SELLAS Life Sciences Group, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firm 123 Consolidated Balance Sheets as of December 31, 20 20 and 20 1 9 125 Consolidated Statements of Operations for the years ended December 31, 20 20 and 20 19 126 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020 and 2019 127 Consolidated Statements of Cash Flows for the years ended Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 128 Notes to Consolidated Financial Statements 129 122 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of SELLAS Life Sciences Group, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of SELLAS Life Sciences Group, Inc. (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, 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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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. 123 Table of Contents 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; and • 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; and • 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 San Francisco, California March 23, 2021 We have served as the Company’s auditor since 2018. 124 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 35,302 $ 7,277 Restricted cash and cash equivalents 100 100 Stock subscription receivable — 308 Contract asset 1,128 — Prepaid expenses and other current assets 395 557 Total current assets 36,925 8,242 Operating lease right-of-use asset 896 217 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 Current liabilities: Accounts payable $ 4,657 $ 3,902 Accrued expenses and other current liabilities 1,913 1,171 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 Warrant liability 55 52 Contingent consideration 4,633 4,912 Total liabilities 18,088 10,516 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 5,000,000 shares authorized; Series A convertible preferred stock, 17,500 shares designated; 0 shares issued and outstanding at December 31, 2020 and December 31, 2019 — — Common stock, $ 0.0001 par value; 350,000,000 shares authorized, 14,254,554 shares issued and outstanding at December 31, 2020; 5,080,100 shares issued and outstanding at December 31, 2019 1 1 Additional paid-in capital 145,864 107,239 Accumulated deficit ( 117,904 ) ( 101,147 ) Total stockholders’ equity 27,961 6,093 Total liabilities and stockholders’ equity $ 46,049 $ 16,609 See accompanying notes to these consolidated financial statements. 125 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) Year Ended December 31, 2020 2019 Licensing revenue $ 1,900 $ — Operating expenses: Research and development 9,282 7,285 General and administrative 9,600 9,923 In-process research and development impairment charge — 2,833 Total operating expenses ( 18,882 ) ( 20,041 ) Loss from operations ( 16,982 ) ( 20,041 ) Non-operating income (expense): Change in fair value of warrant liability ( 97 ) 1,136 Change in fair value of contingent consideration 279 ( 586 ) Interest income, net 26 118 Total non-operating income, net 208 668 Loss before income taxes ( 16,774 ) ( 19,373 ) Income tax benefit ( 17 ) ( 81 ) Net loss ( 16,757 ) ( 19,292 ) Deemed dividend arising from warrant modifications ( 78 ) ( 8,416 ) Impact of anti-dilution protection on liability-classified warrants — ( 243 ) Net loss attributable to common stockholders $ ( 16,835 ) $ ( 27,951 ) Per share information: Net loss per common share attributable to common stockholders, basic and diluted $ ( 2.11 ) $ ( 10.92 ) Weighted-average common shares outstanding, basic and diluted 7,977,104 2,558,755 See accompanying notes to these consolidated financial statements. 126 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Amounts in thousands, except share amounts) 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 Impact of anti-dilution protection on liability-classified warrants — — ( 243 ) — ( 243 ) 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 Issuance of common stock and common stock warrants, net of issuance costs 6,253,078 — 29,418 — 29,418 Issuance of common stock for exercise of warrants, net of offering costs 2,472,576 — 8,625 — 8,625 Issuance of common stock upon exercise of pre-funded warrants 448,800 — 4 — 4 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 See accompanying notes to these consolidated financial statements. 127 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 16,757 ) $ ( 19,292 ) Adjustment to reconcile net loss to net cash used in operating activities: Non-cash In-process research and development impairment charge — 2,833 Deferred income taxes ( 23 ) ( 95 ) Non-cash stock-based compensation 578 573 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 Changes in operating assets and liabilities: Prepaid expenses and other assets 84 ( 76 ) Accounts payable ( 836 ) 12 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 common stock, net of issuance costs 29,599 15,971 Proceeds from exercise of warrants 8,535 3,598 Collection of stock subscription receivable 308 — Net cash provided by financing activities 38,442 19,569 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 Cash, cash equivalents, restricted cash, and restricted cash equivalents at the end of year $ 35,402 $ 7,377 Supplemental disclosure of cash flow information: Cash received during the year for interest $ 26 $ 118 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 Deferred offering costs included in accounts payable and accrued expenses $ 181 $ 135 Right-of-use assets recorded $ 976 $ 549 See accompanying notes to these consolidated financial statements. 