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Item 8. Financial Statements and Supplementary Data

2022-03-31 compared with 2021-03-23 · 317 added, 322 removed, 583 unchanged (52% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (Moss Adams LLP, San Francisco, CA, PCAOB ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020

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SELLAS Life Sciences Group, Inc.

Opinion on the Consolidated Financial Statements

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of SELLAS Life Sciences Group, Inc.

(the “Company”) as of December 31, 2021 and 2020, 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.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

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

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

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

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

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.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

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.

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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.

As part of our audits, 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.

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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.

Our audits 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.

Accounting for Contingent Consideration Liability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ Moss Adams LLP

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Restricted cash and cash equivalents 100 100

Stock subscription receivable — 308

Contract asset — 1,128

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

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

0 shares issued and outstanding at December 31, 2021 and 2020

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

350,000,000 shares authorized, 15,895,637 and 14,254,554 shares issued and outstanding at December 31, 2021 and 2020, respectively

Additional paid-in capital 158,948 145,864

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Operating expenses:

Cost of revenue 200 —

Research and development 15,674 9,282

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Deemed dividend arising from warrant modifications — ( 78 )

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

Net loss attributable to common stockholders $ ( 20,699 ) $ ( 16,835 )

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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 2,102,744 — 3,658 — 3,658

Issuance of common stock for exercise of warrants 2,472,576 — 8,625 — 8,625

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

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 — — 578 — 578

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

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

Issuance of common stock, net of issuance costs 786,927 — 9,005 — 9,005

Issuance of common stock for exercise of warrants 844,061 1 3,068 — 3,069

Vesting of restricted stock units 10,095 — — — —

Stock-based compensation — — 1,011 — 1,011

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Non-cash in-process research and development impairment charge 5,700 —

Deferred income taxes ( 23 ) ( 95 )

Non-cash stock-based compensation 1,011 578

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 )

Non-cash lease expense 173 95

Change in fair value of contingent consideration ( 4,337 ) ( 279 )

Change in fair value of common stock warrants ( 15 ) 97

Deferred income taxes ( 239 ) ( 23 )

Changes in operating assets and liabilities:

Contract asset 1,128 282

Prepaid expenses and other assets ( 1,174 ) 84

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Accrued expenses and other current liabilities 727 742

Operating lease liabilities ( 183 ) —

Deferred revenue ( 5,600 ) 5,600

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Net cash provided by financing activities 12,074 38,442

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

Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 13,947 ) 28,025

Cash, cash equivalents, restricted cash, and restricted cash equivalents at the beginning of year 35,402 7,377

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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

Reclassification of warrant liabilities upon exercise $ — $ 94

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

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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.

SELLAS’ second product candidate, nelipepimut-S ("NPS"), is a HER2-directed cancer immunotherapy.

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

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

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.

Liquidity and Going Concern

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

The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

The Company expects its costs and expenses to increase as it continues to develop its product candidates and progress its current and planned clinical programs.

Pursuant to the requirements of Accounting Standard Codification ("ASC") 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date these financial statements are issued, but will consider such plans if (1) it is probable that the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant condition or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the consolidated financial statements are issued.

Certain elements of the Company’s operating plan to alleviate the conditions that raise substantial doubt are outside of the Company’s control and cannot be included in management’s evaluation under the requirements of Accounting Standard Codification (ASC) 205-40.

Since inception, the Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of $ 138.6 million as of December 31, 2021.

During the year ended December 31, 2021, the Company incurred a net loss of $ 20.7 million and used $ 26.0 million of cash in operations.

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As of December 31, 2021, the Company had cash and cash equivalents of $ 21.4 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.

The Company expects its cash and cash equivalents will not be sufficient to fund its current planned operations for at least the next twelve months from the date of issuance of these financial statements.

These conditions give rise to a substantial doubt over the Company’s ability to continue as a going concern.

