November 10, 2021 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐	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.)

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, LLC

(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 ☒ 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2021, there were 25,403,519 shares of Common Stock, $0.0002 par value per share, outstanding.

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HEAT BIOLOGICS, INC.

TABLE OF CONTENTS


		Page No.

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	2

	Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2021 and September 30, 2020	3

	Consolidated Statements of Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2021 and September 30, 2020	4

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2021 and September 30, 2020	6

	Notes to the Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

SIGNATURES		38

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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, our ability to successfully operate a manufacturing facility, 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, 2020 filed with the SEC on March 25, 2021 (the “2020 Annual Report”). 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.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HEAT BIOLOGICS, INC.

Consolidated Balance Sheets


	September 30,		December 31,
	2021		2020
		(unaudited)
Current Assets
Cash and cash equivalents	$	7,882,412	$	10,931,890
Short-term investments		101,032,250		100,842,438
Accounts receivable		71,420		177,239
Prepaid expenses and other current assets		2,845,226		1,842,620
Total Current Assets		111,831,308		113,794,187

Property and Equipment, net		1,766,898		676,262

Other Assets
In-process R&D		5,866,000		5,866,000
Goodwill		1,452,338		1,452,338
Grant receivable		870,032		—
Operating lease right-of-use asset		1,885,681		2,035,882
Finance lease right-of-use asset		533,561		247,194
Other assets		8,199,850		—
Deposits		249,557		122,779
Total Other Assets		19,057,019		9,724,193

Total Assets	$	132,655,225	$	124,194,642

Liabilities and Stockholders' Equity

Current Liabilities
Accounts payable	$	1,065,663	$	1,051,764
Deferred revenue, current portion		—		603,717
Operating lease liability, current portion		341,977		278,753
Finance lease liability, current portion		222,313		108,127
Accrued expenses and other liabilities		1,660,288		1,614,534
Total Current Liabilities		3,290,241		3,656,895

Long Term Liabilities
Other long-term liabilities		50,511		36,243
Derivative warrant liability		30,971		33,779
Deferred tax liability		361,911		361,911
Deferred revenue, net of current portion		237,500		237,500
Operating lease liability, net of current portion		1,152,008		1,301,636
Financing lease liability, net of current portion		348,128		160,240
Contingent consideration		2,564,608		2,250,844
Contingent consideration, related party		753,907		661,671
Total Liabilities		8,789,785		8,700,719

Commitments and Contingencies

Stockholders' Equity
Common stock, $.0002 par value; 250,000,000 and 250,000,000 shares authorized, 25,143,315 and 22,592,500 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		5,028		4,519
Additional paid-in capital		277,097,787		247,048,349
Accumulated deficit		(152,155,580)		(130,647,485)
Accumulated other comprehensive loss		(52,545)		(166,056)
Total Stockholders' Equity - Heat Biologics, Inc.		124,894,690		116,239,327
Non-Controlling Interest		(1,029,250)		(745,404)
Total Stockholders' Equity		123,865,440		115,493,923

Total Liabilities and Stockholders' Equity	$	132,655,225	$	124,194,642

See Notes to Consolidated Financial Statements

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HEAT BIOLOGICS, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenue:
Grant and contract revenue	$	501,567	$	849,732	$	1,499,706	$	2,344,777

Operating expenses:
Research and development		4,381,542		3,172,663		12,004,084		8,745,966
General and administrative		3,390,093		6,579,193		11,011,003		11,651,415
Change in fair value of contingent consideration		295,000		229,000		406,000		1,045,000
Total operating expenses		8,066,635		9,980,856		23,421,087		21,442,381

Loss from operations		(7,565,068)		(9,131,124)		(21,921,381)		(19,097,604)

Change in fair value of warrant liability		6,831		(37,230)		2,808		(1,039,303)
Investor relations expense		—		—		—		(66,767)
Interest income		195,344		140,614		567,307		249,404
Other (expense) income, net		(185,332)		111,307		(440,675)		127,599
Total non-operating income (loss)		16,843		214,691		129,440		(729,067)

