10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 10, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) |
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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 | |
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:
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) |
(Zip Code) |
(
(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 |
(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.
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).
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 |
☐ |
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☒ |
Smaller reporting company |
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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
As of November 9, 2021, there were
HEAT BIOLOGICS, INC.
TABLE OF CONTENTS
Page No. |
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Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 |
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3 |
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4 |
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6 |
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7 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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38 |
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.
1
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEAT BIOLOGICS, INC.
Consolidated Balance Sheets
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September 30, |
December 31, |
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2021 |
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2020 |
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(unaudited) |
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Current Assets |
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Cash and cash equivalents |
$ |
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$ |
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Short-term investments |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Property and Equipment, net |
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Other Assets |
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In-process R&D |
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Goodwill |
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Grant receivable |
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— |
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Operating lease right-of-use asset |
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Finance lease right-of-use asset |
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Other assets |
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— |
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Deposits |
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Total Other Assets |
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Total Assets |
$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable |
$ |
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$ |
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Deferred revenue, current portion |
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Operating lease liability, current portion |
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Finance lease liability, current portion |
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Accrued expenses and other liabilities |
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Total Current Liabilities |
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Long Term Liabilities |
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Other long-term liabilities |
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Derivative warrant liability |
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Deferred tax liability |
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Deferred revenue, net of current portion |
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Operating lease liability, net of current portion |
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Financing lease liability, net of current portion |
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Contingent consideration |
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Contingent consideration, related party |
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Total Liabilities |
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Commitments and Contingencies |
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Stockholders' Equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total Stockholders' Equity - Heat Biologics, Inc. |
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Non-Controlling Interest |
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( |
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( |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity |
$ |
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$ |
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See Notes to Consolidated Financial Statements
2
HEAT BIOLOGICS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
Three Months Ended |
Nine Months Ended |
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September 30, |
September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenue: |
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Grant and contract revenue |
$ |
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$ |
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$ |
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$ |
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Operating expenses: |
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Research and development |
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General and administrative |
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Change in fair value of contingent consideration |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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( |
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( |
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Change in fair value of warrant liability |
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( |
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( |
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Investor relations expense |
— |
— |
— |
( |
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Interest income |
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Other (expense) income, net |
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( |
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( |
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Total non-operating income (loss) |
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( |
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Net loss before income taxes |
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( |
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( |
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( |
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( |
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Income tax expense |
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— |
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— |
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— |
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— |
|||||
Net loss |
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( |
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( |
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( |
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( |
|||||
Net loss - non-controlling interest |
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( |
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( |
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( |
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( |
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Net loss attributable to Heat Biologics, Inc. |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
|||||
Net loss per share, basic and diluted |
( |
( |
( |
( |
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Weighted-average common shares outstanding, basic and diluted |
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Comprehensive loss: |
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Net loss |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
|||||
Unrealized gain (loss) on foreign currency translation |
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( |
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( |
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Total comprehensive loss |
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( |
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( |
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( |
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( |
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Comprehensive loss attributable to non-controlling interest |
|
( |
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( |
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( |
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( |
|||||
Comprehensive loss - Heat Biologics, Inc. |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
See Notes to Consolidated Financial Statements
3
HEAT BIOLOGICS INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Three Months Ended September 30, 2021 |
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Accumulated |
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Other |
Total |
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Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
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|
Stock |
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APIC |
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Deficit |
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(Loss) Income |
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Interest |
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Equity |
|||||||
Balance at June 30, 2021 |
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
( |
$ |
|
||||||
Issuance of common stock from vesting of restricted stock awards |
|
( |
— |
— |
— |
— |
||||||||||||
Stock-based compensation |
— |
|
— |
— |
— |
|
||||||||||||
Other comprehensive income |
— |
|
— |
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— |
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— |
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|||||||
Net loss |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
||||||
Balance at September 30, 2021 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
( |
|
$ |
( |
|
$ |
|
Nine Months Ended September 30, 2021 |
||||||||||||||||||
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Accumulated |
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Other |
Total |