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On April 16, 2021, the Company entered into a Controlled Equity Offering SM Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or the Agent.

From time to time during the term of the Sales Agreement, the Company may offer and sell shares of common stock having an aggregate offering price up to a total of $ 50.0 million in gross proceeds.

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

Shares of common stock sold under the Sales Agreement are offered and sold pursuant to the Company's registration statement on Form S-3, which was filed with the SEC on April 16, 2021 and declared effective on April 29, 2021.

During the year ended December 31, 2021, the Company sold 786,927 shares of common stock pursuant to the Sales Agreement at an average price of $ 12.04 per share for aggregate net proceeds of approximately $ 9.0 million.

Other than the Sales Agreement, the Company currently does not have any commitments to obtain additional funds.

During the year ended December 31, 2021, the Company received $ 3.1 million from the exercise of warrants to acquire shares of the Company's common stock.

During the year ended December 31, 2021, the Company received $ 2.0 million from milestones achieved pursuant to the 3DMed Agreement (See Note 11).

In January 2022, the Company announced that an IND application for a small Phase I clinical trial investigating safety of GPS in China was accepted by China's National Medical Products Administration ("NMPA").

3D Medicines expects to initiate the trial by mid-2022 and will be responsible for all expenses related to executing the trial in China.

On March 30, 2022, the IND was approved by the NMPA triggering a $ 1.0 million milestone payment to the Company which is expected to be received in the second quarter of 2022.

The current clinical development plan provides for initiation of a Phase II clinical trial following receipt of satisfactory safety data from the Phase I study;

the initiation of the Phase II study will also trigger a milestone payment to the Company which is expected in the second half of 2022.

Total remaining potential milestone payments to the Company under the 3DMed Agreement total $ 192.5 million, not including future royalties.

The Company will require substantial additional financing to commercially develop any current or future product candidates.

Alternatively, the Company will be required to scale back its plans and place certain activities on hold.

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

The Company's management continues to evaluate different strategies to obtain the required funding for future operations.

These strategies may include utilizing the Sales Agreement, public and private placements of equity and/or debt securities, payments from potential strategic research and development collaborations, and licensing and/or marketing arrangements with pharmaceutical companies.

Additionally, the Company continue to pursue discussions with global and regional pharmaceutical companies for licensing and/or co-development rights to its product candidates.

There can be no assurance that these future funding efforts will be successful.

If the Company cannot obtain the necessary funding, the Company will need to delay, scale back or eliminate some or all of its research and development programs;

consider other various strategic alternatives, including a merger or sale;

or cease operations.

Basis of Presentation and Significant Accounting Policies

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operations is the U.S.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Use of Estimates

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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.

Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation, carrying value of IPR&D and any related impairment, carrying value of goodwill, fair value of contingent purchase price consideration, accounting for deferred income taxes, 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

Reclassifications

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Fair Value of Financial Instruments

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As of December 31, 2021 and 2020, 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.

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

See Note 6 for additional information on the fair value of certain financial assets and liabilities.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Concentration of Credit Risk

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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 ongoing global COVID-19 pandemic, including the surges of cases from the Delta and Omicron variants, continues to disrupt the Company’s business operations and those of its contractors, contract research organizations (“CROs”), suppliers, clinical sites, contract manufacturing organizations (“CMOs”), and other partners.

The COVID-19 pandemic could affect the health and availability of the Company’s workforce and that of the third-parties it relies on, such as its CROs, clinical sites, CMOs, and other contractors as well as the governmental agencies, such as the U.S.

Food and Drug Administration (“FDA”) and health authorities in other countries which could delay or otherwise adversely impact the ability of such parties to fulfill their obligations.

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.

The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact 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 duration of the outbreak, the continued availability and efficacy of vaccines, new information which may emerge concerning the severity of COVID-19, the emergence of new variants of COVID-19, and the actions to contain COVID-19 or treat its impact, among others.

