estimated 80% of women presenting with advanced-stage (III or IV) disease. These patients have their tumors routinely surgically debulked to minimal residual disease, and then are treated with platinum- and/or taxane-based chemotherapy. While many patients respond to this treatment regimen and become clinically free of disease, the majority of these patients will relapse. Depending upon their level of residual disease, the risk for recurrence after completion of primary therapy is approximately 70%. Unfortunately, for these women, once the disease recurs, treatment options are limited and the disease is most likely incurable.


35


Intellectual Property

Patents and other intellectual property rights are crucial to our success. It is our policy to protect our intellectual property rights through available means, including filing and prosecuting patent applications in the U.S. and other countries, protecting trade secrets, and utilizing regulatory protections such as data exclusivity. We also include restrictions regarding use and disclosure of our proprietary information in our contracts with third parties, and utilize customary confidentiality agreements with our employees, consultants, clinical investigators and scientific advisors to protect our confidential information and know-how. Together with our licensors, we also rely on trade secrets to protect our combined technology especially where we do not believe patent protection is appropriate or obtainable. It is our policy to operate without infringing on, or misappropriating, the proprietary rights of others. The following chart summarizes our intellectual property rights:
 
Drug Candidate
 
Jurisdiction
Indication
 
Claims
Status
 
Latest Estimated Patent Exclusivity Period
 
GALE-401
US
Vaso-occlusive
Methods of Use
1 issued
2020
GALE-401
US, Europe, India, Japan, and UK
Platelet lowering
Anagrelide Controlled Release Formulations & Methods of Use
4 pending and 7 issued
2029
NeuVax™ (nelipepimut-S)
US, Australia, Canada, China, Europe, Hong Kong, Japan, Korea, and Mexico
Recurrence of cancers expressing low to intermediate levels of HER2/neu
Methods of Use
6 pending and 10 issued
2028
NeuVax in combination with trastuzumab
US and Australia
HER2/neu expressing cancer
Methods of Use
2 issued
2026
GALE-301/GALE-302 Combination
US, Canada, Europe and Japan
Cancers expressing Folate Binding Protein (FBP)
Compositions & Methods of Use
1 pending and 8 issued
2022
GALE-301/GALE-302 Combination
US and PCT
Cancers expressing Folate Binding Protein (FBP)
Combination Dosage Regimen
2 pending
2036
GALE-301
US and PCT
Cancers expressing low levels of FBP (IHC 0 or 1+)
Dosage Regimen
2 pending
2037

Each of the above-referenced pending or issued patents has been licensed by Galena. To Galena’s knowledge, there are no contested proceedings or third-party claims relating to any of the above pending or issued patents.



36


Results of Operations for the Three and Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
Three Months Ended September 30,
 
2017
 
2016
 
% Change
Operating loss
$
(4,462
)
 
$
(6,472
)
 
(31
)%
Non-operating income (expense)
(1,731
)
 
2,130

 
(181
)%
Increase (loss) from discontinued operations
118

 
(2,587
)
 
(105
)%
Net loss
$
(6,075
)
 
$
(6,929
)
 
(12
)%
 
 
 
 
 
 
Net loss per common share, basic and diluted:
 
 
 
 
 
Basic and diluted net loss per share, continuing operations
$
(0.15
)
 
$
(0.41
)
 
(63
)%
Basic and diluted net income (loss) per share, discontinued operations
$

 
$
(0.25
)
 
(100
)%
Basic and diluted net loss per share
$
(0.15
)
 
$
(0.66
)
 
(77
)%

For the three months ended September 30, 2017, our net loss was $6.1 million compared with net loss of $6.9 million for the three months ended September 30, 2016. The decrease of $0.9 million in net loss was primarily attributable to a decrease in operating loss of $2.0 million, or 31%, and a decrease in loss from discontinued operations of $2.7 million, partially offset by an increase in non-operating expense of $3.9 million.

