What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-23 compared with 2020-03-13 · 402 added, 451 removed, 503 unchanged (63% of the section changed)

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Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

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(the “Company”), as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 2.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for Contingent Consideration Liability

As described in Note 6 to the consolidated financial statements, the Company’s contingent consideration liability balance was $4.6 million as of December 31, 2020.

The contingent consideration liability relates to the Company’s future remaining contingent payments arising from a historical acquisition and is based on the achievement of certain development and commercial milestones relating to one of the Company’s drug candidates.

The contingent consideration liability is recorded at its estimated fair value which management revalues periodically with changes in the estimated fair value reflected in non-operating income (expense), net in the consolidated statements of operations.

Management estimates the fair value of the contingent consideration liability using a probability-weighted, discounted cash flow model that factors in observable inputs including changes in discount periods and rates, and unobservable inputs including changes in the probability and anticipated timing for the achievement of stated development and commercial milestones, and which is considered a Level 3 fair value measurement.

The valuation of the contingent consideration liability requires management to make significant assumptions and complex judgements about the potential future value of the contingent payment.

These assumptions include the assessment of the probabilities and timing of achievement of certain developmental and commercial milestones, and discount rates used.

We identified the evaluation of the contingent consideration liability as a critical audit matter due to the significant estimates and assumptions management makes to quantify and to record the amount, including the determination of various unobservable inputs.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of assumptions including the unobservable inputs.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the appropriateness of management’s process for determining the valuation of the contingent consideration liability by:

• Evaluating the methodology, including management’s identification of the significant assumptions, utilized to calculate the amount;

• Testing the mathematical accuracy and the appropriateness of the formulaic calculation.

• Evaluating the reasonableness of the significant assumptions used by management:

• Testing the completeness, accuracy and relevance of underlying data used in management’s estimate;

• Performing inquiries with appropriate non-financial personnel regarding development activities and other factors to corroborate management’s assertions regarding qualitative judgments about the timing of certain stated development and commercial milestones.

• Developing an independent expectation of the contingent consideration liability amount based on historical and current discount rate trends, the passage of time, progress and status of the Company’s on-going development activity.

/s/ Moss Adams LLP

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Stock subscription receivable — 308

Contract asset 1,128 —

Prepaid expenses and other current assets 395 557

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In-process research and development 5,700 5,700

Goodwill 1,914 1,914

Deposits and other assets 614 536

Total assets $ 46,049 $ 16,609

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Operating lease liability 166 217

Deferred revenue 5,600 —

Total current liabilities 12,336 5,290

Operating lease liability, non-current 825 —

Deferred tax liability 239 262

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Series A convertible preferred stock, 17,500 shares designated;

no shares issued and outstanding at December 31, 2019 and December 31, 2018

0 shares issued and outstanding at December 31, 2020 and December 31, 2019

Common stock, $ 0.0001 par value;

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Year Ended December 31,

Licensing revenue $ 1,900 $ —

Operating expenses:

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In-process research and development impairment charge — 2,833

Total operating expenses and operating loss

Total operating expenses ( 18,882 ) ( 20,041 )

Loss from operations ( 16,982 ) ( 20,041 )

Non-operating income (expense):

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Change in fair value of contingent consideration 279 ( 586 )

Loss on settlement of liability-classified warrants

Gain on extinguishment of debt

Interest income (expense), net

Interest income, net 26 118

Total non-operating income, net 208 668

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Income tax benefit ( 17 ) ( 81 )

Net loss ( 16,757 ) ( 19,292 )

Deemed dividend arising from warrant modifications ( 78 ) ( 8,416 )

Deemed dividend arising from beneficial conversion feature of convertible preferred stock

Deemed dividend arising from the issuance of common stock to Series A convertible preferred stockholders under most favored nation provision

Impact of anti-dilution protection on liability-classified warrants — ( 243 )

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(Amounts in thousands, except share amounts)

Preferred Stock

Additional Paid-In Capital

Accumulated Deficit

Total Stockholders' Equity

Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity

Shares Amount

Balance at January 1, 2019 440,529 $ 1 $ 87,099 $ ( 81,855 ) $ 5,245

Issuance of common stock and common stock warrants, net of issuance costs 1,051,441 — 16,144 — 16,144

Issuance of common stock for exercise of warrants, net of offering costs 2,102,744 — 3,658 — 3,658

Issuance of common stock upon exercise of pre-funded warrants 1,485,156 — 8 — 8

Issuance of Series A convertible preferred stock, net of offering costs

Fair value of liability-classified warrants issued in connection with Series A convertible preferred stock offering

Beneficial conversion feature arising from Series A convertible preferred stock

Deemed dividend arising from beneficial conversion feature of Series A convertible preferred stock

Conversion of Series A convertible preferred stock

Issuance of common stock to Series A convertible preferred stockholders under most favored nation provision

Deemed dividend arising from the issuance of common stock to Series A convertible preferred stockholders under most favored nation provision

Impact of anti-dilution protection on liability-classified warrants — — ( 243 ) — ( 243 )

Convertible preferred stock dividends

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

Issuance of common stock in connection with litigation settlements

Issuance of common stock upon conversion of promissory notes

Issuance of common stock in connection with warrant exchange agreements

Issuance of common stock upon vesting of restricted stock units 230 — — — —

Stock-based compensation — — 573 — 573

Net loss — — — ( 19,292 ) ( 19,292 )

Balance at December 31, 2019 5,080,100 1 107,239 ( 101,147 ) 6,093

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Issuance of common stock upon exercise of pre-funded warrants 448,800 — 4 — 4

Impact of anti-diultion protection on liability-classified warrants

Issuance of common stock upon vesting of restricted stock units

Stock-based compensation — — 578 — 578

Net loss — — — ( 16,757 ) ( 16,757 )

Balance at December 31, 2020 14,254,554 $ 1 $ 145,864 $ ( 117,904 ) $ 27,961

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Cash flows from operating activities:

Net loss $ ( 16,757 ) $ ( 19,292 )

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

Gain on extinguishment of debt

Non-cash In-process research and development impairment charge — 2,833

Non-cash interest expense

Deferred income taxes ( 23 ) ( 95 )

Non-cash stock-based compensation 578 573

Fair value of common stock issued in connection with litigation settlements

Amortization of contract asset 282 —

Change in operating lease right of use assets 95 —

Change in fair value of common stock warrants 97 ( 1,136 )

Change in fair value of contingent consideration ( 279 ) 586

Loss on settlement of liability-classified warrants

Changes in operating assets and liabilities:

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Accrued expenses and other current liabilities 742 ( 1,048 )

Deferred revenue 5,600 —

Net cash used in operating activities ( 10,417 ) ( 17,643 )

Cash flows from financing activities:

Proceeds from issuance of Series A convertible preferred stock and common stock warrants, net of issuance costs

Proceeds from issuance of common stock, net of issuance costs 29,599 15,971

Proceeds from exercise of warrants 8,535 3,598

Dividends paid

Principal payments on long-term debt

Collection of stock subscription receivable 308 —

Net cash provided by financing activities 38,442 19,569

Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents

Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents 28,025 1,926

Cash, cash equivalents, restricted cash, and restricted cash equivalents at the beginning of year 7,377 5,451

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Cash received during the year for interest $ 26 $ 118

Cash paid during the year for interest

Supplemental disclosure of non-cash investing and financing activities:

Fair value of liability-classified warrants issued in connection with Series A convertible preferred stock recorded as issuance cost

Deemed dividend arising from beneficial conversion feature of Series A convertible preferred stock

Repayment of interest and principal on long-term debt through issuance of common stock

Supplemental disclosures:

Stock subscription receivable $ — $ 308

Contract asset within accounts payable $ 1,410 $ —

Reclassification of warrant liabilities upon exchange for shares of common stock $ 94 $ 68

Impact of anti-dilution protection on liability-classified warrants $ — 0 $ 243

Debt issued in connection with warrant exchange agreements

Deferred offering costs included in accounts payable and accrued expenses $ 181 $ 135

Right-of-use assets recorded upon adoption of ASC 842

Right-of-use assets recorded $ 976 $ 549

See accompanying notes to these consolidated financial statements.

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(the "Company" or "SELLAS") is a late-stage clinical biopharmaceutical company focused on novel cancer immunotherapeutics for a broad range of cancer indications.

SELLAS’ lead product candidate, galinpepimut-S ("GPS"), is licensed from Memorial Sloan Kettering Cancer Center and targets the Wilms Tumor 1 ("WT1") protein, which is present in an array of tumor types.

SELLAS’ lead product candidate, galinpepimut-S ("GPS"), is licensed from Memorial Sloan Kettering Cancer Center ("MSK") and targets the Wilms Tumor 1 ("WT1") protein, which is present in an array of tumor types.

GPS has potential as a monotherapy or in combination to address a broad spectrum of hematologic malignancies and solid tumor indications.

SELLAS’ second product candidate, nelipepimut-S ("NPS"), is a HER2-directed cancer immunotherapy with potential for the treatment of patients with early stage breast cancer with low to intermediate HER2 expression, otherwise known as HER2 1+ or 2+, which includes triple negative breast cancer patients, following standard of care.

As used in this Annual Report on Form 10-K, the words the "Company," and "SELLAS" refer to SELLAS Life Sciences Group, Inc.

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Upon completion of the Merger, the Company's name changed from "Galena Biopharma, Inc." to "SELLAS Life Sciences Group, Inc." and the Company's financial statements became those of Private SELLAS.

The Company has incurred recurring losses and negative cash flows from operations since inception and has an accumulated deficit of $101.1 million as of December 31, 2019.

The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its product candidates currently in development.

Substantial additional financing will be needed by the Company to fund its operations and to commercially develop its products candidates.

No assurance can be given that any such financing will be available when needed or that the Company's research and development efforts will be successful.

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On January 9, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors named therein (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “January 2020 Registered Offering”), (i) an aggregate of 1,189,000 shares of common stock, par value $0.0001 per share, of the Company, at an offering price of $3.9825 per share and (ii) an aggregate of 448,800 pre-funded warrants exercisable for shares of Common Stock (the “Pre-Funded Warrants”) at an offering price of $3.9725 per Pre-Funded Warrant, for gross proceeds of approximately $6.5 million before deducting the placement agent fee and related offering expenses.

The net proceeds to the Company from the January 2020 Registered Offering, after deducting underwriting discounts and commissions and other estimated offering expenses, and excluding the exercise of any warrants, was approximately $5.9 million .

In 2019, the Company raised $19.6 million , net of issuance costs, through the issuance of securities and the exercise of warrants.

Please see Notes 10 and 11 for further information.

The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions.

In accordance with Accounting Standards Codification ("ASC") 205-40, Presentation of Financial Statements - Going Concern , the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the that the consolidated financial statements are issued.

Since inception, the Company has incurred recurring losses and negative cash flows from operations since inception and has an accumulated deficit of $ 117.9 million as of December 31, 2020.

During the year ended December 31, 2020, the Company incurred a net loss of $ 16.8 million and used $ 10.4 million of cash in operations.

The Company continues to expect to generate operating losses and negative cash flows for the next few years and will need additional funding to support its planned operating activities through profitability.

The transition to profitability is dependent upon the successful development, approval, and commercialization of the Company's product candidates and the achievement of a level of revenues adequate to support its cost structure.

As of December 31, 2020, the Company had cash and cash equivalents of $ 35.3 million.

During the first quarter of 2021, the Company also received $ 3.0 million in cash arising from the exercise of warrants to acquire shares of the Company's common stock.

The Company expects its cash and cash equivalents, together with the $ 3.0 million received from the exercise of warrants to acquire shares of common stock in the first quarter of 2021, will be sufficient to fund current planned operations for at least the next twelve months from the date of issuance of these financial statements, though it may pursue additional capital resources through public or private equity or debt financings or by establishing additional collaborations with other companies.

