10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 7, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2020 | |
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OR | |
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◻ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
Commission file number: 001-35994
Heat Biologics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
26-2844103 (I.R.S. Employer Identification No.) |
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627 Davis Drive, Suite 400 Morrisville, NC (Address of Principal Executive Offices) |
27560 (Zip Code) |
(919) 240-7133
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock |
HTBX |
The Nasdaq Stock Market (The Nasdaq Capital Market) |
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 þ 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 period that the registrant was required to submit such files). Yes þ 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 |
◻ |
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Accelerated filer |
◻ |
Non-accelerated filer |
þ |
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Smaller reporting company |
þ |
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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 þ
As of August 4, 2020, there were 148,560,562 shares of Common Stock, $0.0002 par value per share, outstanding.
HEAT BIOLOGICS, INC.
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Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to raise additional capital to support our clinical development program and other operations, our ability to develop products of commercial value and to identify, discover and obtain rights to additional potential product candidates, our ability to protect and maintain our intellectual property and the ability of our licensors to obtain and maintain patent protection for the technology or products that we license from them, the outcome of research and development activities, our reliance on third-parties, competitive developments, the effect of current and future legislation and regulation and regulatory actions, as well as other risks described more fully in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (the “SEC”). Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere herein and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
As a result of these and other factors, we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
NOTE REGARDING COMPANY REFERENCES
Throughout this Quarterly Report on Form 10-Q, “Heat Biologics,” “the Company,” ‘we” and “our” refer to Heat Biologics, Inc.
1
HEAT BIOLOGICS, INC.
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June 30, |
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December 31, |
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2020 |
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2019 |
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(unaudited) |
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Current Assets |
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Cash and cash equivalents |
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$ |
20,668,241 |
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$ |
9,039,887 |
Short-term investments |
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26,312,039 |
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5,713,922 |
Accounts receivable |
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26,967 |
|
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34,986 |
Prepaid expenses and other current assets |
|
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593,924 |
|
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420,328 |
Total Current Assets |
|
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47,601,171 |
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15,209,123 |
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Property and Equipment, net |
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669,401 |
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559,410 |
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Other Assets |
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In-process R&D |
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5,866,000 |
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5,866,000 |
Goodwill |
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1,452,338 |
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1,452,338 |
Operating lease right-of-use asset |
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2,134,573 |
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2,287,500 |
Finance lease right-of-use asset |
|
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306,643 |
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187,573 |
Deposits |
|
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122,905 |
|
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394,637 |
Total Other Assets |
|
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9,882,459 |
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10,188,048 |
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Total Assets |
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$ |
58,153,031 |
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$ |
25,956,581 |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable |
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$ |
779,642 |
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$ |
1,503,342 |
Deferred revenue, current portion |
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1,915,924 |
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3,410,319 |
Contingent consideration, current portion |
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1,531,636 |
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1,124,970 |
Contingent consideration, related party - current portion |
|
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454,364 |
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454,364 |
Operating lease liability, current portion |
|
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228,776 |
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216,832 |
Finance lease liability, current portion |
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104,828 |
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49,104 |
Accrued expenses and other liabilities |
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1,202,705 |
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1,676,467 |
Total Current Liabilities |
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6,217,875 |
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8,435,398 |
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Long Term Liabilities |
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Other long-term liabilities |
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22,847 |
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— |
Derivative warrant liability |
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47,939 |
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— |
Deferred tax liability |
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361,911 |
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361,911 |
Deferred revenue, net of current portion |
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200,000 |
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200,000 |
Operating lease liability, net of current portion |
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1,402,962 |
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1,519,574 |
Financing lease liability, net of current portion |
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215,112 |
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142,667 |
Contingent consideration, net of current portion |
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1,969,538 |
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1,653,197 |
Contingent consideration, related party - net of current portion |
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578,977 |
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485,984 |
Total Liabilities |
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11,017,161 |
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12,798,731 |
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Commitments and Contingencies (Note 9 and 13) |
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Stockholders' Equity |
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Common stock, $.0002 par value; 250,000,000 shares authorized, 110,023,783 and 33,785,999 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively |
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22,006 |
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6,757 |
Additional paid-in capital |
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163,007,558 |
