10. Commitments and Contingencies

Legal Proceedings

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

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

Settled Matters

On December 16, 2015, Galena received a subpoena issued by the U.S. Attorney’s Office for the District of New Jersey (“USAO NJ”), requesting the production of a broad range of documents pertaining to Galena’s marketing and promotional practices for Abstral. Through its communications with the USAO NJ and the U.S. Department of Justice (“DOJ”), Galena came to understand that the investigation being undertaken by the USAO NJ and DOJ was a criminal investigation in addition to a civil investigation that could ultimately involve Galena as well as one or more former employees. Pursuant to Galena’s charter, Galena was reimbursing certain former employees’ attorney’s fees with respect to the investigation but stopped on May 1, 2017. Galena cooperated with the civil, and is continuing to cooperate with the criminal, investigations, and on September 8, 2017, DOJ announced a settlement agreement with Galena regarding the USAO NJ’s and DOJ’s investigation. The settlement agreement involves a non-criminal resolution and a civil payment in equal installments over twelve months of approximately $7.6 million, plus interest accrued since the date of reaching an agreement in principle, in return for a release of government claims in connection with the investigation. The $7.6 million civil payment is payable over four equal quarterly installments, with the first payment being made in the third quarter of 2017. As set forth in that settlement agreement, for a release of all claims against Galena and its officers and directors and dismissal with prejudice of the qui tam lawsuit described below, the relator received a portion of the civil payment to the federal government. On December 29, 2017, Galena made the remaining three payments to the federal government, which has advised us that all sums due and payable under the settlement agreement have been paid.

In addition, there is a qui tam action pending in the U.S. District Court of the District of New Jersey related to the investigation by USAO NJ and DOJ. On September 18, 2017, Galena executed a settlement agreement with the attorneys for the relator in the qui tam action to settle the statutorily mandated attorney fees award by payment of $0.1 million in cash and $0.2 million in Galena common stock subject to court approval, which amounts were accrued during the second quarter 2017. Galena also obtained the consent of Private SELLAS under the terms of the Merger Agreement. However on November 7, 2017, attorneys for the qui tam relator agreed to have Galena pay the $0.2 million in cash. Galena also obtained the consent of Private SELLAS under the terms of the Merger Agreement. Galena paid the $0.3 million in cash for the statutorily mandated attorney fees award in the fourth quarter of 2017. As a result of receiving the portion of the civil settlement payment noted above and the settlement payment of the statutorily mandated attorney fees award, the relator will dismiss with prejudice the claims against Galena in the qui tam lawsuit.

Open Matters

On October 13, 2016, Galena filed a complaint in the Circuit Court for the County of Multnomah for the State of Oregon against Aon Risk Insurance Services West, Inc. (Aon) where Galena is seeking attorney’s fees, costs and expenses incurred by Galena related to its coverage dispute with a certain insurer and for amounts Galena was required to contribute to the settlements of In re Galena Biopharma, Inc. Derivative Litigation and In re Galena Biopharma, Inc. Securities Litigation as a direct result of certain insurer’s failure to pay its full policy limits of liability and other relief. Galena and Aon are currently engaged in written discovery.

On February 13, 2017, a putative stockholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey captioned, Miller v. Galena Biopharma, Inc., et al. On February 15, 2017, a putative stockholder securities class action complaint was filed in the U.S. District Court for the District of New Jersey entitled, Kattuah v. Galena Biopharma, Inc., et al. The actions assert that the defendants 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. Two groups of stockholders and one individual stockholder filed three motions to be appointed lead plaintiff on April 14, 2017 and April 17, 2017.

