NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Companys management, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2019.
The consolidated financial statements as of and for the three and six months ended June 30, 2019 and 2018 are unaudited. The balance sheet as of December 31, 2018 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 Managements Discussion and Analysis of Financial Condition and Results of Operations, contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 28, 2019 and Amendment No. 1 thereto filed with the SEC on April 24, 2019 (the 2018 Annual Report).
The consolidated financial statements as of and for the three and six months ended June 30, 2019 and 2018 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., Delphi Therapeutics, Inc. and Scorpion Biosciences, Inc.. The functional currency of the entities located outside the United States of America (the foreign entities) is the applicable local currency of the foreign entities. Assets and liabilities of the foreign entities are translated at period-end exchange rates. Statement of operations accounts are translated at the average exchange rate during the period. The effects of foreign currency translation adjustments are included in other comprehensive loss, which is a component of accumulated other comprehensive loss in stockholders equity. All significant intercompany accounts and transactions have been eliminated in consolidation. Heat accounts for its less than 100% interest in accordance with U.S. GAAP. Accordingly, the Company presents non-controlling interest as a component of stockholders equity on its consolidated balance sheets and reports non-controlling interest net loss under the heading net loss non-controlling interest on its consolidated statements of operations and comprehensive loss. At June 30, 2019 and December 31, 2018, Heat held an 85% controlling interest in Pelican and a 100% interest in Heat I. During the six months ended June 30, 2018, Heat held an 80% controlling interest in Pelican and a 92.5% controlling interest in Heat I. For the six months ended June 30, 2018 the Company recognized $161,994 in net loss non-controlling interest for Heat I and $241,201 in net loss non-controlling interest for Pelican. For the six months ended June 30, 2019 all net losses attributable to non-controlling interests relate to Pelican.
All share numbers in the consolidated financial statements and footnotes below have been adjusted for the Companys one-for-ten reverse stock split effective January 19, 2018.
Error Correction
As discussed in the Companys report on Form 10-Q for the quarterly period ended September 30, 2018, during the nine months ended September 30, 2018, the Company determined that an income tax benefit was required for the quarters ended March 31, 2018 and June 30, 2018. Specifically, net operating losses in those periods gave rise to an indefinite-lived deferred tax asset which provided sufficient support to offset up to 80% of the Companys indefinite-lived deferred tax liability. As revised, the Company has income tax benefits for the three and six months ended June 30, 2018 of $235,000 and $440,000, respectively. The Company evaluated the effect of this error and concluded it was not material to any of its previously issued consolidated financial statements.
6
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Liquidity and Capital Resources
The Company has an accumulated deficit of approximately $95.1 million as of June 30, 2019 and a net loss of approximately $4.9 million for the three months ended June 30, 2019 and has not generated significant revenue or positive cash flows from operations. The Company expects to incur significant expenses and continued losses from operations for the foreseeable future. The Company expects its expenses to increase in connection with its ongoing activities, particularly as the Company continues its research and development and advances its clinical trials of, and seek marketing approval for, its product candidates and as the Company continues to fund the Pelican matching funds required in order to access the grant provided by the Cancer Prevention and Research Institute of Texas or CPRIT. In addition, if the Company obtains marketing approval for any of its product candidates, the Company expects to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, the Company will need to obtain substantial additional funding in connection with its continuing operations. Adequate additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate its research and development programs or any future commercialization efforts. To meet its capital needs, the Company intends to continue to consider multiple alternatives, including, but not limited to, additional equity financings such as sales of its common stock under the B. Riley FBR, Inc. At Market Issuance Sales Agreement, if available, debt financings, partnerships, collaborations and other funding transactions. This is based on the Companys current estimates, and the Company could use its available capital resources sooner than it currently expects. The Company continually evaluates various cost-saving measures considering its cash requirements in order to focus resources on its product candidates and ranks its development programs based upon progress in clinical development, among other things. These rankings could result in a reduction, delay, or elimination of certain of its research and development programs and are subject to change based upon future events. The Company will need to generate significant revenues to achieve profitability, and it may never do so. As of June 30, 2019, the Company had approximately $19.5 million in cash, cash equivalents and short-term investments, which it believes is sufficient to fund its operations for one year from date of this filing.
Cash Equivalents and Restricted Cash
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.