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118,173,843 |
Accumulated deficit |
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(115,344,284) |
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(104,597,748) |
Accumulated other comprehensive income (loss) |
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28,044 |
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(11,250) |
Total Stockholders' Equity - Heat Biologics, Inc. |
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47,713,324 |
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13,571,602 |
Non-Controlling Interest |
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(577,454) |
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(413,752) |
Total Stockholders' Equity |
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47,135,870 |
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13,157,850 |
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Total Liabilities and Stockholders' Equity |
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$ |
58,153,031 |
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$ |
25,956,581 |
See Notes to Consolidated Financial Statements
2
HEAT BIOLOGICS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Revenue: |
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Grant and licensing revenue |
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$ |
593,165 |
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$ |
342,487 |
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$ |
1,495,045 |
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$ |
1,043,549 |
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Operating expenses: |
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Research and development |
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2,790,797 |
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3,424,141 |
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5,573,303 |
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6,596,388 |
General and administrative |
|
|
1,801,674 |
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1,860,459 |
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|
5,072,222 |
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|
5,208,060 |
Change in fair value of contingent consideration |
|
|
843,000 |
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|
112,000 |
|
|
816,000 |
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|
226,290 |
Total operating expenses |
|
|
5,435,471 |
|
|
5,396,600 |
|
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11,461,525 |
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12,030,738 |
|
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Loss from operations |
|
|
(4,842,306) |
|
|
(5,054,113) |
|
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(9,966,480) |
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(10,987,189) |
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Change in fair value of warrant liability |
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(24,363) |
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|
— |
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|
(1,002,073) |
|
|
— |
Investor relations expense |
|
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— |
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|
— |
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(66,767) |
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|
— |
Interest income |
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|
56,080 |
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|
124,793 |
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|
108,790 |
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|
275,645 |
Other income (expense), net |
|
|
273,771 |
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|
(15,585) |
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|
16,292 |
|
|
(7,264) |
Total non-operating income (loss) |
|
|
305,488 |
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|
109,208 |
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|
(943,758) |
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|
268,381 |
|
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Net loss before income taxes |
|
|
(4,536,818) |
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|
(4,944,905) |
|
|
(10,910,238) |
|
|
(10,718,808) |
Income tax expense |
|
|
— |
|
|
— |
|
|
— |
|
|
(45,178) |
Net loss |
|
|
(4,536,818) |
|
|
(4,944,905) |
|
|
(10,910,238) |
|
|
(10,763,986) |
Net loss - non-controlling interest |
|
|
(82,388) |
|
|
(174,035) |
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|
(163,702) |
|
|
(277,640) |
Net loss attributable to Heat Biologics, Inc. |
|
$ |
(4,454,430) |
|
$ |
(4,770,870) |
|
$ |
(10,746,536) |
|
$ |
(10,486,346) |
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Net loss per share attributable to Heat Biologics, Inc.- |
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|
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Net loss per share attributable to Heat Biologics, Inc.-basic and diluted |
|
$ |
(0.05) |
|
$ |
(0.14) |
|
$ |
(0.15) |
|
$ |
(0.32) |
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|
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Weighted-average number of common shares used in net loss per share attributable to common stockholders- |
|
|
|
|
|
|
|
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|
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Weighted-average number of common shares used in net loss per share attributable to Heat Biologics, Inc.—basic and diluted |
|
|
87,930,846 |
|
|
33,255,724 |
|
|
72,606,461 |
|
|
33,240,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
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|
|
|
|
|
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|
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|
|
Net loss |
|
$ |
(4,536,818) |
|
$ |
(4,944,905) |
|
$ |
(10,910,238) |
|
$ |
(10,763,986) |
Unrealized (loss) gain on foreign currency translation |
|
|
(179,510) |
|
|
16,612 |
|
|
39,294 |
|
|
8,423 |
Total comprehensive loss |
|
|
(4,716,328) |
|
|
(4,928,293) |
|
|
(10,870,944) |
|
|
(10,755,563) |
Comprehensive loss attributable to non-controlling interest |
|
|
(82,388) |
|
|
(174,035) |
|
|
(163,702) |
|
|
(277,640) |
Comprehensive loss - Heat Biologics, Inc. |
|
$ |
(4,633,940) |
|
$ |
(4,754,258) |
|
$ |
(10,707,242) |
|
$ |
(10,477,923) |
See Notes to Consolidated Financial Statements
3
HEAT BIOLOGICS INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
|
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Three Months Ended June 30, 2020 |
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Accumulated |
|
|
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|
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|
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Other |
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Total |
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Common |
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Accumulated |
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Comprehensive |
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Non-Controlling |
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Stockholders' |
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Stock |
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APIC |
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Deficit |
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Income |
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Interest |
|
Equity |
||||||
Balance at March 31, 2020 |
|
$ |
15,627 |
|
$ |
137,692,553 |
|
$ |
(110,889,854) |
|
$ |
207,554 |
|
$ |
(495,066) |
|
$ |
26,530,814 |
ATM raise |
|
|
6,375 |
|
|
25,564,043 |
|
|
— |
|
|
— |
|
|
— |
|
|
25,570,418 |
Stock issuance costs |
|
|
— |
|
|
(639,826) |
|
|
— |
|
|
— |
|
|
— |
|
|
(639,826) |
Stock-based compensation |
|
|
— |
|
|
373,008 |
|
|
— |
|
|
— |
|
|
— |
|
|
373,008 |
Exercise of warrants |
|
|
4 |
|
|
17,780 |
|
|
— |
|
|
— |
|
|
— |
|
|
17,784 |
Other comprehensive loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(179,510) |
|
|
— |
|
|
(179,510) |
Net loss |
|
|
— |
|
|
— |
|
|
(4,454,430) |
|
|
— |
|
|
(82,388) |
|
|
(4,536,818) |
Balance at June 30, 2020 |
|
$ |
22,006 |
|
$ |
163,007,558 |
|
$ |
(115,344,284) |
|
$ |
28,044 |
|
$ |
(577,454) |
|
$ |
47,135,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020 |
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|
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|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other |
|
|
|
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Total |
||
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Common |
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|
|
|
Accumulated |
|
Comprehensive |
|
Non-Controlling |
|
Stockholders' |