Management's expectations with respect to its ability to fund current planned operations is based on estimates that are subject to risks and uncertainties.

If actual results are different from management's estimates, the Company may need to seek additional strategic or financing opportunities sooner than would otherwise be expected.

There is no guarantee that any of these strategic or financing opportunities will be executed or executed on favorable terms, and some could be dilutive to existing stockholders.

If the Company is unable to obtain additional funding on a timely basis, it may be forced to significantly curtail, delay, or discontinue one or more of its planned research and development programs or be unable to expand its operations or otherwise prepare for the potential regulatory approval and commercialization of its product candidates, assuming positive data.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company currently does not have any commitments to obtain additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all.

If the Company cannot obtain the necessary funding, it will need to delay, scale back or eliminate some or all of its research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that it might otherwise seek to develop or commercialize independently, consider various other strategic alternatives, including a merger or sale of the Company, or cease operations.

If the Company engages in collaborations, it may receive lower consideration upon commercialization of such products than if it had not entered into such arrangements or if it entered into such arrangements at later stages in the product development process.

The Company has evaluated the guidance of Accounting Standards Codification ("ASC") 205-40, Presentation of Financial Statements - Going Concern , in order to determine whether there is substantial doubt about its ability to continue as a going concern for one year from the date its financial statements are available to be issued.

The Company has prepared its consolidated financial statements assuming that it will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business.

The Company has incurred net losses since inception and it expects to generate losses from operations for the foreseeable future primarily due to research and development costs for its product candidates, which raises substantial doubt about the Company’s ability to continue as a going concern.

Various internal and external factors will affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outside of the Company’s control.

The length of time and cost of developing and commercializing these product candidates and/or failure of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

As of December 31, 2019 , the Company had cash and cash equivalents of $7.3 million and restricted cash and cash equivalents of $0.1 million .

In addition, the Company had outstanding accounts payable and accrued expenses of $5.3 million as of December 31, 2019 .

The Company expects its existing cash and cash equivalents as of December 31, 2019 , together with the net proceeds of $5.9 million the Company received in the January 2020 Registered Direct Offering, will enable the Company to fund its operating expenses through the end of 2020.

Basis of Presentation and Significant Accounting Policies

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All significant intercompany accounts and transactions have been eliminated upon consolidation.

Unless the context otherwise indicates, reference in these notes to the "Company" refer to SELLAS Life Sciences Group, Inc., and its wholly owned subsidiaries, Private SELLAS, SLSG Limited, LLC, Sellas Life Sciences Limited, Sellas Life Sciences Group UK Ltd., and Apthera, Inc.

The functional currency of the Company's non-U.S.

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On an ongoing basis, the Company evaluates its estimates using historical experience and other factors, including the current economic environment.

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Actual results could differ significantly from those estimates.

Reverse Stock Split

The Company effected a one-for-50 reverse stock split of its common stock on November 6, 2019.

The reverse stock split combined 50 shares of the Company's issued and outstanding common stock into one share of common stock and correspondingly adjusted the exercise prices for options and warrants that were issued and outstanding.

Options granted were proportionately adjusted for the reverse stock split.

These consolidated financial statements give retroactive effect to such reverse stock split and all share and per share amounts have been adjusted accordingly.

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentation.

These reclassifications had no effect on the Company's loss from operations, net loss, and net loss per share.

Segment Information

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The Company views its operations and manages its business in one segment.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash equivalents and accounts payable, approximate fair value due to the short-term nature of those instruments.

The carrying amounts of the Company’s contingent consideration and liability-classified warrants are each recorded at their estimated fair value.

The fair value of the contingent consideration and warrants utilize certain unobservable inputs that fall within Level 3 of the fair value hierarchy.

The Company measures certain financial assets and liabilities at fair value on a recurring basis.

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

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

Level 2—Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;

quoted prices in markets that are not active;

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of December 31, 2020 and 2019, the carrying amounts of the Company’s financial instruments, including cash equivalents and accounts payable, approximate fair value due to the short-term nature of those instruments and were categorized as Level 1.

As of December 31, 2020 and 2019, the carrying amounts of the Company’s contingent consideration and liability-classified warrants are each recorded at their estimated fair value.

The fair value of the contingent consideration and warrants utilize certain unobservable inputs that fall within Level 3 of the fair value heirarchy.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash on deposit with multiple financial institutions, the balances of which frequently exceed federally insured limits.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a new coronavirus to be a “pandemic”.

The COVID-19 pandemic continues to present substantial public health and economic challenges around the world which have impacted, and will continue to impact, millions of individuals and business worldwide.

Efforts to contain the spread of the coronavirus since March 2020 have led to travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns.

The Company is continuously monitoring the impact of the pandemic on its clinical development programs.

The full extent to which the COVID-19 pandemic directly or indirectly impacts the Company's business, results of operations and financial condition will depend on future developments that are highly uncertain, subject to change and cannot be predicted with confidence, including the actions taken to contain or treat COVID-19, the overall duration of the outbreak, the availability, effectiveness and uptake of vaccines for COVID-19, the emergence of new variants of COVID-19 and whether existing vaccines are effective with respect to such variants, and the emergence of new geographic hotspots where the coronavirus is spreading more rapidly.

In particular, the continued spread of the coronavirus globally could adversely impact the Company's clinical trial operations and could have an adverse impact on our business and the financial results.

Cash and Cash Equivalents

The Company considers any highly liquid investments, such as money market funds, with an original maturity of three months or less to be cash and cash equivalents.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Restricted Cash and Cash Equivalents

Restricted cash consists of certificates of deposit on hand with the Company’s financial institutions as collateral for its corporate credit cards.

The following table provides a reconciliation of the components of cash, cash equivalents, restricted cash, and restricted cash equivalents reported in the Company's consolidated balance sheets to the total amount presented in the consolidated statements of cash flows (in thousands):

Cash and cash equivalents $ 35,302 $ 7,277

Restricted cash and cash equivalents 100 100

Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 35,402 $ 7,377

The Company maintained $ 0.1 million and $ 0.1 million as of December 31, 2020 and December 31, 2019, respectively, on hand with the Company's financial institutions as collateral for its corporate credit cards.

Stock Subscription Receivable

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On January 2, 2020, the Company received the $ 0.3 million gross proceeds for the sale of shares of common stock and therefore recorded a stock subscription receivable of $ 0.3 million as of December 31, 2019.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Intangible Assets

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In December 2019, the Company abandoned future development efforts for the IPR&D asset associated with the GALE-301 and 302 product candidates and recorded an impairment charge of $ 2.8 million, which was equal to the acquired value.

In the fourth quarter of 2018, the Company abandoned future development efforts for the IPR&D asset associated with the GALE-401 product candidate and recorded an impairment charge of $9.1 million and also recorded a separate charge of $0.5 million for deposits and other assets related to upfront milestone payments for this product candidate.

Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed.

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The Company performs its annual goodwill impairment test at the reporting unit level on October 1 of each fiscal year or more frequently if changes in circumstances or the occurrence of events suggest that an impairment exists.

The Company did not recognize any impairment of goodwill during the years ended December 31, 2019 and 2018.

The Company did no t recognize any impairment of goodwill during the years ended December 31, 2020 and 2019.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company adopted ASU No.

2016-02, Leases (Topic 842) (“ASC Topic 842”) and related ASUs, which provide supplementary guidance and clarifications on December 31, 2018, utilizing the modified retrospective transition method.

There was no cumulative-effect adjustment required upon adoption.

Additionally, the Company elected the practical expedient approach and did not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of our existing leases.

Under Topic 842, all significant lease arrangements are generally recognized at lease commencement.

Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at the commencement date.

An ROU asset and corresponding lease liability is not recorded for leases with an initial term of 12 months or less (short term leases) and the Company recognizes lease expense for these leases as incurred over the lease term.

ROU assets represent the Company’s right to use an underlying asset during the reasonably certain lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

The Company primarily uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments.

The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives.

Lease expense is recognized on a straight-line basis over the lease term.

The Company’s lease agreement contains lease and non-lease components, which are generally accounted for separately.

See Note 8 for discussion of the Company’s facility lease.

Revenue Recognition

The Company records revenue in accordance with ASC Topic 606, Revenue From Contracts with Customers .

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five-steps:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company only applies the five step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct.

The Company then allocates the transaction price to each distinct performance obligation based on its relative standalone selling price.

The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

See Noe 11 for further discussion of the Company's revenue recognition associated with the License Agreement with 3D Medicines Inc.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Development, Regulatory and Sales Milestones and Other Payments

At the inception of each arrangement that includes regulatory or development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment.

There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur.

At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments upon first commercial sales and milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.

To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Research and Development Expenses

Research and development costs are expensed as incurred.

Research and development costs that are paid in advance of performance are capitalized as a prepaid expense and amortized recognized to research and development expenses as the services are provided.

Research and development costs that are paid in advance of performance are capitalized as a prepaid expense and recognized as research and development expenses as the services are provided.

Clinical study costs, a component of research and development expenses, are accrued over the service periods specified in the contracts and adjusted as necessary based on an ongoing review of the level of effort and costs actually incurred.

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The simplified method is the midpoint between the vesting period and the contractual term of the option.

For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants.

For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants as it does not have adequate historical pricing information of its own stock commensurate with the expected term.

The risk-free rate is based on the U.S.

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The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive (in thousands):

Year Ended December 31,

Common stock warrants 1,392 302

Stock options 208 22

Restricted stock units 170 —

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Recent Accounting Pronouncements Pending Adoption

Recent Accounting Pronouncements Adopted

In August 2018, FASB issued No.

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All other amendments should be applied retrospectively to all periods presented upon their effective date.

Early adoption is permitted.

An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No.

2018-13 and to delay adoption of the additional disclosures until their effective date.

The Company is currently evaluating the potential impact of the adoption of the new standard on the consolidated financial statements.

In June 2018, the FASB issued ASU No.

2018-07, Improvements to Nonemployee Share-Based Accounting ("ASU No.

2018-07") , which simplifies the accounting for share-based payments granted to nonemployees for goods and services.

2018-07 supersedes ASC 505-50 and expands the scope of ASC 718, Compensation - Stock Compensation (Topic 718) ("ASC 718") to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees.

As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements.

2018-07 generally requires an entity to use a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year, for all (1) liability-classified nonemployee awards that have not been settled as of the adoption date and (2) equity-classified nonemployee awards for which a measurement date has not been established.

The guidance is applicable to public business entities for fiscal years beginning after December 15, 2019 and interim periods within those years.

The Company is currently evaluating the potential impact of the adoption of this standard on its consolidated financial statements.

Recent Accounting Pronouncements Adopted

In July 2019, the FASB issued ASU No.

2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33-10532, Disclosure Update and Simplification, and Nos.

33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates ( SEC Update ) ("ASU No.

2019-07 clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the codification easier to apply.

2019-07 became effective upon issuance and the adoption of ASU No.

2019-07, which is applied prospectively, did not have an impact on the Company’s consolidated financial statements and disclosures.

On January 1, 2019, the Company adopted ASU No.

2016-02, Leases (Topic 842 ), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use ("ROU") assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

The new guidance retains a distinction between finance leases and operating leases, while requiring companies to recognize both types of leases on their balance sheet.

The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the criteria for distinguishing between capital leases and operating leases in legacy U.S.

GAAP - ASC 840.

The Company adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods.

The Company evaluated the potential cumulative effect of applying the new guidance and determined that such an adjustment would be immaterial.

Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company's historical accounting under Topic 840.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Under Topic 842, the Company determines if an arrangement is a lease at inception.

ROU assets and liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term.

For this purpose, the Company considers only payments that are fixed and determinable at the time of lease commencement.

As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.

