NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting. However, certain information or footnote disclosures normally included in complete 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, the unaudited consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2017.
The consolidated financial statements as of and for the three and six months ended June 30, 2017 and 2016 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2016 is derived from the audited consolidated financial statements as of that date. The accompanying unaudited consolidated 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, 2016 filed with the SEC on March 31, 2017 (the 2016 Annual Report).
On April 28, 2017, the Company completed the acquisition of an 80% controlling interest in Pelican Therapeutics, Inc.(Pelican), a related party prior to acquisition. Operations of Pelican are included in the consolidated statement of operations and comprehensive loss from the acquisition date. In October 2016, the Company formed a wholly-owned subsidiary, Zolovax, Inc. to focus on the development of gp96-based vaccines initially targeting Zika with the ability to target HIV, West Nile dengue and yellow fever, among others.
The accompanying consolidated financial statements as of and for the three and six months ended June 30, 2017 and 2016 include the accounts of Heat Biologics, Inc. (the Company), and its subsidiaries, Heat Biologics I, Inc. (Heat I), Heat Biologics III, Inc. (Heat III), Heat Biologics IV, Inc. (Heat IV), Heat Biologics GmbH, and Heat Biologics Australia Pty Ltd. Additionally, as of the three and six months ended June 30, 2017 the accompanying consolidated financials include Zolovax and Pelican. The functional currency of the entities located outside the United States is the applicable local currency (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 December 31, 2016 and June 30, 2017, the Company held a 92.5% controlling interest in Heat I and at June 30, 2017, Heat held an 80% controlling interest in Pelican. All other subsidiaries are wholly owned. For the three and six months ended June 30, 2017 the Company recognized $75,715 and $126,506 in non-controlling interest for Heat I, respectively and since the April 28, 2017 acquisition of Pelican the Company recognized $14,450 in non-controlling interest for Pelican for the same period. The Company accounts for its less than 100% interest in these subsidiaries in the consolidated financial statements in accordance with U.S. GAAP. Accordingly, the Company presents non-controlling interests 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 in the consolidated statements of operations and comprehensive loss.
5
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has an accumulated deficit of approximately $63.4 million as of June 30, 2017 and a net loss of approximately $6.5 million for the six months ended June 30, 2017, and has not generated significant revenue or positive cash flows from operations. These factors raise substantial doubt about the Companys ability to continue as a going concern within one year after the financial statements are issued. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings (including through the at-the-market Issuance Sales Agreement, the FBR Sales Agreement that it entered into with FBR Capital Markets & Co. (FBR) in August 2016), debt financings, partnerships, collaborations and other funding transactions. There can be no assurance that the Company will be able to meet the requirements for use of the FBR Sales Agreement or to complete any such transactions on acceptable terms or otherwise. On April 28, 2017, the acquisition of an 80% controlling interest in Pelican, a related party prior to acquisition, was completed. Pelican has been awarded a $15.2 million grant to fund preclinical and some clinical activities from the Cancer Prevention and Research Institute of Texas (CPRIT). The CPRIT grant is subject to customary CPRIT funding conditions. The Company believes the acquisition aligns its strategic focus and strengthens its position in the T cell activation arena. If the Company is unable to obtain the necessary capital required to maintain operations, it will need to pursue a plan to license or sell its assets, seek to be acquired by another entity and/or cease operations.
Revenue Recognition
The Companys main source of revenue is grant revenue related to a $15.2 million research grant received from the Cancer Prevention and Research Institute of Texas (CPRIT), covering a three-year period from June 1, 2016 through May 31, 2019. Grant revenue is recognized when qualifying costs are incurred and there is reasonable assurance that the conditions of the award have been met for collection. Proceeds received prior to the costs being incurred or the conditions of the award being met are recognized as deferred revenue until the services are performed and the conditions of the award are met (see Note 9).
Business Combinations
We account 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. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed (see Note 2).
Goodwill and In-Process Research and Development
We classify 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. We determine the useful lives of definite-lived intangible assets after considering specific facts and circumstances related to each intangible asset. Factors we consider 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.
6
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company will test 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, 2017.
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 we acquire, 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 we become 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, we 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 (see Note 5).
Contingent Consideration
Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain levels of earnings 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, we reassess 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 are presented in long-term liabilities in the consolidated balance sheets (see Note 2).