|||||
|
|
Stock |
|
APIC |
|
Deficit |
|
(Loss) Income |
|
Interest |
|
Equity |
||||||
Balance at December 31, 2019 |
|
$ |
6,757 |
|
$ |
118,173,843 |
|
$ |
(104,597,748) |
|
$ |
(11,250) |
|
$ |
(413,752) |
|
$ |
13,157,850 |
January 2020 investment offering, net of underwriters discounts |
|
|
4,000 |
|
|
4,102,148 |
|
|
— |
|
|
— |
|
|
— |
|
|
4,106,148 |
ATM raise |
|
|
8,973 |
|
|
36,989,680 |
|
|
— |
|
|
— |
|
|
— |
|
|
36,998,653 |
Issuance of common stock from vesting of restricted stock awards |
|
|
328 |
|
|
(328) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Stock Issuance costs |
|
|
— |
|
|
(1,092,760) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,092,760) |
Stock-based compensation |
|
|
— |
|
|
1,321,200 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,321,200 |
Exercise of warrants |
|
|
1,501 |
|
|
2,740,892 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,742,393 |
Exchange of warrants |
|
|
447 |
|
|
772,883 |
|
|
— |
|
|
— |
|
|
— |
|
|
773,330 |
Other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
39,294 |
|
|
— |
|
|
39,294 |
Net loss |
|
|
— |
|
|
— |
|
|
(10,746,536) |
|
|
— |
|
|
(163,702) |
|
|
(10,910,238) |
Balance at June 30, 2020 |
|
$ |
22,006 |
|
$ |
163,007,558 |
|
$ |
(115,344,284) |
|
$ |
28,044 |
|
$ |
(577,454) |
|
$ |
47,135,870 |
See Notes to Consolidated Financial Statements
4
HEAT BIOLOGICS INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
|
|
Three Months Ended June 30, 2019 |
||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
Total |
||
|
|
Common |
|
|
|
|
Accumulated |
|
Comprehensive |
|
Non-Controlling |
|
Stockholders' |
|||||
|
|
Stock |
|
APIC |
|
Deficit |
|
Loss |
|
Interest |
|
Equity |
||||||
Balance at March 31, 2019 |
|
$ |
6,819 |
|
$ |
116,943,119 |
|
$ |
(90,295,656) |
|
$ |
(28,093) |
|
$ |
(150,209) |
|
$ |
26,475,980 |
Issuance of common stock |
|
|
3 |
|
|
18,894 |
|
|
— |
|
|
— |
|
|
— |
|
|
18,897 |
Exercise of stock options |
|
|
— |
|
|
2,122 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,122 |
Stock-based compensation |
|
|
— |
|
|
386,787 |
|
|
— |
|
|
— |
|
|
— |
|
|
386,787 |
Other comprehensive loss |
|
|
— |
|
|
— |
|
|
— |
|
|
16,612 |
|
|
— |
|
|
16,612 |
Net loss |
|
|
— |
|
|
— |
|
|
(4,770,870) |
|
|
— |
|
|
(174,035) |
|
|
(4,944,905) |
Balance at June 30, 2019 |
|
$ |
6,822 |
|
$ |
117,350,922 |
|
$ |
(95,066,526) |
|
$ |
(11,481) |
|
$ |
(324,244) |
|
$ |
21,955,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019 |
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
Total |
||
|
|
Common |
|
|
|
|
Accumulated |
|
Comprehensive |
|
Non-Controlling |
|
Stockholders' |
|||||
|
|
Stock |
|
APIC |
|
Deficit |
|
Loss |
|
Interest |
|
Equity |
||||||
Balance at December 31, 2018 |
|
$ |
6,499 |
|
$ |
114,883,135 |
|
$ |
(84,580,180) |
|
$ |
(19,904) |
|
$ |
(46,604) |
|
$ |
30,242,946 |
Issuance of common stock |
|
|
3 |
|
|
18,894 |
|
|
— |
|
|
— |
|
|
— |
|
|
18,897 |
Exercise of stock options |
|
|
— |
|
|
2,122 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,122 |
Stock-based compensation |
|
|
320 |
|
|
2,446,771 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,447,091 |
Other comprehensive loss |
|
|
— |
|
|
— |
|
|
— |
|
|
8,423 |
|
|
— |
|
|
8,423 |
Net loss |
|
|
— |
|
|
— |
|
|
(10,486,346) |
|
|
— |
|
|
(277,640) |
|
|
(10,763,986) |
Balance at June 30, 2019 |
|
$ |
6,822 |
|
$ |
117,350,922 |
|
$ |
(95,066,526) |
|
$ |
(11,481) |
|
$ |
(324,244) |
|
$ |
21,955,493 |
See Notes to Consolidated Financial Statements
5
HEAT BIOLOGICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the Six Months Ended |
||||
|
|
June 30, |
||||
|
|
2020 |
|
2019 |
||
Cash Flows from Operating Activities |
|
|
|
|
|
|
Net loss |
|
$ |
(10,910,238) |
|
$ |
(10,763,986) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
153,994 |
|
|
122,012 |
Noncash lease expense |
|
|
48,259 |
|
|
— |
Noncash interest expense |
|
|
9,316 |
|
|
— |
Noncash investor relations expense |
|
|
66,767 |
|
|
— |
Stock-based compensation |
|
|
1,321,200 |
|
|
2,447,091 |
Change in fair value of common stock warrants |
|
|
1,002,073 |
|
|
— |
Change in fair value of contingent consideration |
|
|
816,000 |
|
|
226,290 |
Unrealized gain on investments |
|
|
(61,013) |
|
|
(5,588) |
Increase (decrease) in cash arising from changes in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
7,903 |
|
|
(49,186) |
Prepaid expenses and other current assets |
|
|
(174,274) |
|
|
276,994 |
Accounts payable |
|
|
(719,787) |
|
|
1,004,864 |
Deferred revenue |
|
|
(1,494,395) |
|
|
(1,032,539) |
Deferred tax liability |
|
|
— |
|
|
45,178 |
Accrued expenses and other liabilities |
|
|
(435,338) |
|
|
(503,417) |
Other long-term liabilities |
|
|
22,847 |
|
|
79,858 |
Deposits |
|
|
271,732 |
|
|
(85,065) |
Net Cash Used in Operating Activities |
|
|
(10,074,954) |
|
|
(8,237,494) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
Purchase of short-term investments |
|
|
(24,337,099) |
|
|
(72,993) |
Sale of short-term investments |
|
|
3,799,995 |
|
|
— |
Purchase of property and equipment |
|
|
(211,401) |
|
|
(45,459) |
Proceeds from disposal of property and equipment |
|
|
2,168 |
|
|
— |
Net Cash Used in Investing Activities |
|
|
(20,746,337) |
|
|
(118,452) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
Proceeds from public offering of common stock and warrants, net of issuance costs |
|
|
6,600,970 |
|
|
— |
Proceeds from the issuance of common stock, net of underwriting discounts and commissions |
|
|
36,998,653 |
|
|
18,897 |
Proceeds from exercise of stock options |
|
|
— |
|
|
2,122 |
Stock issuance costs |
|
|
(1,092,760) |
|
|
— |
Proceeds from PPP loan |
|
|
702,000 |
|
|
— |
Repayment of PPP loan |
|
|
(702,000) |
|
|
— |
Repayments on principal of finance lease |
|
|
(54,969) |
|
|
— |
Net Cash Provided by Financing Activities |
|
|
42,451,894 |
|
|
21,019 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(2,249) |
|
|
8,882 |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
11,628,354 |
|
|
(8,326,045) |
|
|
|
|
|
|
|
Cash and Cash Equivalents – Beginning of Period |
|
|
9,039,887 |
|
|
22,154,251 |
|
|
|
|
|
|
|
Cash and Cash Equivalents – End of Period |
|
$ |
20,668,241 |
|
$ |
13,828,206 |
|
|
|
|
|
|
|
Supplemental Disclosure for Cash Flow Information: |
|
|
|
|
|
|
Operating lease right-of-use assets obtained with lease liabilities |
|
$ |
— |
|
$ |
520,399 |
Finance lease right-of-use assets obtained with lease liabilities |
|
$ |
173,822 |
|
$ |
— |
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
Allocation of proceeds from public offering to warrant liabilities |
|
$ |
2,494,823 |
|
$ |
— |
Cashless exercise of warrants classified as liabilities |
|
$ |
2,742,393 |
|
$ |
— |
Cashless exchange of warrants classified as liabilities |
|
$ |
773,330 |
|
$ |
— |
See Notes to Consolidated Financial Statements
6
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. Certain information or footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2020.
The consolidated financial statements as of and for the three and six months ended June 30, 2020 and 2019 are unaudited. The balance sheet as of December 31, 2019 is derived from the audited consolidated financial statements as of that date. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 (the “2019 Annual Report”).
The accompanying unaudited consolidated financial statements as of and for the three and six months ended June 30, 2020 and 2019 include the accounts of Heat Biologics, Inc. (“the Company”), and its subsidiaries, Pelican Therapeutics, Inc. (“Pelican”), Heat Biologics I, Inc. (“Heat I”), Heat Biologics III, Inc. (“Heat III”), Heat Biologics IV, Inc. (“Heat IV”), Heat Biologics GmbH, Heat Biologics Australia Pty Ltd., Zolovax, Inc., Skunkworx Bio, Inc. (formerly known as Delphi Therapeutics, Inc.) and Scorpion Biosciences, Inc. The functional currency of the entities located outside the United States of America (the foreign entities) is the applicable local currency of the foreign entities. Assets and liabilities of the foreign entities are translated at period-end exchange rates. Statement of operations accounts are translated at the average exchange rate during the period. The effects of foreign currency translation adjustments are included in other comprehensive loss, which is a component of accumulated other comprehensive loss in stockholders’ equity. All significant intercompany accounts and transactions have been eliminated in consolidation. At June 30, 2020 and December 31, 2019, Heat held 85% controlling interest in Pelican. Heat accounts for its less than 100% interest in accordance with U.S. GAAP. Accordingly, the Company presents non-controlling interest as a component of stockholders’ equity on its consolidated balance sheets and reports non-controlling interest net loss under the heading “net loss – non-controlling interest” on its consolidated statements of operations and comprehensive loss.