Cash and Cash Equivalents

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Restricted Cash and Cash Equivalents

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Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 21,455 $ 35,402

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.

The Company maintained $ 0.1 million as of December 31, 2021 and 2020, on hand with the Company's financial institutions as collateral for its corporate credit cards.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

As part of the business combination with Galena, the Company acquired certain in-process research and development (“IPR&D”) assets, which were capitalized as intangible assets.

Costs to develop these assets are recorded in research and development expense as incurred in the Company’s consolidated statements of operations.

The Company’s intangible assets were comprised of identifiable assets which are considered indefinite-lived intangible assets and are assessed for impairment annually in the fourth quarter of each fiscal year or more frequently if impairment indicators exist.

In the fourth quarter of 2021 as part of its annual impairment analysis, the Company measured the fair value of the IPR&D asset, nelipepimut-S ("NPS"), by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects and discounting the related net cash flow to present value.

The revenue and cost projections used to value IPR&D were reduced based on the probability of success of developing NPS in other oncology indications outside of breast cancer, given that the Company determined that consummating an out-licensing transaction of NPS for further development in breast cancer was unlikely.

Additionally, the projections consider the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors.

The rates utilized to discount the net cash flow to their present value are commensurate with the stage of development of the projects and uncertainties in the economic estimates used in the projections.

In the fourth quarter of 2021, the fair value of the Company’s NPS IPR&D was determined to exceed its carrying value by $ 5.7 million, and as such the Company recognized an impairment charge equal to the same amount that was recorded within in-process research and development impairment charge in the Company’s consolidated statements of operations.

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

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The Company 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 performs its annual goodwill impairment test in the fourth quarter 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, 2021 and 2020.

Contingent Consideration

The consideration for Galena's acquisition of Apthera, Inc.

in 2011 includes future payments that are contingent upon the achievement of certain events related to the development and commercialization of NPS.

Contingent consideration, and the obligations for such contingent consideration payments, is required to be recognized at fair value as of the acquisition date.

The contingent consideration obligations are then evaluated each reporting period and changes in the fair value of contingent consideration, other than changes due to payments, are recognized as a gain or loss and recorded within the change in the fair value of contingent consideration in the Company's consolidated statements of operations.

The fair value of development and regulatory milestones are estimated utilizing a probability adjusted, discounted cash flow approach.

The fair value of net sales milestones is based on probability adjusted sales estimates and estimated discount rates and utilizes an option pricing model with Monte Carlo simulation to simulate a range of possible payment scenarios, and the average of the payments in these scenarios is then discounted to calculate present fair value.

During the fourth quarter of 2021, the Company changed the valuation technique of net sales milestones from a probability adjusted, discounted cash flow approach to the option pricing model with Monte Carlo simulation.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company adopted ASU No.

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

There was no cumulative-effect adjustment required upon adoption.

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

The discount rates used are an estimated measure of credit risk associated with the years of expected payments based on the current development stage of the associated product candidate, the Company's specific development plan for that product candidate adjusted for the probability of completing the stages of development and when the contingent payments would be triggered.

In estimating the probability of success, the Company utilizes data regarding similar milestone events from several sources, including industry studies and the Company's experience.

The fair value of the contingent consideration is classified as a Level 3 liability as the valuation requires substantial judgment and estimation of factors that are not currently observable in the market.

If different assumptions were used for the various inputs to the valuation, including but not limited to, assumptions involving the probability of success, estimated discount rate, and projected years of payment, the estimated fair value could be significantly higher or lower than the fair value determined.

See Note 6 for additional information on the contingent consideration.

The Company accounts for its leasing arrangements under ASU No.

2016-02, Leases (Topic 842) (“Topic 842”).

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.

Operating lease right-of-use ("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.

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Revenue Recognition

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

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

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.

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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.

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

SELLAS LIFE SCIENCES GROUP, INC.

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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.