Short-term Investments
The Companys 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, income taxes and stock-based compensation. Actual results may differ from those estimates.
Segments
The Company has one reportable segment - the development of immunotherapies designed to activate and expand a patient's T-cell mediated immune system against cancer.
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. Managements 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.
7
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. No impairment existed at June 30, 2019.
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. No impairment existed at June 30, 2019.
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.
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 Companys product candidates and other expenses relating to the design, development, and testing and enhancement of its product candidates.
8
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
The Company earns substantially all its revenue from a research grant from CPRIT. The Companys contract with CPRIT relates to developing a human TNFRSF25 agonist antibody for use in cancer patients through research and development efforts and a noncommercial license from CPRIT-funded research to CPRIT and other government agencies and institutions of higher education in Texas.
CPRIT advances grant funds upon request by the Company consistent with the agreed upon amounts and schedules as provided in the contract. Funds received are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is earned and recognized when qualifying costs are incurred.
Prepaid Expenses and Other Current Assets
The Companys prepaid expenses and other current assets consists primarily of the amount paid in advance for cGMP production of Pelicans PTX-35 antibody and PTX-15 fusion protein for Pelican, as well as Chemistry Manufacturing and Control (CMC) material for the Companys clinical trial studies for HS-110.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that utilization is not presently more likely than not.
Significant Accounting Policies
The significant accounting policies used in preparation of these interim financial statements are disclosed in the 2018 Annual Report and have not changed significantly since such filing.
Recently Issued Accounting Pronouncements
In November 2018, the FASB issued ASU 2018-18:
Collaborative Arrangements
(Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU, in part, requires that certain transactions with collaboration partners be excluded from revenue recognized under Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the impact of this standard and does not plan early adoption of this standard.
In June 2018, the FASB issued ASU 2018-07:
Compensation Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, early adoption is permitted but no earlier than an entitys adoption date of Topic 606.
The Company adopted this ASU in the first quarter of 2019 and there was no material effect on the Companys results of operations or cash flows.
In June 2018, the FASB issued ASU No. 2018-08
,
Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
, which is intended to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments in ASU No. 2018-08 should assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transaction) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. This amendment applies to all entities that make or receive grants or contributions. This ASU is effective for public companies serving as a resource recipient for fiscal years beginning after June 15, 2018, including interim periods within that fiscal year. The Company adopted this ASU in the first quarter of 2019 and there was no material effect on the recognition or measurement of revenue in the Companys financial statements.
9
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In February
2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
which requires recognition of a right-of-use asset and liability for future lease payments for contracts that meet the definition of a lease and requires disclosure of certain information about leasing arrangements. Generally, a lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, the Company considers whether a contract provides us with both the right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. The Company adopted the standard on January 1, 2019 using the optional transition method and, as a result, did not recast prior period unaudited comparative financial statements. The Company has determined that its leases, consisting of leases for office and laboratory space without optional terms or variable components, are operating leases. Adoption of the new standard resulted in the recording of operating lease right-of-use assets and associated lease liabilities of $520,399 and $528,253, respectively, as of January 1, 2019 on the balance sheet with no cumulative impact to accumulated deficit and did not have a material impact on the Companys results of operations or cash flows.
2. Acquisition of Pelican Therapeutics
In 2017, the Company consummated the acquisition of 80% of the outstanding equity of Pelican, a related party, and Pelican became a majority owned subsidiary of the Company. During the quarter ended March 31, 2018, cash consideration of approximately $300,000 was distributed to the participating Pelican stockholders and the remainder of approximately $200,000 for certain Pelican liabilities not satisfied was recognized as other income in the statements of operations and comprehensive loss for the period.
In October 2018, Heat entered into an agreement with the University of Miami (UM) whereby UM exchanged its shares of stock in Heats subsidiaries, Heat I, Inc. and Pelican. The stock exchange resulted in Heat increasing its controlling ownership in Pelican from 80% to 85%.
Under the agreement, the Company is also obligated to make future payments based on the achievement of certain clinical and commercialization milestones, as well as low single digit royalty payments and payments upon receipt of sublicensing income.