128 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business SELLAS Life Sciences Group, Inc. (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 ("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 ("TNBC") 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. and its consolidated subsidiaries following the completion of the business combination with Galena Biopharma, Inc., a Delaware corporation ("Galena"), and SELLAS Life Sciences Group, Ltd., a privately held Bermuda exempted company ("Private SELLAS") in December 2017. This business combination is referred to as the Merger. 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. 2. Liquidity 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. 129 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 3. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. 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, and Apthera, Inc. The functional currency of the Company's non-U.S. operations is the U.S. dollar. Use of Estimates The preparation of these consolidated financial statements in accordance with U.S. 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. On an ongoing basis, the Company evaluates its estimates using historical experience and other factors, including the current economic environment. Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation, the fair value of the warrants, fair value of intangible assets acquired, carrying value of goodwill, fair value of contingent purchase price consideration, fair value of deferred tax liability assumed and accounting for research and development activities. Management believes its estimates to be reasonable under the circumstances. Actual results could differ significantly from those estimates. 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 Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment. 130 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Fair Value of Financial Instruments 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. 131 Table of Contents 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): December 31, 2020 2019 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 In accordance with FASB ASC 505-10-45-2, Receivables for Issuance of Equity , the Company recorded a stock subscription receivable as of December 31, 2019 related to the sale of shares of common stock prior to December 31, 2019 as the cash was collected before the financial statements are issued or available to be issued. Prior to December 31, 2019, the Company sold 75,000 shares of common stock for gross proceeds of $ 0.3 million. 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. Intangible Assets Intangible assets are comprised of identifiable in-process research and development (“IPR&D”) assets and are considered indefinite-lived intangible assets and are assessed for impairment annually on October 1 or more frequently if impairment indicators exist. If the associated research and development effort is abandoned, the related assets will be written off, and the Company will record a non-cash impairment loss. For those compounds that reach commercialization, the IPR&D assets will be amortized over their estimated useful lives. 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. Goodwill 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. Goodwill is not amortized but is subject to an annual impairment test. The Company has a single reporting unit and all goodwill relates to that reporting unit. 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 no t recognize any impairment of goodwill during the years ended December 31, 2020 and 2019. 132 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Leases 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. 133 Table of Contents 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 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. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development expenses. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of revenue over the remaining useful life of the asset. Research and development expenses primarily consist of the intellectual property and research and development materials acquired, expenses from third parties who conduct research and development activities on behalf of the Company as well as related wages, benefits and other operating costs. The Company expenses in-process research and development projects acquired as asset acquisitions which have not reached technological feasibility and which have no alternative future use. Stock-based Compensation The Company measures employee and nonemployee director share-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the awards. Estimating the fair value of share-based awards requires the input of subjective assumptions, including the estimated fair value of the Company’s common stock and, for stock options, the expected life of the options and stock price volatility. The Company accounts for forfeitures for stock option awards as they occur. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in estimating the fair value of share-based awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. 134 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The expected life of the stock options is estimated using the “simplified method,” as the Company has no historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. 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 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. Treasury yield curve commensurate with the expected life of the option. