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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ________________________________
FORM 10-Q
 ________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-33958
gale-20200630_g1.jpg
SELLAS Life Sciences Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 20-8099512
(State of incorporation) (I.R.S. Employer Identification No.)
7 Times Square, Suite 2503, New York, NY 10036
(917) 438-4353
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par value per shareSLSThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time that the registrant was required to submit such files).   Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):      Yes      No
As of August 13, 2020, SELLAS Life Sciences Group, Inc. had outstanding 9,461,978 shares of common stock.



EXPLANATORY NOTE

Unless stated otherwise, the information contained in these consolidated financial statements gives effect to a one-for-fifty reverse stock split of our shares of common stock effected on November 7, 2019. See Note 3 under our consolidated financial statements for further information.



SELLAS LIFE SCIENCES GROUP, INC.
FORM 10-Q - Quarterly Report
For the Quarter Ended June 30, 2020

TABLE OF CONTENTS
 
Page
PART I - FINANCIAL INFORMATION
Item 1
Unaudited Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019
Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019
Unaudited Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2020 and 2019
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019
Item 2
Item 3
Item 4
PART II - OTHER INFORMATION
Item 1Legal Proceedings
Item 1ARisk Factors
Item 2
Item 3
Item 4
Item 5
Item 6

The names “SELLAS Life Sciences Group, Inc.,” “SELLAS,” the SELLAS logo, and other trademarks or service marks of SELLAS Life Sciences Group, Inc. appearing in this Quarterly Report on Form 10-Q are the property of SELLAS Life Sciences Group, Inc. Other trademarks, service marks or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We do not intend the use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of or by either of, these other companies.
Unless the context otherwise indicates, references in these notes to the “Company,” “we,” “us” or “our” refer to SELLAS Life Sciences Group, Inc. and its wholly owned subsidiaries.

1


SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements that reflect our current views with respect to our development programs, business strategy, business plan, financial performance and other future events. These statements include forward-looking statements both with respect to us, specifically, and our industry, in general. Such forward-looking statements include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. In addition, while the Company expects the COVID-19 pandemic to have an impact on its business operations and financial results, the extent of the impact on the Company’s clinical development and regulatory efforts, its corporate development objectives, its financial position and the value of and market for its common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States and in other countries, and the effectiveness of actions taken globally to contain and treat the disease. There are or will be important factors that could cause actual results to differ materially from those indicated in these statements. These factors include, but are not limited to, those factors set forth in the sections captioned “Risk Factors,” “Legal Proceedings,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission ("SEC") on March 13, 2020 ("2019 Annual Report") and in our other public filings with the SEC, all of which you should review carefully. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

2


PART I FINANCIAL INFORMATION

ITEM  1. FINANCIAL STATEMENTS

SELLAS LIFE SCIENCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
June 30, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$3,340  $7,277  
Restricted cash and cash equivalents100  100  
Stock subscription receivable  308  
Prepaid expenses and other current assets1,789  557  
Total current assets5,229  8,242  
Operating lease right-of-use asset984  217  
In-process research and development5,700  5,700  
Goodwill1,914  1,914  
Deposits and other assets687  536  
Total assets$14,514  $16,609  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$2,426  $3,902  
Accrued expenses and other current liabilities1,809  1,171  
Operating lease liability90  217  
Total current liabilities4,325  5,290  
Operating lease liability, non-current918    
Deferred tax liability262  262  
Warrant liability33  52  
Contingent consideration5,193  4,912  
Total liabilities10,731  10,516  
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; Series A convertible preferred stock, 17,500 shares designated; no shares issued and outstanding at June 30, 2020 and December 31, 2019
    
Common stock, $0.0001 par value; 350,000,000 shares authorized, 6,717,900 and 5,080,100 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively.
7  5  
Additional paid-in capital113,491  107,235  
Accumulated deficit(109,715) (101,147) 
Total stockholders’ equity3,783  6,093  
Total liabilities and stockholders’ equity $14,514  $16,609  