Income Taxes.
We account for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. 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 Company's Form 10-K, and have not changed significantly since such filing.
Recently Issued Accounting Pronouncements
In May 2017,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09,
Compensation-Stock Compensation
(
Topic 718
):
Scope of Modification Accounting (ASU 2017-09).
This ASU provides that an entity should account for the effects of a modification unless the fair value, the vesting conditions of the modified award and the classification of the modified award (equity or liability instrument) are the same as the original award immediately before the modification. The provisions of this ASU are effective for years beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt this standard in the third quarter of 2017 and does not expect it to have significant impact to the Companys consolidated financial statements.
7
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment (Topic 350)
. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting units fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. The Company chose to adopt this standard beginning the third quarter of 2017. The Company does not believe the early adoption will have an impact on the Companys consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805)
to clarify the definition of a business, which is fundamental in the determination of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses combinations. The updated guidance requires that in order to be considered a business the integrated set of assets and activities acquired must include, at a minimum, an input and process that contribute to the ability to create output. If substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar assets, it is not considered a business, and therefore would not be considered a business combination. The update is effective for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard in its acquisition of Pelican.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation
(
Topic 718
):
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09).
Under ASU 2016-09, the tax effects of stock compensation will be recognized as income tax expense or benefit to the Companys income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Along with other income tax cash flows, excess tax benefits will be classified as operating activities, and cash paid by the Company when directly withholding shares for tax withholding purposes will be classified as financing activities. The Company has elected to continue to account for forfeitures when they occur. The adoption of ASU 2016-09 did not have a material impact to the Companys consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, requiring lessees to recognize for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis, and (2) a right-of-use (ROU) asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company currently anticipates that upon adoption of the new standard, ROU assets and lease liabilities will be recognized in amounts that will be immaterial to the consolidated balance sheets.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (ASU 2014-09),
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB voted to defer the effective date of the new standard until fiscal years beginning after December 15, 2017 with early application permitted for fiscal years beginning after December 15, 2016. Due to insignificant revenue to date, we do not believe the adoption of the standard will have a material impact on our consolidated financial statements and related disclosures.
2. Acquisition of Pelican Therapeutics
On April 28, 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. Operations of Pelican are included in the consolidated statements of operations and comprehensive loss from the acquisition date. Pelican is a biotechnology company focused on the development and commercialization of monoclonal antibody and fusion protein-based therapies that are designed to activate the immune system. In exchange for 80% of the outstanding capital stock of Pelican on a fully diluted basis, the Company paid to the Pelican Stockholders that executed the Stock Purchase Agreement (the Participating Pelican Stockholders) an aggregate of $500,000 (the Cash Consideration), and issued to the Participating Pelican Stockholders 1,331,056 shares of the Companys restricted common stock representing 4.99% of the outstanding shares of our common stock on the date of the initial execution of the Purchase Agreement (the Stock Consideration). The Cash Consideration will be reduced by the amount by which certain of Pelicans accrued liabilities are not satisfied for less than $250,000. The Cash Consideration and Stock Consideration are being held in escrow for a period of up to six months to secure certain indemnification and other obligations of Pelican and the Participating Pelican Stockholders in connection with the acquisition. Under the agreement, the Company is also obligated to make future payments based on the achievement of certain milestones. The fair value of these future milestone payments are reflected in the contingent consideration account under long term liabilities on the balance sheet.
8
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with FASB ASC Topic 805:
Business Combinations
. The purchase price exceeded the fair value of the net assets acquired resulting in goodwill of $2,189,338. The identifiable indefinite-lived intangible asset consists of in-process R&D of $5,866,000. Operations of the acquired entity are included in the consolidated statements of operations from the acquisition date. Fees and expenses associated with the acquisition were approximately $559,000 for the six months ended June 30, 2017 and are reported in our G&A expense.