Net loss before income taxes		(7,548,225)		(8,916,433)		(21,791,941)		(19,826,671)
Income tax expense		—		—		—		—
Net loss		(7,548,225)		(8,916,433)		(21,791,941)		(19,826,671)
Net loss - non-controlling interest		(115,505)		(64,824)		(283,846)		(228,526)
Net loss attributable to Heat Biologics, Inc.	$	(7,432,720)	$	(8,851,609)	$	(21,508,095)	$	(19,598,145)

Net loss per share, basic and diluted	$	(0.30)	$	(0.43)	$	(0.87)	$	(1.42)

Weighted-average common shares outstanding, basic and diluted		25,137,628		20,532,696		24,828,438		13,783,039

Comprehensive loss:
Net loss	$	(7,548,225)	$	(8,916,433)	$	(21,791,941)	$	(19,826,671)
Unrealized gain (loss) on foreign currency translation		68,582		(63,954)		113,511		(24,660)
Total comprehensive loss		(7,479,643)		(8,980,387)		(21,678,430)		(19,851,331)
Comprehensive loss attributable to non-controlling interest		(115,505)		(64,824)		(283,846)		(228,526)
Comprehensive loss - Heat Biologics, Inc.	$	(7,364,138)	$	(8,915,563)	$	(21,394,584)	$	(19,622,805)

See Notes to Consolidated Financial Statements

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HEAT BIOLOGICS INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Three Months Ended September 30, 2021
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		(Loss) Income		Interest		Equity
Balance at June 30, 2021	$	5,027	$	276,225,048	$	(144,722,860)	$	(121,127)	$	(913,745)	$	130,472,343
Issuance of common stock from vesting of restricted stock awards		1		(1)		—		—		—		—
Stock-based compensation		—		872,740		—		—		—		872,740
Other comprehensive income		—		—		—		68,582		—		68,582
Net loss		—		—		(7,432,720)		—		(115,505)		(7,548,225)
Balance at September 30, 2021	$	5,028	$	277,097,787	$	(152,155,580)	$	(52,545)	$	(1,029,250)	$	123,865,440

	Nine Months Ended September 30, 2021
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		(Loss) Income		Interest		Equity
Balance at December 31, 2020	$	4,519	$	247,048,349	$	(130,647,485)	$	(166,056)	$	(745,404)	$	115,493,923
Issuance of common stock under ATM, net of issuance costs		420		26,303,862		—		—		—		26,304,282
Issuance of common stock from vesting of restricted stock awards		83		(83)		—		—		—		—
Stock issuance costs		—		(658,184)		—		—		—		(658,184)
Stock-based compensation		—		4,376,588		—		—		—		4,376,588
Issuance of restricted stock		3		(3)		—		—		—		—
Exercise of options		6		27,255		—		—		—		27,261
Cancellation and payout of fractional shares		(3)		3		—		—		—		—
Other comprehensive income		—		—		—		113,511		—		113,511
Net loss		—		—		(21,508,095)		—		(283,846)		(21,791,941)
Balance at September 30, 2021	$	5,028	$	277,097,787	$	(152,155,580)	$	(52,545)	$	(1,029,250)	$	123,865,440

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HEAT BIOLOGICS INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Three Months Ended September 30, 2020
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		Income (Loss)		Interest		Equity
Balance at June 30, 2020	$	3,144	$	163,026,420	$	(115,344,284)	$	28,044	$	(577,454)	$	47,135,870
Issuance of common stock under ATM, net of issuance costs		1,330		79,296,779		—		—		—		79,298,109
Stock issuance costs		—		(1,984,155)		—		—		—		(1,984,155)
Stock-based compensation		—		4,728,894		—		—		—		4,728,894
Exercise of warrants		12		699,917		—		—		—		699,929
Other Comprehensive loss		—		—		—		(63,954)		—		(63,954)
Net loss		—		—		(8,851,609)		—		(64,824)		(8,916,433)
Balance at September 30, 2020	$	4,486	$	245,767,855	$	(124,195,893)	$	(35,910)	$	(642,278)	$	120,898,260