See accompanying notes to these unaudited consolidated financial statements.
3

Table of Contents
SELLAS LIFE SCIENCES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Operating expenses:
Research and development$2,280  $1,381  $4,144  $3,240  
General and administrative1,987  2,638  4,187  5,138  
Total operating expenses and operating loss(4,267) (4,019) (8,331) (8,378) 
Non-operating (expense) income, net:
Change in fair value of warrant liability(16) 962  19  1,157  
Change in fair value of contingent consideration(143) (95) (281) (482) 
Interest income, net1  18  25  32  
Total non-operating (expense) income, net(158) 885  (237) 707  
Net loss(4,425) (3,134) (8,568) (7,671) 
Deemed dividend arising from warrant modifications  (952) (78) (1,391) 
Net loss attributable to common stockholders$(4,425) $(4,086) $(8,646) $(9,062) 
Per share information:
Net loss per common share attributable to common stockholders, basic and diluted$(0.66) $(6.33) $(1.32) $(16.56) 
Weighted-average common shares outstanding, basic and diluted6,717,900  645,965  6,546,440  547,212  
See accompanying notes to these unaudited consolidated financial statements.
4

Table of Contents
SELLAS LIFE SCIENCES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
(Unaudited)
Three Months Ended June 30, 2020
Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' Equity (Deficit)
SharesAmountSharesAmount
Balance at March 31, 2020  $  6,717,900  $7  $113,345  $(105,290) $8,062  
Stock-based compensation—  —  —  —  146  —  146  
Net loss—  —  —  —  —  (4,425) (4,425) 
Balance at June 30, 2020  $  6,717,900  $7  $113,491  $(109,715) $3,783  
Six Months Ended June 30, 2020
Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance at December 31, 2019  $  5,080,100  $5  $107,235  $(101,147) $6,093  
Issuance of common stock and common stock warrants, net of issuance costs—  —  1,189,000  1  5,962  —  5,963  
Issuance of common stock upon exercise of pre-funded warrants—  —  448,800  1  3  —  4  
Stock-based compensation—  —  —  —  291  —  291  
Net loss—  —  —  —  —  (8,568) (8,568) 
Balance at June 30, 2020  $  6,717,900  $7  $113,491  $(109,715) $3,783  
Three Months Ended June 30, 2019
Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' Equity (Deficit)
SharesAmountSharesAmount
Balance at March 31, 2019  $  483,529  $1  $89,341  $(86,392) $2,950  
Issuance of common stock and common stock warrants, net of issuance costs—  —  527,344  —  13,416  —  13,416  
Issuance of common stock for exercise of warrants, net of offering costs—  —  20,000  —  1,045  —  1,045  
Issuance of common stock upon exercise of pre-funded warrants—  —  971,830  1  4  —  5  
Stock-based compensation—  —  —  —  126  —  126  
Impact of anti-dilution protection on liability-classified warrants—  —  —  —  (70) —  (70) 
Net loss—  —  —  —  —  (3,134) (3,134) 
Balance at June 30, 2019  $  2,002,703  $2  $103,862  $(89,526) $14,338  
Six Months Ended June 30, 2019
Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance at December 31, 2018  $  440,529  $1  $87,099  $(81,855) $5,245  
Issuance of common stock and common stock warrants, net of issuance costs—  —  527,344  —  13,416  —  13,416  
Issuance of common stock for exercise of warrants, net of offering costs—  —  63,000  —  3,275  —  3,275  
Issuance of common stock upon exercise of pre-funded warrants—  —  971,830  1  4  —  5  
Stock-based compensation—  —  —  —  311  —  311  
Impact of anti-dilution protection on liability-classified warrants—  —  —  —  (243) —  (243) 
Net loss—  —  —  —  —  (7,671) (7,671) 
Balance at June 30, 2019  $  2,002,703  $2  $103,862  $(89,526) $14,338  

See accompanying notes to these unaudited consolidated financial statements.
5

Table of Contents
SELLAS LIFE SCIENCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