The Company's incremental borrowing rate is a hypothetical rate based on the Company's understanding of what the Company's credit rating would be.

The Company's lease terms may include options to extend or terminate the lease and the related payments are only included in the lease liability when it is reasonably certain that the Company will exercise such options.

In connection with the adoption, the Company did not separate lease and associated non-lease components for the transitioned leases, but instead are accounting for them together as a single component.

The adoption did not change the classification of lease-related expenses in the consolidated statements of operations, and the Company did not change the pattern of expense recognition.

As a result, the adoption does not impact the Company's beginning accumulated deficit, or the Company's prior year consolidated statements of operations and has not materially affect the consolidated statements of cash flows.

In July 2017, the FASB issued ASU No.

2017-11, Earnings Per Share (Topic 260);

Distinguishing Liabilities from Equity Topic (480);

Derivatives and Hedging (Topic 815):

(Part I) Accounting for Certain Financial Instrument with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception ("ASU No.

2017-11") , which modifies the classification of some financial instruments.

A down round feature no longer precludes equity classification and, therefore, a freestanding equity feature would no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.

For freestanding equity-classified financial instruments, the amendments require entities present earnings per share in accordance with Topic 260, and to recognize the effect of the down round feature when triggered.

Convertible instruments are now subject to specialized contingent beneficial conversion features.

The Company adopted ASU No.

2017-11 on January 1, 2019 and determined it did not have a material impact to its consolidated financial statements.

The Company determined its liability classified warrants contained cash settlement features that would continue to preclude equity classification subsequent to its adoption of ASU No.

In May 2017, the FASB issued ASU No.

2017-09, Scope of Modification Accounting .

2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.

This guidance is to be applied prospectively to awards modified on or after the adoption date.

In accordance with ASU No.

2017-09, the Company adopted this standard prospectively in the first quarter of 2018.

The adoption of ASU No.

2017-09 did not have a material impact on the Company's consolidated financial statements.

Cash and cash equivalents

Restricted cash and cash equivalents

Total cash, cash equivalents, restricted cash, and restricted cash equivalents

The Company maintained $0.1 million and $0.1 million as of December 31, 2019 and December 31, 2018, respectively, on hand with the Company's financial institutions as collateral for its corporate credit cards.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company adopted this standard on January 1, 2020 and the required disclosures are included in the consolidated financial statements.

Goodwill and Intangible Assets

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The Company's goodwill balance at December 31, 2020 and 2019 was $ 1.9 million.

Intangible assets consist of IPR&D acquired as part of the merger between Galena and the Company in 2017 (the "Merger").

Intangible assets consist of in-process research and development ("IPR&D") acquired as part of the Merger in 2017.

IPR&D assets represent research and development assets that have not yet reached commercialization.

The Company's intangible assets consist of the following:

Year Ended December 31,

GALE-301 and GALE-302

The Company's intangible asset consist of solely the NPS asset, with a carrying value of $ 5.7 million at December 31, 2020 and 2019.

The NPS program is for the prevention of cancer recurrence in breast cancer patients.

The GALE-301 and GALE-302 program is for the prevention of cancer recurrence in ovarian and endometrial cancer patients in the adjuvant setting.

During the fourth quarter of 2019, the Company determined that the IPR&D asset associated with the GALE-301 and GALE-302 product candidates was impaired and recorded an impairment charge of $ 2.8 million which was equal to the acquired value.

The impairment charge also resulted in an income tax benefit of $ 0.1 million.

In the fourth quarter of 2018, the Company abandoned future development efforts for the IPR&D asset associated with the GALE-401 product candidate and recorded an impairment charge $9.6 million , which was equal to the acquired value of GALE-401 of $9.1 million and $0.5 million recorded as deposits and other assets related to upfront milestone payments associated with that product candidate.

The abandonment also resulted in an income tax benefit of $1.4 million .

Collaboration and 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.

Collaboration and In-License Agreements

As part of its business, the Company enters into in-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.

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however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives.

Memorial Sloan Kettering Cancer Center

On September 4, 2014, (the “MSK Effective Date”) the Company entered into a license agreement (the “Original MSK License Agreement”) with MSK under which the Company was granted an exclusive license to develop and commercialize MSK’s WT1 peptide vaccine technology.

Exclusive License Agreement with Memorial Sloan Kettering Cancer Center

On September 4, 2014, the Company entered into a license agreement (the “Original MSK License Agreement”) with MSK under which the Company was granted an exclusive license to develop and commercialize MSK’s WT1 peptide vaccine technology.

Under the terms of the Original MSK License Agreement, the Company is required to obtain certain levels of financing.

If such financing is not met, MSK will have the right to terminate the Original MSK License Agreement with prior written notice, unless the Company manages to overcome the shortfall during the term of the notice period.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As part of the consideration for the rights, privileges and licenses granted under the Original MSK License Agreement, the Company issued 263 shares to MSK representing 1.5% of the Company’s fully diluted share capital as of the MSK Effective Date, which obligation was satisfied by assignment of 131 shares from each of the Company’s President, Chief Executive Officer, and co-founder, Dr.

Stergiou, and the Company’s other co-founder, Dr.

Miltiadis Sougioultzoglou (M.D.), to MSK, for which they received no consideration.

Additionally, the Company was obligated to pay upfront license fees of $1.3 million .

The Company recognized this amount as research and development expense during the year ended December 31, 2014, as it had no alternative future use.

The Company would further be obligated to pay minimum royalty payments of $0.1 million each year commencing in 2015 and research funding costs of $0.2 million in each year and for three years commencing in January 2015.

In addition, to the extent certain development and commercial milestones are achieved, the Company will be required to pay MSK up to $17.4 million in milestone payments for each licensed product, in addition to mid-single royalties in the event of commercial sales of any licensed products.

The Original MSK License Agreement, unless terminated earlier in accordance with the terms of the Original MSK License Agreement, will continue on a country-by-country and licensed product-by-licensed product basis, until the later of:

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or (iii) ten ( 10 ) years from the first commercial sale in such country.

On October 30, 2015, the Company and MSK entered into the License Amendment, Waiver and Share Issuance Agreement (the “First MSK Amendment”).

The First MSK Amendment extended the date required for the Company to obtain financing from August 1, 2015 to December 31, 2016, modified the amount of required financing and waived past non-compliance with certain related provisions of the Original MSK License Agreement.

In exchange for the First MSK Amendment, the Company agreed to issue an aggregate of 217 shares to MSK, which represented 1% of the fully diluted share capital of the Company at such date.

The First MSK Amendment added certain anti-dilution protection clauses and entitled MSK to additional shares to the extent the Company was not able to obtain the required financing.

On August 10, 2016, the Company and MSK entered into the Second License Amendment, Waiver and Agreement (the “Second MSK Amendment”).

The Second MSK Amendment extended further the date required for the Company to obtain financing from December 31, 2016 to June 30, 2017, amended the anti-dilution provisions of the First MSK Amendment and waived past non-compliance with certain related provisions of the First MSK Amendment.

Under the Second MSK Amendment, outstanding obligations of the Company to MSK of $0.9 million were converted into 276 shares effective November 1, 2016 upon the Company’s re-domiciliation to Bermuda.

In consideration for this amendment and pursuant to the anti-dilution provisions in the Original MSK License Agreement as amended by the First MSK Amendment and the Second MSK Amendment, the Company issued MSK 606 additional shares and incurred accordingly $2.0 million of research and development expense, which reflected the fair value of the Company’s shares at such date.

On May 25, 2017, the Company and MSK entered into an Amended and Restated Exclusive License Agreement (the “MSK A&R License Agreement”).

Under the MSK A&R License Agreement, the Company expanded its license under the original MSK License Agreement, as amended, to include a license to commercially develop certain additional WT1 peptides through a program of exploiting certain patents and other rights covering such peptides.

The MSK A&R License Agreement, among other changes, added certain milestone payments for each additional patent licensed product as defined in the MSK A&R License Agreement, and amended the milestone payments due upon commencement of the Phase 3 AML and mesothelioma clinical trials from $0.3 million to $0.4 million .

In consideration for the MSK A&R License Agreement, the Company issued 175 shares to MSK.

Pursuant to a side letter to the MSK A&R License Agreement, dated May 25, 2017 (the “MSK Side Letter”), MSK converted the next milestone payment of $0.2 million , which was due June 30, 2017, into shares.

Further, in consideration for the MSK Side Letter, Dr.

Stergiou, the Company’s Chief Executive Officer, assigned 307 of his shares to MSK, for which Dr.

Stergiou received no cash consideration.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On May 25, 2017, the Company and MSK entered into an Amended and Restated Exclusive License Agreement (the “MSK A&R License Agreement”).

The MSK A&R License Agreement, among other changes, added certain milestone payments for each additional patent licensed product as defined in the MSK A&R License Agreement.

On October 11, 2017, the Company and MSK entered into a second Amended and Restated Exclusive License Agreement (the “Second MSK A&R License Agreement”).

Under the Second MSK A&R License Agreement, the Company and MSK extended the dates for the Company to have obtained necessary financing, and certain milestone dates, in exchange for increased milestone payments, clarification regarding MSK’s anti-dilution rights, and termination of the MSK Side Letter dated May 25, 2017.

In connection with the Second MSK A&R License Agreement, the Company issued 1,495 shares to MSK.

Prior to the Merger, the Company issued an additional 154 shares to MSK in connection with their anti-dilution rights.

Under the Second MSK A&R License Agreement, the Company and MSK extended the dates for the Company to have obtained necessary financing, and certain milestone dates, in exchange for increased milestone payments and clarification regarding MSK’s anti-dilution rights.

For the year ended December 31, 2020, the Company incurred $ 0.1 million of guaranteed minimum royalty payments under the Second MSK A&R License Agreement.

For the year ended December 31, 2019, the Company incurred $ 0.3 million of expenses relating to $ 0.2 million in licensing fees and $ 0.1 million of guaranteed minimum royalty payments.

For the year ended December 31, 2018, the Company incurred $1.0 million of expenses relating to $0.5 million of milestone expenses, $0.3 million in licensing fees, $0.1 million of guaranteed minimum royalty payments and $0.1 million of research funding costs.

Such expenses have been included in research and development costs.

Merck & Co., Inc.

Clinical Trial Collaboration and Supply Agreement

On September 21, 2017, the Company entered into a clinical trial collaboration and supply agreement (the "Merck Agreement") through a Merck & Co., Inc.

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In July 2019, the Company dosed the first patient in this trial.

The Company plans to enroll up to approximately 90 patients at up to 20 centers in the United States.

The trial is initially evaluating patients with ovarian cancer (second or third line) and colorectal cancer (third or fourth line), to be followed by patients with AML who are unable to attain deeper morphological response than partial on hypomethylating agents and who are not eligible for allogeneic hematopoietic stem cell transplant, and patients with triple negative breast cancer, or TNBC (second line), and small cell lung cancer (second line).

Initial clinical data is expected by the second half of 2020.

The tumor type currently being investigated is ovarian cancer (second or third line).

Enrollment in this arm of the study is continuing with a target of a total of 20 patients.

The Company, together with Merck, have determined not to pursue the following indications:

colorectal cancer, TNBC, small cell lung cancer or AML, and are exploring other additional indications to investigate in the basket study.

The University of Texas M.

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Jackson Foundation for the Advancement of Military Medicine, Inc.

(“HJF”) which grants exclusive worldwide rights to a United States patent covering the nelipepimut-S peptide vaccine ("NPS") and several United States and foreign patents and patent applications covering methods of using the peptide as a vaccine.