Subsequently, one of the stockholders groups withdrew its motion for lead plaintiff status and the individual stockholder notified the Court that he does not object to the appointment of the remaining stockholder group, GALE investor group, as lead plaintiff. On July 17, 2017, the Court approved the GALE investor group as named lead plaintiff and its counsel as lead and liaison counsel. The Court also consolidated both actions. An amended complaint was filed on October 6, 2017. On December 15, 2017, Galena and the former officers and employees filed a motion to dismiss the amended complaint. The plaintiffs have responded to a former officer’s motion to dismiss on February 13, 2018 and will respond to Galena’s and the other former officers’ and employees’ motion to dismiss on March 2, 2018. Galena and the former officers and employees are expected to file a reply in April of 2018. Thereafter, Galena will take the matter under advisement. It is not known when the Court will issue a ruling in this matter.

On March 16, 2017, a complaint captioned Keller v. Ashton et al., CA No. 2:17-cv-01777 was filed in the U.S. District Court for the District of New Jersey against Galena’s former directors and the Company, as a nominal defendant. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena’s behalf against its former directors based on substantially similar facts as alleged in the putative stockholder securities class action complaints mentioned above. Galena’s response to the complaint was due on June 1, 2017; however, the Court on May 21, 2017, entered a stay of the proceedings pending resolution of motions to dismiss in the securities litigations described above.

Galena also received a stockholder demand dated April 14, 2017, pursuant to 8 Del. C. Sec. 220, from a stockholder (Albert Zhang) demanding access to Galena’s books and records relating to its sales of Abstral and the U.S. Attorney’s investigation into Galena’s sale of Abstral in order for Mr. Zhang to determine, among other things, whether to file a derivative lawsuit against Galena’s former management and directors. Galena has responded to the demand and Mr. Zhang has indicated that he will file a derivative complaint soon.

On April 27, 2017, a putative stockholder class action was filed in the Court of Chancery of the State of Delaware captioned Patel vs. Galena Biopharma, Inc. et. al, CA No. 2017-0325-JTL seeking relief under Section 225 of the Delaware General Corporation Law (DGCL) and alleging breaches of fiduciary duties by Galena’s former board of directors and former interim chief executive officer regarding proposals to amend Galena’s certificate of incorporation to increase the amount of authorized shares of common stock and effectuate a reverse stock split at the July 2016 and October 2016 stockholder meetings, respectively. On June 2, 2017, an amended verified complaint was filed along with a motion to expedite the proceedings. On June 5, 2017, Galena filed a verified petition under Section 205 of the DGCL and a motion to expedite the proceedings. On June 8, 2017, the Court denied a request by the plaintiff to schedule a preliminary injunction motion and ordered a prompt trial on both the plaintiff and Galena’s claims. On June 20, 2017, the Court consolidated the claims into In re Galena Biopharma, Inc., C. A. No. 2017-0423-JTL. On July 10, 2017, the Court ordered that the trial of the claims be held on August 28, 30 and 31, 2017. On July 24, 2017, Galena entered into a binding settlement term sheet, which the Court enforced on November 30, 2017, over the objection of the plaintiff. On December 8, 2017, the Court set the hearing on the settlement for March 15, 2018. On December 11, 2017, the Court also granted an order validating the ratification votes at the special stockholder meeting held on July 6, 2017 and the certificate of amendments filed by Galena for the increase in authorized shares in 2011, 2013, 2015, and 2016 as well as for the reverse stock split in 2016. On February 22, 2018, the plaintiff filed his brief in support of the settlement as well as his request for attorneys’ fees and an incentive award. On March 1, 2018, the former directors and former interim chief executive officer responded to plaintiff’s brief. On February 28, 2018, the former directors and former interim chief executive officer requested the Court continue the date of the hearing to approve the settlement as the Company was working with the staff of the SEC to obtain the no-action letter required by the binding settlement term sheet. The Plaintiff objected to such continuance. On March 15, 2018, the Court ruled in favor of the Company and continued the settlement hearing for 90 days.

