NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
On January 19, 2018, the Company announced a reverse stock split of its shares of common stock at a ratio of one-for-ten. The reverse stock split took effect at 11 p.m. ET on January 19, 2018, and the Companys common stock began to trade on a post-split basis at the market open on January 22, 2018. During the Companys annual stockholders meeting held June 29, 2017, stockholders approved the Companys reverse stock split and granted the board of directors the authority to implement and determine the exact split ratio within a specified range. When the reverse stock split became effective, every 10 shares of the Companys issued and outstanding common stock were combined into one share of common stock. Effecting the reverse stock split reduced the number of issued and outstanding common stock from approximately 42 million shares to approximately 4.2 million. It also subsequently adjusted outstanding options issued under the Companys equity incentive plan and outstanding warrants to purchase common stock.
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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2018.
The consolidated financial statements as of and for the nine months ended September 30, 2018 and 2017 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2017 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, 2017 filed with the SEC on March 2, 2018 (the 2017 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 statements of operations and comprehensive loss from the acquisition date.
The accompanying consolidated financial statements as of and for the nine months ended September 30, 2018 and 2017 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, Heat Biologics Australia Pty Ltd. and Zolovax. Additionally, as of the nine months ended September 30, 2018 the accompanying consolidated financials include 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, 2017 and September 30, 2018, the Company held a 92.5% controlling interest in Heat I and an 80% controlling interest in Pelican. All other subsidiaries are wholly owned. For the nine months ended September 30, 2018 the Company recognized $223,487 in net loss non-controlling interest for Heat I and $444,732 in net loss non-controlling interest for Pelican. 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 Company has an accumulated deficit of approximately $79.6 million as of September 30, 2018 and a net loss of approximately $11.5 million for the nine months ended September 30, 2018 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 CPRIT Grant. 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 H.C. Wainwright 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 is continually evaluating various cost-saving measures in light of its cash requirements in order to focus resources on its product candidates. The Company will need to generate significant revenues to achieve profitability, and it may never do so. As of September 30, 2018, the Company had approximately $21.0 million in cash and cash equivalents and has sufficient cash on hand to fund its operations one year from date of this filing.
In May 2018, through a public offering, the Company raised approximately $18.8 million, net of underwriting discounts and commissions and other estimated offering expenses, and an additional $4.8 million through the exercise of 3,054,667 warrants.
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.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Restricted cash consists of deposits held by the US Patent and Trademark Office.
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, 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. 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).
6
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 on the anniversary of the acquisition, 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 will qualitatively 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 September 30, 2018.
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 September 30, 2018.
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
will 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 (see Note 2).
Revenue Recognition
Effective January 1, 2018, the Company has adopted on a modified retrospective basis Accounting Standards Codification (ASC) Topic 606.
The Companys sole source of current revenue is grant revenue related to the CPRIT Contract, which is being accounted for under ASC 606. ASC 606 introduces a new framework for analyzing potential revenue transactions by identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the Company satisfies a performance obligation.
7
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The performance obligations of the CPRIT Contract include 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.
Management has concluded that the license and R&D services should be combined into a single performance obligation as both are highly interdependent - a license cannot be effectively granted without the corresponding research basis and CPRIT cannot benefit from the license without the R&D services and are therefore not capable of being distinct.
The CPRIT grant covers a period from June 1, 2017 through October 31, 2019, for a total grant award of up to $15.2 million. CPRIT advances grant funds upon request by the Company consistent with the agreed upon amounts and schedules as provided in the contract. The first tranche of funding of $1.8 million was received in May 2017, and a second tranche of funding of $6.5 million was received in October 2017. The next tranche of funding is expected to be requested and received in the next few months. Funds received are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is recognized when qualifying costs are incurred.
Deferred Revenue
As of September 30, 2018, deferred revenue balance is $3.1 million received from CPRIT for which the costs have not been incurred or the conditions of the award have not been met and $0.2 million of grant funds received from an economic development grant agreement with the City of San Antonio (Economic Development Grant), for the purpose of defraying costs toward the purchase of laboratory equipment. As of September 30, 2018, $5.2 million was recognized as revenue from CPRIT since the CPRIT contract inception.
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 other Tumor Necrosis Factor Receptor Super Family member 25(TNFRSF25) target biologics, as well as Chemistry Manufacturing and Control (CMC) material for the Companys clinical trial studies for HS-110.
Income Taxes
The Company accounts 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 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 has not determined the impact of this standard and does not plan early adoption of this standard.
8
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 has not determined the impact of this standard and does not plan early adoption of this standard.
