What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-16 compared with 2022-03-31 · 200 added, 271 removed, 629 unchanged (43% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Consolidated Balance Sheets as of December 31, 2022 and 2021

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Consolidated Statements of Stockholders' Equity for the years ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the years ended Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021

Notes to Consolidated Financial Statements

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/s/ Moss Adams LLP

San Francisco, California

Campbell, California

March 16, 2023

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Restricted cash and cash equivalents 100 100

Contract asset — 1,128

Prepaid expenses and other current assets 531 1,589

Total current assets 17,756 23,044

Operating lease right-of-use asset 723 896

In-process research and development — 5,700

Operating lease right-of-use assets 874 723

Goodwill 1,914 1,914

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Accrued expenses and other current liabilities 6,286 2,640

Operating lease liability 198 166

Deferred revenue — 5,600

Operating lease liabilities 372 198

Acquired in-process research and development payable 5,500 —

Total current liabilities 15,515 4,982

Operating lease liability, non-current 610 825

Deferred tax liability — 239

Operating lease liabilities, non-current 573 610

Warrant liability 4 40

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General and administrative 12,582 11,320

Acquired in-process research and development 10,000 —

In-process research and development impairment charge — 5,700

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Loss from operations ( 41,950 ) ( 25,294 )

Non-operating income (expense):

Non-operating income:

Change in fair value of warrant liability 36 15

Change in fair value of contingent consideration 296 4,337

Interest income, net 6 26

Total non-operating income, net 4,358 208

Interest income 317 6

Total non-operating income 649 4,358

Loss before income taxes ( 41,301 ) ( 20,936 )

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Net loss $ ( 41,301 ) $ ( 20,699 )

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 )

Net loss per common share, basic and diluted $ ( 2.13 ) $ ( 1.34 )

Weighted-average common shares outstanding, basic and diluted 19,395,709 15,481,113

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Balance at January 1, 2021 14,254,554 $ 1 $ 145,864 $ ( 117,904 ) $ 27,961

Issuance of common stock and common stock warrants, net of issuance costs 6,253,078 — 29,418 — 29,418

Issuance of common stock, 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

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

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

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

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Balance at December 31, 2021 15,895,637 2 158,948 ( 138,603 ) 20,347

Issuance of common stock and common stock warrants, net of issuance costs 4,629,630 — 22,946 — 22,946

Issuance of common stock, net of issuance costs 415,005 — 1,048 — 1,048

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

Issuance of common stock under employee stock purchase plan 25,089 — 85 — 85

Vesting of restricted stock units 40,044 — — — —

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

Acquired in-process research and development charge 10,000 —

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

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Net cash used in operating activities ( 23,809 ) ( 26,021 )

Cash flows from investing activities:

Cash paid for acquisition of in-process research and development ( 4,500 ) —

Net cash used in investing activities ( 4,500 ) —

Cash flows from financing activities:

Proceeds from issuance of common stock and common stock warrants, net of issuance costs 22,946 —

Proceeds from issuance of common stock, net of issuance costs 1,048 9,005

Proceeds from employee stock plan purchases 85 —

Proceeds from exercise of warrants — 3,069

Collection of stock subscription receivable — 308

Net cash provided by financing activities 24,079 12,074

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

Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 4,230 ) ( 13,947 )

Cash, cash equivalents, restricted cash, and restricted cash equivalents at the beginning of year 21,455 35,402

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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

Payable for acquired in-process research and development $ 5,500 $ —

Increase in operating lease right of use assets and current and non-current operating lease liabilities $ 449 $ —

See accompanying notes to these consolidated financial statements.

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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.

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

SELLAS’ lead product candidate, galinpepimut-S ("GPS"), is a cancer immunotherapeutic agent 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 with other immunotherapeutic agents to address a broad spectrum of hematologic, or blood, cancers and solid tumor indications.

SELLAS' second product candidate is GFH009, a small molecule, highly selective cyclin-dependent kinase 9 ("CDK9") inhibitor, which is licensed from GenFleet Therapeutics (Shanghai), Inc.