For the six months ended June 30,
20202019
Cash flows from operating activities:
Net loss $(8,568) $(7,671) 
Adjustment to reconcile net loss to net cash used in operating activities:
Non-cash stock-based compensation291  311  
Change in operating lease right of use assets24    
Change in fair value of common stock warrants(19) (1,153) 
Change in fair value of contingent consideration281  482  
Changes in operating assets and liabilities:
Prepaid expenses and other assets(1,383) (315) 
Accounts payable(1,476) (263) 
Accrued expenses and other current liabilities638  (1,038) 
Net cash used in operating activities(10,212) (9,647) 
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs5,963  13,781  
Collection of stock subscription receivable308    
Net proceeds from exercise of warrants4  3,280  
Net cash provided by financing activities6,275  17,061  
Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents(3,937) 7,414  
Cash, cash equivalents, restricted cash, and restricted cash equivalents at the beginning of period7,377  5,451  
Cash, cash equivalents, restricted cash, and restricted cash equivalents at the end of period$3,440  $12,865  
Supplemental disclosure of cash flow information:
Cash received during the periods for interest$25  $32  
Supplemental disclosure of non-cash investing and financing activities:
Operating right of use asset and current and non-current lease liability$976  $550  
Impact of anti-dilution protection on liability-classified warrants
$  $243  
Offering expenses in accounts payable and accrued expenses and other current liabilities$  $365  

See accompanying notes to these unaudited consolidated financial statements.

6

Table of Contents
SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Description of Business

Overview

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 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. In January 2020, the Company commenced a Phase 3 trial for GPS monotherapy in patients with acute myeloid leukemia, or AML, in the maintenance setting after achievement of their second complete remission. SELLAS’ second product candidate, nelipepimut-S ("NPS"), is a HER2-directed cancer immunotherapy with potential for the treatment of patients with early stage breast cancer with low to intermediate HER2 expression, otherwise known as HER2 1+ or 2+, which includes triple negative breast cancer patients, following standard of care.

As used in this Quarterly Report on Form 10-Q, 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.

On March 11, 2020, the World Health Organization declared the outbreak of a new coronavirus as a “pandemic”. First identified in late 2019 and known now as COVID-19, the coronavirus outbreak has impacted millions of individuals worldwide. While the Company's current business and operations have not been materially impacted by the coronavirus pandemic, the extent to which the Company's business and operations could be impacted throughout the remainder of 2020 will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, the emergence of new geographic hotspots where the coronavirus is spreading more rapidly, the re-emergence of a second outbreak in the fall or winter, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. In particular, the continued spread of the coronavirus globally could adversely impact the Company's clinical trial operations and could have an adverse impact on the Company's business and the Company's financial results. The Company will continue to monitor the situation closely, but given the uncertainty, management cannot estimate the impact of the COVID-19 pandemic on the Company's financial statements or operations.

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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
2. Liquidity

The Company has not generated any revenues, including from product sales, and has funded operations primarily from the proceeds of sales of its equity interests and convertible notes. It is likely that additional financing, beyond the financings described below, will be required by the Company to continue to fund its research and development activities. No assurance can be given that any such financing will be available when needed or that the Company’s research and development efforts will be successful. The Company cannot be certain at this time of the impact of the COVID-19 pandemic on its ability to raise additional capital as needed.

On July 31, 2020, the Company entered into a Securities Purchase Agreement (the “PIPE Purchase Agreement”) with certain investors (the “PIPE Investors”), pursuant to which the Company agreed to issue and sell, in a private placement directly to the PIPE Investors (the "July 2020 PIPE Offering"), 2,744,078 shares of its common stock and accompanying warrants to purchase an aggregate of up to 2,744,078 shares of common stock at a combined purchase price of $3.335 per share and accompanying warrant. The warrants are immediately exercisable at an exercise price of $3.30 per share and will expire five years from the date of issuance. The gross proceeds to the Company from the July 2020 PIPE Offering were approximately $9.2 million before deducting the placement agent fee and related offering expenses. The July 2020 PIPE Offering closed on August 4, 2020.

On January 9, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “January 2020 Registered Offering”), (i) an aggregate of 1,189,000 shares of common stock at an offering price of $3.9825 per share and (ii) an aggregate of 448,800 pre-funded warrants exercisable for shares of common stock (the “Pre-Funded Warrants”) at an offering price of $3.9725 per Pre-Funded Warrant, for gross proceeds of approximately $6.5 million before deducting the placement agent fee and related offering expenses. In a concurrent private placement, the Company issued to the Investors who participated in the January 2020 Registered Offering warrants exercisable for an aggregate of 818,900 shares of common stock at an exercise price of $3.93 per share. Each warrant is immediately exercisable and will expire five and one-half years from the issuance date. The net proceeds to the Company from the January 2020 Registered Offering, after deducting underwriting discounts and commissions and other estimated offering expenses, and excluding the exercise of any warrants, were approximately $6.0 million.