The purchase price has been allocated to the assets and liabilities as follows:
|
|
|
|
|
Aggregate consideration:
|
|
|
|
Cash consideration
|
|
$
|
500,000
|
|
Stock consideration
|
|
$
|
1,052,000
|
|
Contingent consideration
|
|
$
|
2,385,000
|
|
Total Consideration
|
|
$
|
3,937,000
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Cash acquired
|
|
$
|
31,199
|
|
In-process R&D
|
|
$
|
5,866,000
|
|
Goodwill
|
|
$
|
2,189,338
|
|
Deferred tax liability
|
|
$
|
(2,111,760
|
)
|
Net liabilities assumed
|
|
$
|
(1,102,777
|
)
|
Fair value of non-controlling interest
|
|
$
|
(935,000
|
)
|
Total purchase price
|
|
$
|
3,937,000
|
|
The purchase price allocation presented herein is preliminary. The final purchase price allocation will be determined after completion of an analysis to determine the fair value of all assets acquired and liabilities assumed, but in no event later than one year following completion of the Pelican acquisition. Accordingly, the deferred tax liability is an estimate and final deferred tax liability adjustments could differ materially from the preliminary amounts presented herein. Any increase or decrease in the in-process R&D asset, as compared to the information shown herein, could also change the portion of purchase price allocated to goodwill, and could impact the operating results of the Company following the acquisition due to differences in purchase price allocation and amortization related to some of these assets and liabilities.
Goodwill is 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 arises largely from 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.
Pelican has contributed net revenue and net loss of $411,250 and $72,252, respectively, included in the Companys consolidated statement of operations for the six months ended June 30, 2017, excluding acquisition and integration related expenses included in non-recurring and acquisition-related costs.
9
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma information presents the combined results of operations for the three and six months ended June 30, 2017 and 2016, as if we had completed the Pelican acquisition at the beginning of fiscal 2016. The pro forma financial information is provided for comparative purposes only and is not necessarily indicative of what actual results would have been had the acquisition occurred on the date indicated, nor does it give effect to synergies, cost savings, fair market value adjustments, immaterial amortization expense and other changes expected to result from the acquisition. Accordingly, the pro forma financial results do not purport to be indicative of consolidated results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period.
In thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
411
|
|
$
|
|
|
|
$
|
435
|
|
|
$
|
|
|
Net loss
|
|
|
(3,311
|
)
|
|
(3,223
|
)
|
|
|
(6,941
|
)
|
|
|
(8,051
|
)
|
Net loss: Non-controlling interest
|
|
|
(91
|
)
|
|
(145
|
)
|
|
|
(219
|
)
|
|
|
(339
|
)
|
Net loss attributable to Heat Biologics, Inc.
|
|
$
|
(3,220
|
)
|
$
|
(3,078
|
)
|
|
$
|
(6,722
|
)
|
|
$
|
(7,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Heat Biologics, Inc.basic and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.17
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.77
|
)
|
3. Fair Value of Financial Instruments
The carrying amount of certain of the Companys financial instruments, including cash and cash equivalents, restricted cash, related party 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.
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 following table provides a rollforward of the Companys Level 3 fair value measurements:
|
|
|
|
|
|
|
Contingent Consideration
|
|
Balance at December 31, 2016
|
|
$
|
|
|
Acquisition of Pelican
|
|
|
2,385,000
|
|
Change in fair value
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
2,385,000
|
|
10
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. 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,
2017
|
|
December 31,
2016
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
55,883
|
|
$
|
55,883
|
|
Computers
|
|
|
41,333
|
|
|
38,903
|
|
Lab equipment
|
|
|
599,339
|
|
|
587,366
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
696,555
|
|
|
682,152
|
|
Accumulated depreciation
|
|
|
(388,345
|
)
|
|
(322,560
|
)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
308,210
|
|
$
|
359,592
|
|
Depreciation expense was $66,671 and $65,553 for the six months ended June 30, 2017 and 2016, respectively.
5. Goodwill and In-process R&D
As of June 30, 2017 and December 31, 2016, the Company had goodwill of $2,189,338 and $0, respectively. Based upon the results of the qualitative testing, the Company will conclude whether it is more likely than not that the fair values of the Companys goodwill are in excess of its carrying value or if an impairment has occurred.
As of June 30, 2017 and December 31, 2016, the Company had in-process R&D of $5,866,000 and $0, respectively. Acquired in-process R&D is stated at cost and may be immediately expensed if there is no alternative future use. Otherwise, the acquired in-process R&D is reviewed annually for impairment or more frequently as changes in circumstances or the occurrence of events suggest that the remaining value may not be recoverable.