("GenFleet"), for all therapeutic and diagnostic uses in the world outside of Greater China (mainland China, Hong Kong, Macau and Taiwan).

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

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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 $ 179.9 million as of December 31, 2022.

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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.

The $ 13.0 million of development milestone payments to the Company triggered by 3DMed's participation in the REGAL study are variable in nature and not under the Company's control, and therefore are not included in the Company's going concern assumption.

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

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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.

On February 28, 2023, the Company consummated an underwritten public offering (the "February 2023 Offering"), issuing 7,220,217 shares of common stock and accompanying common stock warrants to purchase an aggregate of 7,220,217 shares of common stock.

The shares of common stock and accompanying common stock warrants were sold at a combined price of $ 2.77 per share and accompanying common stock warrant.

Each common stock warrant sold with the shares of common stock represents the right to purchase one share of the Company’s common stock at an exercise price of $ 2.77 per share.

The common stock warrants are exercisable immediately and will expire on February 28, 2028, five years from the date of issuance.

The net proceeds to the Company from the February 2023 Offering were approximately $ 18.5 million, after deducting underwriting discounts and commissions and estimated offering expenses, and excluding the exercise of any warrants.

On April 16, 2021, the Company entered into a Controlled Equity Offering SM Sales Agreement (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.

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.

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 U.S.

Securities and Exchange Commission ("SEC") on April 16, 2021 and declared effective on April 29, 2021.

During the year ended December 31, 2022, the Company sold 415,005 shares of common stock pursuant to the Sales Agreement at an average price of $ 2.60 per share for aggregate net proceeds of approximately $ 1.0 million.

Subsequent to December 31, 2022, the Company sol d 76,882 shares of common stock pursuant to the Sales Agreement at an average price of $ 3.59 for aggregate net proceeds of approximately $ 0.3 million.

There remains approximately $ 39.2 million available for future sales of shares of common stock under the Sales Agreement.

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.

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 product candidates for all therapeutic and other diagnostic uses in mainland China, Hong Kong, Macau and Taiwan ("3DMed Territory").

To date, the Company has received $ 10.5 million in upfront payments and certain technology transfer and regulatory milestones.

The participation of 3DMed in the Company's REGAL Phase 3 clinical trial in China will trigger two development milestone payments totaling $ 13.0 million to the Company, which the Company expects to receive in the first half of 2023.

A total of $ 191.5 million in potential future development, regulatory, and sales milestones, not including future royalties, remains under the 3DMed License Agreement as of December 31, 2022, which milestones are all variable in nature and not under the Company's control.

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.

If the Company is unable to obtain additional funding on a timely basis, it 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.

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.

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

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

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

Basis of Presentation and Significant Accounting Policies

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GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Principles of Consolidation

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operations is the U.S.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Use of Estimates

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

Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation, 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.

Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation, carrying value of goodwill, 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

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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.

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

On March 10, 2023, Silicon Valley Bank ("SVB") was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation ("FDIC") as receiver.

If any of the financial institutions with whom we do business were to be placed into receivership, we may be unable to access to the cash we have on deposit with such institutions.

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.

Public health crises such as pandemics or similar outbreaks could adversely impact our business.

Notably, the COVID-19 pandemic continues to evolve.

The extent to which COVID-19 impacts our operations or those of our collaborators, contractors, suppliers, CROs, clinical sites, CMOs and other material business relations and governmental agencies will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the ultimate duration of the outbreak, new information that will emerge concerning the severity of the virus and the actions to contain it or treat its impact, among others.

Previously, our clinical trial operations were directly and indirectly adversely impacted, and could continue to be directly and indirectly adversely impacted, by the COVID-19 pandemic.

While the potential economic impact brought by, and the ultimate duration of, the COVID-19 pandemic, have been, and continue to be, difficult to assess or predict, the spread of COVID-19 has caused a broad impact globally.

The extent to which the COVID-19 pandemic may impact our business continues to be highly uncertain and cannot be predicted with confidence.