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax return it files, if such a position is more likely than not to be sustained. Potential interest and penalties associated with unrecognized tax positions are recognized in income tax expense. No interest or penalties were recognized in either of the years ended December 31, 2020 or 2019. The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “ Accounting for Income Taxes” (“ASC 740-10”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit. The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the Company’s assumptions or changes in the Company’s assumptions in future periods are recorded in the period they become known. Net Loss Per Share Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible debt, warrants, stock options and unvested restricted stock that would result in the issuance of incremental shares of common stock. In computing the basic and diluted net loss per share, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive. 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): December 31, 2020 2019 Common stock warrants 1,392 302 Stock options 208 22 Restricted stock units 170 — 1,770 324 135 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Recent Accounting Pronouncements Adopted In August 2018, FASB issued No. ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU No. 2018-13") . ASU No. 2018-13 modifies, adds and removes certain specific disclosure requirements on fair value measurements in Topic 820. The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted this standard on January 1, 2020 and the required disclosures are included in the consolidated financial statements. 4. Goodwill and Intangible Assets The Company completes its annual impairment test on October 1 each year, or more frequently if triggering events indicate a possible impairment. The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an interim period impairment test is necessary. The Company's goodwill balance at December 31, 2020 and 2019 was $ 1.9 million. 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 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. 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. 5. 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. The expenditures required under these arrangements in any period may be material and are likely to fluctuate from period to period. These arrangements sometimes permit the Company to unilaterally terminate development of the product and thereby avoid future contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. 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. 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: (i) expiration of the last valid claim embracing such licensed product; (ii) expiration of any market exclusivity period granted by law with respect to such licensed product; or (iii) ten ( 10 ) years from the first commercial sale in such country. 136 Table of Contents 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”). 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. 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 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. 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. subsidiary, Merck Sharp & Dohme B.V. (“Merck subsidiary”), whereby the Company agreed with the Merck subsidiary to collaborate in a research program to evaluate GPS as it is administered in combination with Merck’s PD1 blocker pembrolizumab in a Phase 1/2 clinical trial enrolling patients in up to five cancer indications, including both hematologic malignancies and solid tumors assessing the efficacy and safety of the combination, comparing overall response rates and immune response markers achieved with the combination compared to prespecified rates based on those seen with pembrolizumab alone in comparable patient populations. In the fourth quarter of 2018, pursuant to the Merck Agreement, the Company initiated a Phase 1/2 multi-arm ("basket" type) clinical study of GPS in combination with Merck & Co., Inc.’s anti-PD-1 therapy, Keytruda® (pembrolizumab) in patients with WT1+ relapsed or refractory tumors. In July 2019, the Company dosed the first patient in this trial. 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. D. Anderson Cancer Center and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. On September 11, 2006, the Company acquired rights and assumed obligations under a license agreement among Apthera and The University of Texas M. D. Anderson Cancer Center (“MDACC”) and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. (“HJF”) which grants exclusive worldwide rights to a U.S. patent covering 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. 137 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 6. 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): Description December 31, 2020 Quoted Prices In Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Cash equivalents $ 34,959 $ 34,959 $ — $ — Total assets measured and recorded at fair value $ 34,959 $ 34,959 $ — $ — Liabilities: Warrants potentially settleable in cash $ 55 $ — $ — $ 55 Contingent consideration 4,633 — — 4,633 Total liabilities measured and recorded at fair value $ 4,688 $ — $ — $ 4,688 Description December 31, 2019 Quoted Prices In Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Cash equivalents $ 7,027 $ 7,027 $ — $ — Total assets measured and recorded at fair value $ 7,027 $ 7,027 $ — $ — Liabilities: Warrants potentially settleable in cash $ 52 $ — $ — $ 52 Contingent consideration 4,912 — — 4,912 Total liabilities measured and recorded at fair value $ 4,964 $ — $ — $ 4,964 The Company did not transfer any financial instruments into or out of Level 3 classification during the years ended December 31, 2020 and 2019. See Note 10 for a reconciliation of the changes in the fair value of the warrant liability for the years ended December 31, 2020. 