Liquidity and Capital Resources
The Company has an accumulated deficit of approximately $115.3 million as of June 30, 2020 and a net loss of approximately $4.5 million for the three months ended June 30, 2020 and has not generated significant operating revenue or positive cash flows from operations. The Company expects to incur significant expenses and continued losses from operations for the foreseeable future. The Company expects its expenses to increase in connection with its ongoing activities, particularly as the Company continues its research and development and advances its clinical trials of, and seeks marketing approval for, its product candidates. In addition, if the Company obtains marketing approval for any of its product candidates, the Company expects to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, the Company will need to obtain substantial additional funding in connection with its continuing operations. Adequate additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate its research and development programs or any future commercialization efforts. To meet its capital needs, the Company intends to continue to consider multiple alternatives, including, but not limited to, additional equity financings such as sales of its common stock under at-the-market offerings, if available, debt financings,
7
partnerships, collaborations and other funding transactions. This is based on the Company’s current estimates, and the Company could use its available capital resources sooner than it currently expects. The Company is continually evaluating various cost-saving measures considering its cash requirements in order to focus resources on its product candidates. The Company will need to generate significant revenues to achieve profitability, and it may never do so. On April 23, 2020, the Company filed a shelf registration statement on Form S-3 (the "Registration Statement"). Pursuant to the Registration Statement, the Company may offer and sell securities having an aggregate public offering price of up to $150 million. In connection with the filing of the Registration Statement, the Company also entered into an amendment to its sales agreement (“Common Stock Sales Agreement”) with B. Riley FBR, as sales agent, pursuant to which the Company may issue and sell shares of its common stock under an at-the-market (the “ATM”) offering program. Pursuant to the ATM, the Company will pay B. Riley FBR a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock. As of June 30, 2020, the Company had approximately $47.0 million in cash, cash equivalents and short-term investments, which it believes is sufficient to fund its operations for at least one year from date of this filing.
With the global spread of the ongoing novel coronavirus (“COVID-19”) pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. While the Company is experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, the Company’s business, financial condition, results of operations and growth prospects could be materially adversely affected. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces.
Risk and Uncertainties
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses. With the global spread of the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its business. The extent to which the COVID-19 pandemic impacts the Company’s business, the clinical development of the Company’s products, the business of the Company’s suppliers and other commercial partners, the Company’s corporate development objectives and the value of and market for the Company’s 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, Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease. The Company’s in human phase 1 trial of HS-130 was subject to an approximate 8 week enrollment pause in April and May 2020 due to lack of personal protection equipment (“PPE”) at a clinical site. The site ceased all non-critical/non-essential patient procedures until PPE supplies were available. Enrollment resumed and no delays in overall development milestones are expected for HS-130.
The global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s
8
business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces.
Cash and Cash Equivalents
The Company considers all cash and other highly liquid investments with initial maturities from the date of purchase of three months or less to be cash and cash equivalents.
Derivative Financial Instruments
The Company has issued common stock warrants in connection with the execution of certain equity financings. The fair value of the warrants, which were deemed to be derivative instruments, was recorded as a derivative liability under the provisions of ASC Topic 815 Derivatives and Hedging (“ASC 815”) because they are not considered indexed to the Company’s own stock. Subsequently, the liability is adjusted to fair value as of the end of each reporting period and the changes in fair value of derivative liabilities are recorded in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value of warrant liability” See Note 3 for additional information.
The fair value of the warrants, including the warrants issued in connection with the January 2020 common stock offering and recorded as liability, was determined using the Monte Carlo simulation model, deemed to be an appropriate model due to the terms of the warrants issued.
The fair value of warrants was affected by changes in inputs to the Monte Carlo simulation model including the Company’s stock price, expected stock price volatility, the remaining term, and the risk-free interest rate. This model uses Level 3 inputs, including stock price volatility, in the fair value hierarchy established by ASC 820 Fair Value Measurement. At June 30, 2020, the fair value of such warrants was approximately $47.9 thousand, which is classified as a long-term derivative warrant liability on the Company’s consolidated balance sheets.
Short-term Investments
The Company’s short-term investments are equity securities and are carried at their fair value based on quoted market prices. Realized and unrealized gains and losses on equity securities are included in net earnings in the period earned or incurred.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, useful lives of fixed assets, contingent consideration, valuing warrants, income taxes and stock-based compensation. Actual results may differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation.
Segments
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed the operations and managed the business as one segment.
9
Business Combinations
The Company accounts for acquisitions using the acquisition method of accounting, which requires that all identifiable assets acquired, and liabilities assumed be recorded at their estimated fair values. The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from acquired patented technology. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Goodwill and In-Process Research and Development
The Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. The Company determines the useful lives of definite-lived intangible assets after considering specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, and other economic facts; including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their estimated useful lives. Intangible assets that are deemed to have indefinite lives, including goodwill, are reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived intangibles, other than goodwill, consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis or when events or changes in circumstances indicate evidence a potential impairment exists, using a fair value-based test. Pursuant to ASU 2017-04, the Company must record a goodwill impairment charge if a reporting unit’s carrying value exceeds its fair value. No impairment existed at June 30, 2020.
In-process research and development, or IPR&D, assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. IPR&D assets represent the fair value assigned to technologies that the Company acquires, which at the time of acquisition have not reached technological feasibility and have no alternative future use. During the period that the assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval and the ability to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value.
Contingent Consideration
Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain milestones in the future (“contingent consideration”). Contingent consideration liabilities are measured at their estimated fair value as of the date of acquisition, with subsequent changes in fair value recorded in the consolidated statements of operations. The Company estimates the fair value of the contingent consideration as of the acquisition date using the estimated future cash outflows based on the probability of meeting future milestones. The milestone payments will be made upon the achievement of clinical and commercialization milestones as well as single low digit royalty payments and payments upon receipt of sublicensing income. Subsequent to the date of acquisition, the Company reassesses the actual consideration earned and the probability-weighted future earn-out payments at each balance
10
sheet date. Any adjustment to the contingent consideration liability will be recorded in the consolidated statements of operations. Contingent consideration liabilities expected to be settled within 12 months after the balance sheet date are presented in current liabilities, with the non-current portion recorded under long term liabilities in the consolidated balance sheets.