Cash and Cash Equivalents

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The Company maintained $ 0.1 million as of December 31, 2022 and 2021, on hand with the Company's financial institutions as collateral for its corporate credit cards.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Intangible Assets

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

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

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

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

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

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

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

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

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

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The Company did no t recognize any impairment of goodwill during the years ended December 31, 2022 and 2021.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

in 2011 includes future payments that are contingent upon the achievement of certain events related to the development and commercialization of nelipepimut-S ("NPS").

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

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The 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.

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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.

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

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

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(iii) determine the transaction price;

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

(iv) allocate the transaction price to the performance

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

obligations in the contract;

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

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

Development, Regulatory and Sales Milestones and Other Payments

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

Acquired In-Process Research and Development

Costs incurred in obtaining technology licenses are immediately recognized as acquired in-process research and development expense, provided the technology licensed has no alternative future use as the technology and know-how acquired are not currently commercially viable.

Payments related to contingent consideration such as development milestones, commercial milestones and royalties (Note 8) will be recognized when the contingency is probable and reasonably estimable in accordance with ASC 450, Contingencies .

Research and Development Expenses

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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.

Research and development expenses consist primarily of development research performed by contract research organizations ("CROs"), personnel costs, including salaries, benefits and stock-based compensation, clinical drug supply, investigator grants, materials and supplies, consulting fees, licenses and fees, preclinical studies, and overhead allocations consisting of various support and facility-related costs.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Stock-based Compensation

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As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.

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 stock price volatility assumption is based on the historical volatility of the Company's publicly traded common stock.

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

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No interest or penalties were recognized in either of the years ended December 31, 2022 or 2021.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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”).

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Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit.

The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

rulings by taxing authorities.

Differences between actual results and the Company’s assumptions or changes in the Company’s assumptions in future periods are recorded in the period they become known.

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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.

In May 2021, the FASB issued ASU No.

2021-04, Issuer’s Accounting for Certain Modifications of Exchanges of Freestanding Equity-Classified Written Call Options, 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 did not have a material impact on the Company's consolidated financial statements.

Recent Accounting Standards Not Yet Adopted

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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 standard becomes effective for the Company in the first quarter of 2024 and

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

early adoption is permitted.

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

In May 2021, ASU No.

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

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

SELLAS LIFE SCIENCES GROUP, INC.

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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):

A reconciliation of the change in goodwill and intangible assets for the years ended December 31, 2022 and 2021 is as follows (in thousands):

In-Process Research and Development Goodwill

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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.

Impairment charge — —

December 31, 2022 $ — $ 1,914

The Company completes its annual impairment test on October 1 each year, or more frequently if triggering events indicate a possible impairment.

The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an interim period impairment test is necessary.

The Company's goodwill balance at December 31, 2022 and 2021 was $ 1.9 million.

As of December 31, 2022 and 2021, there were no accumulated impairment losses related to goodwill.

During the year ended December 31, 2021, the Company recognized an impairment charge of $ 5.7 million on its in process research and development ("IPR&D") asset associated with the NPS product candidate, which had been acquired in connection with the Merger, reducing the fair value of the intangible asset to zero as of December 31, 2021.

Collaboration and In-License Agreements

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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;

These arrangements may 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

Exclusive License Agreement with GenFleet Therapeutics (Shanghai) Inc.

On March 31, 2022, the Company entered into an exclusive license agreement with GenFleet pursuant to which GenFleet granted to the Company a sublicensable, royalty-bearing license, under certain of its intellectual property, to develop, manufacture, and commercialize GFH009 for the treatment, diagnosis or prevention of disease in humans and animals in all countries and territories of the world other than mainland China, Hong Kong, Macau and Taiwan (the "GFH009 Territory").

GFH009 is currently in a Phase 1 clinical trial in the United States and China.

