SELLAS Life Sciences Group, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firm (Moss Adams LLP, San Francisco, CA, PCAOB ID: 659 ) 122 Consolidated Balance Sheets as of December 31, 2021 and 2020 124 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 125 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021 and 2020 126 Consolidated Statements of Cash Flows for the years ended Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 127 Notes to Consolidated Financial Statements 128 121 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of SELLAS Life Sciences Group, Inc. Opinion on the 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, 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 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our 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. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our 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 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. 122 Table of Contents /s/ Moss Adams LLP San Francisco, California March 31, 2022 We have served as the Company’s auditor since 2018. 123 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 21,355 $ 35,302 Restricted cash and cash equivalents 100 100 Contract asset — 1,128 Prepaid expenses and other current assets 1,589 395 Total current assets 23,044 36,925 Operating lease right-of-use asset 723 896 In-process research and development — 5,700 Goodwill 1,914 1,914 Deposits and other assets 594 614 Total assets $ 26,275 $ 46,049 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,144 $ 4,657 Accrued expenses and other current liabilities 2,640 1,913 Operating lease liability 198 166 Deferred revenue — 5,600 Total current liabilities 4,982 12,336 Operating lease liability, non-current 610 825 Deferred tax liability — 239 Warrant liability 40 55 Contingent consideration 296 4,633 Total liabilities 5,928 18,088 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 5,000,000 shares authorized; Series A convertible preferred stock, 17,500 shares designated; 0 shares issued and outstanding at December 31, 2021 and 2020 — — Common stock, $ 0.0001 par value; 350,000,000 shares authorized, 15,895,637 and 14,254,554 shares issued and outstanding at December 31, 2021 and 2020, respectively 2 1 Additional paid-in capital 158,948 145,864 Accumulated deficit ( 138,603 ) ( 117,904 ) Total stockholders’ equity 20,347 27,961 Total liabilities and stockholders’ equity $ 26,275 $ 46,049 See accompanying notes to these consolidated financial statements. 124 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) Year Ended December 31, 2021 2020 Licensing revenue $ 7,600 $ 1,900 Operating expenses: Cost of revenue 200 — Research and development 15,674 9,282 General and administrative 11,320 9,600 In-process research and development impairment charge 5,700 — Total operating expenses 32,894 18,882 Loss from operations ( 25,294 ) ( 16,982 ) Non-operating income (expense): Change in fair value of warrant liability 15 ( 97 ) Change in fair value of contingent consideration 4,337 279 Interest income, net 6 26 Total non-operating income, net 4,358 208 Loss before income taxes ( 20,936 ) ( 16,774 ) Income tax benefit ( 237 ) ( 17 ) Net loss ( 20,699 ) ( 16,757 ) Deemed dividend arising from warrant modifications — ( 78 ) Net loss attributable to common stockholders $ ( 20,699 ) $ ( 16,835 ) Per share information: Net loss per common share attributable to common stockholders, basic and diluted $ ( 1.34 ) $ ( 2.11 ) Weighted-average common shares outstanding, basic and diluted 15,481,113 7,977,104 See accompanying notes to these consolidated financial statements. 125 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Amounts in thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity Shares Amount Balance at January 1, 2020 5,080,100 $ 1 $ 107,239 $ ( 101,147 ) $ 6,093 Issuance of common stock and common stock warrants, net of issuance costs 6,253,078 — 29,418 — 29,418 Issuance of common stock for exercise of warrants 2,472,576 — 8,625 — 8,625 Issuance of common stock upon exercise of pre-funded warrants 448,800 — 4 — 4 Stock-based compensation — — 578 — 578 Net loss — — — ( 16,757 ) ( 16,757 ) Balance at December 31, 2020 14,254,554 1 145,864 ( 117,904 ) 27,961 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 Net loss — — — ( 20,699 ) ( 20,699 ) Balance at December 31, 2021 15,895,637 $ 2 $ 158,948 $ ( 138,603 ) $ 20,347 See accompanying notes to these consolidated financial statements. 126 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 20,699 ) $ ( 16,757 ) Adjustment to reconcile net loss to net cash used in operating activities: Non-cash in-process research and development impairment charge 5,700 — Non-cash stock-based compensation 1,011 578 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 Accounts payable ( 2,513 ) ( 836 ) Accrued expenses and other current liabilities 727 742 Operating lease liabilities ( 183 ) — Deferred revenue ( 5,600 ) 5,600 Net cash used in operating activities ( 26,021 ) ( 10,417 ) Cash flows from financing activities: Proceeds from issuance of common stock, net of issuance costs 9,005 29,599 Proceeds from exercise of warrants 3,069 8,535 Collection of stock subscription receivable — 308 Net cash provided by financing activities 12,074 38,442 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 Cash, cash equivalents, restricted cash, and restricted cash equivalents at the end of year $ 21,455 $ 35,402 Supplemental disclosure of cash flow information: Cash received during the year for interest $ 6 $ 26 Supplemental disclosures: Contract asset within accounts payable $ — $ 1,410 Reclassification of warrant liabilities upon exercise $ — $ 94 Deferred offering costs included in accounts payable and accrued expenses $ — $ 181 Right-of-use assets recorded $ — $ 976 See accompanying notes to these consolidated financial statements. 