SLS SELLAS Life Sciences Group Inc

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)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class		Name of Exchange on Which Registered
Common Stock, $0.0001 Par Value per Share		The NASDAQ Capital Market
Securities registered pursuant to Section 12(b) of the Exchange Act:
	None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ¨   Yes         þ   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.     ¨   Yes       þ   No

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.    þ   Yes         ¨   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨   Yes         þ   No

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

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

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

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

Based on the closing price of the Registrant's common stock as reported on the NASDAQ Capital Market, the aggregate market value of the Registrant's common stock held by non-affiliates on June 30, 2014 (the last business day of the Registrant's most recently completed second fiscal quarter) was approximately $275,097,000 .

As of February 29, 2016, Galena Biopharma, Inc. had outstanding 181,746,561 shares of common stock, $0.0001 par value per share, exclusive of treasury shares.

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EXPLANATORY NOTE

Galena Biopharma, Inc. is filing this Amendment No. 2 on Form 10-K/A ("Form 10-K/A") to its Annual Report on Form 10-K for the fiscal year ended December 31, 2015 as filed with the Securities and Exchange Commission on March 10, 2016 (the "Original Filing") solely to replace the Report of Independent Registered Public Accounting Firm (“Report”) which appeared on page 59 and the audit opinion over the internal control over financial reporting (“audit opinion”) on page 91 with a Report and audit opinion that includes the three years ended December 31, 2015, 2014, and 2013. The Report and audit opinion inadvertently omitted the year ended December 31, 2013 in the form of Report and audit opinion filed with the Original Filing and with Amendment No. 1 to its Original Filing on Form 10-K/A on March 11, 2016.

Except for Item 8 and 9A - Financial Statements And Supplementary Data and Controls and Procedures, no other Parts or disclosures from the Original Filing and Amendment No. 1 are included in this Amendment, and except as required to reflect the matters set forth in such included disclosure, this Amendment does not reflect events or developments that have occurred after the date of the Original Filing and Amendment No. 1 and does not modify or update disclosures presented in the Original Filing and Amendment No. 1 in any way.

Among other things, forward-looking statements made in the Original Filing and Amendment No. 1 have not been revised to reflect events, results, or developments that have occurred or facts that have become known to us after the date of the Original Filing and Amendment No. 1 (other than as discussed above), and such forward-looking statements should be read in their historical context. Accordingly, this Amendment should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing and Amendment No. 1.

New certifications of our principal executive and financial officers are included as exhibits to this Form 10-K/A.

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GALENA BIOPHARMA, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

Item No.		Description	Page No.
8		Financial Statements and Supplementary Data	6
9A		Controls and Procedures	39
Index to Exhibits
EX-23.1
EX-31.1
EX-31.2
EX-32.1

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"SAFE HARBOR" STATEMENT

Some of the information contained in this annual report may include forward-looking statements that reflect our current views with respect to our development programs, business strategy, business plan, financial performance and other future events. These statements include forward-looking statements both with respect to us, specifically, and our industry, in general. We make these statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, those factors set forth in the sections entitled “Business,” “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 annual report, all of which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this annual 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 “Safe Harbor” Statement.

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Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GALENA BIOPHARMA, INC.

FORM 10-K — FISCAL YEAR ENDED DECEMBER 31, 2015

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page No.
Report of Independent Registered Public Accounting Firm	7
Consolidated Balance Sheets as of December 31, 2015 and 2014	8
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014, and 2013	9
Consolidated Statements of Stockholders’ Equity for the years ended December 31 2015, 2014, and 2013	10
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013	11
Notes to Consolidated Financial Statements	12

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Galena Biopharma, Inc.

We have audited the accompanying consolidated balance sheets of Galena Biopharma, Inc. (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 . These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Galena Biopharma, Inc. as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Galena Biopharma, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2016 expressed an unqualified opinion thereon.

/s/ Moss Adams LLP

Portland, Oregon

March 10, 2016

 

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Table of Contents

GALENA BIOPHARMA, INC.

CONSOLIDATED BALANCE SHEETS

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

	December 31, 2015				December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	29,730			$	23,650
Restricted cash	401				200
Litigation settlement insurance recovery	21,700				—
Prepaid expenses and other current assets	1,398				1,237
Current assets of discontinued operations	392				27,013
Total current assets	53,621				52,100
Equipment and furnishings, net	335				285
GALE-401 rights	9,255				9,255
In-process research and development	12,864				12,864
Goodwill	5,898				5,897
Deposits and other assets	171				87
Total assets	$	82,144			$	80,488
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,597			$	1,886
Accrued expenses and other current liabilities	5,292				8,885
Litigation settlement payable	25,000				—
Fair value of warrants potentially settleable in cash	14,518				5,383
Current portion of long-term debt	4,739				3,910
Current liabilities of discontinued operations	5,925				7,169
Total current liabilities	57,071				27,233
Deferred tax liability	5,418				5,053
Contingent purchase price consideration	6,142				6,651
Long-term debt, net of current portion	—				4,492
Total liabilities	68,631				43,429
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; 275,000,000 shares authorized, 162,581,753 shares issued and 161,906,753 shares outstanding at December 31, 2015; 200,000,000 shares authorized, 130,146,341 shares issued and 129,471,341 shares outstanding at December 31, 2014	15				12
Additional paid-in capital	296,730				256,377
Accumulated deficit	(279,383		)		(215,481		)
Less treasury shares at cost, 675,000 shares	(3,849		)		(3,849		)
Total stockholders’ equity	13,513				37,059
Total liabilities and stockholders’ equity	$	82,144			$	80,488

See accompanying notes to consolidated financial statements.