In consideration for the exclusive license, the Company has agreed to pay to GenFleet (i) an upfront and technology transfer fee of $ 10.0 million, $ 4.5 million of which was payable within 30 days of the effective date of the license agreement which was March 31, 2022, and $ 5.5 million of which is due upon the first day of the 15th calendar month following the effective date of the license agreement, (ii) development and regulatory milestone payments for up to three indications totaling up to $ 48.0 million in the aggregate, and (iii) sales milestone payments totaling up to $ 92.0 million in the aggregate upon the achievement of certain net sales thresholds in a given calendar year.

The Company has also agreed to pay GenFleet single-digit tiered royalties based upon a percentage of annual net sales of GFH009 in the GFH009 Territory, with the royalty rate escalating based on the level of annual net sales and ranging from the low to high single digits.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

During the year ended December 31, 2022, the Company expensed $ 10.0 million related to the acquired technology as in-process research and development based on the assessment that the technology has no alternative future use as the technology and know-how acquired are not currently commercially viable, $ 4.5 million of which was paid in April 2022 and the remaining $ 5.5 million expected to be paid by the end of the second quarter of 2023 for which the Company has recorded an acquired in-process research and development payable as of December 31, 2022.

Exclusive License Agreement with Memorial Sloan Kettering Cancer Center ("MSK")

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.

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

Under the Second MSK A&R License

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.

Under the Second MSK A&R License 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, 2022 and 2021.

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.

The Compan y incurred $ 0.1 million and $ 0.2 million of sublicensing fees payable under the Second MSK A&R License Agreement in connection with the 3DMed Agreement during the years ended December 31, 2022 and 2021, respectively, included in cost of revenue.

Merck & Co., Inc.

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(“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 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, pembrolizumab (Keytruda) 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.

In November 2022, the Company reported topline clinical and initial immune response data from the clinical trial which showed that treatment with the combination of GPS and pembrolizumab compared favorably to treatment with anti-PD-1 therapy alone in a similar patient population.

The Company plans to present final data from this study at a medical conference in the first half of 2023.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The University of Texas M.

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Description December 31, 2022 Quoted Prices In

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The Company did not transfer any financial instruments into or out of Level 3 classification during the years ended December 31, 2022 and 2021.

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

See Note 10 for a reconciliation of the changes in the fair value of the warrant liability for the year ended December 31, 2022.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

in 2011 and the future contingent payments based on the achievement of certain 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, 2022 and 2021 is as follows (in thousands):

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Using Significant

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Contingent consideration, December 31, 2022 $ —

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.

During the year ended December 31, 2022, the significant unobservable inputs were adjusted in connection with ceasing all development activities of NPS and concluding the Company's extensive out-licensing efforts.

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

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$ 0 - $ 30 million

Discount rate 15.5 % 6.6 %

Discount rate n/a 15.5 %

Cumulative probability of success — % 5.3 %

Projected years of payments 2028 - 2031

Projected years of payments n/a 2028 - 2031

SELLAS LIFE SCIENCES GROUP, INC.

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Professional fees 338 165

Other 161 194

Accrued expenses and other current liabilities $ 6,286 $ 2,640

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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.

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.

As of December 31, 2022, there was no pending or threatened litigation.

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

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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.

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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.

testing objectives.

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

The Company has a non-cancelable operating lease for certain executive, administrative, and general business office space for its headquarters in New York, New York, which began June 5, 2020, was amended in February 2022 to add additional space, and has a term through December 31, 2024.

The Company assessed the lease amendment for the additional space and determined it should be accounted for as a separate contract.

The weighted average discount rate used to account for the Company's operating lease under ASC 842, Leases, is approximately 13.95 %.

As of December 31, 2022, the leases have a remaining term of 2.0 years.

Rent expense related to the Company's operating lease was approximately $ 0.5 million and $ 0.3 million for the years ended December 31, 2022 and 2021, 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.

The Company made cash payments related to operating leases of approximately $ 0.5 million and $ 0.3 million during the years ended December 31, 2022 and 2021, respectively.

Future minimum rental payments under the Company's non-cancelable operating lease are as follows as of December 31, 2022 (in thousands):

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imputed interest ( 106 )

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.