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

The Company currently does not have any commitments to obtain additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all. If the Company cannot obtain the necessary funding, it will need to delay, scale back or eliminate some or all of its research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that it might otherwise seek to develop or commercialize independently, consider various other strategic alternatives, including a merger or sale of the Company, or cease operations. If the Company engages in collaborations, it may receive lower consideration upon commercialization of such products than if it had not entered into such arrangements or if it entered into such arrangements at later stages in the product development process.


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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Company has evaluated the guidance of Accounting Standards Codification ("ASC") 205-40, Presentation of Financial Statements - Going Concern, in order to determine whether there is substantial doubt about its ability to continue as a going concern for one year from the date its financial statements are available to be issued. The Company has prepared its consolidated financial statements assuming that it will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses and negative cash flows from operations since inception and it expects to generate losses from operations for the foreseeable future primarily due to research and development costs for its product candidates, which raises substantial doubt about the Company’s ability to continue as a going concern. Various internal and external factors will affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outside of the Company’s control. The length of time and cost of developing and commercializing these product candidates and/or the failure of any of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

As of June 30, 2020, the Company had cash and cash equivalents of approximately $3.3 million, and restricted cash and cash equivalents of $0.1 million. The Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of $109.7 million as of June 30, 2020. In addition, the Company had current liabilities of $4.3 million as of June 30, 2020. The Company expects its cash and cash equivalents as of June 30, 2020, together with the proceeds from the July 2020 PIPE Offering, will enable the Company to fund its operating expenses and capital expenditure requirements through the second quarter of 2021.

3. Basis of Presentation and Significant Accounting Policies

The Summary of Significant Accounting Policies included in the Company's 2019 Annual Report have not materially changed, except as set forth below.

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.

Unaudited Interim Results

These consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto included in the 2019 Annual Report. The accompanying consolidated financial statements at June 30, 2020 and for the three and six months ended June 30, 2020 and 2019, are unaudited, but include all adjustments, consisting of normal recurring entries, that management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of December 31, 2019 have been derived from the audited financial statements as of that date.

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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Reverse Stock Split

On November 6, 2019, the Company filed a certificate of amendment to its amended and restated Certificate of Incorporation to effect a 1 - for - 50 reverse stock split of the Company's outstanding shares of common stock, which became effective on November 7, 2019. The shares of common stock underlying the Company's outstanding options and warrants were also proportionately adjusted for the reverse stock split. In addition, the number of shares of common stock available for issuance under the Company’s equity incentive plans and employee stock purchase plan were proportionately adjusted for the reverse stock split. Further, the per share exercise prices for options granted under such plans were proportionately adjusted for the reverse stock split. The reverse stock split reduced the number of shares of the Company’s common stock that were outstanding at November 8, 2019 from 227,800,147 to 4,549,208, after the cancellation of fractional shares. No fractional shares were issued in connection with the reverse stock split. Stockholders who otherwise held fractional shares of the Company’s common stock as a result of the reverse stock split received a cash payment in lieu of such fractional shares. These consolidated financial statements give retroactive effect to such reverse stock split and all share and per share amounts have been adjusted accordingly.

Restricted Stock Units with Performance and Service Conditions
        
        During the six months ended June 30, 2020, the Board of Directors granted restricted stock units ("RSUs") to certain employees that vest based on performance and service conditions. The fair values of the 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 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. If performance criteria are not met or are not expected to be met, any compensation expense previously recognized to date associated with the RSUs will be reversed.

Net Loss Per Share

Net 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 they would be anti-dilutive (in thousands):
Six Months Ended June 30,
20202019
Common stock warrants1,120  2,855  
Stock options208  27  
RSUs170    
1,498  2,882  


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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Recent Accounting Pronouncements Adopted

In August 2018, FASB issued No. ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU No. 2018-13"). ASU No. 2018-13 modifies, adds and removes certain specific disclosure requirements on fair value measurements in Topic 820. The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. This standard became effective for the Company on January 1, 2020 and did not have a material impact on the Company's disclosures. For the new disclosure regarding our Level 3 instruments, please read Note 4 to these consolidated financial statements.