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GALENA BIOPHARMA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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

	For the Year Ended December 31,
	2015				2014				2013
Operating expenses:
Research and development	$	23,611			$	27,674			$	20,424
General and administrative	10,609				16,226				8,065
Total operating expenses	34,220				43,900				28,489
Operating loss	(34,220		)		(43,900		)		(28,489		)
Non-operating income (expense):
Litigation settlement	(5,282		)		—				—
Gain (loss) on warrant derivative liability	1,162				16,556				(44,001		)
Interest expense, net	(760		)		(1,110		)		(807		)
Other income	509				170				3,022
Total non-operating income (expense), net	(4,371		)		15,616				(41,786		)
Loss from continuing operations before income taxes	(38,591		)		(28,284		)		(70,275		)
Income tax expense	365				—				1,052
Loss from continuing operations	(38,956		)		(28,284		)		(71,327		)
Loss from discontinued operations	(24,946		)		(8,322		)		(5,351		)
Net loss	$	(63,902	)		$	(36,606	)		$	(76,678	)
Net loss per common share:
Basic and diluted per share, continuing operations	$	(0.25	)		$	(0.24	)		$	(0.79	)
Basic and diluted loss per share, discontinued operations	$	(0.16	)		$	(0.07	)		$	(0.06	)
Basic and diluted net loss per share	$	(0.41	)		$	(0.31	)		$	(0.85	)
Weighted-average common shares outstanding: basic and diluted	155,264,729				119,388,366				90,181,501
Comprehensive loss
Net loss	$	(63,902	)		$	(36,606	)		$	(76,678	)
Reclassification of unrealized gain upon sale of marketable securities	—				—				(2,678		)
Tax effect of reclassification of unrealized gain upon sale of marketable securities	—				—				1,052
Total comprehensive loss	$	(63,902	)		$	(36,606	)		$	(78,304	)

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•

Develop novel cancer immunotherapies to address unmet medical needs through the use of peptide-based vaccines targeting well-established tumor antigens. One of our key strategies is to target the adjuvant setting in patients with higher risk of recurrence, who had their primary treatment for cancer and have no evidence of disease, and are more likely to benefit from treatment via immunotherapy. Our immunotherapy programs are currently targeting two key areas: secondary prevention intended to significantly decrease the risk of disease recurrence in breast, gastric, and ovarian cancers; and primary prevention intended to cease or delay ductal carcinoma in situ (DCIS) from becoming invasive breast cancer.

•	Expand our development pipeline by enhancing the clinical and geographic footprint of our technologies. We intend to accomplish this through the initiation of new clinical trials and potentially through acquisition of additional oncology programs.

•	Leverage partnerships and collaborations, as well as investigator-sponsored trial arrangements, to maximize the scope of potential clinical opportunities in a cost effective and efficient manner.

•	Focus our resources on our valuable and expanding clinical development programs. On November 19, 2015 we sold our Abstral ® (fentanyl) Sublingual Tablets product and related assets and on December 24, 2015 we sold Zuplenz (ondansetron) Oral Soluble Film product and related assets, and as of December 31, 2015, we ceased our commercial operations.

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	December 31, 2015				Level 1				Level 2				Level 3
Assets:
Cash equivalents	$	29,171			$	29,171			$	—			$	—
Total assets measured and recorded at fair value	$	29,171			$	29,171			$	—			$	—
Liabilities:
Warrants potentially settleable in cash	$	14,518			$	—			$	14,518			$	—
Contingent purchase price consideration	6,142				—				—				6,142
Total liabilities measured and recorded at fair value	$	20,660			$	—			$	14,518			$	6,142

	December 31, 2014				Level 1				Level 2				Level 3
Assets:
Cash equivalents	$	19,477			$	19,477			$	—			$	—
Total assets measured and recorded at fair value	$	19,477			$	19,477			$	—			$	—
Liabilities:
Warrants potentially settleable in cash	$	5,383			$	—			$	5,383			$	—
Contingent purchase price consideration	6,651				—				—				6,651
Total liabilities measured and recorded at fair value	$	12,034			$	—			$	5,383			$	6,651

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	December 31,
	2015				2014
Clinical development expense	$	3,294			$	6,967
Compensation and related benefits	1,535				1,040
Professional fees	435				821
Interest expense	28				57
Accrued expenses and other current liabilities	$	5,292			$	8,885

2016 Principal Payments		$	4,254
Add - 5.5% cash final payment (less Unamortized debt issuance costs)		485
Carrying value of long-term debt		$	4,739

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Legal Proceedings

On December 3, 2015, we agreed in principle to resolve and settle the consolidated shareholder derivative action,  In re Galena Biopharma, Inc. Derivative Litigation , Civil Action No. 3:14-cv-00382-SI, currently pending in the United States District Court for the District of Oregon against us and certain of our current and former officers and directors. The settlement will not become effective until approved by the Court. The settlement includes a payment of $15 million in cash by our insurance carriers, which we will use to fund a portion of the class action settlement, and cancellation of 1,200,000 outstanding director stock options. The settlement also will require that we adopt and implement certain corporate governance measures and will provide that the plaintiffs’ counsel may apply to the court for an award of attorneys’ fees and expenses up to $5 million . Any fees and expenses awarded by the court to the plaintiffs’ counsel will be paid by our insurance carriers. The settlement will not include any admission of wrongdoing or liability on the part of us or the individual defendants and will include a full release of us and the individual defendants in connection with the allegations made in the consolidated federal derivative actions and state court derivative actions.

On December 3, 2015, we also agreed in principal to resolve and settle the securities putative class action lawsuit,  In re Galena Biopharma, Inc. Securities Litigation , Civil Action No. 3:14-cv-00367-SI, pending against us, certain of our current and former officers and directors and other defendants in the United States District Court for the District of Oregon. The agreement, which is subject to shareholder notice and Court approval, provides for a settlement payment of $20 million to the class and the dismissal of all claims against us and the other defendants in connection with the consolidated federal securities class actions. Of the $20 million settlement payment to the class, $16.7 million will be paid by our insurance carriers and $3.3 million will be paid by us through a combination of $2.3 million in cash and $1 million in shares of our common stock. In addition to the $3.3 million payable accrued as of December 31, 2015 the company paid $2.0 million in December 2015 in attorney fees outstanding as a condition of the settlement. We will be responsible for defense costs and any settlements or judgments incurred for any related opt-out lawsuits.

The litigation settlement is summarized as follow (in thousands)

	Amount
Class action settlement	$	20,000
Derivative settlement	5,000
Total settlement payable	25,000
Payable by the insurance carriers	21,700
Payable by the company in cash	2,300
Payable by the company in common stock	1,000
Total settlement payable	$	25,000

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Commitments

The Company acquires assets still in development and enters into research and development arrangements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales. Because of the contingent nature of these payments, they are not included in the table of contractual obligations shown below.