127 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business SELLAS Life Sciences Group, Inc. (the "Company" or "SELLAS") is a late-stage clinical biopharmaceutical company focused on novel cancer immunotherapeutics for a broad range of cancer indications. SELLAS’ lead product candidate, galinpepimut-S ("GPS"), is licensed from Memorial Sloan Kettering Cancer Center ("MSK") and targets the Wilms Tumor 1 ("WT1") protein, which is present in an array of tumor types. GPS has potential as a monotherapy or in combination to address a broad spectrum of hematologic malignancies and solid tumor indications. SELLAS’ second product candidate, nelipepimut-S ("NPS"), is a HER2-directed cancer immunotherapy. As used in this Annual Report on Form 10-K, the words the "Company," and "SELLAS" refer to SELLAS Life Sciences Group, Inc. and its consolidated subsidiaries following the completion of the business combination with Galena Biopharma, Inc., a Delaware corporation ("Galena"), and SELLAS Life Sciences Group, Ltd., a privately held Bermuda exempted company ("Private SELLAS") in December 2017. This business combination is referred to as the Merger. Upon completion of the Merger, the Company's name changed from "Galena Biopharma, Inc." to "SELLAS Life Sciences Group, Inc." and the Company's financial statements became those of Private SELLAS. 2. Liquidity 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. The Company continues to expect to generate operating losses and negative cash flows for the next few years and will need additional funding to support its planned operating activities through profitability. The transition to profitability is dependent upon the successful development, approval, and commercialization of the Company's product candidates and the achievement of a level of revenues adequate to support its cost structure. As of December 31, 2021, the Company had cash and cash equivalents of $ 21.4 million. 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. 128 Table of Contents 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. 3. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. Unless the context otherwise indicates, reference in these notes to the "Company" refer to SELLAS Life Sciences Group, Inc., and its wholly owned subsidiaries, Private SELLAS, SLSG Limited, LLC, Sellas Life Sciences Limited, and Apthera, Inc. The functional currency of the Company's non-U.S. operations is the U.S. dollar. 129 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Use of Estimates The preparation of these consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates using historical experience and other factors, including the current economic environment. Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation, 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. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on the Company's loss from operations, net loss, and net loss per share. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment. Fair Value of Financial Instruments The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of December 31, 2021 and 2020, the carrying amounts of the Company’s financial instruments, including cash equivalents and accounts payable, approximate fair value due to the short-term nature of those instruments and were categorized as Level 1. As of December 31, 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 hierarchy. See Note 6 for additional information on the fair value of certain financial assets and liabilities. 130 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Concentration of Credit Risk Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash on deposit with multiple financial institutions, the balances of which frequently exceed federally insured limits. Impact of COVID-19 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 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. Restricted Cash and Cash Equivalents Restricted cash consists of certificates of deposit on hand with the Company’s financial institutions as collateral for its corporate credit cards. The following table provides a reconciliation of the components of cash, cash equivalents, restricted cash, and restricted cash equivalents reported in the Company's consolidated balance sheets to the total amount presented in the consolidated statements of cash flows (in thousands): December 31, 2021 2020 Cash and cash equivalents $ 21,355 $ 35,302 Restricted cash and cash equivalents 100 100 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 21,455 $ 35,402 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. 131 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Intangible Assets 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 Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized but is subject to an annual impairment test. The Company has a single reporting unit and all goodwill relates to that reporting unit. The Company performs its annual goodwill impairment test 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. 