Operating lease liabilities $ 945

Stockholders’ Equity

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

On April 5, 2022, the Company consummated an underwritten public offering (the "April 2022 Offering"), issuing 4,629,630 shares of common stock and accompanying common stock warrants to purchase an aggregate of 4,629,630 shares of common stock.

The shares of common stock and accompanying common stock warrants were sold at a combined price of $ 5.40 per share and accompanying common stock warrant.

Each common stock warrant sold with the shares of common stock represents the right to purchase one share of the Company’s common stock at an exercise price of $ 5.40 per share.

The common stock warrants are exercisable immediately and will expire on April 5, 2027, five years from the date of issuance.

The net proceeds to the Company from the April 2022 Offering, after deducting the underwriting discounts and commissions and other offering expenses, and excluding the exercise of any warrants, were approximately $ 23.0 million.

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

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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.

During the year ended

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.

December 31, 2022, the Company sold 415,005 shares of common stock pursuant to the Sales Agreement at an average price of $ 2.60 per share for aggregate net proceeds of approximately $ 1.0 million.

Subsequent to December 31, 2022, the Company sold 76,882 shares of common stock pursuant to the Sales Agreement at an average price of $ 3.59 for aggregate net proceeds of approximately $ 0.3 million.

There remains approximately $ 39.2 million available for future sales of shares of common stock under the Sales Agreement.

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

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

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Total shares of common stock reserved for future issuance 7,352

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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, 2022 (in thousands, except per share data):

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

Warrant Issuance Outstanding, December 31, 2021 Granted Canceled/Expired Outstanding, December 31, 2022 Exercise Price Per Share Expiration

Warrants classified as equity:

April 2022 Offering — 4,630 — 4,630 $ 5.40 April 2027

January 2020 Offering 309 — — 309 $ 3.93 July 2025

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March 2019 Exercise Agreement 30 — — 30 $ 7.50 March 2024

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

Other 9 — ( 7 ) 2 $ 7.50 June 2024

505 4,630 ( 7 ) 5,128

Warrants classified as liability:

14 — 14 $ 729.94 January 2022 - November 2023

14 — ( 1 ) 13 $ 7.50 September 2023 - November 2023

519 4,630 ( 8 ) 5,141

On February 28, 2023, in connection with closing of the February 2023 Offering, the Company entered into amendments to an aggregate of 3,438,851 warrants issued by the Company in the April 2022 Offering to reduce the exercise price of such warrants to $ 3.62 , the average closing price of the Company’s common stock, as reported on the Nasdaq Capital Market, for the five trading days immediately preceding the pricing of the February 2023 Offering.

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

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Warrants Classified as Equity

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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31,

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Warrant liability, December 31, 2020 $ 55

Fair value of warrants exercised ( 94 )

Change in fair value of warrants ( 15 )

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Warrant liability, December 31, 2022 $ 4

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.

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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").

In December 2020, the Company, together with its wholly-owned subsidiary, SLSG Limited, LLC, entered into the 3DMed License Agreement with 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 (referred to as GPS Plus) product candidates ("GPS Licensed Products") for all therapeutic and other diagnostic uses in the 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.

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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").

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

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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

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

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

During the year ended December 31, 2021, the Company recognized the remaining $ 7.6 million of the initial transaction price as license revenue.

As of December 31, 2021, the full $ 9.5 million initial transaction price was fully recognized as licensing revenue.

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

At the end of each reporting period, the Company reevaluates 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.

On March 31, 2022, the Company announced that an IND application filed by 3DMed for a small Phase 1 clinical trial investigating safety of GPS in China was approved by China's NMPA.

The IND approval by the NMPA triggered a $ 1.0 million milestone payment to the Company which was recognized as licensing revenue in the first quarter of 2022 and payment was received in May 2022.

An additional $ 191.5 million in potential future development, regulatory, and sales milestones, not including future royalties, remains under the 3DMed License Agreement as of December 31, 2022, which milestones are variable in nature and not under the Company's control.

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 $ —

SELLAS LIFE SCIENCES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Cost of Contract Acquisition

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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.