	Nine Months Ended September 30, 2020
							Accumulated
							Other				Total
	Common				Accumulated		Comprehensive		Non-Controlling		Stockholders'
	Stock		APIC		Deficit		Loss		Interest		Equity
Balance at December 31, 2019	$	965	$	118,179,635	$	(104,597,748)	$	(11,250)	$	(413,752)	$	13,157,850
January 2020 investment offering, net of underwriters discounts		571		4,105,577		—		—		—		4,106,148
Issuance of common stock under ATM, net of issuance costs		2,612		116,294,150		—		—		—		116,296,762
Issuance of common stock from vesting of restricted stock awards		47		(47)		—		—		—		—
Stock issuance costs		—		(3,076,915)		—		—		—		(3,076,915)
Stock-based compensation		—		6,050,094		—		—		—		6,050,094
Exercise of warrants		227		3,442,095		—		—		—		3,442,322
Exchange of warrants		64		773,266		—		—		—		773,330
Other comprehensive income		—		—		—		(24,660)		—		(24,660)
Net loss		—		—		(19,598,145)		—		(228,526)		(19,826,671)
Balance at September 30, 2020	$	4,486	$	245,767,855	$	(124,195,893)	$	(35,910)	$	(642,278)	$	120,898,260

See Notes to Consolidated Financial Statements

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HEAT BIOLOGICS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended
	September 30,
	2021		2020
Cash Flows from Operating Activities
Net loss	$	(21,791,941)	$	(19,826,671)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		415,270		242,623
Noncash lease expense		63,797		73,524
Noncash interest expense		14,900		13,838
Noncash investor relations expense		—		66,767
Stock-based compensation		4,376,588		6,050,094
Change in fair value of common stock warrants		(2,808)		1,039,303
Change in fair value of contingent consideration		406,000		1,045,000
Unrealized loss (gain) on investments		278,172		(47,923)
Increase (decrease) in cash arising from changes in assets and liabilities:
Accounts receivable		104,598		(173,447)
Prepaid expenses and other current assets		(1,029,581)		(1,199,730)
Grant receivable		(870,032)		—
Other assets		(8,199,850)		—
Accounts payable		14,766		(748,410)
Accrued expenses and other liabilities		197,428		(201,199)
Deferred revenue		(603,717)		(2,203,838)
Other long-term liabilities		14,268		26,331
Deposits		(126,778)		265,132
Net Cash Used in Operating Activities		(26,738,920)		(15,578,606)

Cash Flows from Investing Activities
Purchase of short-term investments		(66,665,908)		(95,034,396)
Sale of short-term investments		66,197,924		8,295,222
Purchase of property and equipment		(1,383,596)		(321,301)
Proceeds from disposal of property and equipment		—		2,168
Net Cash Used in Investing Activities		(1,851,580)		(87,058,307)

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		26,304,282		116,296,762
Proceeds from exercise of stock options		27,261		—
Proceeds from the exercise of warrants		—		675,675
Stock issuance costs		(658,184)		(3,076,915)
Payment of contingent consideration		—		(2,005,000)
Proceeds from PPP loan		—		702,000
Repayment of PPP loan		—		(702,000)
Repayments on principal of finance lease		(121,503)		(85,140)
Net Cash Provided by Financing Activities		25,551,856		118,406,352

Effect of exchange rate changes on cash and cash equivalents		(10,834)		(1,243)

Net Change in Cash and Cash Equivalents		(3,049,478)		15,768,196

Cash and Cash Equivalents – Beginning of Period		10,931,890		9,039,887

Cash and Cash Equivalents – End of Period	$	7,882,412	$	24,808,083

Supplemental Disclosure for Cash Flow Information:
Right-of-use assets obtained on operating lease commencements	$	88,596	$	75,244
Right-of-use assets obtained on operating lease modifications	$	37,767	$	—
Right-of-use assets obtained on financing lease commencements	$	408,677	$	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	$	—	$	2,766,647
Cashless exchange of warrants classified as liabilities	$	—	$	773,330

See Notes to Consolidated Financial Statements

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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 nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2021.