In August 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230)Restricted Cash. ASU 2016-18 requires the statement of cash flows to be a reconciliation between beginning and ending cash balances inclusive of restricted cash balances. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied using a retrospective transition method to each period presented. The Company adopted this ASU for the year ending December 31, 2018. The adoption of this standard resulted in the removal of changes in Restricted Cash from the Consolidated Statements of Cash Flows of $2,292 and $98,879 for the nine months ended September 30, 2018 and 2017, respectively and inclusion of these amounts as part of the starting and ending cash balances.
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, 2018, 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.
Classification of Certain Items Within the Companys Form 10-K
Certain reclassifications of prior period amounts will be made within the Companys Form 10-K filing for the year ended December 31, 2018 to conform to current period presentation. Specifically, during the nine months ended September 30, 2018, the Company determined that $200,000 related to deferred revenue should have been classified as long term rather than short term. There is no impact to the consolidated statements of operations or consolidated balance sheets. The Company evaluated the effect of this misclassification and concluded it was not material to any of its previously issued consolidated financial statements.
Immaterial Error Correction
Certain error corrections will be made within the Companys Form 10-Q filings for the quarters ended March 31, 2019 and June 30, 2019 to conform to current period presentation. 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, the current year net operating losses 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. Accordingly, the income tax benefit for the quarters ended March 31, 2018 and June 30, 2018 were understated by approximately $205,000 and $235,000, respectively. The Company evaluated the effect of this error and concluded it was not material to any of its previously issued consolidated financial statements. Upon revision, the Company will have an income tax benefit of approximately $205,000 and $235,000 for the quarters ended March 31, 2018 and June 30, 2018, respectively. There is no impact of this error for any quarters prior to March 31, 2018.
9
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $0.5 million minus certain liabilities (the Cash Consideration), and issued to the Participating Pelican Stockholders 133,106 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). During the nine months ended September 30, 2018, the Cash Consideration of approximately $0.3 million was distributed to the Participating Pelican Stockholders and the remainder of approximately $0.2 million for certain Pelican liabilities not satisfied was recognized as other income in the Consolidated Statements of Operations and Comprehensive Loss.
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:
(1)
$2,000,000 upon Pelicans dosing of the first patient in its first Phase 1 trial for an oncology indication;
(2)
$1,500,000 upon Pelicans dosing of the first patient in its first Phase 2 trial for an oncology indication;
(3)
$3,000,000 upon successful outcome of the first Phase 2 trial for an oncology indication;
(4)
$6,000,000 upon Pelicans dosing of the first patient in its first Phase 3 trial for an oncology indication;
(5)
$3,000,000 upon Pelicans dosing of the first patient in its first Phase 3 trial for a non- oncology indication;
(6)
$7,500,000 upon successful outcome of the first Phase 3 trial for an oncology indication;
(7)
$3,000,000 upon successful outcome of the first Phase 3 trial for a non-oncology indication;
(8)
$7,500,000 upon acceptance of a Biologics License Application (BLA) submission for an oncology indication;
(9)
$3,000,000 upon acceptance of a BLA submission for a non-oncology indication;
(10)
$7,500,000 upon first product indication approval in the United States or Europe for an oncology indication;
(11)
$3,000,000 upon first product indication approval in the United States or Europe for a non-oncology indication.
The fair value of these future milestone payments is reflected in the contingent consideration account 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 5.51% based on the median yield of publicly traded non-investment grade debt of companies in the pharmaceutical industry.
The Company performs an analysis on a quarterly basis and as of September 30, 2018, the Company determined the change in the estimated fair value of the contingent consideration was $665,936 for the nine months ended September 30, 2018.
The Company has 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 approximately $2.2 million. The identifiable indefinite-lived intangible asset consists of in-process R&D of approximately $5.9 million.
The estimated fair value of the IPR&D was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows were based on certain key assumptions, including estimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company utilized corporate bond yield data observed in the bond market to develop the discount rate utilized in the cash flows that have been probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions.
Operations of the acquired entity are included in the consolidated statements of operations from the acquisition date.
10
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
|
|
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.
In May 2016, Pelican was awarded a $15.2 million grant from CPRIT for development of Pelicans lead product candidate, PTX-35. The CPRIT Grant is expected to allow Pelican to develop PTX-35 through a 70-patient Phase 1 clinical trial. The Phase 1 clinical trial will be designed to evaluate PTX-35 in combination with other immunotherapies. The CPRIT 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 raise $7.6 million in matching funds over the three year project.