The Company expenses IPR&D 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 measures employee and non-employee 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 expected life of the options and stock price volatility.

The Company accounts for forfeitures for stock option awards as they occur.

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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 expected life of the stock options is estimated using the “simplified method,” as the Company has limited 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.

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Treasury yield curve commensurate with the expected life of the option.

Restricted Stock Units with Performance and Service Conditions

The Company's Board of Directors has granted restricted stock units ("RSUs") to certain employees that vest based on performance and service conditions.

The fair values of the performance-based RSUs are measured on the date of grant and are based on the Company's closing stock price on such date.

Compensation expense is recognized for the number of performance-based RSUs expected to be earned, provided the requisite service period has been rendered, after assessing the probability that certain performance criteria will be met.

Cumulative adjustments are recorded each quarter to reflect the estimated outcome of the performance-related conditions until the date results are determined and settled.

The Company accounts for forfeitures of performance-based RSUs when they occur.

If performance criteria are not met or are not expected to be met, any compensation expense previously recognized to date associated with the performance-based RSUs will be reversed.

Restricted Stock Units with Service Conditions Only

The Board of Directors has granted RSUs to certain employees that vest based on continuous service.

Time-vested RSUs awarded to employees vest one-fourth per year annually over four years , provided the employee remains employed with the Company.

The fair values of the time-vested RSUs are measured on the date of grant and are based on the Company's closing stock price on such date.

Compensation expense for time-vested RSUs with service conditions only are recognized straight-line over the applicable service period.

The Company accounts for forfeitures of time-vested RSUs when they occur.

Previously recognized compensation expense for forfeited RSUs are reversed in the period the time-vested RSUs are forfeited.

The Company uses the asset and liability method of accounting for income taxes.

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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.

The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax returns, 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, 2021 or 2020.

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”).

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 consolidated 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.

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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.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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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.

Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as 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):

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

Common stock warrants 519 1,392

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Restricted stock units 200 170

Recent Accounting Pronouncements Adopted

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):Simplifying the Accounting for Income Taxes which, among other things, eliminates certain exceptions in the current rules regarding the approach for intra-period tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The standard was adopted by the Company on January 1, 2021.

This new standard did not have a material impact on the Company's financial statements.

Recent Accounting Standards Not Yet Adopted

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity which, among other things, simplifies the accounting models for the allocation of proceeds attributable to the issuance of a convertible debt instrument.

As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt.

Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (i) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (ii) a convertible debt instrument was issued at a substantial premium.

The standard becomes effective for the Company in the first quarter of 2024 and early adoption is permitted.

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

In May 2021, ASU No.

2021-04, Issuer’s Accounting for Certain Modifications of Exchanges of Freestanding Equity-Classified Written Call Options was issued to clarify the accounting for modifications or exchanges of freestanding equity-classified written call options, such as warrants, that remain equity classified after modification or exchange.

This ASU became effective for the Company on January 1, 2022 and is not expected to have a material impact on the consolidated financial statements.

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 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.

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.

A reconciliation of the change in goodwill and intangible assets for the year ended December 31, 2021 is as follows (in thousands):

In-Process Research and Development Goodwill

December 31, 2020 $ 5,700 $ 1,914

Impairment charge ( 5,700 ) —

December 31, 2021 $ — $ 1,914

In the fourth quarter of 2021, the Company recognized an impairment charge in connection with our determination that consummating an out-licensing transaction of NPS for further development in breast cancer was unlikely and taking into account the deferred development timelines and a lower probability of success associated with earlier stages of clinical development for the potential development of NPS in other oncology indications.

The Company determined that the carrying amount of the IPR&D associated with NPS exceeded the fair value and recorded a $ 5.7 million impairment charge during the year ended December 31, 2021 and reduced the fair value of the related IPR&D intangible asset to zero .

See Note 2 for discussion on how the Company determined the fair value of its IPR&D.

There was no impairment charge during the year ended December 31, 2020.