132 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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. Leases 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 ("ROU"), assets and lease liabilities are recognized at the commencement date. An ROU asset and corresponding lease liability is not recorded for leases with an initial term of 12 months or less (short term leases) and the Company recognizes lease expense for these leases as incurred over the lease term. ROU assets represent the Company’s right to use an underlying asset during the reasonably certain lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company primarily uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company’s lease agreement contains lease and non-lease components, which are generally accounted for separately. See Note 8 for discussion of the Company’s facility lease. Revenue Recognition The Company records revenue in accordance with ASC Topic 606, Revenue From Contracts with Customers ("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. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five-steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. See Note 11 for further discussion of the Company's revenue recognition associated with the License Agreement with 3D Medicines Inc. 133 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Development, Regulatory and Sales Milestones and Other Payments At the inception of each arrangement that includes regulatory or development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. For arrangements that include sales-based royalties, including milestone payments upon first commercial sales and milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. Research and Development Expenses Research and development costs are expensed as incurred. Research and development costs that are paid in advance of performance are capitalized as a prepaid expense and recognized as research and development expenses as the services are provided. Clinical study costs, a component of research and development expenses, are accrued over the service periods specified in the contracts and adjusted as necessary based on an ongoing review of the level of effort and costs actually incurred. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development expenses. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of revenue over the remaining useful life of the asset. Research and development expenses primarily consist of the intellectual property and research and development materials acquired, expenses from third parties who conduct research and development activities on behalf of the Company as well as related wages, benefits and other operating costs. The Company expenses 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 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. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in estimating the fair value of share-based awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. 134 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The expected life of the stock options is estimated using the “simplified method,” as the Company has 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. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants as it does not have adequate historical pricing information of its own stock commensurate with the expected term. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected life of the option. 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. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax 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 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. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit. The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and 135 Table of Contents 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. Net Loss Per Share Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as 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 their impact would be anti-dilutive (in thousands): December 31, 2021 2020 Common stock warrants 519 1,392 Stock options 534 208 Restricted stock units 200 170 1,253 1,770 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. 136 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 4. Goodwill and Intangible Assets 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. 5. Collaboration and In-License Agreements As part of its business, the Company enters into in-licensing agreements with third parties that often require milestone and royalty payments based on the progress of the licensed asset through development and commercial stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency, and the Company may be required to make royalty payments based upon a percentage of net sales of the product. The expenditures required under these arrangements in any period may be material and are likely to fluctuate from period to period. These arrangements sometimes permit the Company to unilaterally terminate development of the product and thereby avoid future contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. Exclusive License Agreement with Memorial Sloan Kettering Cancer Center On September 4, 2014, the Company entered into a license