138 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued A reconciliation of the change in the fair value of the contingent consideration liability for the years ended December 31, 2020 and 2019 is as follows (in thousands): Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Contingent consideration, January 1, 2019 $ 4,326 Change in the estimated fair value of the contingent consideration 586 Contingent consideration, December 31, 2019 4,912 Change in the estimated fair value of the contingent consideration ( 279 ) Contingent consideration, December 31, 2020 $ 4,633 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 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. 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. 139 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 7. Balance Sheet Accounts Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2020 2019 Insurance $ 221 $ 200 Clinical trial costs 95 224 Professional fees 49 49 Other 30 84 Prepaid expenses and other current assets $ 395 $ 557 Accrued expenses and other current liabilities consist of the following (in thousands): December 31, 2020 2019 Compensation and related benefits $ 812 $ 606 Clinical trial costs 631 371 Professional fees 276 194 Other 194 — Accrued expenses and other current liabilities $ 1,913 $ 1,171 8. Legal Proceedings, Commitments and Contingencies Legal Proceedings From time to time, the Company is subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business, which may include employment matters, breach of contract disputes and stockholder litigation. Such actions and proceedings are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, when the Company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. 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, 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: 140 Table of Contents 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. The actions were consolidated, lead plaintiffs were named by the U.S. District Court for the District of New Jersey and a consolidated complaint was filed. The Company filed a motion to dismiss the consolidated complaint. On August 21, 2018, the Company's motion to dismiss the consolidated complaint was granted without prejudice to file an amended complaint. On September 20, 2018, the plaintiffs filed an amended complaint. On October 22, 2018, the Company filed a motion to dismiss the amended complaint. On November 13, 2019, 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 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. District Court for the District of New Jersey against the Company’s former directors and Galena, as a nominal defendant. In July 2017, a derivative complaint was filed in California state court against the Company’s former directors and Galena, as a nominal defendant. In January 2018, a derivative complaint was filed in the U.S. District Court for the District of New Jersey against the Company’s former directors, officers and employees, and the Company as a nominal defendant. 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 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 The Company acquires assets still in development and enters into research and development arrangements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales. Because of the contingent nature of these payments, they are not included in the table of contractual obligations shown below. These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give the Company the discretion to unilaterally terminate development of the product, which would allow the Company to avoid making the contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. 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. 141 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Leases 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: 2021 $ 303 2022 311 2023 321 2024 330 Total future minimum lease payments 1,265 Less: imputed interest ( 274 ) Operating lease liability $ 991 9. Stockholders’ Equity Preferred Stock The Company has authorized up to 5,000,000 shares of preferred stock, $ 0.0001 par value per share, for issuance. Common Stock 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. 142 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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 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. 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 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. 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. Shares of common stock reserved for future issuance are as follows (in thousands): December 31, 2020 Warrants outstanding 1,392 Stock options outstanding 208 Restricted stock units 170 Options reserved for future issuance under the Company’s 2019 Equity Incentive Plan 101 Shares reserved for future issuance under the Employee Stock Purchase Plan 8 Total shares of common stock reserved for future issuance 1,879 143 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 10. Warrants to Acquire Shares of Common Stock 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. 144 Table of Contents 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. 145 Table of Contents 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. 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. 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 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. 146 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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. 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. 