Pelican has contributed net revenue of $3.7 million and net loss of $2.2 million, respectively, which are included in the Companys consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2018.
11
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma information presents the combined results of operations for the nine months ended September 30, 2017, as if the Company had completed the Pelican acquisition at the beginning of fiscal 2017. All expenses for Pelican have been included in the Companys consolidated financials since the quarter ending September 30, 2017, therefore the nine months ended September 30, 2018 are not pro forma and the three months ended September 30, 2018 and 2017 are not applicable. The pro forma financial information is provided for comparative purposes only for the nine months ended September 30, 2017 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.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
3,735,713
|
|
|
$
|
906,313
|
|
Net loss
|
|
|
(11,463,927
|
)
|
|
|
(9,444,913
|
)
|
Net loss: Non-controlling interest
|
|
|
(668,219
|
)
|
|
|
(422,513
|
)
|
Net loss attributable to Heat Biologics, Inc.
|
|
$
|
(10,795,708
|
)
|
|
$
|
(9,022,400
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Heat Biologics, Inc.basic and diluted
|
|
$
|
(0.75
|
)
|
|
$
|
(2.65
|
)
|
3. Fair Value of Financial Instruments
The carrying amount of certain of the Companys financial instruments, including cash and cash equivalents, restricted cash, 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, 2017
|
|
$
|
2,609,289
|
|
Change in fair value
|
|
|
665,936
|
|
Balance at September 30, 2018
|
|
$
|
3,275,225
|
|
The change in the fair value of the contingent consideration of $665,936 for the nine months ended September 30, 2018 reflects an increase in the probability of reaching Pelicans dosing of the first patient in its first Phase 1 trial for an oncology indication based on the passage of time and impact of progress in antibody manufacturing. Adjustments associated with the change in fair value of contingent consideration are included in the Companys consolidated statement of operations and comprehensive loss.
12
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2018:
|
|
|
|
|
|
|
|
|
|
Valuation
Methodology
|
|
|
Significant
Unobservable Input
|
|
Weighted Average
(range, if applicable)
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
Probability weighted
income approach
|
|
|
Milestone dates
|
|
2019-2026
|
|
|
|
|
|
Discount rate
|
|
3.9% to 9.3%
|
|
|
|
|
|
Probability of occurrence
|
|
23% - 86%
|
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
|
|
|
|
|
Prepaid manufacturing expense
|
|
$
|
2,026,833
|
|
$
|
1,551,597
|
|
Prepaid insurance
|
|
|
335,583
|
|
|
218,750
|
|
Other prepaid expenses
|
|
|
95,320
|
|
|
87,937
|
|
Other current assets
|
|
|
20,015
|
|
|
108,973
|
|
|
|
$
|
2,477,751
|
|
$
|
1,967,257
|
|
5. 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 three to seven years. Expenditures for maintenance and repairs are charged to expense as incurred.
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
55,883
|
|
$
|
55,883
|
|
Computers
|
|
|
33,096
|
|
|
41,333
|
|
Lab equipment
|
|
|
1,189,752
|
|
|
645,433
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,278,731
|
|
|
742,649
|
|
Accumulated depreciation
|
|
|
(615,666
|
)
|
|
(455,758
|
)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
663,065
|
|
$
|
286,891
|
|
Depreciation expense was $171,235 and $100,958 for the nine months ended September 30, 2018 and 2017, respectively.
6. 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 September 30, 2018 and December 31, 2017.
13
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Accrued Expenses and other payables
Accrued expenses and other payables consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
Accrued clinical trial and other expenses
|
|
$
|
1,314,133
|
|
$
|
1,504,240
|
|
Compensation and related benefits
|
|
|
86,038
|
|
|
542,434
|
|
Deferred rent
|
|
|
13,349
|
|
|
27,457
|
|
Patent fees
|
|
|
35,000
|
|
|
40,000
|
|
Other expenses
|
|
|
82,300
|
|
|
162,300
|
|
|
|
$
|
1,530,820
|
|
$
|
2,276,431
|
|
8. Stock-Based Compensation
Stock Options
The following is a summary of the stock option activity for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, December 31, 2017
|
|
|
266,884
|
|
|
$
|
19.57
|
|
Granted
|
|
|
216,336
|
|
|
|
3.62
|
|
Forfeited
|
|
|
(17,814
|
)
|
|
|
31.36
|
|
Outstanding, September 30, 2018
|
|
|
465,406
|
|
|
$
|
11.71
|
|
The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2018 was $2.67. 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 nine months ended September 30, 2018:
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
91.38
|
%
|
Risk-free interest rate
|
|
|
2.44
|
%
|
Expected lives (years)
|
|
|
6.1
|
|
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.