Research and Development
Research and development includes costs associated with developmental products not yet approved by the FDA as well as costs associated with bringing developmental products into advanced phase clinical trials as incurred. These costs consist primarily of pre-manufacturing and manufacturing drug costs, clinical trial execution, investigator payments, license fees, salaries, stock-based compensation and related personnel costs. Other costs include fees paid to consultants and outside service providers related to the development of the Company’s product candidates and other expenses relating to the design, development, and testing and enhancement of its product candidates.
Revenue Recognition
The Company earns substantially all its revenue from a research grant from the Cancer Prevention and Research Institute of Texas (CPRIT). The Company’s contract with CPRIT relates to developing a human TNFRSF25 agonist antibody for use in cancer patients through research and development efforts and a noncommercial license from CPRIT-funded research to CPRIT and other government agencies and institutions of higher education in Texas.
CPRIT advances grant funds upon request by the Company consistent with the agreed upon amounts and schedules as provided in the contract. Funds received are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is earned and recognized when qualifying costs are incurred.
Prepaid Expenses and Other Current Assets
The Company’s prepaid expenses and other current assets consist primarily of the amount paid in advance for manufacturing activities, clinical trial support, and insurance.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that utilization is not presently more likely than not.
Significant Accounting Policies
The significant accounting policies used in preparation of these interim financial statements are disclosed in the 2019 Annual Report and have not changed significantly since such filing.
Recently Issued Accounting Pronouncements
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force), which addresses the accounting for the
11
transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, Income Taxes, and also improves consistency of application by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements upon adoption.
In November 2019, the FASB issued ASU No. 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606). The guidance identifies, evaluates, and improves areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided. The amendments in that ASU expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. For entities that have adopted the amendments in Update 2018-07, the updated guidance is effective for annual periods beginning after December 15, 2019. The Company adopted this ASU in the first quarter of 2020 and there was no material effect on the recognition or measurement of revenue in the Company’s financial statements.
In November 2018, the FASB issued ASU 2018-18: Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU, in part, requires that certain transactions with collaboration partners be excluded from revenue recognized under Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019. The Company adopted this ASU in the first quarter of 2020 and there was no material effect on the recognition or measurement of revenue in the Company’s financial statements.
2. Acquisition of Pelican Therapeutics
In 2017, the Company consummated the acquisition of 80% of the outstanding equity of Pelican, a related party, and Pelican became a majority owned subsidiary of the Company. During the quarter ended March 31, 2018, cash consideration of approximately $300,000 was distributed to the participating Pelican stockholders and the remainder of approximately $200,000 for certain Pelican liabilities not satisfied was recognized as other income in the statements of operations and comprehensive loss for the period. In October 2018, the Company entered into an agreement with the University of Miami (“UM”) whereby UM exchanged its shares of stock in the Company’s subsidiaries, Heat I, Inc. and Pelican. The stock exchange resulted in the Company increasing its controlling ownership in Pelican from 80% to 85%.
Under the Pelican stock acquisition agreement, the Company is also obligated to make future payments based on the achievement of certain clinical and commercialization milestones, as well as low single digit royalty payments and payments upon receipt of sublicensing income. The fair value of these future milestone payments is reflected in the contingent consideration account under current liabilities with the non-current portion under long term liabilities on the balance sheet. The estimated fair value of the contingent consideration was determined using a probability-weighted income approach, at a discount of 8.87% based on the median yield of publicly traded non-investment grade debt of companies in the pharmaceutical industry. The Company estimates the fair value of the contingent consideration on a quarterly basis. At the time of the Pelican acquisition, the Company’s CEO and certain affiliated entities as well as two of the Company’s directors and certain affiliated entities directly or indirectly owned shares of Pelican common stock purchased by the Company. As a result, approximately 20.4% of any such milestone payments will be paid to the Company’s CEO, 2.0% to Edward B. Smith, and 0.3% to John Monahan. On June 22, 2020, we achieved the first milestone when we dosed the first patient in the first Phase 1 clinical trial of PTX-35.
12
Goodwill was calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill resulting from this acquisition related largely to synergies expected from combining the operations. The goodwill is not deductible for income tax purposes. In-process R&D assets are treated as indefinite-lived until the completion or abandonment of the associated R&D program, at which time the appropriate useful lives will be determined. The Company calculated the fair value of the non-controlling interest acquired in the acquisition as 20% of the equity interest of Pelican, adjusted for a minority interest discount.
As discussed in Note 10, in May 2016, Pelican was awarded a $15.2 million CPRIT Grant from CPRIT for development of Pelican’s lead product candidate, PTX-35. The CPRIT Grant is expected to support Pelican in developing PTX-35 through a Phase 1 clinical trial designed to evaluate PTX-35 in combination with other immunotherapies.
3. Fair Value of Financial Instruments
The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other payables approximate fair value due to their short maturities.
As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level I – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level II – Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The changes in the fair value of liability classified warrants are included in net loss for the respective periods. Because some of the inputs to our valuation model are either not observable or are not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy. The Company’s cash equivalents are classified within Level I of the fair value hierarchy.
As June 30, 2020 and December 31, 2019, the fair values of cash, accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. The Company’s short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair value of the short-term investments was based on quoted market prices. There were no transfers between fair value hierarchy levels during the quarters ended June 30, 2020 or 2019.
In January 2020, the Company issued warrants in connection with the public offering of common stock (the “January 2020 Warrants”). Pursuant to the terms of the warrants, the warrants are not considered indexed to the Company’s own stock and therefore are required to be measured at fair value and reported as a liability in the consolidated balance sheets. Additionally, upon the closing of the January 2020 offering, 3,357,166 warrants were required to be classified as a liability. The fair value of the warrant liability is based on the Monte Carlo methodology. The Company is required to revalue the warrants at each reporting date with any changes in fair value recorded on our consolidated statement of operations and
13
comprehensive loss. The valuation of the warrants is classified under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. In order to calculate the fair value of the warrants, certain assumptions were made, including the selling price or fair market value of the underlying common stock, risk-free interest rate, volatility, and remaining life. Changes to the assumptions could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing a weighted average of comparable published betas of peer companies. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.
The Black Scholes model was used to value these warrants before the reclassification and the Monte Carlo simulation was used to value the warrants after reclassification. The following weighted average assumptions were used:
|
|
|
|
|
|
|
January 21, 2020 |
||
Current stock price |
|
$ |
0.33 |
|
Estimated volatility of future stock price |
|
|
124 |
% |
Risk free interest rate |
|
|
1.53 |
% |
Expected term |
|
|
3.7 |
years |
During the six months ended June 30, 2020, 3,291,666 warrants were exchanged for 2,238,332 shares of common stock. As of June 30, 2020, there were a total of 73,000 warrants outstanding that were reported as a liability in the consolidated balance sheet.