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Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
||||||||||||||
|
Stock |
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APIC |
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Deficit |
|
(Loss) Income |
|
Interest |
|
Equity |
|||||||
Balance at December 31, 2020 |
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
( |
$ |
|
||||||
Issuance of common stock under ATM, net of issuance costs |
|
|
— |
— |
— |
|
||||||||||||
Issuance of common stock from vesting of restricted stock awards |
|
( |
— |
— |
— |
— |
||||||||||||
Stock issuance costs |
— |
( |
— |
— |
— |
( |
||||||||||||
Stock-based compensation |
— |
|
— |
— |
— |
|
||||||||||||
Issuance of restricted stock |
|
|
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( |
|
— |
|
— |
|
— |
|
— |
||||||
Exercise of options |
|
|
|
— |
— |
— |
|
|||||||||||
Cancellation and payout of fractional shares |
( |
|
— |
— |
— |
— |
||||||||||||
Other comprehensive income |
|
— |
|
— |
|
— |
|
|
|
— |
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|
||||||
Net loss |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
||||||
Balance at September 30, 2021 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
( |
|
$ |
( |
|
$ |
|
4
HEAT BIOLOGICS INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Three Months Ended September 30, 2020 |
||||||||||||||||||
|
Accumulated |
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Other |
Total |
|||||||||||||||||
Common |
Accumulated |
Comprehensive |
Non-Controlling |
Stockholders' |
||||||||||||||
|
Stock |
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APIC |
|
Deficit |
|
Income (Loss) |
|
Interest |
|
Equity |
|||||||
Balance at June 30, 2020 |
$ |
|
$ |
|
$ |
( |
$ |
|
$ |
( |
$ |
|
||||||
Issuance of common stock under ATM, net of issuance costs |
|
|
|
|
|
— |
|
— |
|
— |
|
|
||||||
Stock issuance costs |
|
— |
|
( |
|
— |
|
— |
|
— |
|
( |
||||||
Stock-based compensation |
|
— |
|
|
|
— |
|
— |
|
— |
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|
||||||
Exercise of warrants |
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|
|
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— |
|
— |
|
— |
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|
||||||
Other Comprehensive loss |
— |
— |
— |
( |
— |
( |
||||||||||||
Net loss |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
||||||
Balance at September 30, 2020 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
( |
|
$ |
( |
|
$ |
|
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 |
$ |
|
$ |
|
$ |
( |
$ |
( |
$ |
( |
$ |
|
||||||
January 2020 investment offering, net of underwriters discounts |
|
|
|
|
|
— |
|
— |
|
— |
|
|
||||||
Issuance of common stock under ATM, net of issuance costs |
|
|
|
|
|
— |
|
— |
|
— |
|
|
||||||
Issuance of common stock from vesting of restricted stock awards |
|
|
|
( |
|
— |
|
— |
|
— |
|
— |
||||||
Stock issuance costs |
|
— |
|
( |
|
— |
|
— |
|
— |
|
( |
||||||
Stock-based compensation |
|
— |
|
|
|
— |
|
— |
|
— |
|
|
||||||
Exercise of warrants |
|
|
|
|
|
— |
|
— |
|
— |
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|
||||||
Exchange of warrants |
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|
|
|
|
— |
|
— |
|
— |
|
|
||||||
Other comprehensive income |
|
— |
|
— |
|
— |
|
( |
|
— |
|
( |
||||||
Net loss |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
||||||
Balance at September 30, 2020 |
|
$ |
|
|
$ |
|
|
$ |
( |
|
$ |
( |
|
$ |
( |
|
$ |
|
See Notes to Consolidated Financial Statements
5
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 |
$ |
( |
$ |
( |
||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Noncash lease expense |
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Noncash interest expense |
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||||
Noncash investor relations expense |
— |
|
||||
Stock-based compensation |
|
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||
Change in fair value of common stock warrants |
( |
|
||||
Change in fair value of contingent consideration |
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||
Unrealized loss (gain) on investments |
|
|
|
( |
||
Increase (decrease) in cash arising from changes in assets and liabilities: |
|
|
||||
Accounts receivable |
|
|
|
( |
||
Prepaid expenses and other current assets |
|
( |
|
( |
||
Grant receivable |
|
( |
|
— |
||
Other assets |
( |
— |
||||
Accounts payable |
|
|
|
( |
||
Accrued expenses and other liabilities |
|
|
|
( |
||
Deferred revenue |
|
( |
|
( |
||
Other long-term liabilities |
|
|
|
|
||
Deposits |
|
( |
|
|
||
Net Cash Used in Operating Activities |
|
( |
|
( |
||
Cash Flows from Investing Activities |
|
|
|
|
||
Purchase of short-term investments |
|
( |
|
( |
||
Sale of short-term investments |
|
|
||||
Purchase of property and equipment |
( |
( |
||||
Proceeds from disposal of property and equipment |
|
— |
|
|
||
Net Cash Used in Investing Activities |
|
( |
|
( |
||
Cash Flows from Financing Activities |
|
|
|
|
||
Proceeds from public offering of common stock and warrants, net of issuance costs |
|
— |
|
|
||
Proceeds from the issuance of common stock, net of underwriting discounts and commissions |
|
|
|
|
||
Proceeds from exercise of stock options |
|
— |
||||
Proceeds from the exercise of warrants |
|
— |
|
|
||
Stock issuance costs |
|
( |
|
( |
||
Payment of contingent consideration |
— |
( |
||||
Proceeds from PPP loan |
— |
|
||||
Repayment of PPP loan |
— |
( |
||||
Repayments on principal of finance lease |
( |
( |
||||
Net Cash Provided by Financing Activities |
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
( |
|
( |
||
Net Change in Cash and Cash Equivalents |
|
( |
|
|
||
Cash and Cash Equivalents – Beginning of Period |
|
|
|
|
||
Cash and Cash Equivalents – End of Period |
$ |
|
$ |
|
||
Supplemental Disclosure for Cash Flow Information: |
|
|
|
|
||
Right-of-use assets obtained on operating lease commencements |
$ |
|
$ |
|
||
Right-of-use assets obtained on operating lease modifications |
$ |
|
$ |
— |
||
Right-of-use assets obtained on financing lease commencements |
$ |
|
$ |
|
||
Supplemental disclosure of non-cash investing and financing activities: |
||||||
Allocation of proceeds from public offering to warrant liabilities |
$ |
— |
$ |
|
||
Cashless exercise of warrants classified as liabilities |
$ |
— |
$ |
|
||
Cashless exchange of warrants classified as liabilities |
$ |
— |
$ |
|
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 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
On December 11, 2020, we effected a -for-seven- reverse stock split. All per share numbers reflect the -for seven reverse stock split.
Liquidity and Capital Resources
The Company has an accumulated deficit of approximately $
7
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 $
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.
8
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 $
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
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.
9
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.
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 $
10
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 $
On January 7, 2020, the Company was awarded a grant of up to $
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.
11
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
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
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
As discussed in Note 10, in May 2016, Pelican was awarded a $
12
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,
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 |
$ |
|
$ |
|
|||
Estimated volatility of future stock price |
|
% |
|
% |
|||
Risk free interest rate |
|
% |
|
% |
|||
Contractual term |
|
years |
|
years |
During the year ended December 31, 2020,
13
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 |
$ |
|
$ |
|
|
— |
|
— |
|||
Liabilities: |
|
|
|
|
|
|
|
|
|||
Contingent consideration |
$ |
|
— |
|
— |
$ |
|
||||
Warrant liability |
$ |
|
|
— |
|
— |
$ |
|
As of December 31, 2020 |
|||||||||||
Description |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||
Assets: |
|||||||||||
Short-term investments |
$ |
|
$ |
|
|
— |
|
— |
|||
Liabilities: |
|
|
|
|
|
|
|
|
|||
Contingent consideration |
$ |
|
— |
|
— |
$ |
|
||||
Warrant liability |
$ |
|
— |
|
— |
$ |
|
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 |
$ |
|
$ |
|
||
Change in fair value |
|
|
( |
|||
Balance at September 30, 2021 |
$ |
|
$ |
|
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:
As of September 30, 2021 |
||||||||
Valuation |
Significant |
Weighted Average |
||||||
|
Methodology |
|
Unobservable Input |
|
(range, if applicable) |
|||
Contingent Consideration |
|
|
Milestone dates |
|
||||
|
|
Discount rate |
|
|||||
|
|
|
Probability of occurrence |
|
The Company measures certain non-financial assets on a non-recurring basis, including goodwill and in-process R&D. 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.
14
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 September 30, 2021 and December 31, 2020. Unrealized gains and losses on securities are reported in the other (expense) income line item on the statement of operations and comprehensive loss. Short-term investments at September 30, 2021 and December 31, 2020 consisted of mutual funds with fair values of $
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at:
September 30, |
December 31, |
|||||
|
2021 |
|
2020 |
|||
Prepaid manufacturing expense |
$ |
— |
$ |
|
||
Prepaid insurance |
|
|
|
|
||
Prepaid preclinical and clinical expenses |
|
|
|
|
||
Other prepaid expenses and current assets |
|
|
|
|
||
$ |
|
$ |
|
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
Property and equipment consist of the following at:
September 30, |
December 31, |
|||||
|
2021 |
|
2020 |
|||
Lab equipment |
$ |
|
$ |
|
||
Computers |
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
||
Leasehold improvements |
|
|
|
|
||
Construction-in-process |
|
|
|
— |
||
Total |
|
|
|
|
||
Accumulated depreciation |
|
( |
|
( |
||
Property and equipment, net |
$ |
|
$ |
|
Depreciation expense was $
7. Goodwill and In-Process R&D
Goodwill of $
15
8. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
September 30, |
December 31, |
|||||
|
2021 |
|
2020 |
|||
Accrued preclinical and clinical trial expenses |
$ |
|
$ |
|
||
Accrued manufacturing expenses |
|
|
||||
Compensation and related benefits |
|
|
||||
Accrued franchise tax |
|
|
|
|
||
Other expenses |
|
|
|
|
||
$ |
|
$ |
|
9. Stockholders’ Equity
Underwritten Registered Offering
On January 21, 2020, the Company closed on a public offering consisting of
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, 2021 to September 30, 2021 the Company sold
Common Stock Warrants
As of September 30, 2021, the Company has outstanding warrants to purchase
The following table summarizes the warrant activity of the Company’s common stock warrants.