14
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company recognized $112,730 and $122,657 in stock-based option compensation expense for the three months ended September 30, 2018 and 2017, respectively and $354,877 and $367,800 in stock-based option compensation expense for the nine months ended September 30, 2018 and 2017, respectively. The following table summarizes information about stock options outstanding at September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
9/30/2018
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Balance
as of
9/30/2018
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
465,406
|
|
|
8.4
|
|
|
$11.71
|
|
|
180,274
|
|
|
7.3
|
|
|
$22.08
|
|
As of September 30, 2018, the unrecognized stock-based compensation expense related to unvested stock options was $1,475,129, which is expected to be recognized over a weighted average period of approximately 16 months.
Restricted Stock
The Company recognized
$27,084 and $16,314
in stock-based compensation expense for employees related to restricted stock awards during the three months ended September 30, 2018 and 2017, respectively, and $292,312 and $152,521
in stock-based compensation expense for employees related to restricted stock awards during the nine months ended September 30, 2018 and 2017, respectively.
The Company recognized $800 and $
5,000
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 September 30, 2018 and 2017, respectively and
$5,557 and $
26,000
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 nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there were 61,144 restricted stock awards granted to employees and non-employees, all of which were unvested.
Total stock-based compensation expense, including restricted stock and stock options was $652,746 and $546,321 for the nine months ended September 30, 2018 and 2017, respectively.
9. Financing
Public Offering
On May 7, 2018, the Company closed an underwritten public offering (the Offering) in which it issued and sold (i) 4,875,000 shares of common stock together with a number of common warrants to purchase 2,437,500 shares of its common stock, and (ii) 9,500,000 pre-funded warrants, with each pre-funded warrant exercisable for one share of common stock, together with a number of common warrants to purchase 4,750,000 shares of its common stock. The public offering price was $1.44 per share of common stock, $1.43 per pre-funded warrant and $0.01 per common warrant. The net proceeds to the Company were approximately $18.8 million, net of underwriting discounts and commissions and other estimated offering expenses. The common stock warrants expire five years after date of issuance and have an exercise price of $1.584 per share. As of September 30, 2018, 3,054,667 common stock warrants have been exercised for an additional $4.8 million of proceeds to the Company and all pre-funded warrants have been exercised. In connection with the offering the Company entered into an underwriting agreement (the Underwriting Agreement), dated May 2, 2018 with A.G.P./Alliance Global Partners (A.G.P.), as representative of the underwriters. The Underwriting Agreement contained 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.
15
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At the Market Offering
On January 18, 2018, the Company entered into a Common Stock Sales Agreement with H.C. Wainwright & Co., LLC, (HCW) as sales agent, pursuant to which the Company may sell from time to time, at its option, shares of its common stock, for the sale of up to $3,658,000 of shares of the Companys common stock and on March 15, 2018 filed with the SEC a prospectus supplement for an additional aggregate offering of up to $1,300,000 shares of Common Stock. Sales of shares of Common Stock have been made pursuant to the Companys shelf registration statement on Form S-3 (File No. 333-221201) filed with the U.S. Securities and Exchange Commission (SEC), dated November 13, 2017. As of September 30, 2018, the Company sold an aggregate of 1,545,449 shares of common stock under the HCW Sales Agreement resulting in net proceeds of approximately $3.7 million.
Common Stock Warrants
In connection with the May 7, 2018 public offering, the Company issued 9,500,000 pre-funded warrants and 7,187,500 common stock warrants each of which are exercisable for one share of common stock. The pre-funded warrants had an exercise price of $0.01 per share and as of September 30, 2018 all pre-funded warrants have been exercised. The common stock warrants have an exercise price of $1.584 per share and expire five years from the issuance date. As of September 30, 2018, 3,054,667 common stock warrants have been exercised. The warrants have been accounted for as equity instruments. The fair value of the common stock warrants of approximately $7.8 million at the date of issuance was estimated using the Black-Scholes Merton model which used the following inputs: term of 5 years, risk free rate of 2.78%, 0% dividend yield, volatility of 124.14%, and share price of $1.30 per share based on the trading price of the Companys common stock.
In connection with the March 23, 2017 public offering, the Company issued warrants to purchase 682,500 shares of common stock with an exercise price of $10.00 per share that 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 12,500 shares of common stock issuable at $125.00 per share which expired July 22, 2018. 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 1,738 warrants remain outstanding. The warrants have an exercise price of $4.80 per share and expire ten years from the issuance date.