Under the terms of the settlement, the class will receive a settlement payment of $1.3 million, in addition to attorney fees in an amount to be approved by the Court. The settlement payment of $1.3 million consists of $50,000 in cash to be paid by the Company or its insurers and $1,250,000 in unrestricted shares of the Company’s common stock (“Settlement Stock”), which valuation will be based on the volume-weighted average closing price for the 20 trading days immediately preceding the day before the transfer of the Settlement Stock to the settlement fund pursuant to the terms and conditions of the settlement. The Company anticipates that the Settlement Stock will be issued, pursuant to the terms of the Stipulation of Settlement, in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 3(a)(10) of the Securities Act. Any amounts awarded by the Court for attorneys’ fees will be paid in part by the settlement fund and in part by the Company’s insurance carriers. Upon the effectiveness of the proposed settlement, the individual defendants will be released from the claims that were asserted or could have been asserted in the class action by class members participating in the settlement.

On July 6, 2017, a complaint captioned Jacob v. Schwartz et al., Case No. C17-01222, was filed in the Superior Court of California, County of Contra Costa against Galena’s former directors and the Company, as a nominal defendant. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena’s behalf against its former directors based on substantially similar facts as alleged in the derivative complaint mentioned above. Galena’s response to the complaint was due on July 7, 2017; however, the Court on September 5, 2017, entered a stay of the proceedings pending resolution of motions to dismiss in the securities litigations described above.

On November 7, 2017, a written demand was made on Galena by a stockholder requesting that additional financial projections and valuation analyses be made in Galena’s Form S-4 relating to the Merger, which was declared effective on November 6, 2017. The demand stated, among other thing, that, if such disclosures are not made within a reasonable period of time, the stockholder intends to file a securities class action lawsuit in federal court. Galena has resolved the matters raised in the demand letter through a nominal monetary payment and additional disclosures in the Form S-4.

On January 23, 2018, a complaint captioned Johnson v Schwartz et al., CA No. 2:18-cv-00903 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. The complaint purports to assert derivative claims for breach of fiduciary duty on Galena’s behalf against its former directors, officers and employees based on substantially similar facts as alleged in the putative stockholder securities class action complaints and derivative complaints mentioned above, as well as making demand futility allegations against the current board of directors, who are not named as defendants. It is expected that the Company and the individual defendants will respond to the complaint through an appropriate pleading or motion and, if necessary, seek an order from the Court staying the proceedings pending further developments in the securities litigations described above.

On or about April 9, 2018, JGB filed a lawsuit in the U.S. District Court for the Southern District of New York captioned JGB (Cayman) Newton, Ltd. v. Sellas Life Sciences Group, Inc., et al., Case 1:18-cv-3095 (DLC), or the JGB Action. The complaint in the JGB Action asserts claims under state law and federal securities law against us, our Chief Executive Officer, Angelos M. Stergiou, M.D., ScD H.C, and our Interim Chief Financial Officer, Aleksey N. Krylov (Mr. Krylov together with the Company and Dr. Stergiou, the Defendants). The complaint in the JGB Action alleges, among other things, that we breached a contractual obligation to deliver certain shares of our common stock to JGB and that, in the course of negotiations related to the senior secured debenture agreement, the Defendants failed to disclose to JGB certain information regarding positive clinical trial results that was not then public. According to the complaint, JGB seeks to receive 2,483,500 shares of our common stock, damages, and costs and expenses incurred in the JGB action, among other things. We dispute the claims in the JGB Action and intend to defend against them vigorously.

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

The Company acquires assets still in development and enters into research and development arrangements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales. Because of the contingent nature of these payments, they are not included in the table of contractual obligations shown below.

These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give the Company the discretion to unilaterally terminate development of the product, which would allow the Company to avoid making the contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. For additional information on the Company’s commitments under collaboration and license agreements read Note 6 to these consolidated financial statements. For additional information on the Company’s commitments of contingent consideration read Note 7 to these consolidated financial statements.

Commitments

The Company rents office space under a non-cancelable operating lease. Rental expense amounted to $0.2 million for the years ended December 31, 2017 and 2016. The Company’s contractual obligations that may require future cash payments as of December 31, 2017 under the non-cancelable operating lease are as follows (in thousands):


	Operating Leases
2018	$	223
2019		76

Total	$	299