As of December 31, 2021 and 2020, there were no accumulated impairment losses related to goodwill.

Collaboration and In-License Agreements

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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:

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

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”).

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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.

Under the Second MSK A&R License

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Agreement, the Company and MSK extended certain milestone dates for the Company in exchange for increased milestone payments.

The Compan y incurred $ 0.1 million of guaranteed minimum royalty payments under the Second MSK A&R License Agreement during the years ended December 31, 2021 and 2020.

Such expenses have been included in research and development costs.

The Compan y incurred $ 0.2 million of sublicensing fees payable under our license from MSK in connection with the 3DMed Agreement during year ended December 31, 2021 included in cost of revenue.

There was no cost of license revenue during the year ended December 31, 2020.

Merck & Co., Inc.

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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.

In 2020, the Company, together with Merck determined to focus on ovarian cancer (second or third line).

In February 2022, the Company reported that enrollment in the study was completed.

Data from the majority of evaluable patients is expected to be examined by mid-2022, with final data analysis for all evaluable patients expected by the end of 2022.

The University of Texas M.

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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.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company incurred the annual maintenance fee during the years ended December 31, 2021 and 2020 and the expenses have been included in research and development costs.

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):

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Description December 31, 2021 Quoted Prices In

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Cash equivalents $ 21,000 $ 21,000 $ — $ —

Restricted cash equivalents 100 100 — —

Total assets measured and recorded at fair value $ 21,100 $ 21,100 $ — $ —

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

Restricted cash equivalents $ 100 $ 100

Total assets measured and recorded at fair value $ 35,059 $ 35,059 $ — $ —

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See Note 10 for a reconciliation of the changes in the fair value of the warrant liability for the years ended December 31, 2021.

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.

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

in 2011 and the future contingent payments based on the achievement of certain development, regulatory and net sales milestones relating to NPS.

The 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.

A reconciliation of the change in the fair value of the contingent consideration liability for the year ended December 31, 2021 and 2020 is as follows (in thousands):

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):

Using Significant

Contingent consideration, January 1, 2019 $ 4,326

Contingent consideration, December 31, 2019 $ 4,912

Change in the estimated fair value of the contingent consideration ( 279 )

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Contingent consideration, December 31, 2021 $ 296

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.

During the year ended December 31, 2021, the significant unobservable inputs were adjusted in connection with our determination that consummating an out-licensing transaction of NPS for further development in breast cancer was unlikely and taking into account the deferred development timeline and a lower probability of success associated with earlier stages of clinical development for the potential development of NPS in other oncology indications.

See Note 2 for further discussion on how the Company determines the fair value of its contingent consideration.

The following significant unobservable inputs were used in the valuation of the contingent consideration liability:

Unobservable input As of December 31, 2021 As of December 31, 2020

Potential milestone payments $ 0 - $ 30 million

$ 0 - $ 30 million

Discount rate 15.5 % 6.6 %

Cumulative probability of success 5.3 % 33.0 %

Projected years of payments 2028 - 2031

SELLAS LIFE SCIENCES GROUP, INC.

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

Insurance $ 221 $ 200

Clinical trial costs $ 1,309 $ 95

Insurance 217 221

Professional fees 36 49

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

Compensation and related benefits $ 812 $ 606

Clinical trial costs $ 1,325 $ 631

Compensation and related benefits 989 812

Professional fees 165 276

Other 161 194

Accrued expenses and other current liabilities $ 2,640 $ 1,913

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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.

The Company’s predecessor, Galena, was involved in multiple legal proceedings and administrative actions, including stockholder class actions, both state and federal.

In 2021, the Company settled all remaining legacy Galena litigation as follows:

• Certain putative shareholder securities class action complaints originally filed against Galena in 2017 which alleged, among other things, that Galena and certain of Galena's former officers and directors failed to disclose that certain of Galena’s promotional practices were allegedly improper and that these alleged failures rendered Galena’s statements about its business misleading.