|
Common Stock |
|
Warrants |
||
Outstanding, December 31, 2020 |
|
|
Issued |
|
|
Expired |
|
( |
Outstanding, September 30, 2021 |
|
|
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 addition, at its 2021 Annual Meeting for Stockholders, the stockholders approved the Company’s 2021 Subsidiaries Stock Incentive Plan (the “SSIP”) which allows for the grant of equity interests in subsidiaries of the Company including Skunkworx Bio, Inc. (“SkunkWorx”), Scorpion Biological Services, Inc. (“Scorpion”), Abacus Biotech, Inc. (“Abacus”), Blackhawk Bio, Inc. (“Blackhawk”) and other newly formed
16
subsidiaries of the Company that adopt the SSIP by resolution of their Board of Directors. On August 2, 2021 the Board of Directors, the Compensation Committee and the Board of Directors of Skunkworx, Scorpion, Abacus and Blackhawk granted to Jeff Wolf an option under the SSIP to purchase
Accounting for Stock-Based Compensation:
Stock Compensation Expense - For the three and nine months ended September 30, 2021, the Company recorded $
Stock Options - Under the Plan, the Company has issued stock options. A stock option grant 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
Fair Value Determination – The Company has used the Black-Scholes 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 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 nine months ended September 30, 2021 and 2020:
● | Volatility – The Company used an average historical stock price volatility of its own data plus an analysis of reported data for a peer group of comparable companies that have issued stock options with substantially similar terms. |
● | 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 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 |
● |
Forfeitures – As required by ASC 718, the Company reviews recent forfeitures and stock compensation expense. The Company accounts for forfeitures as they occur. |
17
The following table summarizes weighted-average assumptions used in our calculations of fair value for the nine months ended September 30, 2021 and 2020:
|
2021 |
2020 |
||||
Dividend yield |
|
— |
% |
— |
% |
|
Expected volatility |
|
|
% |
|
% |
|
Risk-free interest rate |
|
|
% |
|
% |
|
Expected lives (years) |
|
years |
years |
Stock Option Activity - The weighted-average fair value of options granted during the nine months ended September 30, 2021 and 2020, as determined under the Black-Scholes valuation model, was $
The following is a summary of the stock option activity for the nine months ended September 30, 2021:
|
|
Weighted |
|
|
Weighted |
||||||
Average |
|
Aggregate |
|
Average |
|||||||
Exercise |
|
Intrinsic |
|
Remaining |
|||||||
Shares |
Price |
|
Value |
|
Contractual Life |
||||||
Stock options outstanding at December 31, 2020 |
|
$ |
|
$ |
|
||||||
Granted |
|
|
|
|
|
||||||
Exercised |
|
( |
|
|
$ |
|
|||||
Forfeited/Expired |
|
( |
|
|
|
||||||
Stock options outstanding at September 30, 2021 |
|
|
$ |
|
$ |
|
Years |
||||
Stock options exercisable at September 30, 2021 |
|
$ |
|
$ |
|
Years |
Unrecognized compensation expense related to unvested stock options was $
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. 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 nine months ended September 30, 2021:
Weighted |
|||||
Average |
|||||
Shares |
Fair Value |
||||
Restricted stock at December 31, 2020 |
|
$ |
|
||
Granted |
|
|
|||
Vested |
( |
|
|||
Cancelled |
— |
— |
|||
Restricted stock at September 30, 2021 |
|
$ |
|
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
18
The following is a summary of stock unit activity for the nine months ended September 30, 2021:
Weighted |
|||||
Average |
|||||
Shares |
Fair Value |
||||
RSUs at December 31, 2020 |
|
$ |
|
||
Vested |
|
( |
|
|
|
Cancelled |
|
— |
|
— |
|
RSUs at September 30, 2021 |
|
— |
$ |
— |
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 $
The grant is subject to customary CPRIT funding conditions including a matching funds requirement where Pelican will match $
On January 7, 2020, the Company was awarded a grant of up to $
Through September 30, 2021, $
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 September 30, 2021 and 2020, 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.
19
The following table reconciles net loss to net loss attributable to Heat Biologics, Inc.:
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||
September 30, |
September 30, |
|||||||||||
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|||||
Net loss |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
||||
Net loss - Non-controlling interest |
|
( |
|
( |
|
( |
|
( |
||||
Net loss attributable to Heat Biologics, Inc. |
$ |
( |
$ |
( |
$ |
( |
$ |
( |
||||
Weighted-average common shares outstanding, basic and diluted |
|
|
|
|
|
|
|
|
||||
Net loss per share, basic and diluted |
( |
( |
( |
( |
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share in the three and nine months ended September 30, 2021 and 2020 due to their anti-dilutive effect:
|
2021 |
|
2020 |
|
Outstanding stock options |
|
|
|
|
Restricted stock subject to forfeiture and restricted stock units |
|
|
|
|
Outstanding common stock warrants |
|
|
|
|
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 September 30, 2021, $
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 September 30, 2021, and December 31, 2020, the Company had
At September 30, 2021, the Company has federal net operating loss carryforwards of approximately $
13. Leases
Effective January 1, 2019, the Company adopted ASC 842 using the optional transition method, applying
20
The Company conducts its operations from leased facilities in Morrisville, North Carolina, San Antonio, Texas and New Brunswick, New Jersey. The North Carolina lease will expire in 2027 and the Texas and New Jersey leases will expire in 2023. The leases are for general office space and lab space and require the Company to pay property taxes, insurance, common area expenses and maintenance costs.
In June 2021, the Company entered into a lease agreement with Durham KTP Tech 7, LLC, to lease a
In October 2021, Scorpion entered into a lease agreement with Merchants Ice II, LLC, to lease a
Total cash paid for operating leases during the three and nine months ended September 30, 2021 was $
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
21
The Company’s lease cost is reflected in the accompanying statements of operations and comprehensive loss as follows:
For the Three Months Ended September 30, 2021 |
For the Nine Months Ended September 30, 2021 |
|||||
Operating lease cost |
$ |
|
$ |
|
||
Finance lease cost |
||||||
Amortization of lease assets |
|
|
||||
Interest on lease liabilities |
|
|
||||
Total finance lease cost |
$ |
|
$ |
|
The weighted average remaining lease term and incremental borrowing rate as of September 30, 2021 were as follows:
Weighted average remaining lease term |
||||
Operating leases |
years |
|||
Finance leases |
years |
|||
Weighted average discount rate |
||||
Operating leases |
|
% |
||
Finance leases |
|
% |
Maturities of operating and finance lease liabilities as of September 30, 2021 were as follows:
Operating Leases |
|
Finance Leases |
|
Total |
|||||
2021 (excluding the nine months ended September 30, 2021) |
$ |
|
$ |
|
$ |
|
|||
2022 |
|
|
|
||||||
2023 |
|
|
|
||||||
2024 |
|
|
|
||||||
2025 |
|
- |
|
||||||
2026 |
|
- |
|
||||||
Thereafter |
|
- |
|
||||||
Total minimum lease payments |
|
|
|
||||||
Less: imputed interest |
( |
( |
( |
||||||
Present value of lease liabilities |
$ |
|
$ |
|
$ |
|
14. Subsequent Events
The Company has evaluated its consolidated financial statements for subsequent events through November 10, 2021, the date the financial statements were available to be issued.