(“HJF”) which grants exclusive worldwide rights to a U.S.

patent covering NPS 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, the Company is required to pay an annual maintenance fee of $ 0.2 million, up to $ 3.8 million for clinical milestone payments, and to pay a tiered royalty in the mid-single digits based on sales of NPS or other therapeutic products developed from the licensed technologies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Data presented in 2018 from our Phase 2b clinical trial of the combination of trastuzumab (Herceptin®) plus NPS in HER1/2+ breast cancer patients in the adjuvant setting to prevent recurrences showed a clinically and statistically significant improvement in the disease-free survival, or DFS, rate for the TNBC cohort at 24 months for patients treated with NPS plus trastuzumab.

Following ongoing discussions with the FDA and based upon written feedback from the FDA and on the totality of clinical, safety and translational NPS data to date, the Company has finalized the design and plan for a Phase 3 registration-enabling study of NPS in combination with trastuzumab for the treatment of patients with TNBC in the adjuvant setting after standard treatment.

If successful, the Company believes this study may be considered as the basis for a BLA submission to the FDA.

The Company is seeking out-licensing opportunities to fund and conduct the future clinical development of NPS in order to maximize the potential of the program and the Company does not plan to conduct and fund a Phase 3 program for NPS.

Fair Value Measurements

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets (in thousands):

December 31, 2019

Quoted Prices In

Description December 31, 2020 Quoted Prices In

Active Markets

Significant Other

Inputs (Level 2)

(Level 1) Significant Other

Inputs (Level 2) Unobservable

Cash equivalents $ 34,959 $ 34,959 $ — $ —

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Total liabilities measured and recorded at fair value $ 4,688 $ — $ — $ 4,688

December 31, 2018

Quoted Prices In

Description December 31, 2019 Quoted Prices In

Active Markets

Significant Other

Inputs (Level 2)

(Level 1) Significant Other

Inputs (Level 2) Unobservable

Cash equivalents $ 7,027 $ 7,027 $ — $ —

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Contingent consideration, December 31, 2020 $ 4,633

The fair value of the contingent consideration is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model.

The Company presents the contingent consideration liability at fair value and it is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model.

The contingent consideration relates to Galena’s acquisition of Apthera, Inc.

in 2011 and the future contingent payments of a total of up to $32 million based on the achievement of certain development and commercial milestones relating to NPS, of which $2 million has been paid.

in 2011 and the future contingent payments totaling up to $ 32 million based on the achievement of certain development and commercial milestones relating to NPS, of which $ 2 million has been paid to date.

The remaining $ 30 million contingent consideration is payable at the election of the Company in either cash or shares of common stock, provided that the Company may not issue any shares in satisfaction of any contingent consideration unless it has first obtained approval of its stockholders in accordance with Rule 5635(a) of the Nasdaq Marketplace Rules.

Management estimates the fair value of the contingent consideration liability based on financial projections of the acquired drug compound and estimated probabilities of achievement of the development and commercial milestones which involves significant judgment.

The Company evaluates, on a routine, periodic basis, the estimated fair value of the contingent consideration liability and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, are reflected in income or expense in the consolidated statements of operations.

Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing of development milestones achieved and changes in probability assumptions with respect to the likelihood of achieving the various earnout criteria.

Any changes in the estimated fair value of contingent consideration liability may have a material impact on the Company’s operating results.

The significant unobservable assumptions include the probability of achieving each milestone, the date the Company expects to reach the milestone, and a determination of present value factors used to discount future expected cash outflows.

The change in the estimated fair value of the contingent consideration during the year ended December 31, 2018 reflects an adjusted probability and timeline for the potential approval of NPS associated with the positive interim data in the triple-negative breast cancer cohort from the prospective, randomized, single-blinded, controlled Phase 2b investigator-sponsored clinical trial of trastuzumab (Herceptin®) +/- NPS in HER2 1+/2+ breast cancer patients in the adjuvant setting to prevent recurrences that was announced on April 2, 2018.

Changes in fair value reflect new information about the probability and anticipated timing of meeting the conditions of the milestone payments.

As of December 31, 2020, estimated future contingent milestone payments related to the Company's business range from zero , if no milestone events are achieved, to a maximum of $ 30.0 million if all development and commercial milestones are reached.

As of December 31, 2020, resulting probability-weighted cash flows were discounted using a weighted average cost of capital of 11.8 % for development milestones and cost of debt of 5.4 % for the commercial milestones.

The Company estimates the timing of achievement of these development milestones to range from six to nine years as of December 31, 2020.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Balance Sheet Accounts

Prepaid expenses and other current assets consist of the following (in thousands):

Clinical development

Insurance $ 221 $ 200

Clinical trial costs 95 224

Professional fees 49 49

Prepaid expenses and other current assets $ 395 $ 557

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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Professional fees 276 194

Rebates and returns of former commercial products

Accrued expenses and other current liabilities $ 1,913 $ 1,171

Senior Secured Debenture

On May 10, 2016, the Company's predecessor company, Galena, entered into a securities purchase agreement (the “Securities Purchase Agreement”) with JGB (Cayman) Newton, Ltd.

("JGB") pursuant to which Galena sold to JGB, at a 6.375% original issue discount, a $25.5 million senior secured debenture (the "Senior Secured Debenture") and warrants to purchase up to 66 shares of the Company's common stock.

The maturity date of the Senior Secured Debenture was November 10, 2018, with accrued interest at 9% per year, payable monthly.

In addition, on the maturity date of the Senior Secured Debenture (or such earlier date that the principal amount of the Senior Secured Debenture is paid in full by acceleration or otherwise) a fixed amount, which would have been deemed interest under the Senior Secured Debenture, equal to $0.8 million was due and payable to JGB 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 the Company’s common stock, or a combination of cash and the Company’s common stock.

During the year ended December 31, 2018, JGB redeemed $2.8 million of outstanding principal, which the Company satisfied with 13,190 shares of its common stock and redeemed $0.6 million of outstanding principal, which the Company satisfied with cash.

During the year ended December 31, 2018, the Company satisfied $0.1 million of interest with 1,115 shares of its common stock.

As a result of the redemptions during 2018, the Company transferred $1.8 million of restricted cash into unrestricted cash and cash equivalents, which was used to fund the Company’s ongoing operations.

In April 2018, JGB commenced a lawsuit against the Company, as described in Note 9.

On November 5, 2018, the parties to the lawsuit entered into a settlement agreement, which required, among other things, that JGB make a one-time payment to the Company of $6.6 million , representing the $1.6 million of excess cash removed from the amount in the restricted account from the outstanding principal balance of the Senior Secured Debenture and reimbursement of approximately $5.0 million of legal fees incurred by the Company.

The Company recognized a gain on extinguishment of debt of $0.8 million that was previously accrued in long-term debt representing an additional interest payable at maturity as the amount is no longer required to be repaid by the Company.

Accordingly, as of December 31, 2018, there was no principal balance and accrued interest outstanding related to the Senior Secured Debenture.

Short-term Convertible Promissory Notes

During the year ended December 31, 2018, the Company issued convertible promissory notes in the principal amount of $1.0 million in exchange for the surrender and cancellation of warrants to purchase 8,253 shares of its common stock pursuant to the February 2017 public offering by Galena.

The convertible promissory notes accrued interest at a rate of 5% per year and were convertible into shares of the Company's common stock at a conversion price equal to $350.00 .

In April 2018, $0.8 million of outstanding principal and accrued interest was converted into 2,372 shares of common stock.

In November of 2018, the Company paid the remaining principal and interest of $0.2 million to settle the debt.

As of December 31, 2018, there was no principal balance or accrued interest outstanding.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Legal Proceedings, Commitments and Contingencies

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In the opinion of management, as of the date hereof, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the Company’s consolidated results of operations, financial position or cash flows.

The Company’s predecessor company, Galena, was involved in multiple legal proceedings and administrative actions, including stockholder class actions, both state and federal, some of which are ongoing and to which the Company is now subject as a result of the Merger.

The Company is also involved in litigation matters as follows:

The Company’s predecessor, Galena, was involved in multiple legal proceedings and administrative actions, including stockholder class actions, both state and federal, some of which are ongoing and to which the Company is now subject as a result of the Merger as follows:

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On February 13, 2017, certain putative shareholder securities class action complaints were filed in federal court alleging, among other things, that Galena and certain of Galena's former officers and directors failed to disclose that Galena’s promotional practices for Abstral ® (fentanyl sublingual tablets) were allegedly improper and that Galena may be subject to civil and criminal liability, and that these alleged failures rendered Galena’s statements about its business misleading.

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On November 13, 2019, the U.S.

District Court for the District of New Jersey granted the Company's motion to dismiss.

On December 20, 2019, the lead plaintiffs filed a Second Amended Consolidates Class Action Complaint.

District Court for the District of New Jersey granted the Company's motion to dismiss without prejudice to file an amended complaint.

On December 20, 2019, the lead plaintiffs filed a second Amended Consolidated Class Action Complaint.

On January 29, 2020, the Company filed a motion to dismiss the amended complaint.

On January 5, 2021, the U.S.

District Court for the District of New Jersey granted the Company's motion to dismiss without prejudice to file an amended complaint.

On February 18, 2021, the lead plaintiffs filed a third Amended Consolidated Class Action Complaint.

In March 2017, a derivative complaint was filed in the U.S.

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District Court for the District of New Jersey against the Company’s former directors, officers and employees, and the Company as a nominal defendant.

In June 2018, a derivative complaint was filed in the U.S.

District Court for the Northern District of California against the Company’s current and former directors, and the Company as a nominal defendant.

The plaintiff in the June 2018 case voluntarily withdrew his complaint from the U.S District Court of the Northern District of California and on August 27, 2018, refiled the complaint in the Court of Chancery of the State of Delaware.

These complaints purport to assert derivative claims for breach of fiduciary duty on the Company’s behalf against the Company’s former directors and, in certain of the complaints, the Company’s current directors, and the Company’s former officers and former employees, based on substantially similar facts as alleged in the putative shareholder securities class action complaints mentioned above.

The March 2017, July 2017, and January 2018 lawsuits are currently stayed pending resolution of motions to dismiss in the referenced securities class action.

On November 15, 2018, the defendants in the August 2018 lawsuit filed a motion to dismiss the complaint.

On November 13, 2019, the motion to dismiss was granted in its entirety by the Court of Chancery of the State of Delaware.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In April 2017, a putative stockholder class action, captioned Patel vs.

Galena Biopharma Inc.

al, was filed in Delaware state court seeking relief under Section 225 of the Delaware General Corporation Law ("DGCL") and alleging breaches of fiduciary duties by Galena’s former board of directors and former interim chief executive officer regarding the proposals to amend Galena’s certificate of incorporation to increase the amount of authorized shares of common stock and effectuate a reverse stock split at the July 2016 and October 2016 stockholder meetings, respectively.

On June 2, 2017, an amended verified complaint was filed along with a motion to expedite the proceedings.

On July 24, 2017, Galena entered into a binding settlement term sheet, involving payment of $50,000 in cash and $1,250,000 in unrestricted shares of common stock.

The Court enforced the settlement term sheet on November 30, 2017.

On June 14, 2018, the Court entered an Order and Final Judgment approving the settlement and awarding attorneys’ fees to the plaintiff.

All obligations related to the Order and Final Judgment were satisfied in full by the Company in June 2018.

In October 2018, the Company received $0.5 million from its insurance carrier for previous amounts paid by the Company in excess of its retention amount and recorded the amount as a reduction to general and administrative expense in the Company's consolidated statement of operations.

On or about April 9, 2018, JGB filed a lawsuit in the U.S.

District Court for the Southern District of New York (the "Court") captioned JGB (Cayman) Newton, Ltd.

Sellas Life Sciences Group, Inc., et al., Case 1:18-cv-3095 (DLC) (the "JGB Action").

The complaint in the JGB Action asserted claims under state law and federal securities law against the Company, the Company's Chief Executive Officer, Angelos M.

Stergiou, M.D., ScD h.c., and the Company's former Interim Chief Financial Officer, Aleksey N.