The fair value of financial instruments measured on a recurring basis is as follows:
|
|
As of June 30, 2020 |
|||||||||
Description |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
26,312,039 |
|
$ |
26,312,039 |
|
— |
|
|
— |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
4,534,515 |
|
|
— |
|
— |
|
$ |
4,534,515 |
Warrant liability |
|
$ |
47,939 |
|
|
— |
|
— |
|
$ |
47,939 |
|
|
As of December 31, 2019 |
|||||||||
Description |
|
Total |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
5,713,922 |
|
$ |
5,713,922 |
|
— |
|
|
— |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
3,718,515 |
|
|
— |
|
— |
|
$ |
3,718,515 |
14
The following table summarizes the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the six months ended June 30, 2020:
|
|
Contingent |
|
Warrant |
||
|
|
Consideration |
|
Liability |
||
Balance at December 31, 2019 |
|
$ |
3,718,515 |
|
$ |
— |
Fair value at issuance |
|
|
— |
|
|
2,494,823 |
Reclassification of warrants from equity to liability due to modification |
|
|
— |
|
|
869,078 |
Reclassification of warrant liability to equity upon exercise of warrants |
|
|
— |
|
|
(2,742,393) |
Reclassification of warrant liability to equity upon exchange of warrants |
|
|
— |
|
|
(1,575,642) |
Change in fair value |
|
|
816,000 |
|
|
1,002,073 |
Balance at June 30, 2020 |
|
$ |
4,534,515 |
|
$ |
47,939 |
The change in the fair value of the contingent consideration for the six months ended June 30, 2020 was primarily due to the increase in the estimated probability of achieving the initial milestone, a change in discount rate and the passage of time on the fair value measurement. The change in fair value of the warrant liability for the six months ended June 30, 2020 was primarily due to increases in the fair value of the underlying stock. Adjustments associated with the change in fair value of contingent consideration and warrant liability are included in the Company’s consolidated statement of operations and comprehensive loss.
The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of contingent consideration classified as Level 3 as of June 30, 2020:
|
|
|
As of June 30, 2020 |
||||
|
|
|
Valuation |
|
Significant |
|
Weighted Average |
|
|
|
Methodology |
|
Unobservable Input |
|
(range, if applicable) |
|
|
|
|
|
|
|
|
Contingent Consideration |
|
|
Probability weighted income approach |
|
Milestone dates |
|
2020-2031 |
|
|
|
|
|
Discount rate |
|
8.87% |
|
|
|
|
|
Probability of occurrence |
|
2.6% to 100% |
The following table presents quantitative information about the inputs used in the Monte Carlo simulation for the Company’s fair value measurement of the warrant liability classified as Level 3 as of June 30, 2020:
|
|
June 30, 2020 |
||
Current stock price |
|
$ |
0.84 |
|
Estimated volatility of future stock price |
|
|
223.90 |
% |
Risk free interest rate |
|
|
0.18 |
% |
Contractual term |
|
|
0.73 |
years |
The Company measures certain non-financial assets on a non-recurring basis, including goodwill and in-process R&D. As a result of those measurements, during the year ended December 31, 2019, goodwill with a total carrying value of $2.2 million was written down to its estimated fair value of $1.5 million and an impairment charge of $0.7 million was recorded. The Company uses a present value technique to estimate the fair value of these assets. This analysis requires significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital.
15
4. Short-Term Investments
Short-term investments consist of equity securities with a maturity of greater than three months when acquired. The Company holds its securities at fair value as of June 30, 2020 and December 31, 2019. Unrealized gains and losses on securities are reported in the statement of operations and comprehensive loss. Short-term investments at June 30, 2020 and December 31, 2019 consisted of mutual funds with fair values of $26.3 million and $5.7 million, respectively.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at:
|
|
June 30, |
|
December 31, |
||
|
|
2020 |
|
2019 |
||
Prepaid manufacturing expense |
|
$ |
367,262 |
|
$ |
148,156 |
Prepaid insurance |
|
|
11,905 |
|
|
120,851 |
Other prepaid expenses and current assets |
|
|
214,757 |
|
|
132,162 |
Other current assets |
|
|
— |
|
|
19,159 |
|
|
$ |
593,924 |
|
$ |
420,328 |
6. Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives, ranging generally from five to seven years. Expenditures for maintenance and repairs are charged to expense as incurred.
Property and equipment consist of the following at:
|
|
June 30, |
|
December 31, |
||
|
|
2020 |
|
2019 |
||
Lab equipment |
|
$ |
1,496,969 |
|
$ |
1,311,853 |
Computers |
|
|
62,380 |
|
|
53,065 |
Furniture and fixtures |
|
|
62,747 |
|
|
50,453 |
Leasehold improvements |
|
|
17,403 |
|
|
14,259 |
|
|
|
|
|
|
|
Total |
|
|
1,639,499 |
|
|
1,429,630 |
Accumulated depreciation |
|
|
(970,098) |
|
|
(870,220) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
669,401 |
|
$ |
559,410 |
Depreciation expense was $56,670 and $99,242 for the three and six months ended June 30, 2020, respectively, and $54,826 and $122,012 for the three and six months ended June 30, 2019, respectively.
7. Goodwill and In-Process R&D
Goodwill of $2.2 million and in-process R&D of $5.9 million were recorded in connection with the acquisition of Pelican, as described in Note 2. The Company performs an annual impairment test at the reporting unit level as of April 1st of each fiscal year. As of April 1, 2020, the Company qualitatively assessed whether it is more likely than not that the respective fair value of the reporting unit is less than its carrying amount, including goodwill. Based on that assessment, the Company
16
determined that this condition does not exist. As such, performing the first step of the two-step test impairment test was unnecessary. No impairment was recorded during the quarter ended June 30, 2020.
However, during the year ended December 31, 2019, the Company experienced a sustained decline in the quoted market price of the Company’s common stock and as a result the Company determined that as of December 31, 2019 it was more likely than not that the carrying value of these acquired intangibles exceeded their estimated fair value. Accordingly, the Company performed an interim impairment analysis as of that date using the income approach. This analysis required significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital. Pursuant to ASU 2017-04, the Company recorded a goodwill impairment charge for the excess of the reporting unit’s carrying value over its fair value. During the year ended December 31, 2019, goodwill with a total carrying value of $2.2 million was written down to its estimated fair value of $1.5 million and an impairment charge of $0.7 million was recorded.
8. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
June 30, |
|
December 31, |
||
|
|
2020 |
|
2019 |
||
Accrued clinical trial expenses |
|
$ |
447,674 |
|
$ |
1,156,618 |
Compensation and related benefits |
|
|
183,498 |
|
|
303,870 |
Other expenses |
|
|
571,533 |
|
|
215,979 |
|
|
$ |
1,202,705 |
|
$ |
1,676,467 |
9. Stockholders’ Equity
Underwritten Registered Offering
On January 21, 2020, the Company closed on a public offering consisting of 20,000,000 shares of common stock together with Warrants to purchase 10,000,000 shares of common stock. The gross proceeds to the Company from this offering were approximately $7,000,000, before deducting underwriting discounts, commissions, and other offering expenses.