The actions were consolidated with lead plaintiffs named by the U.S.

District Court for the District of New Jersey.

In 2021, the Company reached a settlement with the plaintiffs in this action which, in November 2021, received preliminary court approval and which was fully covered by our directors and officers insurance policy applicable to this case.

Final approval from the court was received on February 24, 2022.

• 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.

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

In July 2017, a derivative complaint was filed in California state court against Galena’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.

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

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

The Company reached a settlement with the plaintiffs in these three cases which was approved by the U.S.

District Court for the District of New Jersey on November 19, 2021, and which was fully covered by the Company's directors and officers insurance policy applicable to these cases.

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

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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.

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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.

See Note 5 for additional information on the Company’s commitments under collaboration and license agreements and commitments of contingent consideration.

SELLAS LIFE SCIENCES GROUP, INC.

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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.

At inception of the lease, 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.

As of December 31, 2021, the lease has a remaining term of 3.0 years.

Rent expense related to the Company's operating lease was approximately $ 0.3 million and $ 0.4 million for the years ended December 31, 2021 and 2020, respectively.

The Company made cash payments related to operating leases of approximately $ 0.3 million during each of the years ended December 31, 2021 and 2020.

Future minimum rental payments under the Company's non-cancelable operating lease are as follows as of December 31, 2021 (in thousands):

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Operating lease liability $ 808

On December 6, 2021, the Company entered into a sublease amendment to expand its office space in New York, New York.

In accordance with the agreement, the commencement of the sublease will not begin until the sublandlord has vacated and made the space available and ready for use, which did not occur until February 21, 2022.

Therefore, no amounts associated with the sublease amendment were recognized in the consolidated financial statements for the year ended December 31, 2021.

On February 22, 2022, a commencement date was reached as the Company took over the space and will begin making additional rental payments of approximately $ 0.2 million per year through December 31, 2024.

Stockholders’ Equity

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

There were no preferred shares outstanding as of December 31, 2021 and 2020.

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

On April 16, 2021, the Company entered into the Sales Agreement with Cantor Fitzgerald & Co.

(the "Agent").

From time to time during the term of the Sales Agreement, the Company may offer and sell shares of common stock having an aggregate offering price up to a total of $ 50.0 million in gross proceeds.

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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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):

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Stock options outstanding 534

Restricted stock units 170

Restricted stock units outstanding 200

Options reserved for future issuance under the Company’s 2019 Equity Incentive Plan 449

Shares reserved for future issuance under the Employee Stock Purchase Plan 8

Shares reserved for future issuance under the Employee Stock Purchase Plans 311

Total shares of common stock reserved for future issuance 2,013

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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

The following is a summary of the Company's warrants to acquire shares of common stock activity for the year ended December 31, 2021 (in thousands, except per share data):

Warrant Issuance Outstanding, December 31, 2020 Exercised Outstanding, December 31, 2021 Exercise Price Per Share Expiration

Warrants classified as equity:

January 2020 Offering 719 ( 410 ) 309 $ 3.93 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

July 2020 PIPE Offering 445 ( 420 ) 25 $ 3.30 August 2025

July 2018 Offering 141 ( 9 ) 132 $ 7.50 July 2023

March 2019 Exercise Agreement 63 ( 33 ) 30 $ 7.50 March 2024

Other 10 ( 1 ) 9 $ 306.66 December 2022 - June 2024

1,378 ( 873 ) 505

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

Warrants classified as liability:

14 — 14 $ 729.94 January 2022 - November 2023

1,392 ( 873 ) 519

1 unchanged sentence

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Warrants Classified as Equity

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

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

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

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

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

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

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

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

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

Distinguishing Liabilities from Equity (Topic 480);

Derivatives and Hedging (Topic 815):

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

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

July 2020 Offering Warrants

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

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

January 2020 Offering Warrants

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

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

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

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

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

June 2019 Offering Warrants

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

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

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

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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.