        In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Accounting ("ASU No. 2018-07"), which simplifies the accounting for share-based payments granted to nonemployees for goods and services. ASU No. 2018-07 supersedes ASC 505-50 and expands the scope of ASC 718, Compensation - Stock Compensation (Topic 718) ("ASC 718"), to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASU No. 2018-07 generally requires an entity to use a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year, for all (1) liability-classified nonemployee awards that have not been settled as of the adoption date and (2) equity-classified nonemployee awards for which a measurement date has not been established. This standard became effective for the Company on January 1, 2020 and did not have a material impact on the Company's consolidated financial statements and related disclosure.

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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. 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):
 
DescriptionJune 30, 2020Quoted Prices In    
Active Markets
(Level 1)
Significant Other
Observable 
Inputs (Level 2)
Unobservable 
Inputs
(Level 3)
Assets:
Cash equivalents$3,000  $3,000  $  $  
Total assets measured and recorded at fair value$3,000  $3,000  $  $  
Liabilities:
Warrant liability$33  $  $  $33  
Contingent consideration5,193      5,193  
Total liabilities measured and recorded at fair value$5,226  $  $  $5,226  
DescriptionDecember 31, 2019Quoted Prices In  
Active Markets
(Level 1)
Significant Other
Observable 
Inputs (Level 2)
Unobservable 
Inputs
(Level 3)
Assets:
Cash equivalents$7,027  $7,027  $  $  
Total assets measured and recorded at fair value$7,027  $7,027  $  $  
Liabilities:
Warrant liability$52  $  $  $52  
Contingent consideration4,912      4,912  
Total liabilities measured and recorded at fair value$4,964  $  $  $4,964  

The Company did not transfer any financial instruments into or out of Level 3 classification during the six months ended June 30, 2020 or the year ended December 31, 2019. See Note 8, Warrants to Acquire Shares of Common Stock, for a reconciliation of the changes in the fair value of the warrant liability for the six months ended June 30, 2020.


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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
A reconciliation of the change in the fair value of the contingent consideration liability for the six months ended June 30, 2020 is as follows (in thousands):
 
 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 consideration281  
Contingent consideration, June 30, 2020$5,193  

The fair value of the contingent consideration is measured at the end of each reporting period using Level 3 inputs in a probability-weighted, discounted cash-outflow model. The contingent consideration relates to Galena's acquisition of Apthera, Inc. in 2011 and the future contingent payments of up to $32.0 million based on the achievement of certain development and commercial milestones relating to the Company’s nelipepimut-S ("NPS") product candidate, of which $2.0 million has been paid to date. The remaining contingent consideration of up to $30.0 million 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 from its stockholders in accordance with Rule 5635(a) of the Nasdaq Marketplace Rules.

The significant unobservable assumptions include the probability of achieving each milestone, the date the Company expects to reach the milestone, and a determination of present value factors used to discount future expected cash outflows. Changes in fair value reflect new information about the probability and anticipated timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time. As of June 30, 2020, estimated future contingent milestone payments related to the Company's business range from zero, if no milestone events are achieved, to a maximum of $30.0 million if all development and commercial milestones are reached. As of June 30, 2020, resulting probability-weighted cash flows were discounted using a weighted average cost of capital of 11.8% for development milestones and cost of debt of 3.6% for the commercial milestones. The Company estimates the timing of achievement of these development milestones to range from five to eight years as of June 30, 2020.