The Company has accounted for the warrants as liabilities and recorded them at fair value in our consolidated balance sheets (see Note 3).
At-The-Market-Offering
From January 1, 2020 to June 30, 2020 the Company sold approximately 44,864,076 shares of common stock under the Common Stock Sales Agreement, as applicable, at an average price of approximately $0.82 per share, raising aggregate net proceeds of approximately $36,072,869 after deducting an aggregate commission of approximately 3%.
Common Stock Warrants
During the six months ended June 30, 2020, 9,992,500 January 2020 warrants were exercised for 7,494,375 shares of common stock, and 3,291,666 previously outstanding warrants were exchanged for 2,238,332 shares of common stock. As of June 30, 2020, the Company has outstanding warrants to purchase 5,746,564 shares of common stock issuable at a weighted-average exercise price of $2.04 per share.
17
The following table summarizes the warrant activity of the Company’s common stock warrants.
|
|
|
|
|
Common Stock |
|
|
Warrants |
Outstanding, December 31, 2019 |
|
9,030,730 |
Issued |
|
10,000,000 |
Exercised |
|
(9,992,500) |
Exchanged |
|
(3,291,666) |
Outstanding, June 30, 2020 |
|
5,746,564 |
Equity Compensation Plans
The Company maintains various equity compensation plans with substantially similar provisions under which it may award employees, directors and consultants incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock based awards with terms established by the Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the plans. In July 2019, the Company’s shareholders approved an increase of 4,000,000 shares in the number of shares available for grant. At the 2020 Special Meeting of Stockholders, the stockholders approved an amendment to the Plan to increase the number of shares by 4,000,000. As of June 30, 2020, there were 2,310,884 shares remaining available for grant under these plans.
Accounting for Stock-Based Compensation:
Stock Compensation Expense - For the three and six months ended June 30, 2020, the Company recorded $0.4 million, and $1.3 million of stock-based compensation expense, respectively. For the three and six months ended June 30, 2019, the Company recorded $0.4 million, and $2.4 million of stock-based compensation expense respectively. No compensation expense of employees with stock awards was capitalized during the three and six months ended June 30, 2020 and 2019.
Stock Options - Under the Plan, the Company has issued stock options. A stock option granted gives the holder the right, but not the obligation to purchase a certain number of shares at a predetermined price for a specific period of time. The Company typically issues options that vest over four years in equal installments beginning on the first anniversary of the date of grant. Under the terms of the Plan, the contractual life of the option grants may not exceed ten years. During the six months ended June 30, 2020 and 2019, the Company issued options that expire ten years from the date of grant.
Fair Value Determination – The Company has used the Black-Scholes-Merton option pricing model to determine fair value of our stock option awards on the date of grant. The Company will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.
The following weighted-average assumptions were used for option grants during the three and six months ended June 30, 2020 and 2019:
● | Volatility – The Company used an average historical stock price volatility based on an analysis of reported data for a peer group of comparable companies that have issued stock options with substantially similar terms, as the Company had a limited to no trading history for its common stock. |
● | Expected life of options – The expected term represents the period that the Company’s stock option grants are expected to be outstanding. The Company elected to utilize the “simplified” method to estimate the expected |
18
term. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. |
● | Risk-free interest rate – The rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with the expected life of the stock options. |
● | Dividend yield – The expected dividend yield was considered to be 0% in the option pricing formula since the Company had not paid any dividends and had no plan to do so in the future. |
● |
Forfeitures – As required by ASC 718, the Company reviews recent forfeitures and stock compensation expense. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Additionally, the Company conducts a sensitivity analysis of the forfeiture rate. Based on these evaluations the Company currently does not apply a forfeiture rate. |
The following table summarizes weighted-average assumptions used in our calculations of fair value for the six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
2020 |
|
|
2019 |
|
Dividend yield |
|
— |
% |
|
— |
% |
Expected volatility |
|
89.61 |
% |
|
131.10 |
% |
Risk-free interest rate |
|
0.86 |
% |
|
2.50 |
% |
Expected lives (years) |
|
5.9 |
years |
|
5.5 |
years |
Stock Option Activity - The weighted-average fair value of options granted during the six months ended June 30, 2020 and 2019, as determined under the Black-Scholes valuation model, was $0.42 and $0.80, respectively.
The following is a summary of the stock option activity for the six months ended June 30, 2020:
|
|
|
|
Weighted |
|
Weighted |
||
|
|
|
|
Average |
|
Average |
||
|
|
|
|
Exercise |
|
Remaining |
||
|
|
Shares |
|
Price |
|
Contractual Life |
||
Stock options outstanding at December 31, 2019 |
|
3,063,636 |
|
$ |
2.56 |
|
|
|
Granted |
|
2,567,000 |
|
|
0.58 |
|
|
|
Forfeited/Expired |
|
(38,200) |
|
|
2.20 |
|
|
|
Stock options outstanding at June 30, 2020 |
|
5,592,436 |
|
$ |
1.65 |
|
8.9 |
Years |
Stock options exercisable at June 30, 2020 |
|
2,357,128 |
|
$ |
2.83 |
|
8.2 |
Years |
Unrecognized compensation expense related to unvested stock options was $2.1 million as of June 30, 2020, which is expected to be recognized over a weighted-average period of 1.7 years and will be adjusted for forfeitures as they occur.
19
Restricted Stock - Under the Plan, the Company has issued restricted stock. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted stock issued to members of our Board of Directors and Executives vest 50% on grant date, 30% on the first anniversary and 10% each anniversary thereafter. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.
The following is a summary of restricted stock award activity for the three months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Average |
|
|
|
Shares |
|
Fair Value |
|
Restricted stock at December 31, 2019 |
|
1,254,653 |
|
$ |
0.86 |
Granted |
|
2,380,000 |
|
|
0.46 |
Vested |
|
(1,622,720) |
|
|
0.62 |
Restricted stock at June 30, 2020 |
|
2,011,933 |
|
$ |
0.58 |
Restricted Stock Units - Under the Plan, the Company issued time-based RSUs. RSUs are not actual shares, but rather a right to receive shares in the future. The shares are not issued and the employee cannot sell or transfer shares prior to vesting and has no voting rights until the RSUs vest. The employees' time-based RSUs vest 25% on the award date and 25% each anniversary thereafter. The grant date fair value of the RSUs is equal to the closing market price of our common stock on the grant date. The Company recognizes the grant date fair value of RSUs of shares the Company expects to issue as compensation expense ratably over the requisite service period.