These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give the Company the discretion to unilaterally terminate development of the product, which would allow the company to avoid making the contingent payments; however, the company is unlikely to cease development if the compound successfully achieves clinical testing objectives. The Company’s contractual obligations that may require future cash payments as of December 31, 2015 are as follows (in thousands):

	Operating Leases (1)				Non-Cancelable Employment Agreements (2)				Subtotal				Cancelable License Agreements (3)				Total
2016	$	316			$	850			$	1,166			$	350			$	1,516
2017	323				—				323				350				673
2018	316				—				316				350				666
2019	251				—				251				4,200				4,451
2020 and thereafter	236				—				236				2,965				3,201
Total	$	1,442			$	850			$	2,292			$	8,215			$	10,507

(1)	Operating leases are primarily facility and equipment related obligations with third party vendors. Operating lease expenses during the years ended December 31, 2015, 2014, and 2013 were approximately $116,000 , $72,000 and $77,000 , respectively.

(2)	Employment agreement obligations include management contracts, as well as scientific advisory board member compensation agreements. Certain agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually at the discretion of the Compensation Committee, as well as for minimum bonuses that are payable.

(3)

License agreements generally relate to the company’s obligations with The Board of Regents, University of Texas and Henry M. Jackson Foundation for our oncology therapies. The company continually assesses the progress of its licensed technology and the progress of its research and development efforts as it relates to its licensed technology and may terminate with notice to the licensor at any time. In the event these licenses are terminated, no amounts will be due.

The Company applies the disclosure provisions FASB ASC Topic 460 (“ASC 460”), “ Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," to its agreements that contain guarantee or indemnification clauses. TheCompany provides (i) indemnifications of varying scope and size to certain investors and other parties for certain losses suffered or incurred by the indemnified party in connection with various types of third-party claims and (ii) indemnifications of varying scope and size to officers and directors against third party claims arising from the services they provide to us. These indemnifications give rise only to the disclosure provisions of ASC 460. To date, the Company has not incurred costs as a result of these obligations and does not expect to incur material costs in the future. Accordingly, the Company has not accrued any liabilities in its financial statements related to these indemnifications.

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

8. 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, privileges and restrictions, including voting rights, dividend 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 275,000,000  shares of common stock, $0.0001  par value per share, for issuance. Shares of common stock are reserved as follows:

September 2013 Underwritten Public Offering - On September 18, 2013 the Company closed an underwritten public offering of 17,500,000 units at a price to the public of $2.00 per unit for gross proceeds of $35 million (the "September 2013 Offering"). Each unit consists of one share of common stock, and a warrant to purchase 0.35 of a share of common stock at an exercise price of $2.50 per share. The offering included an over-allotment option for the underwriters to purchase an additional 2,625,000 shares of common stock and/or warrants up to 918,750 share of common stock. On September 23, 2013, the underwriters exercised their over-allotment option in full. The additional gross proceeds to the company as a result of the full exercise of the over-allotment option were approximately $5.2 million . The total net proceeds of the September 2013 offering, including the exercise of the over-allotment option, were $37.5 million , after deducting underwriting discounts and commissions and offering expenses payable by the company.

November 2014 Purchase Agreement with Lincoln Park Capital, LLC - On November 18, 2014, the Company entered into a purchase 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 purchase agreement. Pursuant to the purchase agreement, LPC initially purchased 2.5 million shares of the Company's common stock at $2.00 per share and the Company issued 631,221 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. In addition to the LPC’s initial purchase of our common stock under the purchase agreement, during 2014, we received net proceeds of $8.5 million from LPC’s subsequent purchases of a total of 4.6 million shares of our common stock, excluding the commitment fee shares.

At Market Issuance Sales Agreements - On May 24, 2013 the Company entered into At Market Issuance Sales Agreements (ATM) with 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. The ATM is available to the Company until it is terminated by the Agents or the Company. During the year ended December 31, 2015 we received $2.3 million by issuing 1.4 million shares of our common stock. During the year ended December 31, 2014, we received $2.3 million in net proceeds from the sale of 1.4 million shares of our common stock through the ATM. There were no sales of our common stock under the ATM in 2013. On December 4, 2015 we replenished the ATM limit up to $20 million in gross proceeds available for future sales of our common stock.

March 2015 Underwritten Public Offering - On March 18, 2015 the Company closed an underwritten public offering of 24,358,974 units at a price to the public of $ 1.56 per unit for gross proceeds of $38 million (the "March 2015 Offering"). Each unit consists of one share of common stock, and a warrant to purchase 0.50 of a share of common stock at an exercise price of $2.08 per share. The March 2015 Offering included an over-allotment option for the underwriters to purchase an additional 3,653,846 shares of common stock and/or warrants to purchase up to 1,826,923 shares of common stock. On March 18, 2015, the underwriters exercised their over-allotment option to purchase warrants to purchase an aggregate of 1,826,923 shares of common stock. On April 10, 2015, the underwriters exercised their over-allotment option to purchase 3,653,846 shares of common stock for additional net proceeds of $5.4 million . The total net proceeds of the March 2015 Offering, including the exercise of the over-allotment option to purchase the warrants, were $40.8 million , after deducting underwriting discounts and commissions and offering expenses payable by the Company.

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Other Equity Transactions — During 2013, the Company issued a total of 492,988 shares of common stock to the holders of the Company's outstanding contingent value rights holders for a milestone payment with a total fair market value of $1,247,000 .