(dollars in thousands)
Nine Months Ended September 30,
 
2017
 
2016
 
% Change
Operating loss
$
(14,461
)
 
$
(24,732
)
 
(42
)%
Non-operating income (expense)
(1,116
)
 
15,566

 
(107
)%
Loss from discontinued operations
(10,620
)
 
(8,867
)
 
20
 %
Net income (loss)
$
(26,197
)
 
$
(18,033
)
 
45
 %
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
Basic and diluted net loss per share, continuing operations
$
(0.45
)
 
$
(0.97
)
 
(54
)%
Basic and diluted net loss per share, discontinued operations
$
(0.31
)
 
$
(0.93
)
 
(67
)%
Basic and diluted net loss per share
$
(0.76
)
 
$
(1.90
)
 
(60
)%

For the nine months ended September 30, 2017, our net loss was $26.2 million compared with a net loss of $18.0 million for the nine months ended September 30, 2016. Net loss during the nine months ended September 30, 2016 was affected by two significant non-cash adjustments included in non-operating income, including a $14.2 million gain on our warrant liability due a significant decrease in our stock price and a $5.2 million gain on our contingent purchase price liability based on its revaluation following the discontinuation of our PRESENT clinical trial during the second quarter of 2016. Non-operating income totaled $15.6 million for the nine months ended September 30, 2016 compared to non-operating expense of $1.1 million for the nine months ended September 30, 2017. Operating loss decreased $10.3 million, or 42%, from the nine months ended September 30, 2016 compared to the nine months ended September 30, 2017 primarily due reducing expenses following to the discontinuation of our PRESENT clinical trial in the second quarter of 2016. The increase in loss from discontinued operations was due to the written agreement in principle with U.S. Attorney's Office of the District of New Jersey, or USAO NJ, and the Department of Justice, or DOJ, that includes a civil payment of approximately $7.6 million accrued during the first quarter of 2017, partially offset by decreased channel obligations and legal defense costs related to our former commercial products. The written agreement in principle is further discussed in Note 6 to the condensed consolidated financial statements.

Further analysis of the changes and trends in our operating results are discussed below.

37


Research and Development Expense

Research and development expenses are comprised of both (i) directs costs, which are mainly contract research organizations costs, materials and supplies, licenses and fees, consultancy fees, and milestone payments and (ii) internal or indirect costs which are mainly personnel costs, including salaries, benefits and stock-based compensation, and overhead allocations consisting of various support and facilities-related costs.

We do not track total research and development expenses by product candidate, therapeutic area or development phase, as we do not allocate internal or indirect costs by product candidate, therapeutic area or development phase. However, we manage our research and development expenses by identifying the research and development activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other considerations. We continually review our R&D pipeline and the status of development and, as necessary, reallocate resources among the R&D portfolio that we believe will best support the future growth of our business.

Research and development expense for the three and nine months ended September 30, 2017 and 2016, respectively, was as follows (dollar amounts in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Research and development expense
$
951

 
$
3,624

 
(74
)%
 
$
5,357

 
$
15,242

 
(65
)%

The majority of our research and development expenses for the three and nine months ended September 30, 2017 relate to our three ongoing investigator sponsored studies with NeuVax and internal preparation work on our GALE-401 asset to enter a Phase 3 study. The significant decrease in research and development costs from the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 was due to the reduction in expenses following the discontinuation of our Phase 3 PRESENT trial upon the recommendation of the IDMC in the third quarter of 2016. In addition, research and development headcount has decreased from four at September 30, 2016 to two at September 30, 2017. We have reduced usage of outside service providers during 2017 in order to preserve capital and remain focused on our ongoing development programs.

Direct and unallocated indirect costs associated with research and development expense for the three and nine months ended September 30, 2017 and 2016, respectively, were as follows (dollars in thousands):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Therapeutic Area
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Direct costs
 
 
 
 
 

 
 
 
 
 

GALE-401
Essential Thrombocythemia
$
56

 
$
188

 
(70
)%
 
$
599

 
$
370

 
62
 %
NeuVaxTM
Node-positive or node negative/triple negative HER2 IHC 1+/2+
(238
)
 
1,651

 
(114
)%
 
339

 
8,718

 
(96
)%
NeuVaxTM + Herceptin®
Node-positive or node negative/triple negative HER2 IHC 1+/2+
281

 
652

 
(57
)%
 
1,220

 
1,756

 
(31
)%
NeuVaxTM + Herceptin®
High risk, node-positive or negative, HER2 IHC 3+
80

 
119

 
(33
)%
 
476

 
337

 
41
 %
GALE-301 + GALE-302
Ovarian & breast
172

 