5. Balance Sheet Accounts

Prepaid expenses and other current assets consist of the following (in thousands):
June 30, 2020December 31, 2019
Insurance$1,015  $200  
Clinical development535  224  
Professional services104  49  
Other135  84  
Prepaid expenses and other current assets$1,789  $557  

Accrued expenses and other current liabilities consist of the following (in thousands):
June 30, 2020December 31, 2019
Clinical trial costs$1,043  $371  
Compensation and related benefits487  606  
Professional fees279  194  
Accrued expenses and other current liabilities$1,809  $1,171  

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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
6. Commitments and Contingencies

Office Space Rental

During the second quarter of 2020, the Company entered into a non-cancelable operating lease for certain executive, administrative, and general business office space for its headquarters in New York, New York, which began on June 5, 2020 and has a term through December 31, 2024. The Company recognized a current operating lease liability of $0.1 million and a non-current operating lease liability of $0.9 million with a corresponding right of use asset ("ROU") of $1.0 million, which is based on the present value of the minimum rental payments of the lease. The discount rate of the Company's operating lease under ASC 842 is the Company's estimated incremental borrowing rate of 13%. As of June 30, 2020, the lease has a remaining term of 4.5 years.

The Company had a non-cancelable operating lease for office space in New York, New York, which began on August 1, 2018 with a term through July 31, 2020. The Company adopted ASC 842 in the first quarter of 2019 and as a result of the adoption, the Company recognized a current operating lease liability of $0.4 million and a non-current operating lease liability of $0.2 million with a corresponding ROU of $0.6 million, which is based on the present value of the minimum lease payments of the lease. The discount rate used to account for the Company's operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 13%. As of June 30, 2020, the lease had a remaining term of less than 1.0 year and the lease expired on July 31, 2020.

Rent expense related to the Company's operating leases was approximately $0.1 million for each of the three months ended June 30, 2020 and 2019. Rent expense related to the Company's operating leases was approximately $0.2 million for each of the six months ended June 30, 2020. Future minimum lease payments under the Company's non-cancelable operating leases are as follows as of June 30, 2020 (in thousands):
Future minimum lease payments:
2020 (remaining)$107  
2021302  
2022311  
2023321  
2024330  
Total future minimum lease payments1,371  
Less: imputed interest(363) 
Current and non-current operating lease liability$1,008  

Operating lease amortization of the ROU asset was $0.1 million for each of the three months ended June 30, 2020 and 2019 and $0.2 million for each of the six months ended June 30, 2020 and 2019.



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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Legal Proceedings

From time to time, the Company is subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business, which may include employment matters, breach of contract disputes and stockholder litigation. Such actions and proceedings are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, when the Company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, as of the date hereof, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the Company’s consolidated results of operations, financial position or cash flows.

The Company’s predecessor company, Galena, was involved in multiple legal proceedings and administrative actions, including stockholder class actions, both state and federal, and to which the Company is now subject, as follows:

On February 13, 2017, certain putative shareholder securities class action complaints were filed in federal court alleging, among other things, that Galena and certain of Galena's former officers and directors failed to disclose that Galena’s promotional practices for Abstral® (fentanyl sublingual tablets) were allegedly improper and that Galena may be subject to civil and criminal liability, and that these alleged failures rendered Galena’s statements about its business misleading. The actions were consolidated, lead plaintiffs were named by the U.S. District Court for the District of New Jersey and a consolidated complaint was filed. The Company filed a motion to dismiss the consolidated complaint. On August 21, 2018, the Company's motion to dismiss the consolidated complaint was granted without prejudice to file an amended complaint. On September 20, 2018, the plaintiffs filed an amended complaint. On October 22, 2018, the Company filed a motion to dismiss the amended complaint. On November 13, 2019, the U.S. District Court for the District of New Jersey granted the Company's motion to dismiss. On December 20, 2019, the lead plaintiffs filed a Second Amended Consolidated Class Action Complaint. On January 29, 2020, the Company filed a motion to dismiss the amended complaint.

In March 2017, a derivative complaint was filed in the U.S. District Court for the District of New Jersey against the Company’s former directors and Galena, as a nominal defendant. In July 2017, a derivative complaint was filed in California state court against the Company’s former directors and Galena, as a nominal defendant. In January 2018, a derivative complaint was filed in the U.S. District Court for the District of New Jersey against the Company’s former directors, officers and employees, and the Company as a nominal defendant. These complaints purport to assert derivative claims for breach of fiduciary duty on the Company’s behalf against the Company’s former directors and, in certain of the complaints, certain of the Company’s former officers and former employees, based on substantially similar facts as alleged in the putative shareholder securities class action complaints mentioned above. The derivative lawsuit filed in California state court is currently stayed pending resolution of a motion to dismiss in the referenced securities class action. On July 13, 2020 and July 16, 2020, respectively, the Company filed motions to dismiss the two complaints filed in the U.S. District Court for the District of New Jersey.