9. Warrants

The following is a summary of warrant activity for the years ended December 31, 2015 and 2014 (in thousands):

 

	March 2015 Warrants			September 2013 Warrants			December 2012 Warrants			April 2011 Warrants			Other Warrant Issuances			Consultant and Oxford Warrants			Total
Outstanding, January 1, 2014	—			6,442			4,917			1,158			1,444			889			14,850
Granted	—			—			—			—			—			300			300
Exercised	—			(2,469	)		(1,886	)		(543	)		(327	)		(469	)		(5,694	)
Expired	—			—			—			—			(916	)		—			(916	)
Outstanding, December 31, 2014	—			3,973			3,031			615			201			720			8,540
Granted	14,006			—			—			—			—			—			14,006
Expired	—			—			—			—			—			(238	)		(238	)
Outstanding, December 31, 2015	14,006			3,973			3,031			615			201			482			22,308
Expiration	March 2020			September 2018			December 2017			April 2017			Varies 2014-2016			Varies 2014-2020

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

Warrants classified as liabilities

Liability-classified warrants consist of warrants to purchase common stock issued in connection with equity financings in March 2015, September 2013, December 2012, April 2011, March 2011, March 2010 and August 2009. These warrants are potentially settleable in cash and were determined not to be indexed to our common stock.

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 consolidated statement of comprehensive loss as other income (expense). The fair value of the warrants is estimated using an appropriate pricing model with the following inputs:

 

	As of December 31, 2015
	March 2015 Warrants				September 2013 Warrants				December 2012 Warrants				April 2011 Warrants				March 2011 Warrants				March 2010 Warrants
Strike price	$	2.08			$	2.50			$	1.83			$	0.65			$	0.65			$	2.02
Expected term (years)	4.22				2.72				1.98				1.31				0.18				0.24
Volatility %	75.85		%		74.70		%		76.37		%		65.60		%		47.98		%		71.41		%
Risk-free rate %	1.58		%		1.24		%		1.05		%		0.77		%		—		%		—		%

 

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

	As of December 31, 2014
	September 2013 Warrants				December 2012 Warrants				April 2011 Warrants				March 2011 Warrants				March 2010 Warrants
Strike price	$	2.50			$	1.90			$	0.65			$	0.65			$	2.15
Expected term (years)	3.72				2.98				2.31				1.18				1.24
Volatility %	75.60		%		76.85		%		78.24		%		77.38		%		77.12		%
Risk-free rate %	1.30		%		1.09		%		0.80		%		0.32		%		0.35		%

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

The changes in fair value of the warrant liability for the years ended December 31, 2015 and 2014 were as follows (in thousands):

 

	March 2015 Warrants				September 2013 Warrants				December 2012 Warrants				April 2011 Warrants				Other Warrant Issuances				Total
Warrant liability, January 1, 2014	$	—			$	22,950			$	18,060			$	5,069			$	2,886			$	48,965
Fair value of warrants granted	—				—				—				—				—				—
Fair value of warrants exercised	—				(12,713		)		(10,086		)		(2,906		)		(1,321		)		(27,026		)
Change in fair value of warrants	—				(7,677		)		(5,947		)		(1,538		)		(1,394		)		(16,556		)
Warrant liability, December 31, 2014	—				2,560				2,027				625				171				5,383
Fair value of warrants granted	10,296				—				—				—				—				10,296
Fair value of warrants exercised	—				—				—				—				—				—
Change in fair value of warrants	41				(627		)		(462		)		(88		)		(25		)		(1,161		)
Warrant liability, December 31, 2015	$	10,337			$	1,933			$	1,565			$	537			$	146			$	14,518

Warrants classified as equity

Equity-classified warrants consist of warrants issued in connection with consulting services provided to us. Additionally, on May 8, 2013 as a part of our Loan financing, we granted Oxford Financial LLC warrants to purchase 182,186 shares of common stock at an exercise price of $2.47 per share, which equaled to 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 $1.93 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.

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

10. Stock-Based Compensation

Options to Purchase Shares of Common Stock — The Company follows the provisions ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors and consultants, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.

For stock options and warrants granted in consideration for services rendered by non-employees, the company recognizes compensation expense in accordance with the requirements of ASC Topic 505-50. Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, is being re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options and warrants are fully vested.

The following table summarizes the components of stock-based compensation expense in the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015 , 2014, and 2013 (in thousands):

	2015				2014				2013
Research and development	$	350			$	484			$	754
General and administrative	1,591				4,903				2,150
Total stock-based compensation	$	1,941			$	5,387			$	2,904

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:

 

	2015			2014			2013
Risk free interest rate	1.67	%		2.01	%		1.57	%
Volatility	73.97	%		79.37	%		77.98	%
Expected lives (years)	6.16			6.16			6.25
Expected dividend yield	0.00	%		0.00	%		0.00	%

The weighted-average fair value of options granted during the years ended December 31, 2015 and 2014 was $1.07 and $1.74 per share, respectively.

The company’s expected common stock price volatility assumption is based upon the 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 of paying cash dividends in the future. 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.

 

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31, 2015 , there was $5,662,000 of unrecognized compensation cost related to outstanding options that is expected to be recognized as a component of the Company’s operating expenses over a weighted-average period of 2.85 years.

As of December 31, 2015 , an aggregate of 26,500,000 shares of common stock were reserved for issuance under the Company’s 2007 Incentive Plan, including 13,262,000 shares subject to outstanding common stock options granted under the plan and 8,177,000 shares available for future grants. The administrator of the plan determines the times when an option may become exercisable. Vesting periods of options granted to date have not exceeded four years . The options generally will expire, unless previously exercised, no later than ten years from the grant date.

The following table summarizes option activity of the company:

 

	Total Number of Shares (In Thousands)			Weighted Average Exercise Price
Outstanding at December 31, 2014	8,590			$	3.25
Granted	6,743			1.63
Exercised	(39	)		0.79
Cancelled	(2,032	)		2.31
Outstanding at December 31, 2015	13,262			$	2.58
Options exercisable at December 31, 2015	7,192			$	3.22

The weighted average remaining contractual life of options outstanding as of December 31, 2015, 2014, and 2013 was 7.63 , 7.35 , and 8.09 , respectively. The weighted average remaining contractual life of options exercisable as of December 31, 2015, 2014, and 2013 was 6.20 , 6.51 , and 6.76 , respectively.

The aggregate intrinsic value of outstanding options as of December 31, 2015, 2014, and 2013 was $539,000 , $610,000 , and $30,537,000 , respectively. The aggregate intrinsic value of exercisable options as of December 31, 2015, 2014, and 2013 was $518,000 , $509,000 , and $16,376,000 , respectively. The aggregate intrinsic value is calculated based on the positive difference between the closing fair market value of the Company's common stock and the exercise price of the underlying options.