agreement (the “Original MSK License Agreement”) with MSK under which the Company was granted an exclusive license to develop and commercialize MSK’s WT1 peptide vaccine technology. The Original MSK License Agreement, unless terminated earlier in accordance with the terms of the Original MSK License Agreement, will continue on a country-by-country and licensed product-by-licensed product basis, until the later of: (i) expiration of the last valid claim embracing such licensed product; (ii) expiration of any market exclusivity period granted by law with respect to such licensed product; or (iii) ten ( 10 ) years from the first commercial sale in such country. On May 25, 2017, the Company and MSK entered into an Amended and Restated Exclusive License Agreement (the “MSK A&R License Agreement”). Under the MSK A&R License Agreement, the Company expanded its license under the original MSK License Agreement, as amended, to include a license to commercially develop certain additional WT1 peptides through a program of exploiting certain patents and other rights covering such peptides. The MSK A&R License Agreement, among other changes, added certain milestone payments for each additional patent licensed product as defined in the MSK A&R License Agreement. On October 11, 2017, the Company and MSK entered into a second Amended and Restated Exclusive License Agreement (the “Second MSK A&R License Agreement”). Under the Second MSK A&R License 137 Table of Contents 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. Clinical Trial Collaboration and Supply Agreement On September 21, 2017, the Company entered into a clinical trial collaboration and supply agreement (the "Merck Agreement") through a Merck & Co., Inc. subsidiary, Merck Sharp & Dohme B.V. (“Merck subsidiary”), whereby the Company agreed with the Merck subsidiary to collaborate in a research program to evaluate GPS as it is administered in combination with Merck’s PD1 blocker pembrolizumab in a Phase 1/2 clinical trial enrolling patients in up to five cancer indications, including both hematologic malignancies and solid tumors assessing the efficacy and safety of the combination, comparing overall response rates and immune response markers achieved with the combination compared to prespecified rates based on those seen with pembrolizumab alone in comparable patient populations. In the fourth quarter of 2018, pursuant to the Merck Agreement, the Company initiated a Phase 1/2 multi-arm ("basket" type) clinical study of GPS in combination with Merck & Co., Inc.’s anti-PD-1 therapy, Keytruda® (pembrolizumab) in patients with WT1+ relapsed or refractory tumors. In July 2019, the Company dosed the first patient in this trial. 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. D. Anderson Cancer Center and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. On September 11, 2006, the Company acquired rights and assumed obligations under a license agreement among Apthera and The University of Texas M. D. Anderson Cancer Center (“MDACC”) and The Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. (“HJF”) which grants exclusive worldwide rights to a U.S. patent covering NPS and several U.S. and foreign patents and patent applications covering methods of using the peptide as a vaccine. Under the terms of this license, the Company is required to pay an annual maintenance fee of $ 0.2 million, up to $ 3.8 million for clinical milestone payments, and to pay a tiered royalty in the mid-single digits based on sales of NPS or other therapeutic products developed from the licensed technologies. 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. 6. Fair Value Measurements The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets (in thousands): 138 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Description December 31, 2021 Quoted Prices In Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Cash equivalents $ 21,000 $ 21,000 $ — $ — Restricted cash equivalents 100 100 — — Total assets measured and recorded at fair value $ 21,100 $ 21,100 $ — $ — Liabilities: Warrants potentially settleable in cash $ 40 $ — $ — $ 40 Contingent consideration 296 — — 296 Total liabilities measured and recorded at fair value $ 336 $ — $ — $ 336 Description December 31, 2020 Quoted Prices In Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Cash equivalents $ 34,959 $ 34,959 $ — $ — Restricted cash equivalents $ 100 $ 100 Total assets measured and recorded at fair value $ 35,059 $ 35,059 $ — $ — Liabilities: Warrants potentially settleable in cash $ 55 $ — $ — $ 55 Contingent consideration 4,633 — — 4,633 Total liabilities measured and recorded at fair value $ 4,688 $ — $ — $ 4,688 The Company did not transfer any financial instruments into or out of Level 3 classification during the years ended December 31, 2021 and 2020. 