On October 5, 2021, Scorpion entered into a lease agreement with Merchants Ice II, LLC, to lease a
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this Quarterly Report. This discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 25, 2021 (the “2020 Annual Report”). This discussion may contain forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and the 2020 Annual Report for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
OVERVIEW
We are a biopharmaceutical company primarily engaged in the development of immune therapies and vaccines. Our allogeneic vaccine platform is based on secreted gp96 and designed to activate the immune system. This platform has broad applications in cancer and infectious disease. Our platform leverages a natural molecular warning system that presents antigens to the immune system. HS-110 (viagenpumatucel-L) is our first allogeneic (“off-the-shelf”) cell line biologic product candidate in a series of proprietary immunotherapies designed to stimulate a patient’s T cells to fight cancer. HS-130 is another allogeneic cell line engineered to express the extracellular domain of OX40 ligand as a fusion protein (OX40L-Fc). This biologic is a key costimulator of T cells, with potential to augment antigen-specific CD4+ and CD8+ T cell responses. We have initiated development of a new COVID-19 vaccine program under our Zolovax, Inc. subsidiary that utilizes our gp96 platform to chaperone SARS-CoV-2 antigens, eliciting an immune response against the spike glycoprotein. Our subsidiary Pelican Therapeutics, Inc. (“Pelican”), is developing PTX-35, a novel T cell co-stimulator agonist antibody targeting TNFRSF25.
These programs are designed to harness innate and/or antigen specific immune activation and tolerance mechanisms to reprogram immunity and provide a long-term, durable clinical effect. We have completed the following clinical milestones, completed patient enrollment for our HS-110 Phase 2 non-small cell lung cancer (NSCLC) clinical trial, completed enrollment and dosed fifteen patients in our HS-130 Phase 1 clinical trial and dosed fifteen patients in our PTX-35 Phase 1a clinical trial.
We are also providing pre-clinical, CMC development, and administrative support for these programs; while constantly focusing on protecting and expanding our intellectual property in areas of strategic interest. As we advance our clinical programs, we are in close contact with our CROs and clinical sites to monitor the impact of COVID-19 on our studies, current timelines, and costs.
In an effort to decrease our dependence upon third party manufacturers and enhance efficiency, we are designing and building a cGMP facility in San Antonio, Texas for the development of bioanalytics, process development and manufacturing activities. We also expect to offer fee-for-service contracting to external customers after completion of the build out.
We are also expanding our infectious disease/biothreat programs and have formed a biothreat advisory board to aid in advancing our biothreat initiatives. In addition, our Skunkworx Bio, Inc. subsidiary is utilizing advanced computational methods and bioinformatics to further enhance target precision and is developing proprietary “pocket biologics” to identify miniature proteins which bind to critical domains of druggable targets.
23
Our Clinical Programs
We completed patient enrollment in our HS-110 Phase 2 non-small cell lung cancer (NSCLC) clinical trial and completed enrollment of patients in our HS-130 Phase 1 clinical trial that combines HS-110 with HS-130 to drive immune surveillance. Our PTX-35 safety and dose escalation Phase 1 clinical trial also continues to enroll patients. We are also providing pre-clinical, CMC development, and administrative support for these efforts; while constantly focusing on protecting and expanding our intellectual property in areas of strategic interest. We currently do not have any FDA approved products or sales and we have not generated any significant revenue since our inception nor revenue from product sales. We expect to continue to incur significant expenses and increased operating losses over the next several years. We anticipate that our expenses will increase substantially in the following areas:
● | ongoing clinical trials of our product candidates; |
● | maintaining, expanding, and protecting our intellectual property portfolio; |
● | gaining regulatory approvals for our product pipeline; |
● | continued research and development efforts; |
● | the building and operation of our facility for the development of bioanalytics, process development and manufacturing activities; |
● | increased operational, financial, management information systems, and personnel - including personnel to support our product development and commercialization efforts; and |
● | expenses incurred with operating as a public company. |
About our gp96 Platform
Our gp96 platform is designed to activate and expand tumor antigen specific “killer” T cells to destroy a patient’s cancer. By turning immunologically “COLD tumors HOT,” we believe our platform can become an essential component of the immuno-oncology regimen to enhance the effectiveness and durability of checkpoint inhibitors and other cancer therapies, thereby improving outcomes for those patients less likely to benefit from checkpoint inhibitors alone.
We believe this is a highly differentiated approach as our platform delivers a broad range of tumor antigens that are previously unrecognized by the patient’s immune system. Tumor antigens are processed and chaperoned by a powerful and naturally occurring immune adjuvant, gp96, to activate an anti-cancer immune response. Our cancer vaccine therapeutics are replication incompetent, “off-the-shelf”, allogenic cell-based therapies that are locally administered into the skin. The treatment primes innate immune recognition and activates T cells to seek and destroy the cancer cells throughout the body. These gp96 agents can be administered with a variety of immuno-modulators to enhance a patient’s immune response through T cell activation.
Unlike many other “patient specific” or autologous immunotherapy approaches, our drug biotherapeutics are fully allogeneic, “off-the-shelf” products. This provides a means to quickly administer the biotherapeutic without the need to extract and expand blood or tumor tissue from individual patients or create individualized treatment based on the patient’s haplotype. Our gp96 product candidates are produced from allogeneic cell lines expressing tumor-specific proteins common among cancers. Because each patient receives the same treatment, we believe that our immunotherapy approach offers superior speed to initiation, logistics, manufacturing efficiencies, and importantly, cost benefits, compared to “personalized” precision medicine approaches.
Our gp96 platform also delivers antigen-driven T cell activation and specific co-stimulation in a single product. The vaccine delivers both the gp96 heat shock protein and a T cell co-stimulatory fusion protein (OX40L) as a single therapeutic, without the need for multiple, independent biologic products. This dual approach has several potential advantages including: (a) enhanced activation of antigen-specific CD8+ T cells; (b) boosting the number of antigen-specific CD8+ and CD4+ T cells compared to OX40L alone; (c) stimulation of T cell memory function to remain effective after treatment, even in the event of cancer remission; (d) demonstration of less toxicity, as the source of cancer associated antigens and co-stimulator are supplied at the same time locally in the draining lymph nodes, which drives targeted, cancer specific immunity towards the tumor rather than throughout the body; and (e) simplification of combination cancer immunotherapy versus systemic co-stimulation with conventional monoclonal antibodies (mAbs).
24
An Allogenic Cell-Based Approach to Activating the Immune System
Our gp96 platform is an allogenic cell-based, T cell-stimulating platform that functions as an immune activator to stimulate and expand T effector cells. The key component of this innovative immunotherapy platform is the dual functionality of the gp96 heat shock protein.