The aggregate intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013 was $37,000 , $13,429,000 , and $890,000 respectively.

Employee Stock Purchase Plan — The Company also has an employee stock purchase plan (“ESPP”) which allows employees to contribute up to 15% of their cash earnings, subject to certain maximums, to be used to purchase shares of our common stock on each semi-annual purchase date. The purchase price is equal to 85% of the market value per share on either the first or last day of the semi-annual period, whichever is lower. Our ESPP is non-compensatory pursuant to the provisions of generally accepted accounting principles for share-based compensation expense. The ESPP contains an “evergreen provision” with annual increases in the number of shares available for issuance on the first day of each year through January 1, 2015 equal to the lesser of: (a)  250,000 shares increased on each anniversary of the adoption of the Plan by 1%  of the total shares of stock then outstanding and (b)  1,000,000 shares. As of December 31, 2015, an aggregate of 528,131 shares of common stock were authorized and available for future issuance under the ESPP. The company has issued 471,869 shares under the ESPP through December 31, 2015.

Restricted Stock Units — In addition to options to purchase shares of common stock, the Company may grant restricted stock units (“RSU”) as part of its compensation package. If granted, each RSU would be granted at the fair market value of the Company's common stock on the date of grant. Vesting is determined on a grant-by-grant basis.

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

11. Other Income

Other income is summarized as follows (in thousands):

 

		Year Ended December 31,
		2015				2014				2013
Realized gain on sale of marketable securities		$	—			$	—			$	3,911
Change in fair value of the contingent purchase price liability		509				170				(926		)
Miscellaneous other income		—				—				37
Total other income		$	509			$	170			$	3,022

12. Net Loss Per Share

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

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):

 

	December 31,
	2015			2014
Warrants to purchase common stock	22,308			8,540
Options to purchase common stock	13,262			8,590
Total	35,570			17,130

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

13. Income Taxes

The components of federal and state income tax expense are as follows (in thousands):

 

		As of December 31,
		2015				2014				2013
Current
Federal		$	—			$	—			$	—
State		—				—				—
Total current		—				—				—
Deferred expense (benefit)
Federal		332				—				894
State		33				—				158
Total deferred		365				—				1,052
Total income tax expense (benefit)		$	365			$	—			$	1,052

The components of net deferred tax assets are as follows (in thousands):

 

		As of December 31,
		2015				2014
Net operating loss carryforwards		$	75,221			$	53,950
Tax credit carryforwards		3,866				3,590
Stock based compensation		5,050				4,676
Other		1,430				190
Licensing deduction deferral		9,910				8,919
Gross deferred tax assets		95,477				71,325
Valuation allowance		(95,477		)		(71,325		)
Net deferred tax asset		$	—			$	—

The components of net deferred tax liabilities are as follows (in thousands):

 

		As of December 31,
		2015				2014
In-process research and development not subject to future amortization for tax purposes		$	5,418			$	5,053
Gross deferred tax liability		$	5,418			$	5,053

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The provision for income taxes differs from the provision computed by applying the federal statutory rate to net loss before income taxes as follows (in thousands):

 

		As of December 31,
		2015				2014				2013
Expected federal income tax benefit		$	(21,603	)		$	(12,447	)		$	(25,713	)
State income taxes after credits		(2,375		)		(1,283		)		(3,676		)
Unrealized gain on marketable securities		—				—				1,052
Changes in warrant value		(456		)		(6,503		)		17,283
Stock compensation		508				3,996				813
Effect of change in valuation allowance		24,029				17,275				11,408
Income tax credits		(276		)		(42		)		(240		)
Other		538				(996		)		125
		$	365			$	—			$	1,052

The Company has incurred net operating losses from inception. At December 31, 2015, the Company had domestic federal and state net operating loss carryforwards of approximately $200.0 million and $183.5 million , respectively, available to reduce future taxable income, which expire at various dates beginning in 2015 through 2035 . The Company also had federal and state research and development tax credit carryforwards of approximately $2.5 million and $2.1 million , respectively, available to reduce future tax liabilities and which expire at various dates beginning in 2023 through 2035 . The income tax expense for the year ended December 31, 2015 relates to indefinite lived deferred tax liabilities. The income tax expense for the year ended December 31, 2013 relates to the realized gain on sale of marketable securities.

At December 31, 2015, approximately $1.4 million of the Company's net operating loss carryforwards were generated as a result of deductions related to the exercises of stock options. If utilized, this portion of the Company's carryforwards, as tax effected, will be accounted for as a direct increase to contributed capital rather than as a reduction of that year's provision for income taxes. Net operating loss carryforwards created by excess tax benefits from the exercise of stock options are not recorded as deferred tax assets. The deferred tax assets related to net operating losses have been accordingly reduced by $0.6 million for the year ended December 31, 2015.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carryforwards and research and development credit carryforwards which could be utilized annually to offset future taxable income and taxes payable.

Based on an assessment of all available evidence including, but not limited to the Company’s limited operating history in its core business and lack of profitability, uncertainties of the commercial viability of its technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, the Company has concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred income tax valuation allowance has been recorded against these assets. The valuation allowance increased by $24.0 million and $17.4 million for the years ended December 31, 2015 and 2014, respectively.

The Company files income tax returns in the U.S. federal, Massachusetts, Colorado, California, Connecticut, Georgia, Oregon, and Texas jurisdictions. The Company is subject to tax examinations for the 2010 tax year and beyond. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months . The Company has not incurred any interest or penalties. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the financial statements as general and administrative expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

14. License Agreements

As part of its business, the Company enters into licensing agreements with third parties that often require milestone and royalty payments based on the progress of the licensed asset through development and commercial stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency, and the Company may be required to make royalty payments based upon a percentage of net sales of the product. The expenditures required under these arrangements in any period may be material and are likely to fluctuate from period to period.

These arrangements sometimes permit the Company to unilaterally terminate development of the product and thereby avoid future contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives.