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): 139 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Contingent consideration, December 31, 2019 $ 4,912 Change in the estimated fair value of the contingent consideration ( 279 ) Contingent consideration, December 31, 2020 4,633 Change in the estimated fair value of the contingent consideration ( 4,337 ) Contingent consideration, December 31, 2021 $ 296 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 2026 - 2029 140 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 7. Balance Sheet Accounts Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2021 2020 Clinical trial costs $ 1,309 $ 95 Insurance 217 221 Professional fees 36 49 Other 27 30 Prepaid expenses and other current assets $ 1,589 $ 395 Accrued expenses and other current liabilities consist of the following (in thousands): December 31, 2021 2020 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 8. Legal Proceedings, Commitments and Contingencies Legal Proceedings From time to time, the Company is subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business, which may include employment matters, breach of contract disputes and stockholder litigation. Such actions and proceedings are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, when the Company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, as of the date hereof, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the Company’s consolidated results of operations, financial position or cash flows. 141 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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 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 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 The Company acquires assets still in development and enters into research and development arrangements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales. These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give the Company the discretion to unilaterally terminate development of the product, which would allow the Company to avoid making the contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. See Note 5 for additional information on the Company’s commitments under collaboration and license agreements and commitments of contingent consideration. 142 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Leases The Company has a non-cancelable operating lease for office space in New York, New York, which began June 5, 2020 with a term through December 31, 2024. 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, 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): Total minimum lease payments: 2022 $ 311 2023 321 2024 330 Total future minimum lease payments 962 Less: imputed interest ( 154 ) 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. 9. Stockholders’ Equity Preferred Stock The Company has authorized up to 5,000,000 shares of preferred stock, $ 0.0001 par value per share, for issuance. There were no preferred shares outstanding as of December 31, 2021 and 2020. Common Stock 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. 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. 143 Table of Contents 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. The net proceeds to the Company from the December 2020 Registered Direct Offering, after deducting placement agent fees and related offering expenses, was approximately $ 15.0 million. On July 31, 2020, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell, in a private placement directly to the investors (the "July 2020 PIPE Offering"), 2,744,078 shares of its common stock and accompanying warrants to purchase up to an aggregate of 2,744,078 shares of common stock at a combined purchase price of $ 3.335 per share and accompanying warrant. The warrants were immediately exercisable upon issuance at an exercise price of $ 3.30 per share and will expire five years from the date of issuance. The July 2020 PIPE Offering closed on August 4, 2020. The net proceeds to the Company from the July 2020 PIPE Offering, after deducting placement agent fees and related offering expenses, were approximately $ 8.5 million. On January 9, 2020, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the investors (the “January 2020 Registered Direct Offering”), (i) an aggregate of 1,189,000 shares of common stock, par value $ 0.0001 per share, of the Company, at an offering price of $ 3.9825 per share and (ii) an aggregate of 448,800 pre-funded warrants exercisable for shares of common stock at an offering price of $ 3.9725 per pre-funded warrant, for gross proceeds of approximately $ 6.5 million before deducting the placement agent fee and related offering expenses. In a concurrent private placement, the Company issued to the Investors who participated in the January 2020 Registered Offering warrants exercisable for up to an aggregate of 818,900 shares of common stock at an exercise price of $ 3.93 per share. Each warrant was immediately exercisable upon issuance and will expire five and one-half years from the issuance date. The net proceeds to the Company from the January 2020 Registered Direct Offering, after deducting placement agent fees and related offering expenses, and excluding the exercise of any warrants, was approximately $ 6.0 million. Shares of common stock reserved for future issuance are as follows (in thousands): December 31, 2021 Warrants outstanding 519 Stock options outstanding 534 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 Plans 311 Total shares of common stock reserved for future issuance 2,013 144 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 10. Warrants to Acquire Shares of Common Stock The following is a summary of the Company's warrants to acquire shares of common stock activity for the year ended December 31, 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 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 Warrants classified as liability: 14 — 14 $ 729.94 January 2022 - November 2023 1,392 ( 873 ) 519 Warrants to acquire shares of common stock primarily consist of equity-classified warrants. In addition, warrants to acquire shares of common stock that may require the Company to settle in cash are liability-classified warrants. Warrants Classified as Equity 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 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 Liability-classified warrants consist of warrants to acquire common stock issued in connection with previous equity financings. These warrants may be settled in cash and were determined to not be indexed to the Company’s common stock. The liability-classified warrants are grouped within other warrants outstanding in the table above. The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated statement of operations as a change in fair value of warrant liability. The fair value of the warrants accounted for as liabilities is estimated using a Black-Scholes pricing model with the following inputs: 145 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued As of December 31, 2021 2020 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. The risk-free rate is based on the zero coupon rates in effect at the time of valuation. The dividend yield used in the pricing model is zero , because the Company has no present intention to pay cash dividends on its shares of common stock. 11. License Revenue with 3D Medicines, Inc. Exclusive License Agreement with 3D Medicines, Inc. In December 2020, the Company, together with its wholly-owned subsidiary, SLSG Limited, LLC, entered into an Exclusive License Agreement (the “3DMed License Agreement”) with 3D Medicines Inc. ("3DMed"), pursuant to which the Company granted 3DMed a sublicensable, royalty-bearing license, under certain intellectual property owned or controlled by the Company, to develop, manufacture and have manufactured, and commercialize GPS and heptavalent GPS ("GPS Plus") product candidates ("GPS Licensed Products") for all therapeutic and other diagnostic uses in mainland China, Hong Kong, Macau and Taiwan ("3DMed Territory"). The license is exclusive, except with respect to certain know-how that has been non-exclusively licensed to the Company and is sublicensed to 3DMed on a non-exclusive basis. The Company has retained development, manufacturing and commercialization rights with respect to the GPS Licensed Products in the rest of the world. In partial consideration for the rights granted by the Company, 3DMed agreed to pay the Company (i) a one-time upfront cash payment of $ 7.5 million, and (ii) milestone payments totaling up to $ 194.5 million in the aggregate upon the achievement of certain technology transfer, development and regulatory milestones, as well as sales milestones based on certain net sales thresholds of GPS Licensed Products in the 3DMed Territory in a given calendar year. The Company is responsible for providing the licensed technology and data (the "3DMed License") as well as transferring certain technological and manufacturing know-how (the "transfer of know-how"). 146 Table of Contents 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. The royalties are payable on a GPS Licensed Product-by-GPS Licensed Product and region-by-region basis commencing on the first commercial sale of a GPS Licensed Product in a region and continuing until the latest of (i) the date that is 15 years from the receipt of marketing authorization for such GPS Licensed Product in such region and (ii) the date that is 10 years from the expiration of the last valid claim of a licensed patent covering or claiming such GPS Licensed Product in such region. The royalty rate is subject to reduction under certain circumstances, including when generic competition for a GPS Licensed Product exists in a particular region. 3DMed is responsible for all costs related to developing, obtaining regulatory approval of and commercializing the GPS Licensed Products in the 3DMed Territory. 3DMed is required to use commercially reasonable best efforts to develop and obtain regulatory approval for, and upon receipt of regulatory approval, commercialize the GPS Licensed Products in the 3DMed Territory. A joint development committee has been established between 3DMed and the Company to coordinate and review the development, manufacturing and commercialization plans with respect to the GPS Licensed Products in the 3DMed Territory. The Company and 3DMed also agreed to negotiate in good faith the terms and conditions of a clinical supply agreement, a commercial supply agreement, and related quality agreements pursuant to which the Company will manufacture or have manufactured and supply 3DMed with all quantities of the GPS Licensed Products necessary for 3DMed to develop and commercialize the GPS Licensed Products in the 3DMed Territory until 3DMed has received all approvals required for 3DMed or its designated contract manufacturing organization to manufacture the GPS Licensed Products in the 3DMed Territory. The 3DMed License Agreement will expire on a GPS Licensed Product-by-GPS Licensed Product and region-by-region basis on the date of the expiration of all of 3DMed’s payment obligations to the Company. Upon expiration of the 3DMed License Agreement, the license granted to 3DMed will become fully paid-up, perpetual and irrevocable. Either party may terminate the 3DMed License Agreement for the other party’s material breach following a cure period or upon certain insolvency events. The Company may terminate the 3DMed License Agreement if 3DMed or its affiliates or sublicensees challenge the validity or enforceability of the licensed patents. At any time following the two-year anniversary of the effective date, 3DMed has the right to terminate the 3DMed License Agreement for convenience, subject to certain requirements. 