The Company recognized $ 1.1 million in expense associated with these costs during the year ended December 31, 2021.

There were no such costs during the year ended December 31, 2022.

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.

The Company incurred $ 0.1 million and $ 0.2 million of sublicensing fees payable under the Second MSK A&R License Agreement in connection with the 3DMed License during the year ended December 31, 2022 and 2021, respectively.

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.

On December 29, 2017, the 2017 Equity Incentive Plan was approved by the stockholders of the Company, and currently allows for issuance of up to approximately 22,000 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.

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;

On September 10, 2019, the 2019 Equity Incentive Plan was approved by the stockholders of the Company, which currently allows for issuance of up to approximately 1,964,000 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.

The number of shares reserved for issuance under the 2019 Equity Incentive Plan automatically increased on January 1 of each year up to 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.

As of December 31, 2022, approximately 641,000 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 approximately 1,691,000 on January 1, 2023.

The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively (in thousands):

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Total stock-based compensation $ 1,726 $ 1,011

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Options to Purchase Shares of Common Stock

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The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates.

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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.

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

As of December 31, 2022, there was $ 2.9 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 2.55 years.

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Granted 546 5.01

Canceled ( 40 ) 6.17

Outstanding at December 31, 2022 1,040 $ 7.57 8.48 $ 91

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Time-Vested RSUs and RSUs with Performance Conditions

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

Unvested at December 31, 2019 — $ —

Unvested at January 1, 2021 170 $ 1.89

Granted 40 $ 8.00

Vested ( 10 ) $ 8.00

Unvested at December 31, 2021 200 $ 2.81

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Vested ( 40 ) $ 6.01

Canceled ( 2 ) $ 5.34

Unvested at December 31, 2022 255 $ 3.25

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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

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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 employees to 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.

During the year ended December 31, 2022, approximately 25,000 shares of common stock were purchased by employees under the 2021 ESPP for proceeds of approximately $ 0.1 million.

There are approximately 275,000 shares of common stock reserved for issuance under the 2021 ESPP as of December 31, 2022.

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

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$ ( 41,301 ) $ ( 20,936 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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Federal — ( 239 )

State — ( 22 )

Total deferred — ( 239 )

Total income tax benefit $ — $ ( 237 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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Lease liability 198 170

Capitalized Section 174 research and development 765 —

Other 282 217

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As of December 31,

In-process research and development not subject to future amortization for tax purposes $ — $ 1,197

Right of use asset $ 184 $ 152

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Net deferred tax liability $ — $ —

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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Foreign rate differential 11.9 % 14.0 %

Valuation allowance 8.7 % 5.8 %

Permanent differences 0.2 % 0.2 %

Contingent consideration — % 0.1 %

Other 0.3 % 0.1 %

Valuation allowance 5.8 % ( 8.1 ) %

Effective income tax rate — % ( 1.1 ) %

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

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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.

There was no income tax benefit or expense for the year ended December 31, 2022.

The income tax benefit for the year ended December 31, 2021 primarily related to indefinite lived deferred tax liabilities.

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.

The valuation allowance increased by approximately $ 3.6 million for the year ended December 31, 2022, which was primarily driven by the acquired in-process research and development and NOL carryforwards.

At December 31, 2022, the Company had domestic federal and state net operating loss carryforwards of approximately $ 49.4 million and $ 2.6 million, respectively, available to reduce future taxable income, which expire beginning in 2027.

Under the provisions of the Internal Revenue Code, the net operating losses (“NOL”) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities.

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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.

federal and state income tax purposes, the statute of limitations currently remains open for the years ending December 31, 2019 to present and December 31, 2018 to present, respectively.

In addition, all of the net operating losses and research and development credit carryforwards that may be utilized in future years may be subject to examination.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31, 2022, 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.

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.

Employee Benefit Plan

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Employees become eligible for participation upon the start of employment.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

to the limit allowed under the Internal Revenue Code.

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

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The Company evaluated all events or transactions that occurred after December 31, 2022 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.

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data