 
NA

 
302

 
243

 
24
 %
Indirect costs
 
600

 
1,014

 
(41
)%
 
2,421

 
3,818

 
(37
)%
Total
 
$
951

 
$
3,624

 
(74
)%
 
$
5,357

 
$
15,242

 
(65
)%


38


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 for the three and nine months ended September 30, 2017 and 2016, respectively, was as follows (dollars in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
General and administrative expense
$
3,511

 
$
2,848

 
23
%
 
$
9,104

 
$
9,490

 
(4
)%

The 23% increase in selling, general, and administrative expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was driven by a $1.3 million increase in legal expenses incurred primarily in support for the Merger Agreement and related filings, partially offset by decreases in non-cash stock based compensation of $0.4 million, $0.2 million in personnel related expenses. The 4% decrease in selling, general, and administrative expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was driven by decreases in non-cash stock based compensation of $1.1 million, director's and officer's insurance of $0.3 million, and outside services of $0.3 million, partially offset by an increase in legal expenses of $1.4 million primarily in support of the Merger Agreement.

39


Non-Operating Income (Expense), Net

Non-operating income (expense), net for the three and nine months ended September 30, 2017 and 2016, respectively, was as follows (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Litigation settlement
$

 
$

 
 %
 
$
(1,300
)
 
$
(1,800
)
 
(28
)%
Change in fair value of warrants potentially settleable in cash
4,115

 
3,652

 
13
 %
 
7,822

 
14,172

 
(45
)%
Goodwill and intangible assets impairment loss
(5,231
)
 

 
NA

 
(5,231
)
 

 
NA

Interest expense, net
(565
)
 
(1,377
)
 
(59
)%
 
(2,225
)
 
(1,988
)
 
12
 %
Change in fair value of the contingent purchase price liability
(50
)
 
(145
)
 
(66
)%
 
(182
)
 
5,182

 
(104
)%
Total non-operating income (expense), net
$
(1,731
)
 
$
2,130

 
(181
)%
 
$
(1,116
)
 
$
15,566

 
(107
)%

The increases in our net non-operating expense during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 was primarily due to significant decreases in the fair value of warrants accounted for as liabilities and the fair value of the contingent purchase price liability in 2016. The decreases in the estimated fair value of our warrant liabilities were primarily due to the decrease in our common stock price, which is one of the most impactful inputs to the pricing model we use to estimate the fair value of our warrant liabilities. In addition to the significant decrease in the fair value of warrants during the nine months ended September 30, 2016, our contingent purchase price consideration related to the approval of NeuVax also decreased. The interim analysis of the PRESENT Phase 3 clinical trial and subsequent close down of the trial triggered an intangible asset and goodwill impairment analysis of the carrying amount and the fair value was determined to exceed the carrying amount as of June 30, 2016 based on the other ongoing and planned trials with NeuVax. The Company determined the fair value of the contingent purchase price consideration at each reporting period and the lower probability and extended time line for marketing approval were updated to align with the valuation performed of NeuVax resulting in the significant decrease in the fair value which are the two largest variables impacting the liability during the three and nine months ended September 30, 2016. In addition, during the three and nine months ended September 30, 2017, the Company performed an interim impairment analysis on goodwill and intangible assets resulting in an impairment loss of $5.2 million as it was determined that the carrying values of the intangible assets exceeded their fair and the carrying value of the Company's sole reporting unit exceeded the carrying value. See Note 2 to the condensed consolidated financial statements for additional details on the goodwill and intangible assets impairment loss.

The change in fair value of warrants, goodwill and intangible assets impairment loss, and the change in contingent purchase price consideration are all non-cash in nature.

Income Taxes

For the three and nine months ended September 30, 2017 and 2016, there was no income tax benefit or expense recognized.


40


Discontinued Operations

We sold the assets of our commercial business during the fourth quarter of 2015. We believe this disposition allows us to focus our resources on our clinical development programs and maximize the value of these assets to our shareholders.

The following table represents the components attributable to the commercial operations that are presented in the condensed consolidated statements of operations as discontinued operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Additional channel obligations
(496
)
 
(520
)
 
(923
)
 
(2,186
)
Selling, general, and administrative
614

 
(2,067
)
 
(1,897