In conjunction with the acquisition of NeuVax ^TM , the Company acquired rights and assumed obligations under a license agreement among Apthera and The University of Texas M. D. Anderson Cancer Center (“MDACC”) and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. (“HJF”) which grants exclusive worldwide rights to a U.S. patent covering the nelipepimut-S peptide and several U.S. and foreign patents and patent applications covering methods of using the peptide as a vaccine. Under the terms of this license, we are required to pay an annual maintenance fee of $200,000 , we paid a milestone payment of $200,000 upon commencing the Phase 3 PRESENT trial of NeuVax and other clinical milestone payments, as well as royalty payments based on sales of NeuVax or other therapeutic products developed from the licensed technologies.

Effective December 3, 2012, we entered into a license and supply agreement with ABIC Marketing Limited, a subsidiary of Teva Pharmaceuticals (“ABIC”), under which we granted ABIC exclusive rights to seek marketing approval in Israel for our NeuVax product candidate for intradermal injection for the treatment of breast cancer following its approval by the FDA or the European Medicines Agency, and to market, sell and distribute NeuVax in Israel assuming such approval is obtained. ABIC’s rights also include a right of first refusal in Israel for all future indications for which NeuVax may be approved. Under the license and supply agreement, ABIC will assume responsibility for regulatory registration of NeuVax in Israel, provide financial support for local development, and commercialize the product in the region in exchange for making royalty payments to us based on future sales of NeuVax. ABIC also agrees in the license and supply agreement to purchase from us all supplies of NeuVax at a price determined according to a specified formula.

On March 18, 2013, we acquired Abstral ^® (fentanyl) sublingual tablets for sale and distribution in the United States from Orexo AB (ORX.ST), a specialty pharmaceutical company based in Sweden. Abstral has been approved by the U.S. Food and Drug Administration (FDA) and is a transmucosal immediate-release fentanyl (TIRF) product.

Under our agreement with Orexo, we assumed responsibility for the U.S. commercialization of Abstral and for all regulatory and reporting matters in the U.S. We also agreed to establish and maintain through 2015 a specified minimum commercial field force to market, sell and distribute Abstral and to use commercially reasonable efforts to reach the specified sales milestones. Orexo is entitled to reacquire the U.S. rights to Abstral from us for no consideration if we breach our obligations to establish and maintain the requisite sales force throughout the marketing period. We launched U.S. commercial sales of Abstral in the fourth quarter of 2013.

In exchange for the U.S. rights to Abstral, (1) we paid Orexo $10 million in March 2013 and a  $5 million milestone payment in cash in October 2013 upon the approval by the FDA of a specified U.S. manufacturer of Abstral; and (2) we agreed to pay to Orexo: (a)  three one-time future cash milestone payments based on our net sales of Abstral; and (b) a low double-digit royalty on future net sales. No further milestone or royalty payments will be due after the date on which all claims of the last remaining licensed patents expire (currently 2019 ) or become invalidated by a governmental agency.

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On November 19, 2015, Galena Biopharma, Inc. (the “Company”) and Sentynl Therapeutics Inc., a Delaware corporation (“Sentynl”), entered into and closed upon an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to Sentynl and Sentynl agreed to purchase from the Company, certain assets of the Company related to and including its Abstral ^® (fentanyl) sublingual tablets product (“Abstral”). The assets sold and assigned to Sentynl pursuant to the Purchase Agreement included all of the Company’s rights and interests in the Asset Purchase Agreement by and between the Company and Orexo AB (“Orexo”) dated March 15, 2013, and the License Agreement by and between the Company and Orexo dated March 18, 2013 (collectively, the “Orexo Agreements”). The Company’s future obligations under the Orexo Agreements were assumed by Sentynl pursuant to such assignment. The Purchase Agreement further provides that the Company will continue to be responsible for any pre-closing liabilities and obligations related to Abstral, as well for certain channel liabilities related to Abstral for a period of time post-closing. In connection with the transactions contemplated by the Purchase Agreement, the Company assigned to Sentynl all of its rights to and interests in the Orexo Agreements. In connection with such assignment, Orexo released the Company from any future liabilities and obligations under the Orexo Agreements.

 

The total potential consideration payable to the Company under the Purchase Agreement is $12 million, comprised of an $8 million upfront payment and up to an aggregate of $4 million, consisting of two one-time payments based on Sentynl's achievement of "net sales" of Abstral in amounts ranging from $25 million to $35 million.

On January 12, 2014, we acquired worldwide rights to anagrelide controlled release (CR) formulation, which we renamed GALE-401, through our acquisition of Mills Pharmaceuticals, LLC ("Mills"), and Mills became a wholly owned subsidiary. GALE-401 contains the active ingredient anagrelide, an FDA-approved product that has been in use since the late 1990s for the treatment of myleoproliferative neoplasms (MPNs). Mills holds an exclusive license to develop and commercialize anagrelide CR formulation, pursuant to a license agreement with BioVascular, Inc. Under the terms of the license agreement, Mills has agreed to pay BioVascular, Inc. a mid-to-low single digit royalty on net revenue from the sale of licensed products as well as future cash milestone payments based on the achievement of specified regulatory milestones. We are responsible for patent prosecution and maintenance.

On July 17, 2014, we entered into a definitive license and supply agreement with MonoSol Rx, LLC (MonoSol) for the U.S. commercial rights to Zuplenz ^® (ondansetron) Oral Soluble Film, an FDA approved product in adult patients for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV). Zuplenz is also approved for pediatric patients with moderately emetogenic CINV. In exchange for the U.S. rights to Zuplenz, in connection with the effectiveness of the license and transfer to us of the New Drug Application (NDA) for Zuplenz, we paid MonoSol a total of $5 million in cash and shares of our common stock. In addition to these payments, we agreed to pay MonoSol $0.5 million upon the earlier of (a) the occurrence of a specified managed care milestone and (b) December 31, 2014, (ii) $0.25 million within 30 days after MonoSol’s payment of applicable fees relating to the notice of allowance by the United States Patent and Trademark Office of a U.S. patent with composition claims covering Zuplenz that extend beyond 2028 , (iii) future cash milestone payments of up to an aggregate of $16.5 million , consisting of six one-time payments based on our achievement of "net sales" of Zuplenz in amounts ranging from $20 million to $100 million , and (iv) a double-digit royalty on future “net sales.”