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.

The 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 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.

Warrants Classified as Liabilities

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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 liability-classified warrants are grouped within other warrants outstanding in the table above.

The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date.

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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 %

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31,

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.

Risk free interest rate 0.65 % 0.16 %

Volatility 131.04 % 150.38 %

Expected term (years) 1.75 2.75

Expected dividend yield — % — %

Strike price $ 7.50 $ 7.50

The changes in fair value of the warrant liability for the year ended December 31, 2021 and 2020 were as follows (in thousands):

Warrant Liability

Warrant liability, December 31, 2019 $ 52

Fair value of warrants exercised ( 94 )

Change in fair value of warrants 97

Warrant liability, December 31, 2020 55

Change in fair value of warrants ( 15 )

Warrant liability, December 31, 2021 $ 40

Deemed Dividend Arising from Warrant Modifications

On January 2, 2020, the Company amended the March 2019 Exercise Agreement 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 was recorded as a deemed dividend increasing the net loss attributable to common stockholders and additional paid-in-capital.The expected volatility assumptions are based on the Company's implied volatility.

The expected life assumption is based on the remaining contractual terms of the warrants.

1 unchanged sentence

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

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

License Revenue with 3D Medicines, Inc.

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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").

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The 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.

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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.

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 were assessed to be probable of being achieved at the inception of the 3DMed License Agreement and therefore were not

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company achieved $ 2.0 million of these milestones during the year ended December 31, 2021.

The Company determined that $ 192.5 million in future certain development, regulatory, and sales milestones is 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.

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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.

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 recognized the transaction price over the technology transfer period, which was finalized in the second quarter of 2021.

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

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

The Company recognized $ 7.6 million of license revenue during the year ended December 31, 2021.

As of December 31, 2021, the initial transaction price of the single performance obligation of $ 9.5 million has been fully recognized as licensing revenue.

The following table presents a summary of the activity in the Company's deferred revenue during the year ended December 31, 2021 and 2020 (in thousands):

Deferred revenue, December 31, 2019 $ —

Additions 7,500

Revenue recognized ( 1,900 )

Deferred revenue, December 31, 2020 5,600

Additions 2,000

Revenue recognized ( 7,600 )

Deferred revenue, December 31, 2021 $ —

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.

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

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

The Company recognized $ 1.1 million and $ 0.3 million in expense associated with these costs during the years ended December 31, 2021 and 2020, respectively.

Cost of License Revenue

The Company incurred $ 0.2 million of sublicensing fees payable under its license from MSK in connection with the 3DMed License during the year ended December 31, 2021.

There was no cost of license revenue during the year ended December 31, 2020.

Stock-Based Compensation

2 unchanged sentences

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.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

As of December 31, 2021, an aggregate of 2,684 shares of common stock under the 2017 Equity Incentive Plan were forfeited 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;

2 unchanged sentences

The number of shares reserved for issuance under the 2019 Equity Incentive Plan was automatically increased to 1,244,258 on January 1, 2022.

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, 2021 and 2020, respectively (in thousands):

16 unchanged sentences

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.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Company accounts for forfeitures as they occur, therefore, outstanding stock options equal vested and expected to vest stock options.

As of December 31, 2021, there was $ 2.1 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 2.69 years.

The following table summarizes stock option activity of the Company for the years ended December 31, 2021 and 2020, respectively:

4 unchanged sentences

Granted 186 1.87

Canceled ( 5 ) 175.86

Outstanding at December 31, 2020 208 13.38

4 unchanged sentences

The aggregate intrinsic value equals the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying stock options.

RSUs with 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:

Time-Vested RSUs and RSUs with Performance Conditions

The Company granted RSUs pursuant to the Company's 2019 Equity Incentive Plan that will settle in shares of common stock.