On or about May 2, 2018, JGB filed an amended complaint, adding as defendants certain members of the Company's Board of Directors.

On May 18, 2018, the Company filed an answer to the amended complaint and filed seven counterclaims.

On June 18, 2018, the Company filed a motion for judgment on the pleadings and a motion to dismiss the amended complaint.

On July 6, 2018, JGB filed a motion for partial judgment on the pleadings and motion to dismiss all of the Company's counterclaims.

On September 24, 2018, without any prior written notice, JGB unilaterally directed that all of the funds, approximately $8.5 million in cash, be removed from the restricted account, an amount in excess of the outstanding principal balance of the Senior Secured Debenture.

On October 23, 2018, the Court entered an Opinion and Order, granting, in full, the Company's motion to dismiss JGB's amended complaint and allowing four of the Company's counterclaims to proceed to trial.

Following the October 23 Opinion and Order of the Court, the parties to the JGB Action entered into a settlement agreement on November 5, 2018.

The settlement agreement provides, among other things, that JGB will make a one-time payment to the Company of $6.6 million , inclusive of the $1.6 million excess amount removed from the restricted account.

The entire settlement amount was received in November 2018.

The Company offset approximately $5.0 million of legal fees incurred during the year ended December 31, 2018 previously recorded in general and administrative expense in the consolidated statement of operations with proceeds from the settlement.

The Company recognized a gain on extinguishment of debt of $0.8 million that was previously accrued in long-term debt for an additional interest payable at maturity as the amount is no longer payable by the Company.

The settlement agreement also provides for the termination of the Senior Secured Debenture and all ancillary agreements, including the security agreement covering the Company's assets as well as a release of all security interests in the collateral.

The derivative lawsuit filed in California state court is currently stayed pending resolution of a motion to dismiss in the referenced securities class action.

On July 13, 2020 and July 16, 2020, respectively, the Company filed motions to dismiss the two complaints filed in the U.S.

District Court for the District of New Jersey.

The Company has reached a settlement in principle with the plaintiffs in these three cases which is subject to final documentation and court approval.

Contingent Consideration related to Development, Regulatory and Commercial Milestone Payments and Business Combinations

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Because of the contingent nature of these payments, they are not included in the table of contractual obligations shown below.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

1 unchanged sentence

however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives.

For additional information on the Company’s commitments under collaboration and license agreements read Note 5 to these consolidated financial statements.

For additional information on the Company’s commitments of contingent consideration read Note 5 to these consolidated financial statements.

The Company has a non-cancelable operating lease for office space in New York, New York, which began August 1, 2018 with a term through July 31, 2020.

As disclosed in Note 3, the Company adopted ASC 842 in the first quarter of 2019 and as a result of the adoption, the Company recognized a current operating lease liability of $0.4 million and a non-current operating lease liability of $0.2 million with a corresponding ROU asset of $0.6 million , which is based on the present value of the minimum rental payments of the lease.

The discount rate used to account for the Company's operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 13% .

As of December 31, 2019, the lease has a remaining term of less than 1.0 year .

Rent expense related to the Company's operating lease was approximately $0.4 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively.

For additional information on the Company’s commitments under collaboration and license agreements and commitments of contingent consideration read Note 5 to these consolidated financial statements.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company has a non-cancelable operating lease for office space in New York, New York, which began June 5, 2020 with a term through December 31, 2024.

The Company recognized a current operating lease liability of $ 0.1 million and a non-current operating lease liability of $ 0.9 million with a corresponding ROU asset of $ 1.0 million, which is based on the present value of the minimum rental payments of the lease.

The discount rate used to account for the Company's operating lease under ASC Topic 842 is the Company’s estimated incremental borrowing rate of 13 %.

As of December 31, 2020, the lease has a remaining term of than 4.0 years.

Rent expense related to the Company's operating lease was approximately $ 0.4 million for the years ended December 31, 2020 and 2019, respectively.

The Company made cash payments related to operating leases of approximately $ 0.3 million and $ 0.4 million for the years ended December 31, 2020 and 2019, respectively.

Future minimum rental payments under the Company's non-cancelable operating lease are as follows as of December 31, 2020 (in thousands):

Total minimum lease payments, all due in 2020

Total minimum lease payments:

Total future minimum lease payments 1,265

imputed interest ( 274 )

3 unchanged sentences

The Company has authorized up to 5,000,000 shares of preferred stock, $ 0.0001 par value per share, for issuance.

Series A Convertible Preferred

On March 7, 2018, the Company entered into a securities purchase agreement with investors pursuant to which the Company agreed to sell to the investors, in a private placement pursuant to Rule 4(a)(2) and Regulation S under the Securities Act, an aggregate of 10,700 shares of the Company’s newly-created non-voting Series A Convertible Preferred, and warrants to acquire an aggregate 27,672 shares of the Company’s common stock at an aggregate purchase price of $10.7 million .

The Series A Convertible Preferred was initially convertible into 36,896 shares of common stock based on an initial conversion price of $290.00 per share.

At the first closing of the Series A Convertible Preferred on March 9, 2018, the Company issued an aggregate 5,987 shares of Series A Convertible Preferred and warrants to acquire 15,483 shares of common stock for aggregate gross proceeds of $6.0 million .

The second closing of the remaining 4,713 shares of the Series A Convertible Preferred and warrants to acquire 12,188 shares of its common stock, for aggregate gross proceeds of $4.7 million , occurred on May 1, 2018 following receipt of stockholder approval.

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

On December 13, 2020, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the investors (the “December 2020 Registered Direct Offering”), an aggregate of 2,320,000 shares of common stock, par value $ 0.0001 per share, of the Company, at an offering price of $ 7.00 per share for gross proceeds of approximately $ 16.2 million.

The net proceeds to the Company from the December 2020 Registered Direct Offering, after deducting placement agent fees and related offering expenses, was approximately $ 15.0 million.

On July 31, 2020, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell, in a private placement directly to the investors (the "July 2020 PIPE Offering"), 2,744,078 shares of its common stock and accompanying warrants to purchase up to an aggregate of 2,744,078 shares of common stock at a combined purchase price of $ 3.335 per share and accompanying warrant.

The warrants were immediately exercisable upon issuance at an exercise price of $ 3.30 per share and will expire five years from the date of issuance.

The July 2020 PIPE Offering closed on August 4, 2020.

The net proceeds to the Company from the July 2020 PIPE Offering, after deducting placement agent fees and related offering expenses, were approximately $ 8.5 million.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In the event of a "qualified offering," as defined in the securities purchase agreement, holders of the Series A Convertible Preferred (the "Series A Holders") had the right to exchange their shares of Series A Convertible Preferred for the same securities sold in a qualified offering on a $1.00 for $1.00 basis based on the stated value of their shares of Series A Convertible Preferred under the most favored nation provision.

On July 16, 2018, following consummation of the July 2018 Offering, which was deemed a qualified offering as described below, the Series A Holders exchanged an aggregate of $7,871,186 of stated valued and accrued but unpaid dividends on their Series A Convertible Preferred for an aggregate of 74,963 shares of the Company’s common stock and warrants to purchase an aggregate of 74,963 shares of the Company’s common stock.

Following such exchange, there are no shares of Series A Convertible Preferred issued and outstanding.

The warrants had an initial exercise price of $105.00 per share and a term of five years.

The fair value of the common stock and warrants to purchase shares of common stock exceeded the carrying amount of the Series A Preferred by $8.7 million and that amount is recorded as a deemed dividend in the consolidated statements of operations during the year ended December 31, 2018, as it represents a transfer of value from the common stockholders to the preferred investors.

Since the Company does not have accumulated earnings, the deemed dividend is taken from additional paid-in capital.

This one-time, non-cash charge impacted net loss attributable to common stockholders and loss per share for the year ended December 31, 2018.

See Note 11 for further discussion of the warrants related to the Series A Convertible Preferred.

The Company evaluated the Series A Convertible Preferred in accordance with the provisions of ASC 815, Derivatives and Hedging , including consideration of embedded derivatives requiring bifurcation.

The issuance of the Series A Convertible Preferred generated a beneficial conversion feature (“BCF”), which arose as the equity security was issued with an embedded conversion option that was beneficial to the investor or in the money at inception because the conversion option had an effective conversion price that was less than the market price of the underlying stock at the commitment date.

The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock.

As the Series A Convertible Preferred could have been converted immediately, the Company recognized a BCF of $2.0 million as a deemed dividend in the consolidated statements of operations related to the first closing on March 9, 2018 and an additional BCF of $2.5 million as a deemed dividend related to the second closing on May 1, 2018.

These one-time, non-cash charges impacted net loss attributable to common stockholders and loss per share for the year ended December 31, 2018.

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

On January 9, 2020, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the investors (the “January 2020 Registered Direct Offering”), (i) an aggregate of 1,189,000 shares of common stock, par value $ 0.0001 per share, of the Company, at an offering price of $ 3.9825 per share and (ii) an aggregate of 448,800 pre-funded warrants exercisable for shares of common stock at an offering price of $ 3.9725 per pre-funded warrant, for gross proceeds of approximately $ 6.5 million before deducting the placement agent fee and related offering expenses.

In a concurrent private placement, the Company issued to the Investors who participated in the January 2020 Registered Offering warrants exercisable for up to an aggregate of 818,900 shares of common stock at an exercise price of $ 3.93 per share.

Each warrant was immediately exercisable upon issuance and will expire five and one-half years from the issuance date.

The net proceeds to the Company from the January 2020 Registered Direct Offering, after deducting placement agent fees and related offering expenses, and excluding the exercise of any warrants, was approximately $ 6.0 million.

On October 29, 2019, the Company entered into an Equity Distribution Agreement (the "Distribution Agreement") with Maxim Group LLC (the "Agent").

From time to time during the term of the Distribution Agreement, the Company may offer and sell shares of common stock having an aggregate offering price up to a total of $5.0 million in gross proceeds.

The Agent will collect a fee equal to 3% of the gross sales price of all shares of common stock sold.

Shares of common stock sold under the Distribution Agreement will be offered and sold pursuant to the Company's effective registration statement on Form S-3.

From time to time during the term of the Distribution Agreement, the Company could offer and sell shares of common stock having an aggregate offering price up to a total of $ 5.0 million in gross proceeds.

The Agent was entitled to collect a fee equal to 3 % of the gross sales price of all shares of common stock sold.

Shares of common stock sold under the Distribution Agreement were to be offered and sold pursuant to the Company's effective registration statement on Form S-3.

During the year ended December 31, 2019, the Company sold 524,097 shares of common stock pursuant to the Distribution Agreement for net proceeds of $ 2.7 million.

The Distribution Agreement was terminated on January 9, 2020.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On June 18, 2019, the Company consummated an underwritten public offering (the “June 2019 Offering”) of (i) 527,344 shares of common stock, (ii) 1,472,656 pre-funded warrants exercisable for shares of common stock, and (iii) accompanying common stock warrants to purchase up to an aggregate of 2,000,000 shares of common stock.

The shares of common stock and accompanying common stock warrants were sold at a combined price of $ 7.50 per share and accompanying common stock warrant.

Each common stock warrant sold with the shares of common stock represented the right to purchase one share of common stock at an exercise price of $25.00 per share and, commencing July 10, 2019, could be exercised pursuant to the terms thereof on a cashless basis, at the option of the holder, in whole or in part, for one share of common stock, if the weighted average price of the common stock on any trading day immediately prior to the exercise date is lower than the then-applicable exercise price per share.

As of December 31, 2019, 1,997,740 of the June 2019 Offering warrants were cashlessly exercised and 2,260 warrants remain outstanding.