During the nine months ended September 30, 2018, 3,054,667 common stock warrants have been exercised and 12,500 common stock warrants have expired. No warrants were exercised during the same period in 2017. As of September 30, 2018 the Company has outstanding warrants to purchase 4,132,833 shares of common stock issuable at $1.584 per share, 296,159 shares of common stock issuable at $10.00 per share; and warrants to purchase 1,738 shares of common stock issuable at $4.80 per share. These warrants do not meet the criteria required to be classified as liability awards and therefore are treated as equity awards.
10. Grant and Licensing 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 period from June 1, 2016 through October 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 approximately $1.8 million and $3.7 million during the three and nine months ended September 30, 2018 for qualified expenditures under the grant. The Company recognized grant revenue of approximately $0.5 million and $0.9 million during the three and nine months ended September 30, 2017, including an additional $0.02 million of research funding revenue for research and development services provided to Shattuck Labs, Inc. which research funding agreement terminated January 31, 2017.
16
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2018, the Company had deferred revenue of $3.1 million for proceeds received from the CPRIT grant, but for which the costs had not been incurred or the conditions of the award had not been met. The Company had deferred revenue, net of current portion of $0.2 million grant funds received from an economic development grant agreement with the City of San Antonio (Economic Development Grant), for the purpose of defraying costs toward the purchase of laboratory equipment.
11. 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(3,923,586
|
)
|
$
|
(2,504,178
|
)
|
|
$
|
(11,463,927
|
)
|
|
$
|
(9,053,987
|
)
|
Net loss: Non-controlling interest
|
|
|
(265,024
|
)
|
|
(203,371
|
)
|
|
|
(668,219
|
)
|
|
|
(344,328
|
)
|
Net loss attributable to Heat Biologics, Inc.
|
|
$
|
(3,658,562
|
)
|
$
|
(2,300,807
|
)
|
|
$
|
(10,795,708
|
)
|
|
$
|
(8,709,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in net loss per share attributable to Heat Biologics, Inc.basic and diluted
|
|
|
23,143,952
|
|
|
3,578,661
|
|
|
|
14,359,429
|
|
|
|
3,269,536
|
|
Net loss per share attributable to Heat Biologics, Inc.basic and diluted
|
|
$
|
(0.16
|
)
|
$
|
(0.64
|
)
|
|
$
|
(0. 75
|
)
|
|
$
|
(2.66
|
)
|
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
For the Nine months Ended
September 30,
|
|
|
|
2018
|
|
2017
|
|
Outstanding stock options
|
|
|
465,406
|
|
|
267,355
|
|
Outstanding restricted stock units
|
|
|
61,144
|
|
|
29,138
|
|
Outstanding common stock warrants
|
|
|
4,430,730
|
|
|
310,397
|
|
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, 2018, $0.7 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 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 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, 2018, and December 31, 2017, 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 September 30, 2018, and December 31, 2017, the Company had no such accruals.
17
HEAT BIOLOGICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was enacted into law. The Tax Act lowered the Federal corporate tax rate from 34% to 21% for periods beginning on or after January 1, 2018 and made numerous other tax law changes. The Company has measured deferred tax assets at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled. The Company is required to recognize the effect of tax law changes in the period of enactment. Additional federal and state interpretive guidance is still forthcoming that could potentially affect the measurement of these balances or give rise to new deferred tax amounts. As such, the remeasurement of our deferred tax balance is provisional pending future guidance. The Company reasonably anticipates that any such guidance will be available prior to December 31, 2018.
13. Subsequent Events
On October 2, 2018, the Company held its 2018 Annual Meeting of Stockholders (the Annual Meeting). At the Annual Meeting, the Companys stockholders (i) elected the following four individuals as directors: Jeffrey Wolf, John Monahan, Ph.D., Edward B. Smith, III, and John Prendergast, Ph.D.; (ii) ratified and approved the appointment of BDO USA, LLP as the Companys independent registered public accounting firm for the year ending December 31, 2018; and (iii) approved and adopted the Companys 2018 Stock Incentive Plan, which allows the Company to grant up to 4,000,000 awards under the 2018 Stock Incentive Plan.
Effective October 31, 2018, the Company entered into an exchange agreement with the University of Miami pursuant to which the Company agreed to issue 35,000 shares of its common stock to the University of Miami in exchange for the return to the Company by the University of Miami of certain shares of capital stock it held in the Companys subsidiaries, Heat Biologics I, Inc. and Pelican Therapeutics, Inc.
18
ITEM 2.