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 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) 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) 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. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the time of valuation. The dividend yield used in the pricing model is zero , because the Company has no present intention to pay cash dividends on its shares of common stock. 147 Table of Contents 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, 2019 Fair value of warrants exercised Change in fair value of warrants Warrant liability, December 31, 2020 Other (liability classified $ 52 $ ( 94 ) $ 97 $ 55 11. 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. 148 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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. 149 Table of Contents 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. 12. Stock-Based Compensation 2017 Equity Incentive Plan On December 29, 2017, the 2017 Equity Incentive Plan was approved by the stockholders of the Company, and currently allows for the issuance of up to a maximum of 24,204 shares of common stock underlying stock options granted prior to September 10, 2019. The 2017 Equity Incentive Plan was terminated upon the approval of the 2019 Incentive Plan subject to outstanding stock options granted under the 2017 Equity Incentive Plan that remain exercisable through maturity for the Company's employees and directors. 2019 Equity Incentive Plan On September 10, 2019, the 2019 Equity Incentive Plan was approved by the stockholders of the Company, and currently allows for issuance of up to (i) 200,000 shares of common stock in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate plus (ii) any shares of common stock that are represented by awards granted under the Company’s 2017 Equity Incentive Plan that are forfeited, expire or are cancelled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company on or after September 10, 2019. As of December 31, 2020, an aggregate of 2,684 shares of common stock under the 2017 Equity Incentive Plan were forfeited back to the Company subsequent to September 10, 2019 and are available for future issuance. The number of shares reserved for issuance under the 2019 Equity Incentive Plan will automatically increase on January 1 of each year, for a period of not more than four years, commencing on January 1, 2020 and ending on (and including) January 1, 2023, by an amount equal to the lesser of (i) 5 % of the total number of shares of common stock outstanding at the end of the prior fiscal year; and (ii) an amount determined by the board of directors or authorized committee. As of December 31, 2020, 100,689 shares of common stock were reserved for future grants under the 2019 Equity Incentive Plan. The number of shares reserved for issuance under the 2019 Equity Incentive Plan was automatically increased to 813,417 on January 1, 2021. 150 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively (in thousands): Years Ended December 31, 2020 2019 Research and development $ 14 $ — General and administrative 564 573 Total stock-based compensation $ 578 $ 573 Options to Purchase Shares of Common Stock The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock-based awards and the following assumptions were used for stock options granted during the years ended December 31, 2020 and 2019, respectively: Years Ended December 31, 2020 2019 Risk free interest rate 0.62 % 2.49 % Volatility 106.24 % 96.57 % Expected lives (years) 6.15 6.15 Expected dividend yield — % — % The weighted-average grant date fair value of options granted during the years ended December 31, 2020 and 2019 was $ 1.53 and $ 54.00 , respectively. The Company’s expected common stock price volatility assumption is based upon the Company's own implied volatility in combination with the implied volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method, which averages the contractual term of the Company’s options of ten years with the average vesting term of four years for an average of six years . The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero because the Company has never paid cash dividends and presently has no intention to do so. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The Company accounts for forfeitures as they occur, therefore, outstanding stock options equal vested and expected to vest stock options. As of December 31, 2020, there was $ 0.7 million of unrecognized compensation cost related to outstanding stock options that is expected to be recognized as a component of the Company’s operating expenses over a weighted-average period of 2.02 years. 151 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The following table summarizes stock option activity of the Company for the years ended December 31, 2020 and 2019, respectively: Total Number of Shares (in thousands) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (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 Vested and exercisable at December 31, 2020 12 $ 127.90 7.92 $ — The aggregate intrinsic values of outstanding and exercisable stock options at December 31, 2020 were calculated based on the closing price of the Company’s common stock as reported on the Nasdaq Capital Market on December 31, 2020 of $ 5.81 per share. The aggregate intrinsic value equals the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying stock options. 