As of December 31, 2021, there was $ 0.6 million of unrecognized compensation cost related to outstanding RSUs that is expected to be recognized as a component of the Company’s operating expenses over a weighted-average period of 2.39 years.

The following table summarizes RSU activity of the Company for the years ended December 31, 2021 and 2020, respectively:

Total Number of Shares

3 unchanged sentences

Unvested at December 31, 2020 170 $ 1.89

Granted 40 $ 8.00

Vested ( 10 ) $ 8.00

Unvested at December 31, 2021 200 $ 2.81

2021 Employee Stock Purchase Plan

On April 22, 2021, the Board of Directors adopted the 2021 Employee Stock Purchase Plan ("2021 ESPP") which was approved by the Company's stockholders on June 8, 2021.

The 2021 ESPP allows employees to

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

contribute up to 20 % of their cash earnings, subject to a maximum of $25,000 per year under Internal Revenue Service rules, to be used to purchase shares of the Company's common stock on semi-annual purchase dates.

The 2021 ESPP allows eligible employees to purchase shares of common stock at a price per share equal to 85 % of the lower of the fair market value of the common stock at the beginning or end of each six-month offering period during the term of the 2021 ESPP.

The first offering period began in September 2021.

There are currently 300,000 shares of common stock reserved for issuance under the 2021 ESPP.

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.

The Company also has the 2017 Employee Stock Purchase Plan (“2017 ESPP”).

As of December 31, 2021, the Board of Directors has not established the various parameters under the 2017 ESPP and no shares have been delivered under the 2017 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.

There are 11,302 shares of common stock reserved for issuance under the 2017 ESPP as of December 31, 2021.

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

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$ ( 20,936 ) $ ( 16,774 )

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

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

As of December 31,

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Lease liability 170 208

Other 217 190

Gross deferred tax assets 12,884 12,660

17 unchanged sentences

Permanent differences 0.2 % 0.2 %

Tax rate change and true-up — % — %

Fair value change warrants — % ( 6.5 ) %

Contingent consideration — % 0.1 %

1 unchanged sentence

Valuation allowance 5.8 % ( 8.1 ) %

Tax credits — % — %

Effective income tax rate ( 1.1 ) % ( 0.1 ) %

At December 31, 2021, the Company had domestic federal and state net operating loss carryforwards of approximately $ 42.6 million and $ 2.0 million, respectively, available to reduce future taxable income, which expire

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.

beginning in 2027.

The income tax benefit for the years ended December 31, 2021 and 2020 relates to 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.

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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 valuation allowance increased by $ 1.2 million for the year ended December 31, 2021, which was driven by the impairment charge recorded on the Company's IPR&D during the current year and resulting decrease in the related deferred tax liability.

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

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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,

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.

As of December 31, 2021, the Company has no unrecognized tax benefits or accrued interest or penalties associated with uncertain tax positions.

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.

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.

The American Rescue Plan Act of 2021 ("American Rescue Plan") was subsequently signed into law on March 11, 2021 as a follow on to the CARES act to provide additional relief in connection with the ongoing COVID-19 pandemic.

The CARES Act and American Rescue Plan adjusted a number of provisions in the tax code, including, among other things, the calculation and eligibility of certain deductions, the treatment of net operating losses and tax credits, provisions relating to PPP loan extension The enactment of the CARES Act and American Rescue Plan did not have a material impact on the Company's income tax provision or consolidated financial statements for the years ended December 31, 2021 and 2020.

Employee Benefit Plan

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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.

Participants may elect to have a portion of their salary deferred and contributed to the 401(k) Plan up

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 Company made matching contributions which amounted to approximately $ 75,000 and $ 43,000 for the years ended December 31, 2021 and 2020, respectively.

These amounts were charged to the consolidated statements of operations.

The employer contributions vest immediately.

Subsequent Events

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

The Company evaluated all events or transactions that occurred after December 31, 2021 up through the date these consolidated 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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data