As a molecular chaperone, gp96 is typically found within the cell’s endoplasmic reticulum and facilitates the folding of newly synthesized proteins for functionalized tasks. When a cell abnormally dies through necrosis or infection, gp96 is naturally released into the surrounding microenvironment. This event becomes a Danger Associated Molecular Protein, or “DAMP”, a molecular warning signal for localized innate activation of the immune system. In this context, gp96 serves as a potent adjuvant, or immune stimulator, via Toll-Like Receptor 4/2 (TLR4 and TLR2) signaling which serves to activate professional antigen presenting cells (APCs), such as dendritic cells that upregulate T cell costimulatory ligands, major histocompatibility (MHC) molecules and immune activating cytokines. It is among the most powerful adjuvants found in the body and uniquely shows exclusive specificity to CD8+ “killer” T cells through cross-presentation of the gp96-chaperoned tumor associated peptide antigens directly to MHC class I molecules for direct activation and expansion of CD8+ T cells. Thus, gp96 plays a central role driving mechanism of action for our T cell activating platform immuno-therapies; mimicking necrotic cell death and activating a powerful, tumor antigen-specific T cell immune response to attack the patient’s cancer cells.
About COVID-19 Program
Besides its utility in oncology, our gp96 platform has been shown to activate the human immune system to combat infectious diseases. Our collaborators have laid a solid foundation by engineering different pathogenic antigens into our platform. Previous preclinical studies using our gp96 platform includes SIV/HIV, Malaria and Zika. We initiated a COVID-19 vaccine program in collaboration with the University of Miami in March 2020.
During the first quarter of 2020, preclinical studies using a cell-based COVID-19 vaccine expressing gp96-Ig, OX40L-Ig, and the SARS-CoV-2 spike glycoprotein (ZVX-60) were started under a sponsored research agreement with the University of Miami Miller School of Medicine. In July 2020, we announced proof-of-concept data demonstrating effective vaccine immunogenicity in relevant preclinical models, including expansion of human-HLA-restricted T cells against immunodominant epitopes of SARS-CoV-2 spike glycoprotein. Data showed robust T cell mediated immune response directed against the spike protein of SARS-CoV-2. In August 2020, we announced publication of positive preclinical COVID-19 vaccine results, which included supporting data that our gp96-based COVID-19 vaccine induces systemic and tissue-specific (e.g. lung) memory CD8+ T cells and tissue-resident memory CD8+ T cells. These results were published in the peer-reviewed journal Frontiers in Immunology in January 2021. In January 2021, we communicated that Waisman Biomanufacturing was contracted to complete process development and manufacturing for ZVX-60. We believe this COVID-19 vaccine is especially suited for immune compromised patients and is being developed for use as either a standalone, or in combination with other vaccines, to enhance prophylactic protection against COVID-19.
The strategy for this program includes providing prophylactic protection to elderly patients and those with underlying health conditions to drive cellular immune responses via CD8+ T cells, in addition to humoral B cell immune responses. We currently plan to seek grant funding for further development of this program however to date we have not received any grant funding.
About PTX-35
Pelican is focused on developing an agonist PTX-35 mAb, against a T cell costimulatory receptor, TNFRSF25. PTX-35 is designed to harness antigen specific immune activation and tolerance mechanisms to reprogram immunity and provide a long-term, durable clinical effect. TNFRSF25 agonism has been shown to provide highly selective and potent stimulation of antigen experienced ‘memory’ CD8+ cytotoxic T cells, which are the class of long-lived T cells capable of eliminating tumor cells in patients. Due to the preferential specificity of PTX-35 to antigen experienced CD8+ T cells, this agent represents a promising candidate as a T cell co-stimulator biotherapeutic in cancer patients.
25
When combined in preclinical studies with Heat Biologics HS-110 and HS-130 immunotherapies or anti-PD-1 checkpoint inhibitor, PTX-35 has been shown to enhance antigen specific T cell activation to eliminate tumor cells. Pelican is also developing other immune biologics that target TNFRSF25 modulators for various immunotherapy approaches.
Our Bioanalytics, Process Development and Manufacturing Activities
To promote efficiency and reduce our reliance on third-party CDMO vendors, we are building in-house bioanalytic, process development, and manufacturing capabilities to support our current biotherapeutics and discovery pipeline. Manufacturing will also be offered to third parties as a fee-for-service model. We have entered into a lease for a 20,441 square foot facility in San Antonio, Texas where we plan to conduct such services and are currently in the process of building the manufacturing facility. Our expansion in Texas is part of a company-wide-growth strategy to enhance efficiency and decrease our dependence on third-party CDMO vendors as we advance our clinical trials and translate our research and development pipeline. We estimate that the investment to build out the facility with labs, equipment, and staff will be approximately $26 million. Equipment purchases of $8.2 million through third quarter of 2021 and approximately $6.4 million for lab equipment expected to be spent in the fourth quarter of 2021 and first quarter of 2022 are included in the $26 million. This excludes federal new market tax credits, historical designation federal and state tax credits, as well as city and county tax abatement incentives with the City of San Antonio and Bexar County, respectively. We intend to fund this initiative with current working capital. The potential value of tax credits and tax incentives to Scorpion are estimated at approximately $4.5 million based on the total cost of the build out, employees hired, real property, and other factors. Operations at the facility are projected to commence by second quarter of 2022, and we expect to fill production capacity by immediately transitioning our outsourced manufacturing and development to in-house. Fee-for-service contracting with be offered to external customers after completion of the build out. However, there can be no assurance that we will be successful in these new operations. As of November 10, 2021, $10.4 million has been spent on laboratory related manufacturing equipment for the San Antonio Facility.
Recent Developments
On August 19, 2021, we announced the formation of a biothreat advisory board comprised Andrew C. Weber, Former Assistant Secretary of Defense for Nuclear, Chemical & Biological Defense Programs; Dr. Gregory Koblentz, Associate Professor at George Mason University and leading expert on chemical and biological weapons; David Lasseter, Former Deputy Assistant Secretary of Defense for Countering Weapons of Mass Destruction, Former US Representative Jack Kingston, who also serves as the Secretariat of the Alliance for Biosecurity; and former two-term U.S. senator and Arkansas Attorney General Mark Pryor who currently serves with the law firm of Brownstein Hyatt Farber Schrek.
On October 5, 2021, Scorpion Biological Services, Inc. entered into a lease with Merchants Ice II, LLC (the “Landlord”), pursuant to which the Company will lease approximately 20,144 square feet of office and lab space located at 1305 E. Houston Street, San Antonio, Texas 78205 for general office, laboratory, research, analytical, and/or biomanufacturing purposes.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
26
The notes to our consolidated financial statements contained herein and to our audited consolidated financial statements contained in our 2020 Annual Report contain a summary of our significant accounting policies. We consider the following accounting policies critical to the understanding of the results of our operations:
● | Revenue; |
● | In-process R&D; |
● | Goodwill impairment; |
● | Income tax; |
● | Contingent consideration; |
● | Stock-based compensation; |
● | Research and development costs, including clinical and regulatory costs; and |
● | Recent accounting pronouncements. |
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2021 and 2020
Revenues. For the three months ended September 30, 2021 we recognized $0.5 million of grant revenue for qualified expenditures under the CPRIT grant. For the three months ended September 30, 2020, we recognized $0.8 million of grant revenue for qualified expenditures under the CPRIT grant. The decrease in grant revenue in the current-year period primarily reflects the expected timing of completion of deliveries under the current phase of the contracts. As of September 30, 2021, we had a grant receivable balance of $0.9 million for CPRIT proceeds not yet received, but for which the costs had been incurred or the conditions of the award had been met. We continue our efforts to secure future non-dilutive grant funding to subsidize ongoing research and development costs.