The fair value of these future milestone payments is reflected in the contingent consideration account under current liabilities with the non-current portion under long term liabilities on the balance sheet. The estimated fair value of the contingent consideration was determined using a probability-weighted income approach, at a discount of 4.6% based on the median yield of publicly traded non-investment grade debt of companies in the pharmaceutical industry. The Company estimates the fair value of the contingent consideration on a quarterly basis.
Goodwill was calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill resulting from this acquisition related largely to synergies expected from combining the operations. The goodwill is not deductible for income tax purposes.
In-process R&D assets are treated as indefinite-lived until the completion or abandonment of the associated R&D program, at which time the appropriate useful lives will be determined. The Company calculated the fair value of the non-controlling interest acquired in the acquisition as 20% of the equity interest of Pelican, adjusted for a minority interest discount.
As discussed in Note 10, in May 2016, Pelican was awarded a $15.2 million CPRIT Grant from CPRIT for development of Pelicans lead product candidate, PTX-35. The CPRIT Grant is expected to support Pelican in developing PTX-35 through a Phase 1 clinical trial designed to evaluate PTX-35 in combination with other immunotherapies.
3. Fair Value of Financial Instruments
The carrying amount of certain of the Companys financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other payables approximate fair value due to their short maturities.
As a basis for determining the fair value of certain of the Companys 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.
10
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
As of June 30, 2019 and December 31, 2018, the fair values of cash, accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. The Companys short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair value of the short-term investments was based on quoted market prices. There were no transfers between fair value hierarchy levels during the quarters ended June 30, 2019 or 2018.
The fair value of financial instruments measured on a recurring basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
5,648,609
|
|
|
$
|
5,648,609
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
3,331,515
|
|
|
|
|
|
|
|
|
|
|
$
|
3,331,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
5,570,027
|
|
|
$
|
5,750,027
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
3,105,225
|
|
|
|
|
|
|
|
|
|
|
$
|
3,105,225
|
|
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 year ended June 30, 2019:
|
|
|
|
|
|
|
Contingent Consideration
|
|
Balance at December 31, 2018
|
|
$
|
3,105,225
|
|
Change in fair value
|
|
|
226,290
|
|
Balance at June 30, 2019
|
|
$
|
3,331,515
|
|
The change in the fair value of the contingent consideration for the six months ended June 30, 2019 was primarily because of the change in discount rate and the passage of time on the fair value measurement. Adjustments associated with the change in fair value of contingent consideration are included in the Companys consolidated statement of operations and comprehensive loss.
The following table presents quantitative information about the inputs and valuation methodologies used for the Companys fair value measurements of contingent consideration classified as Level 3 as of June 30, 2019:
|
|
|
|
|
|
|
|
|
Valuation
Methodology
|
|
Significant
Unobservable Input
|
|
Weighted Average
(range, if applicable)
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
Probability weighted
income approach
|
|
Milestone dates
|
|
2019-2026
|
|
|
|
|
Discount rate
|
|
4.6%
|
|
|
|
|
Probability of occurrence
|
|
23% to 86%
|
11
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Short-Term Investments
The following summarizes information about short term investments at June 30, 2019 and December 31, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains (Losses)
|
|
|
Estimated
Fair Value
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
|
$
|
5,643,152
|
|
|
$
|
5,457
|
|
|
$
|
5,648,609
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
|
$
|
5,570,158
|
|
|
$
|
(131
|
)
|
|
$
|
5,570,027
|
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Prepaid manufacturing expense
|
|
$
|
387,760
|
|
$
|
559,110
|
|
Prepaid insurance
|
|
|
53,567
|
|
|
284,931
|
|
Prepaid clinical study expenses
|
|
|
143,827
|
|
|
-
|
|
Other prepaid expenses and current assets
|
|
|
99,015
|
|
|
117,276
|
|
|
|
$
|
684,169
|
|
$
|
961,317
|
|
6. Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives, ranging generally from five to seven years. Expenditures for maintenance and repairs are charged to expense as incurred.
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Lab equipment
|
|
$
|
1,257,525
|
|
$
|
1,218,532
|
|
Leasehold improvements
|
|
|
9,445
|
|
|
9,445
|
|
Computers
|
|
|
45,055
|
|
|
38,589
|
|
Furniture and fixtures
|
|
|
58,146
|
|
|
58,146
|
|
Total
|
|
|
1,370,171
|
|
|
1,324,712
|
|
Accumulated depreciation
|
|
|
(803,578
|
)
|
|
(681,566
|
)
|
Property and equipment, net
|
|
$
|
566,593
|
|
$
|
643,146
|
|
Depreciation expense was $54,826 and $122,012 for the three and six months ended June 30, 2019, respectively, and $64,333 and $108,408 for the three and six months ended June 30, 2018, respectively.