Each common stock warrant sold with the shares of common stock represented the right to purchase one share of common stock at an exercise price of $ 25.00 per share and, commencing July 10, 2019, could be exercised pursuant to the terms thereof on a cashless basis, at the option of the holder, in whole or in part, for one share of common stock, if the weighted average price of the common stock on any trading day immediately prior to the exercise date was lower than the then-applicable exercise price per share.

The pre-funded warrants and accompanying common stock warrants were sold at a combined price of $ 7.495 per pre-funded warrant and common stock warrant.

The pre-funded warrants were exercisable immediately, at an exercise price of $ 0.005 per share.

As of December 31, 2019, all of the pre-funded warrants sold in the June 2019 Offering were exercised.

The net proceeds to the Company from the June 2019 Offering, after deducting underwriting discounts and commissions and other estimated offering expenses, and excluding the exercise of any warrants, was approximately $ 13.4 million.

See Note 10 for further discussion of the warrants related to the June 2019 Offering.

On July 16, 2018, the Company completed the July 2018 Offering, issuing 136,900 shares of common stock and 93,500 pre-funded warrants exercisable for shares of common stock and accompanying common stock warrants to purchase an aggregate of 230,400 shares of common stock.

The shares of common stock and accompanying common stock warrants were sold at a combined price of $105.00 per share and accompanying common stock warrant.

The pre-funded warrants and accompanying common stock warrants were sold at a combined price of $104.995 per pre-funded warrant and common stock warrant.

Each accompanying common stock warrant sold with the shares of common stock and pre-funded warrants represents the right to purchase one share of the Company’s common stock at an exercise price of $105.00 per share.

The common stock warrants are exercisable immediately and will expire on July 16, 2023, five years from the date of issuance.

The pre-funded warrants are exercisable immediately, have an exercise price of $0.005 per share, and will expire on July 16, 2023, five years from the date of issuance.

The net proceeds to the Company from the July 2018 Offering, after deducting the underwriting discounts and commissions and other estimated offering expenses, and excluding the exercise of any warrants, were approximately $21.6 million .

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

2 unchanged sentences

Stock options outstanding 208

Restricted stock units 170

Options reserved for future issuance under the Company’s 2019 Equity Incentive Plan 101

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Warrants to Acquire Shares of Common Stock

July 2019 Investor Agreements

The following is a summary of the Company's warrants to acquire shares of common stock activity for the year ended December 31, 2020 (in thousands):

Warrant Issuance Outstanding, December 31, 2019 Granted Exercised Outstanding, December 31, 2020 Expiration

July 2020 PIPE Offering — 2,744 ( 2,299 ) 445 August 2025

January 2020 Offering — 819 ( 100 ) 719 July 2025

Pre-funded January 2020 Offering — 449 ( 449 ) — July 2025

June 2019 Offering 2 — — 2 July 2025

March 2019 Exercise Agreement 63 — — 63 July 2023

July 2018 Offering 208 — ( 67 ) 141 February 2022

Other 29 — ( 7 ) 22 November 2023

302 4,012 ( 2,922 ) 1,392

The following is a summary of the Company's warrants to acquire shares of common stock activity for the year ended December 31, 2019 (in thousands):

Warrant Issuance Outstanding, January 1, 2019 Granted Exercised Outstanding, December 31, 2019 Expiration

June 2019 Offering — 2,000 ( 1,998 ) 2 July 2025

Pre-funded June 2019 Offering — 1,473 ( 1,473 ) — July 2025

March 2019 Exercise Agreement — 63 — 63 September 2023

July 2018 Offering 305 — ( 97 ) 208 June 2024

Other 51 — ( 22 ) 29 November 2023

356 3,536 ( 3,590 ) 302

Warrants to acquire shares of common stock primarily consist of equity-classified warrants.

In addition, warrants to acquire shares of common stock that may require the Company to settle in cash are liability-classified warrants.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Warrants Classified as Equity

The pre-funded warrants exercisable for shares of common stock and warrants to acquire shares of common stock issued during 2020 and 2019 were recorded in equity upon issuance.

During its evaluation of equity classification for the pre-funded warrants exercisable for shares of common stock and warrants to acquire shares of common stock issued in 2020 and 2019 the Company considered the conditions as prescribed within ASC 815-40, Derivatives and Hedging, Contracts in an Entity’s own Equity (“ASC 815-40”).

The conditions within ASC 815-40 are not subject to a probability assessment.

The pre-funded warrants exercisable for shares of common stock and warrants to acquire shares of common stock do not fall under the liability criteria within ASC 480, Distinguishing Liabilities from Equity , as they are not puttable and do not represent an instrument that has a redeemable underlying security.

The pre-funded warrants exercisable for shares of common stock and warrants to acquire shares of common stock do meet the definition of a derivative instrument under ASC 815, but are eligible for the scope exception as they are indexed to the Company’s own stock and would be classified in permanent equity if freestanding.

In addition, the Company determined that the down round feature in the warrants to acquire shares of common stock issued in the June 2019 Offering did not preclude equity classification based on ASU No.

2017-11, Earnings Per Share (Topic 260);

Distinguishing Liabilities from Equity (Topic 480);

Derivatives and Hedging (Topic 815):

(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, which changed the classification of certain equity-linked financial instruments (or embedded features) with down round features.

A down round feature no longer precludes equity classification, therefore a freestanding equity feature would no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.

July 2020 Offering Warrants

On August 4, 2020, pursuant to the July 2020 PIPE Offering, the Company issued 2,744,078 warrants to acquire shares of common stock.

The warrants were immediately exercisable upon issuance at an exercise price of $ 3.30 per share and will expire five years from the date of issuance.

January 2020 Offering Warrants

On January 13, 2020, pursuant to the January 2020 Registered Direct Offering, the Company issued 448,800 pre-funded warrants to acquire shares of common stock.

The pre-funded warrants were immediately exercisable upon issuance at an exercise price of $ 0.01 per share and were exercisable until exercised in full.

All 448,800 pre-funded warrants issued on January 13, 2020 were exercised in full during the year ended December 31, 2020.

In a concurrent private placement, the Company issued 818,900 warrants to acquire shares of common stock.

The warrants were immediately exercisable upon issuance at an exercise price of $ 3.93 per share and will expire five and one-half years from the date of issuance.

June 2019 Offering Warrants

On June 18, 2019, pursuant to the June 2019 Offering, the Company issued 1,472,656 pre-funded warrants to acquire shares of common stock.

The pre-funded warrants were immediately exercisable upon issuance at an exercise price of $ 0.005 per share and were exercisable until exercised in full.

All 1,472,656 pre-funded warrants were exercised in full during the year ended December 31, 2019.

On June 18, 2019, the Company also issued 2,000,000 warrants to acquire shares of common stock.

The warrants were immediately exercisable upon issuance at an original exercise price of $ 25.00 per share will expire five years from the date of issuance.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On July 8, 2019, the Company entered into a series of Investor Agreements (collectively, the "Investor Agreements") with certain purchasers of securities (each an "Investor") in connection with the June 2019 Offering.

In connection with the Investor Agreements, the parties thereto agreed to, among other things, (i) amend the expiration date of those certain leak-out agreements previously entered into with certain Investors in connection with the June 2019 Offering from August 2, 2019 to August 15, 2019, (ii) amend the warrants issued to such Investors in connection with the June 2019 Offering such that they became cashlessly exercisable pursuant to the terms thereof on July 10, 2019 (the "Warrant Amendment"), and (iii) amend the warrant agreement entered into with Computershare Trust Company, N.A.

The parties to the Investor Agreements agreed to, among other things, (i) amend the expiration date of those certain leak-out agreements previously entered into with certain Investors in connection with the June 2019 Offering from August 2, 2019 to August 15, 2019, (ii) amend the warrants issued to such Investors in connection with the June 2019 Offering such that they became cashlessly exercisable pursuant to the terms thereof on July 10, 2019 (the "Warrant Amendment"), and (iii) amend the warrant agreement entered into with Computershare Trust Company, N.A.

on June 18, 2019 to reflect the terms of the Warrant Amendment.

The reduced exercise price from $ 25.00 to $ 0.00 resulted in the Company recognizing a $ 7.3 million deemed dividend during the year ended December 31, 2019, increasing net less loss attributable to common stockholders and additional paid-in capital.

Warrants Issued in 2018

On July 16, 2018, the Company issued the 2018 Warrants to purchase up to an aggregate of 230,400 shares of common stock, with an exercise price per share of $105.00 .

The 2018 Warrants were immediately exercisable and expire on July 16, 2023.

Pursuant to the terms of certain warrants issued in connection with previously outstanding Series A Convertible Preferred sold in March 2018 and May 2018, the exercise price of these warrants was automatically adjusted to $105.00 per share from the original exercise price of $329.50 per share.

The Company recognized the $0.5 million increase to the fair value of the warrant liability as a result of the adjusted stock price as a deemed dividend in the consolidated statements of operations during the year ended December 31, 2018.

This one-time, non-cash charge impacted net loss attributable to common stockholders and loss per share for the year ended December 31, 2018.

On March 6, 2019, the Company entered into the Exercise Agreement with one of the holders of the 2018 Warrants.

Pursuant to the Exercise Agreement, such warrant holder agreed to exercise for cash up to 76,000 of the 2018 Warrants for shares of common stock at an adjusted exercise price of $55.00 per share for any 2018 Warrants exercised prior to May 31, 2019.

In addition to reducing the exercise price of the 2018 Warrants held by the warrant holder, the Exercise Agreement also provided for the issuance of the New Warrants to purchase up to an aggregate of approximately 76,000 shares of common stock at an exercise price of $70.00 per share to be issued on a share-for-share basis in an amount equal to the number of the 2018 Warrants that were cash exercised by the warrant holder prior to May 31, 2019.

July 2018 Offering Warrants

On July 16, 2018, the Company issued warrants to purchase up to an aggregate of 305,363 shares of common stock, with an original exercise price per share of $ 105.00 (the "July 2018 Offering Warrants").

The July 2018 Offering warrants were immediately exercisable and expire on July 16, 2023.

In connection with the June 2019 Offering, the Company reduced the exercise price of the July 2018 Offering warrants to $ 7.50 per share from the previous exercise price of $ 105.00 per share.

The reduced exercise price of the July 2018 Offering warrants increased the value of fair value of the July 2018 Offering warrants by approximately $ 0.8 million and is recorded as a deemed dividend increasing net loss attributable to common stockholders and additional paid-in-capital during the year ended December 31, 2019.

March 2019 Exercise Agreement Warrant s

On March 6, 2019, the Company entered into a Warrant Exercise Agreement with one of the holders of the July 2018 Offering warrants.

Pursuant to the Warrant Exercise Agreement, such warrant holder agreed to exercise for cash up to 76,000 of the July 2018 Offering Warrants for shares of common stock at an adjusted exercise price of $ 55.00 per share for any July 2018 Offering Warrants exercised prior to May 31, 2019.

In addition to reducing the exercise price of the July 2018 Offering Warrants held by the warrant holder, the Warrant Exercise Agreement also provided for the issuance of new warrants to purchase up to an aggregate of approximately 76,000 shares of common stock at an exercise price of $ 70.00 per share to be issued on a share-for-share basis in an amount equal to the number of the July 2018 Offering Warrants that were cash exercised by the warrant holder prior to May 31, 2019 (the "New Warrants").

The New Warrants expire five years from the date of issuance.

During the year ended December 31, 2019, the warrant holder exercised approximately 63,000 of the 2018 Warrants for gross proceeds to the Company of $3.5 million and approximately 63,000 New Warrants were issued.

The reduced exercise price of the 63,000 2018 Warrants exercised by the warrant holder increased the fair value of these Existing Warrants by approximately $0.3 million during the year ended December 31, 2019, which is recorded as a deemed dividend increasing the net loss attributable to common stockholders and in additional paid-in capital.

The Exercise Agreement expired on May 31, 2019.