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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
7. Stockholders’ Equity

Preferred Stock

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

Common Stock

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

On October 29, 2019, the Company entered into an Equity Distribution Agreement (the "Distribution Agreement") with Maxim Group LLC (the "Agent"), pursuant to which the Company was permitted to offer and sell shares of common stock through the Agent having an aggregate offering price up to $5.0 million in gross proceeds. In connection with such sales, the Agent collected fees equal to 3% of the gross sales price of all shares of common stock sold. Sales of the shares under the Distribution Agreement were made in transactions deemed to be "at the market offering" as defined in Rule 415 under the Securities Act of 1933. Shares sold under the Distribution Agreement were offered and sold pursuant to the Company's effective registration statement on Form S-3. During the year ended December 31, 2019, the Company sold 524,097 shares of common stock pursuant to the Distribution Agreement for net proceeds of $2.7 million. The Distribution Agreement was terminated on January 9, 2020. There were no shares of common stock sold pursuant to the Distribution Agreement in 2020.

On January 9, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Investors”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investors (the “January 2020 Registered Offering”), (i) an aggregate of 1,189,000 shares of common stock, par value $0.0001 per share, of the Company, at an offering price of $3.9825 per share and (ii) an aggregate of 448,800 pre-funded warrants exercisable for shares of common stock 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 an aggregate of 818,900 shares of common stock at an exercise price of $3.93 per share. Each warrant is immediately exercisable and will expire five and one-half years from the issuance date. The net proceeds to the Company from the January 2020 Registered Offering, after deducting the placement agent fee and other estimated offering expenses, and excluding the exercise of any warrants, was approximately $6.0 million.

As of June 30, 2020, the Company has shares of common stock reserved for future issuance as follows (in thousands):
Warrants outstanding1,120  
Stock options outstanding208  
RSUs outstanding170  
Shares reserved for future issuance under the Company’s 2019 Equity Incentive Plan101  
Shares reserved for future issuance under the Employee Stock Purchase Plan8  
Total common stock reserved for future issuance1,607  

Stock Subscription Receivable

Prior to December 31, 2019, the Company sold 75,000 shares of common stock for gross proceeds of $0.3 million. As the gross cash proceeds of $0.3 million were not received until January 2, 2020, the Company recorded a stock subscription receivable of $0.3 million as of December 31, 2019.

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SELLAS LIFE SCIENCES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
8. Warrants to Acquire Shares of Common Stock

Warrants Outstanding

The following is a summary of the activity of the Company's warrants to acquire shares of common stock for the six months ended June 30, 2020 (in thousands):
 
Warrant IssuanceOutstanding, December 31, 2019GrantedExercisedCanceled/ExpiredOutstanding, June 30, 2020Expiration
January 2020 Offering  819      819  July 2025
Pre-funded January 2020 Offering  449  (449)     July 2025
June 2019 Offering2        2  June 2024
March 2019 Exercise Agreement63        63  March 2024
July 2018 Offering208        208  July 2023
Series A Convertible Preferred19        19  September 2023
2017 Equilibria6        6  December 2022
Galena February 20171        1  February 2022
Galena Other3      (1) 2  January 2022
302  1,268  (449) (1) 1,120  

Warrants to acquire shares of common stock consist of warrants that may be settled in cash, which are liability-classified warrants, and equity-classified warrants.

Warrants Classified as Liabilities

Liability-classified warrants consist of warrants to acquire common stock issued in connection with previous equity financings for Series A Convertible Preferred Stock, Galena's February 2017 financing, and various other Galena equity financings that were assumed by the Company at the consummation of the Merger. These warrants may be settled in cash and were determined not to be indexed to the Company’s common stock.

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 change in fair value of warrant liability. The fair value of the warrants is estimated using a Black-Scholes pricing model with the following inputs:
As of June 30, 2020
Warrant IssuanceOutstanding (in thousands)Strike price (per share)Expected term (years)Volatility %