Research and development expense. Research and development expenses increased approximately 37.5% to $4.4 million for the three months ended September 30, 2021 compared to $3.2 million for the three months ended September 30, 2020. The components of R&D expense are as follows, in millions:
For the Three Months Ended |
||||||
|
September 30, |
|||||
2021 |
|
2020 |
||||
Programs |
|
|
|
|
||
HS-110 |
$ |
0.2 |
$ |
0.1 |
||
HS-130 |
|
0.3 |
|
0.2 |
||
PTX-35 |
|
1.1 |
|
0.5 |
||
COVID-19 |
0.7 |
0.1 |
||||
Other programs |
|
— |
|
0.1 |
||
Unallocated research and development expenses |
|
2.1 |
|
2.2 |
||
$ |
4.4 |
$ |
3.2 |
● | HS-110 expense was $0.2 million, reflecting the current-period mix of development activities, primarily due to increased costs associated with our Phase 2 trial. |
● | HS-130 expense was $0.3 million and included regulatory consulting and investigator site payments for the ongoing Phase 1 clinical trial. |
● | PTX-35 expense increased $0.6 million primarily due to dosing of patients, third-party regulatory consulting and investigator site payments for the ongoing Phase 1 clinical trial. |
● | COVID-19 program was $0.7 million and primarily represents sponsored research agreement costs and manufacturing costs. |
● | Other programs include preclinical costs associated with our Zika program, T cell costimulatory programs, and laboratory supplies. |
27
● | Unallocated research expenses primarily reflects personnel costs, including stock-based compensation from stock awards. |
General and administrative expense. General and administrative expense was $3.4 million and $6.6 million for the three months ended September 30, 2021 and 2020. The decrease was due to a decrease in stock-based compensation expense of $3.9 million due to our CEO being granted immediately vesting stock options in the third quarter of 2020 that did not recur in 2021, off-set by increased personnel costs of $0.2 million, increase in employee travel of $0.1 million, increase in D&O insurance of $0.1 million, and an increase of $0.3 million for consulting and other professional expenses to manage the business.
Change in fair value of contingent consideration. The change in fair value of contingent consideration was $0.3 million for the three months ended September 30, 2021, compared to $0.2 million for the three months ended September 30, 2020. The change in the 2021 period primarily reflects the increased timeline of the Phase 1a trial and the remeasurement of discounted cash flows for the passage of time and milestone achievement.
Total non-operating income (loss). Total non-operating income was $0.02 million for the three months ended September 30, 2021 which primarily consisted of $0.2 million of interest income, and ($0.2) million of unrealized losses on short-term investment balances. Total non-operating income was $0.2 million for the three months ended September 30, 2020 which primarily consisted of interest income on cash and short-term investments.
Net loss attributable to Heat Biologics, Inc. We had a net loss attributable to Heat Biologics, Inc. of $7.4 million, or ($0.30) per basic and diluted share for the three months ended September 30, 2021 compared to a net loss of $8.9 million, or ($0.43) per basic and diluted share for the three months ended September 30, 2020.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenues. For the nine months ended September 30, 2021, we recognized $1.5 million of grant revenue for qualified expenditures under the CPRIT grant and NIH grant. For the nine months ended September 30, 2020, we recognized $2.3 million of grant revenue for qualified expenditures under the CPRIT grant. The decrease in grant revenue in the current-year period primarily reflects the expected timing of completion of deliveries under the current phase of the contracts. As of September 30, 2021, we had a grant receivable balance of $0.9 million for CPRIT proceeds not yet received but for which the costs had been incurred or the conditions of the award had been met. We continue our efforts to secure future non-dilutive grant funding to subsidize ongoing research and development costs.
Research and development expense. Research and development expenses increased approximately 36.4% to $12.0 million for the nine months ended September 30, 2021 compared to $8.8 million for the nine months ended September 30, 2020. The components of R&D expense are as follows, in millions:
For the Nine Months Ended |
||||||
September 30, |
||||||
2021 |
|
2020 |
||||
Programs |
|
|
|
|
||
HS-110 |
$ |
1.4 |
$ |
0.5 |
||
HS-130 |
|
0.6 |
|
0.6 |
||
PTX 35 |
|
2.2 |
|
1.6 |
||
COVID-19 |
1.6 |
0.2 |
||||
Other programs |
|
0.2 |
|
0.2 |
||
Unallocated research and development expenses |
|
6.0 |
|
5.7 |
||
$ |
12.0 |
$ |
8.8 |
● | HS-110 expense increased $0.9 million, reflecting the current-period mix of development activities, primarily due to increased costs associated with the transition of patients from active treatment into long-term follow-up, and increased manufacturing costs. |
28
● | HS-130 expense remained steady at $0.6 million due to the completion of enrollment of patients, third-party regulatory consulting and investigator site payments for the ongoing Phase 1 clinical trial. |
● | PTX-35 expense was $2.2 million primarily consisting of manufacturing development and patient dosing. |
● | COVID-19 program was $1.6 million and primarily represents sponsored research agreement costs and manufacturing costs. |
● | Other programs include preclinical costs associated with our Zika program, T cell costimulatory programs, and laboratory supplies. |
● | Unallocated research expenses primarily reflects personnel costs, including stock-based compensation from stock awards. |
General and administrative expense. General and administrative expense was $11.0 million and $11.7 million for the nine months ended September 30, 2021 and 2020. The decrease was primarily due to a decrease in stock-based compensation expense of $1.7 million due to our CEO being granted immediately vesting stock options in the third quarter of 2020 that did not recur in 2021, an increase in D&O insurance premiums of $0.3 million, an increase in consulting expenses of $0.6 million, an increase in personnel costs of $0.2 million, an increase in franchise taxes of $0.2 million, and a decrease in public company expenses of $0.3 million.
Change in fair value of contingent consideration. The change in fair value of contingent consideration was $0.4 million for the nine months ended September 30, 2021, compared to $1.0 million in the nine months ended September 30, 2020. The change in the 2021 period primarily reflects the increased timeline of the Phase 1a trial and the remeasurement of discounted cash flows for the passage of time and milestone achievement.
Total non-operating income (loss). Other income was $0.1 million for the nine months ended September 30, 2021, compared to a loss of $(0.7) million for the nine months ended September 30, 2020. The change of $0.8 million primarily consists of a decrease in extinguishment expense and changes in fair value related to warrants of ($1.1) million, and a increase in interest income on cash and short-term investment balances of $0.2 million and a decrease of $0.5 million of unrealized losses on short-term investment balances.