The consolidated financial statements as of and for the three and nine months ended September 30, 2021 and 2020 are unaudited. The balance sheet as of December 31, 2020 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, 2020 filed with the SEC on March 25, 2021 (the “2020 Annual Report”).

The accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2021 and 2020 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.), Scorpion Biological Services, Inc. (formerly Scorpion Biosciences, Inc), Blackhawk Bio, Inc, and Abacus Biotech, 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 September 30, 2021 and December 31, 2020, 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.

On December 11, 2020, we effected a one-for-seven- reverse stock split. All per share numbers reflect the one-for seven reverse stock split.

Liquidity and Capital Resources

The Company has an accumulated deficit of approximately $152.2 million as of September 30, 2021 and a net loss of approximately $7.5 million and $21.8 million for the three and nine months ended September 30, 2021 and has not generated significant 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, builds its in-house bioanalytic, process development and manufacturing facility and expands its infectious disease/biological threat program. 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. Furthermore, any new business ventures that the Company may engage in are likely to require commitments of capital. Accordingly, the Company will in the future need to obtain substantial additional funding in connection with its planned 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

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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, partnerships, collaborations and other funding transactions. As of September 30, 2021, the Company had approximately $108.9 million in cash and cash equivalents and short-term investments, which it believes is sufficient to fund its operations for at least one year from the date these consolidated financial statements were issued. 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.

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 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 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 or its manufacturing facility, uncertainty of market acceptance of the Company’s products or manufacturing capability or success of new business ventures, 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. 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 at the end of the second quarter of 2020 and no delays in overall development milestones are expected for the development of HS-130.

The Company relies on third-party manufacturers to purchase from their third-party vendors the materials necessary to produce product candidates and manufacture product candidates for clinical studies. The Company also depends on third-party suppliers for key materials and services used in research and development, as well as manufacturing processes, and are subject to certain risks related to the loss of these third-party suppliers or their inability to supply adequate materials and services. The Company does not control the manufacturing processes of the contract development and manufacturing organizations, or CDMOs, with whom it contracts and is dependent on these third parties for the production of its therapeutic candidates in accordance with relevant regulations (such as current Good Manufacturing Practices, or cGMP, which includes, among other things, quality control, quality assurance and the maintenance of records and documentation.

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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, were 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 September 30, 2021, the fair value of such warrants was $30,971, 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, valuation of goodwill and in process research and development (“IPR&D”), income taxes, valuation of warrant liabilities, and stock-based compensation. Actual results may differ from those estimates.

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.

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.

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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 September 30, 2021.

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 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.

Deferred Revenue

Deferred revenue is comprised of grant funds received from an economic development grant agreement with the City of San Antonio (“Economic Development Grant”) that we entered into on November 1, 2017. Under the Economic Development Grant, we received $0.2 million in state enterprise fund grants for the purpose of defraying costs toward the purchase of laboratory equipment. As part of the agreement, we will provide the city of San Antonio with a purchase money security interest in the equipment to secure the repayment of grant funds should we fail to perform under the terms and conditions of the agreement. Our obligations under the agreement include meeting certain employment levels for a period of not less than seven years commencing on or before December 31, 2017 and establishing Pelican’s corporate

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headquarters in San Antonio. The Economic Development Grant funds will be recognized as income upon the achievement of the performance criteria and determination that the cash is no longer refundable to the State of Texas.

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.

Grants Receivable and Revenue Recognition

Effective January 1, 2019, the Company has adopted ASU No. 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The Company’s primary source of revenue is grant revenue related to the CPRIT contract, which is being accounted for under ASC 958 as a conditional non-exchange contribution.