12
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Goodwill and In-Process R&D
Goodwill of $2.2 million and in-process R&D of $5.9 million were recorded in connection with the acquisition of Pelican, as described in Note 2. The carrying value of goodwill and in-process R&D has remained unchanged and no impairment was recognized as of June 30, 2019 and December 31, 2018.
8. Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Compensation and related benefits
|
|
$
|
118,340
|
|
$
|
628,147
|
|
Other accrued operating expenses
|
|
|
1,051,269
|
|
|
1,049,904
|
|
|
|
$
|
1,169,609
|
|
$
|
1,678,051
|
|
9. Stockholders Equity
Common Stock Warrants
During the three months and six months ended June 30, 2019, there were no changes in the Companys outstanding warrants. As of June 30, 2019, the Company has outstanding warrants to purchase 9,030,730 shares of common stock issuable at a weighted-average exercise price of $1.89 per share.
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. As of June 30, 2019, there were 126,774 shares remaining available for grant under these plans. As discussed in Note 14, in July 2019, the Companys shareholders approved an increase of 4,000,000 shares in the number of shares available for grant.
Stock Options
The following is a summary of the stock option activity for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, December 31, 2018
|
|
|
465,303
|
|
|
$
|
11.60
|
|
Granted
|
|
|
2,725,821
|
|
|
|
1.07
|
|
Exercised
|
|
|
(2,000
|
)
|
|
|
1.06
|
|
Expired
|
|
|
(14,634
|
)
|
|
|
4.88
|
|
Forfeited
|
|
|
(107,585
|
)
|
|
|
1.68
|
|
Outstanding, June 30, 2019
|
|
|
3,066,905
|
|
|
$
|
2.62
|
|
13
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The weighted average grant-date fair value of stock options granted during the six months ended June 30, 2019 was $0.94. The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for stock options granted during the three months ended June 30, 2019:
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
131.3
|
%
|
Risk-free interest rate
|
|
|
2.5
|
%
|
Expected lives (years)
|
|
|
5.5
|
|
The risk-free interest 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. The Company used an average historical stock price volatility based on an analysis of reported data for a peer group of comparable companies that have issued stock options with substantially similar terms, as the Company had limited to no trading history for its common stock. Expected term represents the period that the Companys 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.
Expected dividend yield was considered to be 0% in the option pricing formula since the Company had not paid any dividends and had no plans to do so in the future. As required by ASC 718, the Company reviews recent forfeitures and stock compensation expense. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Additionally, the Company conducts a sensitivity analysis of the forfeiture rate. Based on these evaluations the Company currently does not apply a forfeiture rate.
The following table summarizes information about stock options outstanding at June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
Balance
as of
6/30/2019
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Balance
as of
6/30/2019
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
3,066,905
|
|
|
9.1
|
|
|
$2.62
|
|
|
1,311,854
|
|
|
8.8
|
|
|
$4.19
|
|
Restricted Stock
The following is a summary of restricted stock and restricted stock unit activity for the six months ended June 30, 2019:
|
|
|
|
|
|
|
Shares
|
|
Unvested, December 31, 2018
|
|
|
56,520
|
|
Granted
|
|
|
1,579,179
|
|
Vested
|
|
|
(747,805
|
)
|
Forfeited
|
|
|
(49,340
|
)
|
Unvested, June 30, 2019
|
|
|
838,554
|
|
10. Grant Revenue
In June 2016, Pelican entered into a cancer research grant contract or Grant Contract with CPRIT,
under which CPRIT awarded a grant not to exceed $15.2 million for use in developing cancer treatments by targeting a novel T-cell costimulatory receptor (namely, TNFRSF25). The Grant Contract covers a period from June 1, 2016 through November 30, 2019, as amended. The first tranche of funding of $1.8 million was received in May 2017, and a second tranche of funding of $6.5 million was received in October 2017. The remaining $6.9 million is expected to be requested and received following a planned IND filing in 2019.