Pursuant to the terms of certain warrants issued in connection with previously outstanding Series A Convertible Preferred sold in March 2018 and May 2018, the exercise price of these warrants was automatically adjusted on March 6, 2019 to $55.00 per share from the previous exercise price of $105.00 per share as a result of the Company's entry into the Exercise Agreement.

The Company recognized the $0.2 million increase to the fair value of the warrant liability as a result of the adjusted exercise price as a deemed dividend which increased the net loss attributable to common stockholders during the year ended December 31, 2019.

Additionally, the Company agreed to seek the approval of The Nasdaq Stock Market, by November 8, 2019, to reduce the exercise price to $7.50 per share (subject to adjustment for stock splits and the like) of the New Warrants.

Prior to November 8, 2019, the Company requested such approval from The Nasdaq Stock Market.

On January 2, 2020, the Company amended the New Warrants to provide for an exercise of $7.50 per share (subject to adjustment for stock splits and the like).

During the year ended December 31, 2019, the warrant holder exercised approximately 63,000 of the July 2018 Offering Warrants for gross proceeds to the Company of $ 3.5 million and approximately 63,000 New Warrants were issued.

The reduced exercise price of the 63,000 July 2018 Offering Warrants exercised by the warrant holder increased the fair value of these warrants by approximately $ 0.3 million during the year ended December 31, 2019, which is recorded as a deemed dividend increasing the net loss attributable to common stockholders and in additional paid-in capital.

The Warrant Exercise Agreement expired on May 31, 2019.

On January 2, 2020, the Company amended the New Warrants to provide for an exercise price of $ 7.50 per share (subject to adjustment for stock splits and the like).

The reduced exercise price of the 63,000 New Warrants increased the fair value of these warrants by approximately $ 0.1 million during the year ended December 31, 2020, which is recorded as a deemed dividend increasing the net loss attributable to common stockholders and additional paid-in-capital.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In connection with the June 2019 Offering, the Company reduced the exercise price of the 2018 Warrants to $7.50 per share from the previous exercise price of $105.00 per share.

The reduced exercise price of the 2018 Warrants increased the value of fair value of the 2018 Warrants by approximately $0.8 million and is recorded as a deemed dividend increasing net loss attributable to common stockholders and additional paid-in-capital during the year ended December 31, 2019.

Pursuant to the terms of certain liability-classified warrants issued in connection with our previously outstanding Series A Convertible Preferred stock in March 2018 and May 2018, the exercise price of these warrants was automatically adjusted on June 18, 2019 to $7.50 per share from the previous exercise price of $55.00 per share.

Other Warrants Outstanding

As of December 31, 2020, there are approximately 22,000 other warrants outstanding to acquire shares of common stock at a weighted average exercise price per share of $ 1,569.91 .

The exercise prices range from $ 7.50 per share to $ 42,600 per share and expiration ranges from 2021 to 2023.

Pursuant to the terms of certain warrants issued in connection with previously outstanding Series A Convertible Preferred issued and sold in March 2018 and May 2018, the exercise price of these warrants was automatically adjusted on March 6, 2019 to $ 55.00 per share from the previous exercise price of $ 105.00 per share as a result of the Company's entry into the Warrant Exercise Agreement.

The Company recognized the $ 0.2 million increase to the fair value of the warrant liability as a result of the adjusted exercise price as a deemed dividend which increased the net loss attributable to common stockholders during the year ended December 31, 2019.

The following is a summary of the Company's warrants to acquire shares of common stock activity for the year ended December 31, 2019 (in thousands):

Warrant Issuance

Outstanding, December 31, 2018

Canceled/Expired

Outstanding, December 31, 2019

June 2019 Offering

Pre-funded June 2019 Offering

March 2019 Exercise Agreement

July 2018 Offering

Pre-funded July 2018 Offering

Series A Convertible Preferred

September 2023

2017 Equilibria

December 2022

Galena February 2017

February 2022

The following is a summary of the Company's warrants to acquire shares of common stock activity for the year ended December 31, 2018 (in thousands):

Warrant Issuance

Outstanding, January 1, 2018

Canceled/Expired

Outstanding, December 31, 2018

July 2018 Offering

Pre-funded July 2018 Offering

Series A Convertible Preferred

September 2023

2017 Equilibria

December 2022

Galena February 2017

February 2022

Warrants to acquire shares of common stock consist of warrants that may require the Company to settle in cash, which are liability-classified warrants, and equity-classified warrants.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Pursuant to the terms of certain liability-classified warrants issued in connection with our previously outstanding Series A Convertible Preferred stock issued and sold in March 2018 and May 2018, the exercise price of these warrants was automatically further adjusted on June 18, 2019 to $ 7.50 per share from the previous exercise price of $ 55.00 per share.

The Company recognized the $ 0.1 million increase to the fair value of the warrant liability as a result of the adjusted exercise price as a deemed dividend which increased the net loss attributable to common stockholders during the year ended December 31, 2019.

Warrants Classified as Liabilities

Liability-classified warrants consist of warrants to acquire common stock issued in connection with previous equity financings for the Series A Convertible Preferred, Galena's February 2017 offering, and various other Galena equity financings that were assumed by the Company at the consummation of the Merger.

Liability-classified warrants consist of warrants to acquire common stock issued in connection with previous equity financings.

These warrants may be settled in cash and were determined to not be indexed to the Company’s common stock.

The liability-classified warrants are grouped within Other warrants outstanding in the tables above.

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 operations as a change in fair value of warrant liability.

The fair value of the warrants is estimated using a Black-Scholes pricing model with the following inputs:

The fair value of the warrants accounted for as liabilities is estimated using a Black-Scholes pricing model with the following inputs:

As of December 31, 2020

Warrant Issuance

Outstanding (in thousands)

Strike price (per share)

Expected term (years)

Risk-free rate %

Series A Convertible Preferred

Galena February 2017

Warrant Issuance Outstanding (in thousands) Strike price (per share) Expected term (years) Volatility % Risk-free rate %

Other warrants (liability-classified) 13 $ 7.50 2.75 150.38 % 0.16 %

As of December 31, 2019

Warrant Issuance

Outstanding (in thousands)

Strike price (per share)

Expected term (years)

Risk-free rate %

Series A Convertible Preferred

Galena February 2017

Warrant Issuance Outstanding (in thousands) Strike price (per share) Expected term (years) Volatility % Risk-free rate %

Other warrants (liability-classified) 19 $ 7.50 3.75 112.84 % 1.64 %

The expected volatility assumptions are based on the Company's implied volatility in combination with the implied volatilities of similar publicly traded entities.

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The dividend yield used in the pricing model is zero , because the Company has no present intention to pay cash dividends on its shares of common stock.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The changes in fair value of the warrant liability for the year ended December 31, 2020 were as follows (in thousands):

Warrant Issuance

Warrant liability, December 31, 2018

Fair value of warrants granted

Fair value of warrants exercised

Adjustment to exercise price of warrants

Change in fair value of warrants

Warrant liability, December 31, 2019

Series A Convertible Preferred

Galena February 2017

Warrants Classified as Equity

The Company issued warrants to acquire 6,323 shares of the its common stock at an exercise price of $371.00 per share, maturing five years from issuance, to EQC Private Markets SAC Fund Ltd-EQC Biotech Sely I Fund on December 29, 2017.

Warrant Issuance Warrant liability, December 31, 2019 Fair value of warrants exercised Change in fair value of warrants Warrant liability, December 31, 2020

Other (liability classified $ 52 $ ( 94 ) $ 97 $ 55

License Revenue with 3D Medicines, Inc.

Exclusive License Agreement with 3D Medicines, Inc.

In December 2020, the Company, together with its wholly-owned subsidiary, SLSG Limited, LLC, entered into an Exclusive License Agreement (the “3DMed License Agreement”) with 3D Medicines Inc.

("3DMed"), pursuant to which the Company granted 3DMed a sublicensable, royalty-bearing license, under certain intellectual property owned or controlled by the Company, to develop, manufacture and have manufactured, and commercialize GPS and heptavalent GPS ("GPS Plus") product candidates ("GPS Licensed Products") for all therapeutic and other diagnostic uses in mainland China, Hong Kong, Macau and Taiwan ("3DMed Territory").

The license is exclusive, except with respect to certain know-how that has been non-exclusively licensed to the Company and is sublicensed to 3DMed on a non-exclusive basis.

The Company has retained development, manufacturing and commercialization rights with respect to the GPS Licensed Products in the rest of the world.

In partial consideration for the rights granted by the Company, 3DMed agreed to pay the Company (i) a one-time upfront cash payment of $ 7.5 million, and (ii) milestone payments totaling up to $ 194.5 million in the aggregate upon the achievement of certain technology transfer, development and regulatory milestones, as well as sales milestones based on certain net sales thresholds of GPS Licensed Products in the 3DMed Territory in a given calendar year.

The Company is responsible for providing the licensed technology and data (the "3DMed License") as well as transferring certain technological and manufacturing know-how (the "transfer of know-how").

3DMed also agreed to pay tiered royalties based upon a percentage of annual net sales of GPS Licensed Products in the 3DMed Territory ranging from the high single digits to the low double digits.

The royalties are payable on a GPS Licensed Product-by-GPS Licensed Product and region-by-region basis commencing on the first commercial sale of a GPS Licensed Product in a region and continuing until the latest of (i) the date that is 15 years from the receipt of marketing authorization for such GPS Licensed Product in such region and (ii) the date that is 10 years from the expiration of the last valid claim of a licensed patent covering or claiming such GPS Licensed Product in such region.

The royalty rate is subject to reduction under certain circumstances, including when generic competition for a GPS Licensed Product exists in a particular region.

3DMed is responsible for all costs related to developing, obtaining regulatory approval of and commercializing the GPS Licensed Products in the 3DMed Territory.

3DMed is required to use commercially reasonable best efforts to develop and obtain regulatory approval for, and upon receipt of regulatory approval, commercialize the GPS Licensed Products in the 3DMed Territory.

A joint development committee has been established between 3DMed and the Company to coordinate and review the development, manufacturing and commercialization plans with respect to the GPS Licensed Products in the 3DMed Territory.

The Company and 3DMed also agreed to negotiate in good faith the terms and conditions of a clinical supply agreement, a commercial supply agreement, and related quality agreements pursuant to which the Company will manufacture or have manufactured and supply 3DMed with all quantities of the GPS Licensed Products necessary for 3DMed to develop and commercialize the GPS Licensed Products in the 3DMed Territory until 3DMed has received all approvals required for 3DMed or its designated contract manufacturing organization to manufacture the GPS Licensed Products in the 3DMed Territory.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The pre-funded warrants exercisable for shares of common stock and warrants to acquire shares of common stock issued during the June 2019 Offering and the July 2018 Offering were recorded in equity upon issuance.

During its evaluation of equity classification for the pre-funded warrants exercisable for shares of common stock and warrants to acquire shares of common stock issued in the June 2019 Offering, the Company considered the conditions as prescribed within ASC 815-40, Derivatives and Hedging, Contracts in an Entity’s own Equity (“ASC 815-40”).

The conditions within ASC 815-40 are not subject to a probability assessment.

In addition, the Company determined that the down round feature in the warrants to acquire shares of common stock issued in the June 2019 Offering did not preclude equity classification.

As described in Note 3, on January 1, 2019, the Company adopted ASU No.

2017-11, which changed the classification of certain equity-linked financial instruments (or embedded features) with down round features.

The 3DMed License Agreement will expire on a GPS Licensed Product-by-GPS Licensed Product and region-by-region basis on the date of the expiration of all of 3DMed’s payment obligations to the Company.

Upon expiration of the 3DMed License Agreement, the license granted to 3DMed will become fully paid-up, perpetual and irrevocable.