Net loss attributable to Heat Biologics, Inc. We had a net loss attributable to Heat Biologics, Inc. of $21.5 million, or ($0.87) per basic and diluted share for the nine months ended September 30, 2021 compared to a net loss of $19.6 million, or ($1.42) per basic and diluted share for the nine months ended September 30, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Since our inception in June 2008, we have incurred significant losses and we have financed our operations with net proceeds from the private placement of our preferred stock, common stock and debt. Since our initial public offering, we have primarily financed our operations with net proceeds from the public offering of our securities and to a lesser extent, the proceeds from the exercise of warrants. On January 21, 2020, we closed an underwritten public offering of shares of our common stock and warrants to purchase shares of our common stock pursuant to which we received net proceeds of approximately $6.4 million. For the year ended December 31, 2020 we received net proceeds of approximately $114.4 million from sales of our common stock in at-the-market offerings. For the nine months ended September 30, 2021 we received net proceeds of $25.6 million from the sale of 2,106,027 shares of our common stock in at-the-market offerings. We had no sales of our common stock in at-the-market offerings for the three months ended September 30, 2021. As of September 30, 2021, we had an accumulated deficit of $152.2 million. We had net losses of $26.4 million and $20.4 million for the years ended December 31, 2020 and 2019, respectively. We had net losses of $21.5 million and $19.6 million for the nine months ended September 30, 2021 and 2020, respectively.
We expect to incur significant expenses and continued losses from operations for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and advance our clinical trials of, and seek marketing approval for, our product candidates and as we add to our product candidate pipeline including expansion of our infectious disease/biothreat programs. Our expenses will also increase due
29
to our recent new lease obligations for the manufacturing facility in San Antonio and related equipment expenses. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. Although we currently have sufficient funds to complete our Phase 2 clinical trial, as currently planned, and expect that we will have sufficient funds to fund our operations into 2024, we will need to obtain substantial additional future funding in connection with our future planned clinical trials, the manufacturing facility that we are building out in San Antonio, Texas and any new programs or ventures we pursue. While we are currently funding vaccine development and preclinical studies, we do not expect to use significant corporate resources to advance our COVID-19 program. We are applying for several large grants to support clinical development of this program and are engaged in collaboration discussions, which we believe may provide attractive and non-dilutive pathways to help accelerate development of our COVID-19 program; however, to date we have not received any grant funding for such program and there can be no assurance that we will receive such grant funding or if received, the amount of such grant funding. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, which include sales of our common stock under at-the-market offerings, if available, debt financings, partnerships, collaborations and other funding transactions. This is based on our current estimates, and we could use our available capital resources sooner than we currently expect. We will need to generate significant revenues to achieve profitability, and we may never do so. As of September 30, 2021, we had approximately $108.9 million in cash and cash equivalents and short-term investments.
Cash Flows
Operating activities. The use of cash during the nine months ended September 30, 2021 and 2020 resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities during the nine months ended September 30, 2021 was $26.7 million compared to $15.6 million during the same period in 2020. The increase was primarily due to an increased net loss of $2.0 million, a decrease in stock-based compensation of $1.7 million, a decrease in the change in fair value of common stock warrants of $1.0 million, a decrease in the change in fair value of contingent consideration of $0.6 million, a decrease in deferred revenue of $1.6 million, an increase in other assets of $8.2 million and an increase in accounts payable and accrued expenses of $1.2 million. The increase in other assets relates to reimbursements made to Merchants Ice, LLC for equipment in our new San Antonio lease that will be classified as a right of use asset upon lease commencement.
Investing activities. Net cash used in investing activities was $1.9 million during the nine months ended September 30, 2021 compared to $87.1 million during the same period in 2020. The decrease is from the change in net purchases of short-term investments of $86.3 million from 2021 to 2020 and the increase in purchases of property and equipment of $1.1 million.
Financing activities. Net cash provided by financing activities was $25.6 million during the nine months ended September 30, 2021 compared to $118.4 million during the nine months ended September 30, 2020. The decrease of $92.8 million was primarily due to a $90.0 million net decrease of sales of our common stock through an at-the-market Common Stock Sales Agreement with B. Riley FBR, Inc. and Cantor Fitzgerald & Co., net of the decrease in related stock issuance costs of $2.4 million, partially offset by a public offering of shares that occurred in 2020 of $6.6 million.
Current and Future Financing Needs
We have incurred an accumulated deficit of $152.2 million through September 30, 2021. We have incurred negative cash flows from operations since we started our business. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, and our research and discovery efforts.
In order to promote efficiency and reduce our reliance on third-party vendors, we plan to enhance our in-house development of bioanalytic, process development and manufacturing capabilities and offer such services to third parties for fees. We have entered into a lease for a 20,441 square foot facility in San Antonio, TX to conduct such services and
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are currently building the facility. Our proposed expansion in Texas is part of a company-wide-growth strategy to enhance efficiency and decrease our dependence on third-party vendors as we advance our clinical trials and general research and development. We estimate that the investment to build out the facility with labs, equipment, and staff will be approximately $26 million, without taking into account federal new market tax credits based on the location in San Antonio, federal and state historical tax credits based on the historical designation of the facility, as well as city and county tax abatement incentives with the City of San Antonio and Bexar County, respectively. Equipment purchases of $8.2 million through third quarter 2021 and approximately $6.4 million for lab equipment expected to be spent in the fourth quarter of 2021 and first quarter of 2022 are included in the $26 million. We intend to fund this initiative with current working capital. The potential value of tax credits and tax incentives to Scorpion are estimated to be up to approximately $4.5 million based on the total cost of the build out, employees hired, real property, and other factors. Operations at the facility are projected to commence by second quarter of 2022, and we expect to fill production capacity by transitioning our outsourced manufacturing and development to in-house immediately and followed by contracting with external customers. However, there can be no assurance that we will be successful in these new operations. As of November 10, 2021 we have spent $10.4 million on laboratory related manufacturing equipment for the San Antonio facility.
We intend to meet our financing needs through multiple alternatives, including, but not limited to, cash on hand, additional equity financings, debt financings and/or funding from partnerships or collaborations and potential revenue, if any, from our planned development and manufacturing facility.
However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
● | the progress of our research activities; |
● | the number and scope of our research programs; |
● | the progress of our preclinical and clinical development activities; |
● | the progress of the development efforts of parties with whom we have entered into research and development agreements; |
● | our expansion plans and cash needs of any new projects such as our planned development and manufacturing facility described above; |
● | the cost we incur to build the facility for the development of bioanalytics, process development and manufacturing activities, the cost of the equipment required for such facility and the revenue derived from such facility |
● | our ability to maintain current research and development licensing arrangements and to establish new research and development and licensing arrangements; |
● | our ability to achieve our milestones under licensing arrangements; |
● | the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; |
● | the costs and timing of regulatory approvals; |
● | the receipt of grant funding if any; and |
● | clinical laboratory development and testing. |
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our equity or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock, such as through the Amended and Restated Common Stock Sales Agreement with B. Riley FBR, Inc. and Cantor Fitzgerald & Co., or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. While we are 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, our business, financial condition, results of operations and growth prospects could be materially adversely affected.