The CPRIT grant covers the periods from June 1, 2017 through May 31, 2022, for a total grant award of up to $15.2 million. CPRIT advances grant funds upon request by the Company consistent with the agreed upon amounts and schedules as provided in the contract. 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 the third tranche of funding of $5.4 million was received in December 2019. The remaining $1.5 million will be awarded, on a reimbursement basis, after the Company has fulfilled every requirement of the grant and the grant has been approved to be finalized. Funds received are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is recognized when qualifying costs are incurred. When grant funds are received after costs have been incurred, the Company records revenue and a corresponding grants receivable until grant funds are received.

On January 7, 2020, the Company was awarded a grant of up to $224,713 from the NIH. The NIH grant provides funding for continued development of the Company’s technologies for PTX-35. The grant funds will be made available by the NIH to the Company as allowable expenses are incurred. For the three and nine months ended September 30, 2021, the Company incurred approximately $0.0 million and $0.03 million of allowable expenses under the NIH grant and recognized a corresponding amount of grant revenues. For the three and nine months ended September 30, 2020, no revenue was recognized.

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.

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Significant Accounting Policies

The significant accounting policies used in preparation of these interim financial statements are disclosed in the 2020 Annual Report and have not changed significantly since such filing.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2022 and 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 August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for convertible instruments. This ASU also requires entities to use the if-converted method for all convertible instruments in calculating diluted earnings-per-share. The ASU is effective for annual periods beginning after December 15, 2023 with early adoption permitted. We are currently evaluating the impact this standard will have on our consolidated 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. 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 22.7% of any such milestone payments will be paid to certain directors of the Company which is presented separately on the balance sheet as contingent consideration, related party - net of current portion. On June 22, 2020, the Company achieved the first milestone when it dosed the first patient in the first Phase 1 clinical trial of PTX-35.

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 research and development assets are treated as indefinite-lived until the completion or abandonment of the associated research and development (“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 supports Pelican in developing PTX-35 through its current Phase 1 clinical trial designed to evaluate PTX-35 in combination with other immunotherapies.

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3. Fair Value of Financial Instruments

The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, 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 Company’s cash equivalents are classified within Level I of the fair value hierarchy.

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 September 30, 2021 or 2020.

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 these warrants, the warrants were 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, 479,595 outstanding warrants were evaluated for whether they were modified for accounting purposes and it was determined that they 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 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 its own data. 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 following table presents quantitative information about the inputs used in the valuation for the Company’s fair value measurement of the warrant liability classified as Level 3:


	September 30, 2021			December 31, 2020
Current stock price	$	5.95		$	5.36
Estimated volatility of future stock price		132.73	%		141.28	%
Risk free interest rate		0.41	%		0.17	%
Contractual term		2.16	years		2.90	years

During the year ended December 31, 2020, 470,238 warrants were exchanged for 319,756 shares of common stock. As of September 30, 2021, there were a total of 9,357 warrants outstanding that were reported as a liability on the consolidated balance sheet.

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The fair value of financial instruments measured on a recurring basis is as follows:


	As of September 30, 2021
Description	Total		Level 1		Level 2	Level 3
Assets:
Short-term investments	$	101,032,250	$	101,032,250	—		—
Liabilities:
Contingent consideration	$	3,318,515		—	—	$	3,318,515
Warrant liability	$	30,971		—	—	$	30,971


	As of December 31, 2020
Description	Total			Level 1	Level 2	Level 3
Assets:
Short-term investments	$	100,842,438	$	100,842,438	—		—
Liabilities:
Contingent consideration	$	2,912,515		—	—	$	2,912,515
Warrant liability	$	33,779		—	—	$	33,779

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 nine months ended September 30, 2021:


	Contingent		Warrant
	Consideration		Liability
Balance at December 31, 2020	$	2,912,515	$	33,779
Change in fair value		406,000		(2,808)
Balance at September 30, 2021	$	3,318,515	$	30,971

The change in the fair value of the contingent consideration for the nine months ended September 30, 2021 was primarily due to the increase in the estimated probability of achieving the secondary 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 nine months ended September 30, 2021 was primarily due to increase 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 September 30, 2021:

Form: 10-Q

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