Under the terms of the license agreement, we assumed responsibility for the commercialization of Zuplenz and for all regulatory and reporting matters in the U.S. We also agreed in the license and supply agreement to use our best commercial efforts to begin commercializing Zuplenz in the U.S. on or before December 31, 2014 in accordance with a joint commercialization plan to be established by the company and MonoSol. We also agreed that, until net sales of Zuplenz exceed a specified minimum amount or a competing product has been approved by the FDA and is placed into the market for sale, we will maintain a specified minimum number of field sales force personnel on specified terms.

 

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On December 17, 2015, Galena Biopharma, Inc. (the “Company”) and Midatech Pharma PLC, a public limited company organized under the laws of England and Wales (“Midatech”), entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to Midatech and Midatech agreed to purchase from the Company, certain assets of the Company related to and including its Zuplenz ^® (ondansetron) Oral Soluble Film (“Zuplenz”). The assets to be sold and assigned to Midatech pursuant to the Purchase Agreement include all of the Company’s rights and interests in the License and Supply Agreement by and between the Company and MonoSol Rx, LLC (“MonoSol”) dated July 17, 2014 (the “MonoSol License”). The Company’s future obligations under the MonoSol agreement will be assumed by Midatech pursuant to such assignment. The Purchase Agreement further provides that the Company will continue to be responsible for any pre-closing liabilities and obligations related to Zuplenz, as well for certain channel liabilities related to Zuplenz for a period of time post-closing. The transaction was completed on December 24, 2015.

The total potential consideration payable to the Company under the Purchase Agreement is $29.75 million, comprised of an $3.75 million upfront payment upon the closing and up to an aggregate of $26 million, consisting of four one-time payments based on Midatech's achievement of "net sales" of Zuplenz in amounts ranging from $12 million to $70 million.

Through a separate agreement with MonoSol entered into on December 16, 2015 (the “MonoSol License Amendment”), (i) the Company and MonSol agreed to amend the MonoSol License in order to reduce the number of field representatives that the Company is required to maintain with respect to Zuplenz, and (ii) the Company agreed to pay MonoSol $900,000 of the upfront fee payable to the Company under the Purchase Agreement and 20% of any future milestone payments received by the Company under the Purchase Agreement.

On December 24, 2015, the Company and Midatech closed upon the Purchase Agreement. In connection with the closing of the transactions contemplated by the Purchase Agreement, the Company assigned to Midatech all of its rights to and interests in the Company’s License and Supply Agreement, dated July 17, 2014 (the “MonoSol License”). As a result of such assignment, Midatech assumed all of the Company’s obligations under the MonoSol License.

15. Related Party Transactions

Since 2011, the Company has retained TroyGould PC as outside corporate counsel. Sanford J. Hillsberg, the Chairman of the Company, is a senior lawyer with TroyGould PC. The Company incurred $577,000 , $553,000 , and $577,000 for services provided by TroyGould PC during the years ended December 31, 2015, 2014, and 2013, respctively. At December 31, 2015 and 2014 Galena owed $20,000 and $97,000 , respectively, to TroyGould PC.

16. Employee Benefit Plan

The Company sponsors a 401(k) retirement savings plan (the “Plan”). Participation in the Plan is available to full-time employees who meet eligibility requirements. Eligible employees may defer a portion of their salary as defined by Internal Revenue Service regulations. The Company may make matching contributions on behalf of all participants in the 401(k) Plan in an amount determined by the Company’s board of directors. The Company may also make additional discretionary profit sharing contributions in amounts as determined by the Board of Directors, subject to statutory limitations. Matching and profit-sharing contributions, if any, are subject to a vesting schedule; all other contributions are at all times fully vested. The Company intends the 401(k) Plan, and the accompanying trust, to qualify under Sections 401(k) and 501 of the Internal Revenue Code so that contributions by employees to the 401(k) Plan, and income earned (if any) on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that the Company will be able to deduct its contributions, if any, when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. The Company made matching contributions totaling $115,000 for the year ended December 31, 2015. For the years ending December 31, 2014 and 2013, the Company made matching contributions totaling $70,000 and $35,000 , respectively

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

17. Discontinued Operations

As part of the Company's strategic objective to focus its resources on its development pipeline, our management and board of directors decided and committed to pursue a plan to sell or otherwise divest the Company’s commercial business during the third quarter of 2015. The Company’s commercial business was comprised of two products: Abstral ^® (fentanyl) Sublingual Tablets and Zuplenz ^® (ondansetron) Oral Soluble Film. As described in Note 14, both products were sold in the fourth quarter of 2015.

The Company met the relevant criteria for reporting the commercial business as held for sale and in discontinued operations in the accompanying financial statements as of December 31, 2015 and 2014 and for the years then ended, pursuant to FASB Topic 205-20, Presentation of Financial Statements--Discontinued Operations, and FASB Topic 360, Property, Plant, and Equipment. The Company assessed the commercial business net asset group for impairment pursuant to FASB Topic 360, as discussed in Note 1, determining that the carrying value exceeded the fair value of the assets, therefore the company recorded a $8.1 million impairment charge as of September 30, 2015.

The Company entered into an agreement with a third party firm to assist the company with the divestiture of its commercial operations including identifying potential acquirers. Pursuant to the terms of the agreement, in the event the Company successfully completed a divestiture through the sale of its commercial operations to a third-party, the Company paid a success fee to the third party firm in an amount of $0.9 million , reimbursement for reasonable out-of-pocket expenses and agreed to pay 5% of realized future revenue and payment streams.

The Company entered into compensatory arrangements related to the divestiture of our commercial business with certain members of commercial management. Under the terms of these arrangements, if the Company met certain sales and margin numbers in the fourth quarter of 2015 and successfully completes a divestiture through sale of its commercial operations to a third-party, the Company paid a retention fee to the three employees in a combined total amount equal to $352,000 or 3% of cash consideration received as upfront payment in the transactions. These employees will also receive severance payments equal to one month’s salary for between four and seven months. In addition to these compensatory agreements loss from discontinued operations includes one-time termination benefits provided to employees that were part of the commercial business and did not accept employment opportunities at the companies who purchased Abstral and Zuplenz.