6. Accrued Expenses and other payables
Accrued expenses and other payables consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
Accrued clinical trial and other expenses
|
|
$
|
519,820
|
|
$
|
580,218
|
|
Compensation and related benefits
|
|
|
35,295
|
|
|
642,532
|
|
Deferred rent
|
|
|
35,324
|
|
|
42,423
|
|
Patent fees
|
|
|
30,000
|
|
|
40,000
|
|
Other expenses related to Pelican acquisition
|
|
|
82,301
|
|
|
|
|
|
|
$
|
702,740
|
|
$
|
1,305,173
|
|
The decrease of compensation and related benefits was related to 2016 employee bonuses which were accrued at December 31, 2016 but subsequently paid in January 2017.
11
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Stock-Based Compensation
Common Stock Warrants
In connection with the March 23, 2016 public offering the Company issued warrants to purchase 6,825,000 shares of common stock with an exercise price of $1.00 per share and expire five years from the issuance date. In connection with the Companys July 23, 2013 initial public offering, the Company issued warrants to the underwriters for 125,000 shares of common stock issuable at $12.50 per share upon exercise and expire five years from the issuance date. On March 10, 2011, the Company issued warrants to purchase shares of common stock to third parties in consideration for a private equity placement transaction of which 17,392 warrants remain outstanding. The warrants have an exercise price of $0.48 per share and expire ten years from the issuance date. During the six months ended June 30, 2017 and 2016 no warrants were exercised. As of June 30, 2017 the Company has outstanding warrants to purchase 2,961,571 shares of common stock issuable at $1.00 per share; warrants to purchase 125,000 shares of common stock issuable at $12.50 per share; and warrants to purchase 17,392 shares of common stock issuable at $0.48 per share. These warrants do not meet the criteria required to be classified as liability awards and therefore are treated as equity awards.
Stock Options
The following is a summary of the stock option activity for the six months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, December 31, 2016
|
|
|
1,136,753
|
|
|
$
|
3.93
|
|
Granted
|
|
|
1,526,500
|
|
|
$
|
0.84
|
|
Forfeited
|
|
|
(143,253
|
)
|
|
$
|
2.10
|
|
Outstanding, June 30, 2017
|
|
|
2,520,000
|
|
|
$
|
2.16
|
|
The weighted average grant-date fair value of stock options granted during the six months ended June 30, 2017 was $0.57. 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 six months ended June 30, 2017:
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
76.62
|
%
|
Risk-free interest rate
|
|
|
2.20
|
%
|
Expected lives (years)
|
|
|
6.25
|
|
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 did not have sufficient 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. The forfeiture rate was considered to be none as the options vest on a monthly basis.
The Company recognized $123,418 and $128,405 in stock-based compensation expense for the three months ended June 30, 2017 and 2016, respectively and $245,142 and $338,839 in share-based option compensation expense for the six months ended June 30, 2017 and 2016, respectively for the Companys stock option awards.
12
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes information about stock options outstanding at June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
Balance
as of
6/30/2017
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Balance
as of
6/30/2017
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
2,520,000
|
|
|
8.6
|
|
|
$2.16
|
|
|
882,308
|
|
|
7.1
|
|
|
$4.12
|
|
As of June 30, 2017, the unrecognized stock-based compensation expense related to unvested stock options was $1,812,962, which is expected to be recognized over a weighted average period of approximately 17.8 months.
Restricted Stock
The Company recognized $19,686 and $0 in stock-based compensation expense for employees related to restricted stock awards during the three months ended June 30, 2017 and 2016, respectively and $136,207 and $0 in stock-based compensation expense for employees related to restricted stock awards during the six months ended June 30, 2017 and 2016, respectively.
The Company recognized $10,500 and $1,634 in share-based compen
sation expense related to issuance of shares of restricted stock to non-employees (i.e., consultants) in exchange for services during the three months ended June 30, 2017 and 2016, respectively and $21,000 and
$2,917 during the six months ended June 30, 2017 and 2016, respectively
. As of June 30, 2017 there were 302,625 restricted stock awards granted to employees, all of which were unvested.
Total stock-based compensation expense, including restricted stock and stock options was $402,349 and $341,756 for the six months ended June 30, 2017 and 2016, respectively.