14
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The grant is subject to customary CPRIT funding conditions including a matching funds requirement where Pelican will match $0.50 for every $1.00 from CPRIT. Consequently, Pelican is required to provide $7.6 million in matching funds over the life of the project. Upon commercialization of the product, the terms of the grant require Pelican to pay tiered
royalties in the low to mid-single digit percentages. Such royalties reduce to less than one percent after a mid-single-digit multiple of the grant funds have been paid to CPRIT in royalties.
Through June 30, 2019, all $8.3 million of grant funding received to date has been recognized as revenue.
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 three and six months ended June 30, 2019 and 2018, all the Companys common stock options, unvested restricted stock units and warrants were anti-dilutive and therefore have been excluded from the diluted calculation.
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share in the three and six months ended June 30 due to their anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Outstanding stock options
|
|
|
|
3,066,905
|
|
|
424,592
|
|
Restricted stock subject to forfeiture and restricted stock units
|
|
|
|
838,554
|
|
|
62,207
|
|
Outstanding common stock warrants
|
|
|
|
9,030,730
|
|
|
4,443,230
|
|
12. Income Tax
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As of June 30, 2019, $0.9 million of the deferred tax asset arising from the generation of 2018 net operating losses has been utilized to offset a portion of the previously recorded deferred tax liability associated with indefinite lived R&D in process costs. Specifically, the prior & current year net operating losses gave rise to an indefinite-lived deferred tax asset which provided sufficient support to offset a portion of the Companys indefinite-lived deferred tax liability
In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the accompanying consolidated financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered more-likely-than-not that the position taken will be sustained by a taxing authority. As of June 30, 2019, and December 31, 2018, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Companys effective income tax rate associated with these items. The Companys policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense. As of June 30, 2019, and December 31, 2018, the Company had no such accruals.
13. Leases
As described in Note 1, effective January 1, 2019, the Company adopted ASC 842 using the optional transition method, applying no practical expedients. In accordance with the optional transition method, the Company did not recast the prior period consolidated financial statements. The lease term is the noncancelable period of the lease. There are no termination provisions or renewal periods reasonably certain of exercise or options controlled by the lessor. Finance leases, variable lease costs and short-term leases are not material to our consolidated financial statements.
15
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company leases office space under operating leases. Total lease costs, consisting of fixed operating lease costs, in the three and six months ended June 30, 2019 amounted to $66,894 and $133,789, respectively.
As of June 30, 2019, lease liabilities have been determined using a discount rate of approximately 8.6%. The rate implicit in the Companys leases is not readily determinable. Accordingly, the Company uses its estimated incremental borrowing rate, which represents the rate of interest that it would pay to borrow on a collateralized basis over a similar term.
As of June 30, 2019, the weighted-average remaining life of the Companys leases is approximately 3.3 years. Operating cash flows in the three and six months ended June 30, 2019 include $68,742 and $136,263, respectively, of payments for amounts included in the measurement of operating lease liabilities.
Maturities of operating lease liabilities as of June 30, 2019 were as follows:
|
|
|
|
Year ending December 31:
|
|
|
|
July 1 through December 31, 2019
|
|
$97,496
|
|
2020
|
|
115,580
|
|
2021
|
|
118,158
|
|
2022
|
|
120,737
|
|
2023
|
|
20,195
|
|
Total lease payments
|
|
472,166
|
|
Less: imputed interest
|
|
(60,608
|
)
|
Present value of operating lease liabilities
|
|
$411,558
|
|
In April 2019, the Company entered into a 96-month lease for office and laboratory space that is expected to commence upon the expiration of an existing lease in September 2019. Scheduled lease payments under the new lease total approximately $1.8 million. As of June 30, 2019, the Company had not taken control of the space and the lease term had not commenced. Accordingly, no right of use asset or lease liability related to the lease has been recorded. The Company expects to incur approximately $300,000 of the cost of improvements.
14. Subsequent event
On July 23, 2019, the Company held its 2019 Annual Meeting of Stockholders (the Annual Meeting). At the Annual Meeting, the Companys stockholders approved an increase of 4,000,000 in the number of shares available for issuance under the Companys 2018 Stock Incentive Plan.
16
ITEM 2.