Either party may terminate the 3DMed License Agreement for the other party’s material breach following a cure period or upon certain insolvency events.

The Company may terminate the 3DMed License Agreement if 3DMed or its affiliates or sublicensees challenge the validity or enforceability of the licensed patents.

At any time following the two-year anniversary of the effective date, 3DMed has the right to terminate the 3DMed License Agreement for convenience, subject to certain requirements.

3DMed may terminate the 3DMed License Agreement upon prior notice to the Company if the grant of the license to 3DMed is prohibited or delayed for a period of time due to a change of U.S.

export laws and regulations.

The 3DMed License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature.

Revenue Recognition

The Company evaluated the 3DMed License Agreement and concluded that 3DMed was a customer and the contract should be evaluated under ASC 606.

In determining the appropriate amount of revenue to be recognized under ASC 606 as the Company fulfills its obligations under the Agreement, the Company performs the following steps:

(i) identifies the promised goods or services in the contract;

(ii) determines whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii) measures the transaction price, including any constraints on variable consideration;

(iv) allocates the transaction price to the performance obligations;

and (v) recognizes revenue when (or as) the Company satisfies each performance obligation.

The Company identified the 3DMed License and the transfer of know-how to be the material promises under the 3DMed License Agreement.

The Company determined that 3DMed License and the transfer of know-how are not distinct from each other.

As such, for the purposes of ASC 606, the Company determined that these two material promises, described above, should be combined into a single performance obligation.

The Company determined the initial transaction price of the single performance obligation to be $ 9.5 million, which includes the $ 7.5 million upfront fee as well as $ 2.0 million in development milestones that are assessed to be probable of being achieved at the inception of the 3DMed License Agreement and therefore were not constrained.

The Company has subsequently achieved $ 1.0 million of these milestones in the first quarter of 2021 and expects to achieve the remaining $ 1.0 million in the second quarter of 2021.

The Company determined that $ 192.5 million in future certain development, regulatory, and sales milestones to be variable consideration subject to constraint at inception.

At the end of each subsequent reporting period, the Company will reevaluate the probability of achievement of the future development, regulatory, and sales milestones subject to constraint and, if necessary, will adjust its estimate of the overall transaction price.

Any such adjustments will be recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

For the sales-based royalties, the Company will recognize revenue when the related sales occur.

To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Since 3DMed is benefiting from the combined single performance obligation relating to the 3DMed License and the transfer of know-how as the technology transfer occurs, the Company is recognizing the transaction price over the technology transfer period, which is expected to be finalized in the second quarter of 2021.

The revenue recognized is based an output method to measure progress, using a straight-line convention, which the Company believes reasonably approximates its efforts in satisfying the combined performance obligation.

The Company recognized $ 1.9 million of license revenue during the year ended December 31, 2020 and deferred $ 5.6 million of the $ 7.5 million of the upfront cash received.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table presents a summary of the activity in the Company's deferred revenue, related to the upfront cash payment received of $ 7.5 million, during the year ended December 31, 2020 (in thousands):

Balance at January 1, 2020 Additions Reductions Balance at December 31, 2020

Deferred revenue $ — $ 7,500 $ ( 1,900 ) $ 5,600

Cost of Contract Acquisition

The Company incurred contract acquisition costs (commissions) recorded as a contract asset amounting to approximately $ 1.4 million which were capitalized under ASC 340-40 as incremental costs of obtaining the contract with 3DMed.

These costs are amortized through general and administrative expense over the technology transfer period, commensurate with when the license revenue is recognized.

The Company recognized $ 0.3 million in expense associated with these costs during the year ended December 31, 2020.

Stock-Based Compensation

Share and per share amounts below have been retroactively adjusted to reflect the exchange ratio and reverse stock split described in Note 3.

2017 Equity Incentive Plan

19 unchanged sentences

Risk free interest rate 0.62 % 2.49 %

Volatility 106.24 % 96.57 %

Expected lives (years) 6.15 6.15

11 unchanged sentences

The following table summarizes stock option activity of the Company for the years ended December 31, 2020 and 2019, respectively:

Weighted Average Remaining Contractual Term (in years)

Shares (in thousands) Weighted

Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate

(in thousands)

Outstanding at January 1, 2019 8 $ 261.09 9.22 $ —

Granted 19 69.00

Canceled ( 5 ) 175.86

Outstanding at December 31, 2019 22 $ 112.81 8.98 $ —

Granted 186 1.87

Outstanding at December 31, 2020 208 $ 13.38 9.08 733

2 unchanged sentences

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.

RSUs with Time-Based and Performance-Based Conditions

The Company granted restricted stock units ("RSUs") subject to both time-based and performance-based vesting conditions to certain of its employees and non-employees pursuant to the 2016 Incentive Plan.

These RSUs vest based on both (i) continued service either over a three -year measurement period or at the end of the required service period and (ii) the achievement of a liquidity event.

The initial vesting date for these RSUs was February 27, 2018.

The liquidity event, as defined in the relevant RSU grant agreements, will be satisfied upon the earlier of either:

(a) change of control or (b) a qualified public offering.

During the year ended December 31, 2019, approximately 230 shares of common stock were issued in connection upon the vesting of RSUs.

As of December 31, 2019, there were no RSUs outstanding under any of the Company's incentive plans.

RSUs with Performance and Service Conditions

The Company granted RSUs subject to both performance-based and service-based vesting conditions to certain of its employees pursuant to the Company's 2019 Equity Incentive Plan that will settle in shares of common stock.

These RSUs vest based on the achievement of certain clinical and regulatory milestones and the respective employee's continued employment with the Company.

As of December 31, 2020, there was $ 0.3 million of unrecognized compensation cost related to outstanding RSUs.

The following table summarizes RSU activity of the Company for the year ended December 31, 2020:

Total Number of Shares

(in thousands) Weighted Average Grant Date Fair Value Per Share

Unvested at December 31, 2019 — $ —

Granted 170 $ 1.89

Unvested at December 31, 2020 170 $ 1.89

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

2017 Employee Stock Purchase Plan

3 unchanged sentences

There are approximately 8,300 shares of common stock reserved for issuance under the ESPP, plus the number of shares of common stock that are automatically added on January 1st of each year for a period of up to ten years , commencing on January 1, 2018 and ending on (and including) January 1, 2027, in an amount equal to the lesser of (i) 1 % of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, and (ii) 3,000 shares of common stock.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The loss before income taxes is as follows (in thousands):

The Company's loss before income taxes is as follows (in thousands):

As of December 31,

$ ( 4,664 ) $ ( 8,477 )

( 12,110 ) ( 10,895 )

$ ( 16,774 ) $ ( 19,372 )

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

As of December 31,

Federal $ — $ —

Total current 5 14

Deferred expense

Federal — ( 117 )

State ( 22 ) 22

Total deferred ( 22 ) ( 95 )

Total income tax expense (benefit)

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

Total income tax benefit $ ( 17 ) $ ( 81 )

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

As of December 31,

Net operating loss carryforwards $ 7,155 $ 6,720

Tax credit carryforwards

Stock-based compensation 75 2,059

Licensing deduction deferral 4,059 5,139

Contingent consideration 973 —

Lease liability 208 47

1 unchanged sentence

Valuation allowance ( 11,514 ) ( 12,987 )

Net deferred tax asset

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

Net deferred tax assets $ 1,146 $ 1,005

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

As of December 31,

2 unchanged sentences

Gross deferred tax liability $ 1,385 $ 1,267

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

12 unchanged sentences

Contingent consideration 0.1 % 4.5 %

Other 11.0 % 0.8 %

Valuation allowance ( 8.1 ) % 9.9 %

Tax credits — % — %

Effective income tax rate ( 0.1 ) % ( 0.5 ) %

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

At December 31, 2020, the Company had domestic federal and state net operating loss carryforwards of approximately $ 33.7 million and $ 1.2 million, respectively, available to reduce future taxable income, which expire beginning in 2027.

8 unchanged sentences

This annual limitation may result in the expiration of the net operating losses and credits before utilization.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In assessing the need for a valuation allowance the Company may utilize indefinite-lived deferred tax liabilities from an indefinite-lived intangible asset as a future source of income.

1 unchanged sentence

Therefore, the Company is permitted to offset the indefinite-lived deferred tax liability up to the 80 percent limitation for NOL’s generated subsequent to January 1, 2018.

The valuation allowance increased by $1.6 million for the year ended December 31, 2019 as a result of the impairment of one of the Company's indefinite-lived intangible assets.

The valuation allowance decreased by $ 1.5 million for the year ended December 31, 2020.

The Company files income tax returns in the United States and various state jurisdictions.

7 unchanged sentences

End of the year - unrecognized tax benefits $ — $ —

The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $55,000 as of December 31, 2018.

As of December 31, 2020, the Company does not believe that it is reasonably possible that its unrecognized tax benefits would significantly change in the following 12 months.

1 unchanged sentence

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others.

The Company is required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring the Company's U.S.

deferred tax assets and liabilities, as well as reassessing the net realizability of the Company's deferred tax assets and liabilities.

In December 2017, the SEC staff issued Staff Accounting Bulletin No.

118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

As a result, the Company previously provided a provisional estimate of the effect of the Tax Act in the Company's financial statements.

In the fourth quarter of 2018, we completed our analysis to determine the effect of the Tax Act and recorded no material adjustments as of December 31, 2018.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Securities Act (CARES Act) was signed into law in the US in March 2020.

The CARES Act adjusted a number of provisions in the tax code, including the calculation and eligibility of certain deductions and the treatment of net operating losses and tax credits.

The enactment of the CARES Act did not result in any material adjustments to the Company's income tax provision for the year ended December 31, 2020, or to the Company's net deferred tax assets as of December 31, 2020.

Employee Benefit Plan

3 unchanged sentences

The Company makes a matching contribution to the plan for each participant who has elected to make tax-deferred contributions for the plan year.

The Company made matching contributions which amounted to approximately $38,000 for the year ended December 31, 2019.

There were no matching contributions made during the year ended December 31, 2018.

The Company made matching contributions which amounted to approximately $ 43,000 and $ 38,000 for the year ended December 31, 2020 and 2019, respectively.

These amounts were charged to the statement of operations.

2 unchanged sentences

The Company evaluated all events or transactions that occurred after December 31, 2020 up through the date these financial statements were issued.

Other than as disclosed elsewhere in the notes to the consolidated financial statements, the Company did not have any material subsequent events.

On January 9, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors named therein (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “January 2020 Registered Offering”), (i) an aggregate of 1,189,000 shares of common stock, par value $0.0001 per share, of the Company, at an offering price of $3.9825 per share and (ii) an aggregate of 448,800 pre-funded warrants exercisable for shares of common stock (the “Pre-Funded Warrants”) at an offering price of $3.9725 per pre-funded warrant, for gross proceeds of approximately $6.5 million before deducting the placement agent fee and related offering expenses.

The net proceeds to the Company from the January 2020 Registered Offering, after deducting the placement agent fee and other estimated offering expenses, and excluding the exercise of any warrants, was approximately $5.9 million .

On January 9 2020, in a concurrent private placement, the Company issued to the Investors who participated in the January 2020 Registered Offering warrants exercisable for an aggregate of 818,900 shares of common stock at an exercise price of $3.93 per share.

Each warrant is immediately exercisable and will expire five and one-half years from the issuance date.

Subsequent to December 31, 2019, all 448,800 pre-funded warrants exercisable for shares of common stock issued in the January 2020 Registered Offering were exercised at an exercise price of $0.01 per share.

Other than as disclosed below and elsewhere in the notes to the consolidated financial statements, the Company did not have any material subsequent events.

Subsequent to December 31, 2020, 830,200 warrants to acquire shares of common stock were exercised at a weighted average exercise price of $ 3.61 for $ 3.0 million of gross proceeds.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data