3DMed may terminate the 3DMed License Agreement upon prior notice to the Company if the grant of the license to 3DMed is prohibited or delayed for a period of time due to a change of U.S. export laws and regulations. The 3DMed License Agreement includes customary representations and warranties, covenants and indemnification obligations for a transaction of this nature. Revenue Recognition The Company evaluated the 3DMed License Agreement and concluded that 3DMed was a customer and the contract should be evaluated under ASC 606. In determining the appropriate amount of revenue to be recognized under ASC 606 as the Company fulfills its obligations under the Agreement, the Company performs the following steps: (i) identifies the promised goods or services in the contract; (ii) determines whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measures the transaction price, including any constraints on variable consideration; (iv) allocates the transaction price to the performance obligations; and (v) recognizes revenue when (or as) the Company satisfies each performance obligation. The Company identified the 3DMed License and the transfer of know-how to be the material promises under the 3DMed License Agreement. The Company determined that 3DMed License and the transfer of know-how are not distinct from each other. As such, for the purposes of ASC 606, the Company determined that these two material promises, described above, should be combined into a single performance obligation. The Company determined the initial transaction price of the single performance obligation to be $ 9.5 million, which includes the $ 7.5 million upfront fee as well as $ 2.0 million in development milestones that were assessed to be probable of being achieved at the inception of the 3DMed License Agreement and therefore were not 147 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued constrained. 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. Any such adjustments will be recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. For the sales-based royalties, the Company will recognize revenue when the related sales occur. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. Since 3DMed is benefiting from the combined single performance obligation relating to the 3DMed License and the transfer of know-how as the technology transfer occurs, the Company 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 $ 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 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. 12. Stock-Based Compensation 2017 Equity Incentive Plan On December 29, 2017, the 2017 Equity Incentive Plan was approved by the stockholders of the Company, and currently allows for the issuance of up to a maximum of 24,204 shares of common stock underlying stock options granted prior to September 10, 2019. The 2017 Equity Incentive Plan was terminated upon the approval of the 2019 Incentive Plan subject to outstanding stock options granted under the 2017 Equity Incentive Plan that remain exercisable through maturity for the Company's employees and directors. 148 Table of Contents 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, 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; and (ii) an amount determined by the board of directors or authorized committee. As of December 31, 2021, 449,476 shares of common stock were reserved for future grants under the 2019 Equity Incentive Plan. The number of shares reserved for issuance under the 2019 Equity Incentive Plan was automatically increased to 1,244,258 on January 1, 2022. 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): Years Ended December 31, 2021 2020 Research and development $ 126 $ 14 General and administrative 885 564 Total stock-based compensation $ 1,011 $ 578 Options to Purchase Shares of Common Stock The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock-based awards and the following assumptions were used for stock options granted during the years ended December 31, 2021 and 2020, respectively: Years Ended December 31, 2021 2020 Risk free interest rate 1.05 % 0.62 % Volatility 121.53 % 106.24 % Expected lives (years) 6.18 6.15 Expected dividend yield — % — % The weighted-average grant date fair value of options granted during the years ended December 31, 2021 and 2020 was $ 6.98 and $ 1.53 , respectively. The Company’s expected common stock price volatility assumption is based upon the Company's own implied volatility in combination with the implied volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method, which averages the contractual term of the Company’s options of ten years with the average vesting term of four years for an average of six years . The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero because the Company has never paid cash dividends and presently has no intention to do so. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The 149 Table of Contents 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: Total Number of Shares (in thousands) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding at January 1, 2020 22 $ 112.81 Granted 186 1.87 Outstanding at December 31, 2020 208 13.38 Granted 326 8.00 Outstanding at December 31, 2021 534 $ 10.09 8.77 $ 681 Vested and exercisable at December 31, 2021 111 $ 20.39 8.01 $ 345 The aggregate intrinsic values of outstanding and exercisable stock options at December 31, 2021 were calculated based on the closing price of the Company’s common stock as reported on the Nasdaq Capital Market on December 31, 2021 of $ 5.53 per share. The aggregate intrinsic value equals the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying stock options. 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 (in thousands) Weighted Average Grant Date Fair Value Per Share Unvested at December 31, 2019 — $ — Granted 170 $ 1.89 Vested — $ — Unvested at December 31, 2020 170 $ 1.89 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 150 Table of Contents 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 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 11,302 shares of common stock reserved for issuance under the 2017 ESPP as of December 31, 2021. 13. Income Taxes The Company's loss before income taxes is as follows (in thousands): As of December 31, 2021 2020 U.S. $ ( 6,956 ) $ ( 4,664 ) Non - U.S. ( 13,980 ) ( 12,110 ) $ ( 20,936 ) $ ( 16,774 ) The components of federal and state income tax (benefit) are as follows (in thousands): As of December 31, 2021 2020 Current Federal $ — $ — State 2 5 Foreign — — Total current 2 5 Deferred expense Federal ( 239 ) — State — ( 22 ) Foreign — — Total deferred ( 239 ) ( 22 ) Total income tax benefit $ ( 237 ) $ ( 17 ) 151 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The components of net deferred tax assets are as follows (in thousands): As of December 31, 2021 2020 Net operating loss carryforwards $ 9,059 $ 7,155 Stock-based compensation 140 75 Licensing deduction deferral 3,236 4,059 Contingent consideration 62 973 Lease liability 170 208 Other 217 190 Gross deferred tax assets 12,884 12,660 Valuation allowance ( 12,732 ) ( 11,514 ) Net deferred tax assets $ 152 $ 1,146 The components of gross deferred tax liabilities are as follows (in thousands): As of December 31, 2021 2020 In-process research and development not subject to future amortization for tax purposes $ — $ 1,197 Right of use asset 152 188 Gross deferred tax liability $ 152 $ 1,385 The net deferred tax liabilities are as follows (in thousands): As of December 31, 2021 2020 Net deferred tax asset $ 152 $ 1,146 Gross deferred tax liability 152 1,385 Net deferred tax liability $ — $ 239 The provision for income taxes differs from the provision computed by applying the federal statutory rate to net loss before income taxes as follows: As of December 31, 2021 2020 U.S. federal statutory income tax rate ( 21.0 ) % ( 21.0 ) % State and local taxes, net of federal benefit ( 0.2 ) % 2.5 % Foreign rate differential 14.0 % 15.2 % Permanent differences 0.2 % 0.2 % Contingent consideration — % 0.1 % Other 0.1 % 11.0 % Valuation allowance 5.8 % ( 8.1 ) % 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 152 Table of Contents SELLAS LIFE SCIENCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception, which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future. Utilization of the net operating loss and tax credits carryforwards may be limited by “ownership change” rules, as defined in Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization. In assessing the need for a valuation allowance the Company may utilize indefinite-lived deferred tax liabilities from an indefinite-lived intangible asset as a future source of income. The Company’s IPR&D, as recorded in acquisition accounting, can be utilized as a source of income arising from the future reversal of temporary difference that can be offset against post 2017 indefinite-lived NOLs. Therefore, the Company is permitted to offset the indefinite-lived deferred tax liability up to the 80 percent limitation for NOL’s generated subsequent to January 1, 2018. The valuation allowance 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. The Company is subject to tax examinations for the 2015 tax year and beyond. The Company does not recognize tax benefits that are not more-likely-than-not to be supported based upon the technical merits of the tax position taken. In assessing its unrecognized tax benefits, the Company has analyzed its tax return filing positions in all of the federal, state and foreign filing jurisdictions where it is required to file income tax returns, as well as all open years in those jurisdictions. 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. 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 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. 14. Employee Benefit Plan The Company sponsors a 401(k) Plan. Employees become eligible for participation upon the start of employment. Participants may elect to have a portion of their salary deferred and contributed to the 401(k) Plan up 153 Table of Contents 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 $ 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. 15. Subsequent Events 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. 154 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.