The following table describes the net proceeds from the sale and the assets and liabilities sold, net of selling costs (in thousands):

	Sale of Abstral and related assets on November 19, 2015				Sale of Zuplenz and related assets on December 24, 2015
Net proceeds from sales
Total consideration	$	8,348			$	3,750
Less selling costs*	(815		)		(1,050		)
Proceeds from sale, net of selling costs	$	7,533			$	2,700

*Note selling costs related to the sale of Zuplenz and related assets are included in accrued liabilities and were paid in the first quarter of 2016.

In addition to the upfront proceeds received from the sale of Abstral and Zuplenz and their related assets, the Company is eligible to receive up to $30 million in future milestone payments based on future net revenue of the products. The additional consideration will be recognized in the period that the net revenue milestones are achieved.

The following table presents a reconciliation of the carrying amounts of assets and liabilities of the commercial operations to assets held for sale in the balance sheets (in thousands):

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

	2015				2014
Carrying amounts of assets included as part of discontinued operations:
Accounts receivable	$	392			$	1,535
Inventories	—				655
Prepaid expenses and other current assets	—				1,747
Equipment and furnishings, net	—				270
Abstral rights, net	—				14,533
Zuplenz rights	—				8,101
Goodwill	—				172
Total current assets of discontinued operations	$	392			$	27,013
Carrying amounts of liabilities included as part of discontinued operations:
Accounts payable	$	1,491			$	385
Accrued expenses and other current liabilities	4,434				6,784
Total current liabilities of discontinued operations	$	5,925			$	7,169

The following table represents the components attributable to the commercial business in 2015, 2014, and 2013 that are presented in the consolidated statements of comprehensive loss as discontinued operations (in thousands):

	2015				2014				2013
Net revenue	$	9,734			$	9,319			$	2,487
Cost of revenue	(1,780		)		(1,403		)		(520		)
Amortization of certain acquired intangible assets	(921		)		(440		)		(131		)
Research and development	(355		)		(680		)		(651		)
Selling, general, and administrative	(17,655		)		(15,118		)		(6,536		)
Impairment charge form classification as held for sale	(8,071		)		—				—
Loss on sale of commercial business assets	(4,549		)		—				—
Severance and exit costs	(1,349		)		—				—
Loss from discontinued operations	$	(24,946	)		$	(8,322	)		$	(5,351	)

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

18. Selected Quarterly Financial Data (Unaudited)

The following amounts are in thousands, except per share amounts:

		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
2015
Net revenue		$	2,750			$	3,382			$	2,166			$	1,436
Gross profit on net revenue (1)		$	2,357			$	2,914			$	1,454			$	1,229
Net loss		$	(10,537	)		$	(15,660	)		$	(18,026	)		$	(19,678	)
Net loss per share		$	(0.08	)		$	(0.10	)		$	(0.11	)		$	(0.12	)
2014
Net revenue		$	2,173			$	2,331			$	1,620			$	3,195
Gross profit on net revenue (1)		$	1,751			$	1,886			$	1,303			$	2,536
Net loss		$	(2,536	)		$	(19,941	)		$	(6,173	)		$	(7,506	)
Net loss per share		$	(0.02	)		$	(0.17	)		$	(0.05	)		$	(0.06	)

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GALENA BIOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

19. Subsequent Events

The Company evaluated all events or transactions that occurred after December 31, 2014 up through the date these financial statements were issued. Other than as disclosed elsewhere in the notes to the condensed consolidated financial statements, the Company did not have any material recognizable or unrecognizable subsequent events.

January 2016 Underwritten Public Offering - On January 12, 2016 the cCompany closed an underwritten public offering of 19,772,727 units at a price to the public of $1.10 per unit for gross proceeds of $21.8 million (the January 2016 Offering"). Each unit consists of one share of common stock, and a warrant to purchase 0.60 of a share of common stock at an exercise price of $1.42 per share. The January 2016 Offering included an over-allotment option for the underwriters to purchase an additional 2,965,909 shares of common stock and/or warrants to purchase up to 1,779,545 shares of common stock. On January 12, 2016, the underwriters exercised their over-allotment option to purchase warrants to purchase an aggregate of 1,779,545 shares of common stock. The underwriters did not exercise their over-allotment option to purchase 2,965,909 shares of our common stock. The total net proceeds of the January 2016 Offering, including the exercise of the over-allotment option to purchase the warrants, were $20.1 million, after deducting underwriting discounts and commissions and offering expense payable by the company.

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and Principal Accounting Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Principal Accounting Officer have concluded that our disclosure controls and procedures are effective.

Evaluation of Disclosure Controls and Procedure Management’s report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Accounting Officer, we conducted evaluations of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluations under the framework in Internal Control-Integrated Framework (2013) issued by the COSO, our Chief Executive Officer and Principal Accounting Officer concluded that our internal control over financial reporting was effective as of December 31, 2015.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report includes an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.

There have been no changes in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Galena Biopharma, Inc.

We have audited Galena Biopharma, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Galena Biopharma, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Galena Biopharma, Inc. as of December 31, 2015 and 2014, and the consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 , and our report dated March 10, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ Moss Adams LLP

Portland, Oregon

March 10, 2016

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ITEM 15. EXHIBITS

Exhibit Number		Description
23.1		Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.**
31.1		Sarbanes-Oxley Act Section 302 Certification of Mark W. Schwartz, Ph.D.**
31.2		Sarbanes-Oxley Act Section 302 Certification of John T. Burns.**
32.1		Sarbanes-Oxley Act Section 906 Certification of Mark W. Schwartz, Ph.D., and John T. Burns.**
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema.
101.CAL		XBRL Taxonomy Extension Calculation.
101.DEF		XBRL Taxonomy Extension Definition.
101.LAB		XBRL Taxonomy Extension Label.
101.PRE		XBRL Taxonomy Extension Presentation.
101.PRE		XBRL Taxonomy Extension Presentation.

**	Filed herewith.

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