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 Vested — $ — Unvested at December 31, 2020 170 $ 1.89 152 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 2017 Employee Stock Purchase Plan The Company also has an employee stock purchase plan (“ESPP”) which allows employees to contribute up to 15 % of their cash earnings, subject to certain maximums, to be used to purchase shares of the Company’s common stock on each semi-annual purchase date. On each offering date, each eligible employee, pursuant to an offering made under the ESPP, will be granted a right to purchase up to that number of shares of common stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board of Directors, but in either case not exceeding fifteen percent ( 15 %) of such employee’s earnings (as defined by the Board of Directors in each offering) during the period that begins on the offering date (or such later date as the Board of Directors determines for a particular offering) and ends on the date stated in the offering, which date will be no later than the end of the offering. As of December 31, 2020, the Board of Directors has not established the various parameters under the ESPP and no shares have been delivered under the ESPP. 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. 13. Income Taxes The Company's loss before income taxes is as follows (in thousands): As of December 31, 2020 2019 U.S. $ ( 4,664 ) $ ( 8,477 ) Non - U.S. ( 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, 2020 2019 Current Federal $ — $ — State 5 14 Total current 5 14 Deferred expense Federal — ( 117 ) State ( 22 ) 22 Total deferred ( 22 ) ( 95 ) Total income tax benefit $ ( 17 ) $ ( 81 ) 153 Table of Contents 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, 2020 2019 Net operating loss carryforwards $ 7,155 $ 6,720 Stock-based compensation 75 2,059 Licensing deduction deferral 4,059 5,139 Contingent consideration 973 — Lease liability 208 47 Other 190 27 Gross deferred tax assets 12,660 13,992 Valuation allowance ( 11,514 ) ( 12,987 ) Net deferred tax assets $ 1,146 $ 1,005 The components of gross deferred tax liabilities are as follows (in thousands): As of December 31, 2020 2019 In-process research and development not subject to future amortization for tax purposes $ 1,197 $ 1,220 Right of use asset $ 188 $ 47 Gross deferred tax liability $ 1,385 $ 1,267 The net deferred tax liabilities are as follows (in thousands): As of December 31, 2020 2019 Net deferred tax asset $ 1,146 $ 1,005 Gross deferred tax liability 1,385 1,267 Net deferred tax liability $ 239 $ 262 The provision for income taxes differs from the provision computed by applying the federal statutory rate to net loss before income taxes as follows: As of December 31, 2020 2019 U.S. federal statutory income tax rate ( 21.0 ) % ( 21.0 ) % State and local taxes, net of federal benefit 2.5 % ( 1.1 ) % Foreign rate differential 15.2 % 11.8 % Permanent differences 0.2 % 1.1 % Tax rate change and true-up — % — % Fair value change warrants — % ( 6.5 ) % 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 ) % 154 Table of Contents 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. The income tax benefit for the year ended December 31, 2020 and 2019 relates to both the indefinite lived deferred tax liabilities. Under the provisions of the Internal Revenue Code, the net operating losses (“NOL”) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 %, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception, which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future. Utilization of the net operating loss and tax credits carryforwards may be limited by “ownership change” rules, as defined in Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization. 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. The Company’s IPR&D, as recorded in acquisition accounting, can be utilized as a source of income arising from the future reversal of temporary difference that can be offset against post 2017 indefinite-lived NOLs. 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 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. The Company is subject to tax examinations for the 2017 tax year and beyond. The Company does not recognize tax benefits that are not more-likely-than-not to be supported based upon the technical merits of the tax position taken. In assessing its unrecognized tax benefits, the Company has analyzed its tax return filing positions in all of the federal, state and foreign filing jurisdictions where it is required to file income tax returns, as well as all open years in those jurisdictions. The following table indicates the changes to the Company’s unrecognized tax benefits (in thousands): As of December 31, 2020 2019 Beginning of the year - unrecognized tax benefits $ — $ 55 Increase/(decrease) - prior year tax positions — ( 55 ) End of the year - unrecognized tax benefits $ — $ — 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. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized in the near term. 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. 155 Table of Contents 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. 14. Employee Benefit Plan The Company sponsors a 401(k) Plan. Employees become eligible for participation upon the start of employment. Participants may elect to have a portion of their salary deferred and contributed to the 401(k) Plan up to the limit allowed under the Internal Revenue Code. 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 $ 43,000 and $ 38,000 for the year ended December 31, 2020 and 2019, respectively. These amounts were charged to the statement of operations. The employer contributions vest immediately. 15. Subsequent Events 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 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. 156 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.