The following is a summary of stock unit activity for the three months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Average |
|
|
|
Shares |
|
Fair Value |
|
RSUs at December 31, 2019 |
|
30,026 |
|
$ |
4.33 |
Vested |
|
(16,406) |
|
|
4.73 |
Cancelled |
|
(338) |
|
|
5.20 |
RSUs at June 30, 2020 |
|
13,282 |
|
$ |
3.80 |
10. Grant Revenue
In June 2016, Pelican entered into a cancer research grant contract or Grant Contract with CPRIT, under which CPRIT awarded a grant not to exceed $15.2 million for use in developing cancer treatments by targeting a novel T-cell costimulatory receptor (namely, TNFRSF25). The Grant Contract covers a period from June 1, 2016 through November 30, 2020, as amended. The first tranche of funding of $1.8 million was received in May 2017, and a second tranche of funding of $6.5 million was received in October 2017 and a third tranche of funding of $5.4 million was received in December 2019. The remaining $1.5 million will be awarded after the Company has fulfilled every requirement of the grant and the grant has been approved to be closed.
The grant is subject to customary CPRIT funding conditions including a matching funds requirement where Pelican will match $0.50 for every $1.00 from CPRIT. Consequently, Pelican is required to provide $7.6 million in matching funds over the life of the project. Upon commercialization of the product, the terms of the grant require Pelican to pay tiered royalties in the low to mid-single digit percentages. Such royalties reduce to less than one percent after a mid-single-digit multiple of the grant funds have been paid to CPRIT in royalties.
Through June 30, 2020, $11.8 million of grant funding received to date has been recognized as revenue.
20
11. Net Loss Per Share
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the periods. Fully diluted net loss per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and warrants that are computed using the treasury stock method.
For the quarters ended June 30, 2020 and 2019, all of the Company’s common stock options, unvested restricted stock units and warrants are anti-dilutive and therefore have been excluded from the diluted calculation.
21
The following table reconciles net loss to net loss attributable to Heat Biologics, Inc.:
|
|
For the Three Months Ended |
|
For the Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
||||||||
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
Net loss |
|
$ |
(4,536,818) |
|
$ |
(4,944,905) |
|
$ |
(10,910,238) |
|
$ |
(10,763,986) |
Net loss - Non-controlling interest |
|
|
(82,388) |
|
|
(174,035) |
|
|
(163,702) |
|
|
(277,640) |
Net loss attributable to Heat Biologics, Inc. |
|
$ |
(4,454,430) |
|
$ |
(4,770,870) |
|
$ |
(10,746,536) |
|
$ |
(10,486,346) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in net loss per share attributable to common stockholders —basic and diluted |
|
|
87,930,846 |
|
|
33,255,724 |
|
|
72,606,461 |
|
|
33,240,529 |
Net loss per share attributable to Heat Biologics, Inc —basic and diluted |
|
$ |
(0.05) |
|
$ |
(0.14) |
|
$ |
(0.15) |
|
$ |
(0.32) |
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share in the three and six months ended June 30, 2020 and 2019 due to their anti-dilutive effect:
|
|
2020 |
|
2019 |
Outstanding stock options |
|
5,592,436 |
|
3,008,754 |
Restricted stock subject to forfeiture and restricted stock units |
|
2,025,215 |
|
838,679 |
Outstanding common stock warrants |
|
5,746,564 |
|
9,030,730 |
12. Income Tax
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As of June 30, 2020, $0.9 million of the deferred tax asset arising from the generation of 2018 net operating losses has been utilized to offset a portion of the previously recorded deferred tax liability associated with indefinite lived R&D in process costs. Specifically, the prior & current year net operating losses gave rise to an indefinite-lived deferred tax asset which provided sufficient support to offset a portion of the Company’s indefinite-lived deferred tax liability.
In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the accompanying unaudited condensed consolidated financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered ‘more-likely-than-not’ that the position taken will be sustained by a taxing authority. As of June 30, 2020, and December 31, 2019, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with these items. The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying statements of operations and comprehensive loss. As of June 30, 2020, and December 31, 2019, the Company had no such accruals.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act includes numerous provisions such as permitting NOL carryovers to offset 100% of taxable income for taxable years beginning before 2021 and a technical correction to the Tax Cuts and Jobs Act allowing immediate expensing for Qualified Improvement Property through bonus depreciation. At this time management does not expect a substantial impact to deferred taxes.
22
The Company has determined, based on its preliminary analysis, that the provisions of CARES Act are not expected to impact our 2020 financials. The Company will monitor the updates, both to our business as well as guidance issued with respect to CARES Act that could impact the current interpretation of the issued provisions.
13. Leases
Effective January 1, 2019, the Company adopted ASC 842 using the optional transition method, applying no practical expedients. In accordance with the optional transition method, the Company did not recast the prior period consolidated financial statements. The lease term is the noncancelable period of the lease. There are no termination provisions or renewal periods reasonably certain of exercise or options controlled by the lessor.
The Company conducts its operations from leased facilities in Morrisville, North Carolina, and San Antonio, Texas, the leases for which will expire in 2027 and 2023. The leases are for general office space and require the Company to pay property taxes, insurance, common area expenses and maintenance costs.
On October 1, 2019, the commencement date of our Morrisville, North Carolina lease, a right-of-use asset of $2.0 million and a liability of $1.4 million were recorded on our balance sheet. Total cash paid for operating leases during the three and six months ended June 30, 2020 was $0.08 million and $0.2 million and is included within cash flows from operating activities within the consolidated statement of cash flows.
The Company leases furniture and specialized lab equipment under finance leases. The related right-of-use assets are amortized on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. The effective interest rate is 6.17%.
The Company’s lease cost is reflected in the accompanying statements of operations and comprehensive loss as follows:
|
|
For the Three Months Ended June 30, 2020 |
|
For the Six |
||
Operating lease cost |
|
$ |
103,956 |
|
$ |
207,912 |
Finance lease cost |
|
|
|
|
|
|
Amortization of lease assets |
|
|
29,725 |
|
|
54,752 |
Interest on lease liabilities |
|
|
4,903 |
|
|
9,315 |
Total finance lease cost |
|
$ |
34,628 |
|
$ |
64,067 |
The weighted average remaining lease term and incremental borrowing rate as of June 30, 2020 were as follows:
Weighted average remaining lease term |
|
|
|
|
Operating leases |
|
|
6.5 |
years |
Finance leases |
|
|
2.5 |
years |
Weighted average discount rate |
|
|
|
|
Operating leases |
|
|
6.55 |
% |
Finance leases |
|
|
6.17 |
% |
23
Maturities of operating and finance lease liabilities as of June 30, 2020 were as follows:
|
|
Operating Leases |
|
Finance Leases |
|
Total |
|||
2020 (excluding the six months ended June 30, 2020) |
|
$ |
161,619 |
|
$ |
60,342 |
|
$ |
221,961 |
2021 |
|
|
330,032 |
|
|