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OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We have adopted and maintain disclosure controls and procedures (as defined Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021 our Chief Executive Officer and Chief Financial Officer concluded that, as of such a date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2021, there were no changes in our internal control over financial reporting (as defined in Rules 13a 15(f) and 15d 15(f) of the Exchange Act) that occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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ITEM 1A. RISK FACTORS.
Investing in our securities involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. The following information updates should be read in conjunction with the information disclosed in Part 1, Item 1A, “Risk Factors,” contained in our 2020 Annual Report. Except as disclosed below, there have been no material changes from the risk factors and uncertainties disclosed in our 2020 Annual Report.
We have incurred net losses every year since our inception and expect to continue to generate operating losses and experience negative cash flows and it is uncertain whether we will achieve profitability.
We have incurred net losses in each year since our inception, including net losses of $21.8 million and $19.8 million for the nine months ended September 30, 2021 and 2020, respectively. We had an accumulated deficit of $152.2 million as of September 30, 2021. For the years ended December 31, 2020 and 2019, we incurred a net loss of $26.4 million and $20.4 million, respectively. We expect to continue to incur operating losses until such time, if ever, as we are able to achieve sufficient levels of revenue from operations. Our ability to achieve profitability will depend on us obtaining regulatory approval for our product candidates and market acceptance of our product offerings and our capacity to develop, introduce and sell our products to our targeted markets. There can be no assurance that any of our product candidates will be approved for commercial sale, or even if our product candidates are approved for commercial sale that we will ever generate significant sales or achieve profitability. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.
Even if we succeed in developing and commercializing one or more product candidates, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue to incur significant operating expenses and anticipate that our expenses will increase substantially in the foreseeable future as we:
● | continue to undertake preclinical development and conduct clinical trials for product candidates; |
● | seek regulatory approvals for product candidates; |
● | implement additional internal systems and infrastructure; |
● | build a facility for the development of bioanalytics, process development and manufacturing activities; and |
● | hire additional personnel. |
We also expect to experience negative cash flows for the foreseeable future as we fund our operating losses. As a result, we will need to generate significant revenues or raise additional financing in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability would likely negatively impact the value of our securities and financing activities.
We may need to raise additional capital to support our long-term business plans and our failure to obtain funding when needed may force us to delay, reduce or eliminate our development programs or commercialization efforts.
During the nine months ended September 30, 2021, our operating activities used net cash of approximately $26.7 million and as of September 30, 2021, our cash and cash equivalents and short-term investments were approximately $108.9 million. During the years ended December 31, 2020 and 2019, our operating activities used net cash of approximately $22.0 million and $12.8 million, respectively. We expect to incur additional operating losses in the future and therefore expect our cumulative losses to increase. We do not expect to derive revenue from any significant source in the near future until we or our potential partners successfully commercialize our products. We expect to incur additional operating losses in the future and therefore expect our cumulative losses to increase. We do not expect to derive revenue from any of our product candidates in the near future until we or our potential partners successfully commercialize our products or we generate revenue from our manufacturing services that we plan to provide third parties. We expect our expenses to increase if and when we initiate and conduct Phase 3 and other clinical trials and seek marketing approval for our product candidates. In addition, we expect our expenses to increase due to the build out of the manufacturing facility in San Antonio and the purchase of equipment for the facility. Until such time as we receive approval from the FDA and other regulatory
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authorities for our product candidates, we will not be permitted to sell our products and therefore will not have product revenues from the sale of products
We will need to raise additional capital to fund our long term operations and milestone payments and we cannot be certain that funding will be available to us on acceptable terms on a timely basis, or at all. To meet our financing needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, which we expect will include sales of common stock through at the market issuances, debt financings and/or funding from partnerships or collaborations. Our ability to raise capital through the sale of securities may be limited by our number of authorized shares of common stock and various rules of the SEC and the Nasdaq Capital Market that place limits on the number and dollar amount of securities that we may sell. Any additional sources of financing will likely involve the issuance of our equity or debt securities, which will have a dilutive effect on our stockholders, assuming we are able to sufficiently increase our authorized number of shares of common stock. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct our business. If we fail to raise additional funds on acceptable terms, we may be unable to complete planned preclinical and clinical trials or obtain approval of our product candidates from the FDA and other regulatory authorities or continue to maintain our listing on the Nasdaq Capital Market. In addition, we could be forced to delay, discontinue or curtail product development, forego sales and marketing efforts, and forego licensing in attractive business opportunities. Any additional sources of financing will likely involve the issuance of our equity or debt securities, which will have a dilutive effect on our stockholders.
We have a limited operating history conducting commercial development of bioanalytics, process development and manufacturing activities, which may limit the ability of investors to make an informed investment decision.
We plan to expand our operations by operating a facility for the development of bioanalytics, process development and manufacturing activities. To date, we have limited experience manufacturing products for third parties and ourselves. Because of the numerous risks and uncertainties associated with development and manufacturing, we are unable to predict if we will be successful in providing such services to ourselves or third parties. Although we plan to use our anticipated facility to service our internal manufacturing needs, we also intend to generate revenue to offset the expenses we incur in operating the facility as well as the initial start-up expenses from third parties. Our ability to generate this revenue will depend, in part, on our ability to attract and maintain customers for our development, manufacturing and technology transfer services and on the amount of spent by the customers on such services. If our anticipated facility fails to attract customers and operate at sufficient capacity, our margins will suffer, and we may not be able to fund the costs we incur to operate the facility. Our bioanalytics, process development and manufacturing activities will also depend, in part, on our ability to attract and retain an appropriately skilled and sufficient workforce to operate our development and manufacturing facility and our ability to comply with various quality standards and environmental, health and safety laws and regulations.
Future sales of our common stock by our existing stockholders could cause our stock price to decline.
On November 9, 2021, we had 25,403,519 shares of our common stock outstanding, all of which are currently eligible for sale in the public market, subject, in certain circumstances to the volume, manner of sale and other limitations under Rule 144 promulgated under the Securities Act. It is conceivable that stockholders may wish to sell some or all of their shares. If our stockholders sell substantial amounts of our common stock in the public market at the same time, the market price of our common stock could decrease significantly due to an imbalance in the supply and demand of our common stock. Even if they do not actually sell the stock, the perception in the public market that our stockholders might sell significant shares of our common stock could also depress the market price of our common stock.
A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause stockholders to lose part or all of their investment in our shares of common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no sales of unregistered securities during the quarter ended September 30, 2021 that were not previously disclosed.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index. The Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX
Exhibit No. |
|
Description |
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101.INS* |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
101.SCH* |
XBRL Taxonomy Extension Schema Document |
|
101.CAL* |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF* |
XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB* |
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE* |
XBRL Taxonomy Extension Presentation Linkbase Document |
|
104* |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
* |
Filed herewith. |
# |
Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HEAT BIOLOGICS, INC. |
||
Date: November 10, 2021 |
By: |
/s/ Jeffrey A. Wolf |
Jeffrey A. Wolf |
||
Chairman and Chief Executive Officer |
||
(Principal Executive Officer) |
||
Date: November 10, 2021 |
By: |
/s/ William Ostrander |
William Ostrander |
||
Chief Financial Officer |
||
(Principal Financial and Accounting Officer) |
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