8. Financing
The Company may sell shares of its common stock through FBR by any method permitted that is deemed an at the market offering as defined in Rule 415 under the Securities Act of 1933, as amended (the Securities Act), including sales made directly on or through the NASDAQ Capital Market, the existing trading market for the Companys common stock, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices, and/or any other method permitted by law. Sales of shares of common stock are made pursuant to the Companys effective shelf registration statement on Form S-3 (File No. 333-199274) filed with the U.S. Securities and Exchange Commission (SEC), the base prospectus, dated October 23, 2014, filed as part of such registration statement and the prospectus supplement, dated August 15, 2016. FBR is entitled to compensation at a fixed commission rate up to 3.0% of the gross proceeds per share sold through it as sales agent under the sales agreement. Beginning in August 2016 and through December 31, 2016, the Company sold 4,791,377 shares of common stock under the FBR Sales Agreement resulting in net proceeds of approximately $6.8 million. As of June 30, 2017, the Company has sold an additional 2,346,727 shares of common stock under the Sales Agreement resulting in net proceeds of approximately $2.3 million after FBRs commission and other expenses.
Public Offering
On March 28, 2017, the Company sold pursuant to the terms of an Underwriting Agreement (the Underwriting Agreement) that it entered into on March 23, 2017 with Aegis Capital Corp. (Aegis), as representative of the several underwriters named therein (the Underwriters), 5,000,000 shares of the Companys common stock, and 750,000 additional shares of the common stock to cover over-allotments at an offering price of $0.80 per share (the Offering). The net proceeds to the Company from the Offering were approximately $4.1 million, after deducting underwriting discounts, commissions, and other third party offering expenses. The Underwriting Agreement contains customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act of 1933, as amended (the Securities Act), other obligations of the parties and termination provisions.
13
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Grant Revenues
In June 2016, Pelican entered into a Cancer Research Grant Contract (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 three-year period from June 1, 2016 through May 31, 2019.
Upon commercialization of the product, the terms of the Grant Contract 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.
The Company recognized grant revenue of $411,250 and $0 in the three and six months ended June 30, 2017 and 2016, respectively, for qualified expenditures under the grant. As of June 30, 2017 the Company had deferred revenue of $1,409,212 for proceeds received but for which the costs had not been incurred or the conditions of the award had not been met.
10. Net Loss Per Share
Basic and diluted net loss per common share is calculated by dividing net loss applicable to Heat Biologics, Inc. by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. The Companys potentially dilutive shares, which include outstanding stock options and warrants, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The following table reconciles net loss to net loss attributable to Heat Biologics, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(3,309,081
|
)
|
$
|
(3,032,767
|
)
|
|
$
|
(6,549,809
|
)
|
|
$
|
(7,767,253
|
)
|
Net loss: Non-controlling interest
|
|
|
(90,166
|
)
|
|
(107,546
|
)
|
|
|
(140,956
|
)
|
|
|
(282,428
|
)
|
Net loss attributable to Heat Biologics, Inc.
|
|
$
|
(3,218,915
|
)
|
$
|
(2,925,221
|
)
|
|
$
|
(6,408,853
|
)
|
|
$
|
(7,484,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in net loss per share attributable to Heat Biologics, Inc.basic and diluted
|
|
|
35,244,833
|
|
|
17,524,641
|
|
|
|
31,124,119
|
|
|
|
13,324,641
|
|
Net loss per share attributable to Heat Biologics, Inc.basic and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.17
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.56
|
)
|
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2017
|
|
2016
|
|
Outstanding stock options
|
|
|
2,520,000
|
|
|
1,574,484
|
|
Outstanding restricted stock units
|
|
|
302,625
|
|
|
|
|
Outstanding common stock warrants
|
|
|
3,103,963
|
|
|
6,967,382
|
|
11. 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, 2017, a full valuation allowance has been provided against certain deferred tax assets as it is currently deemed more likely than not that the benefit of such net tax assets will not be utilized. 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.
14
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the accompanying unaudited condensed consolidated financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered more-likely-than-not that the position taken will be sustained by a taxing authority. As of June 30, 2017 and December 31, 2016, 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 in the accompanying statements of operations and comprehensive loss. As of June 30, 2017 and December 31, 2016, the Company had no such accruals.
15
ITEM 2.