UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 2018
OR
For the transition period from ____________ to ____________
Commission File Number: 001-35994
HEAT BIOLOGICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
26-2844103
(I.R.S. Employer Identification Number)
801 Capitola Drive
Durham, NC
(Address of Principal Executive Offices)
27713
(Zip Code)
(919) 240-7133
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $0.0002 par value per share
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (section
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
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Accelerated filer
Smaller reporting company
Emerging growth company
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þ
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standard provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the closing price of the common stock on June 30, 2018 as
reported on The NASDAQ Capital Market, was approximately $49,651,206.
As of March 28, 2019, the issuer had 33,091,824 shares of common stock outstanding.
Documents incorporated by reference: None.
HEAT BIOLOGICS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
PART II
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity-Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
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Forward-Looking Statements
PART I
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. The forward-
looking statements are contained principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report in some cases you can identify forward-looking statements by
terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These
statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and
generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements.
You should refer to Item 1A. “Risk Factors” section of this Annual Report for a discussion of important factors that may cause our actual results to differ materially from those
expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove
to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-
looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any
specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,”
“our,” and “Heat,” refer to Heat Biologics, Inc. and its subsidiaries.
Item 1.
Business
Overview
We are a biopharmaceutical company developing immunotherapies focused on activating a patient’s immune system against cancer through T-cell activation and expansion.
Our T-cell Activation Platform (TCAP), includes two variations for intradermal administration, Immune Pan-antigen Cytotoxic Therapy ( ImPACT®) and Combination Pan-
antigen Cytotoxic Therapy (ComPACT™). To further augment antigen experienced T-cell activation and expansion, we are also developing a novel T-cell co-stimulator PTX-
35 for systemic administration. These programs are designed to harness the body's natural antigen specific immune activation and tolerance mechanisms to reprogram immunity
and provide a long-term, durable clinical effect. Currently we are enrolling patients in our HS-110 combination immunotherapy trial, preparing IND submissions for our HS-
130 and PTX-35 programs, and providing pre-clinical, CMC development, and administrative support for these operations; while constantly focusing on protecting and
expanding our intellectual property in areas of strategic interest.
We are continue to enroll patients in our Phase 2 clinical trial for advanced non-small cell lung cancer (NSCLC), in combination with either Bristol-Myers Squibb’s nivolumab
(Opdivo®) or more recently, Merck &Co., Inc’s (Merck’s) anti-PD1 checkpoint inhibitor, pembrolizumab (KEYTRUDA ®). Our other programs are in pre-clinical and CMC
development with two IND filings anticipated during 2019.
Our T-cell Activation Platform (TCAP), includes two variations, ImPACT® and ComPACT™ which are designed to activate and expand tumor antigen specific “killer” T-cells
to destroy a patient’s cancer. By turning immunologically “COLD tumors HOT,” we believe our platform will become an essential component of the immuno-oncology cocktail
to enhance the effectiveness and durability of checkpoint inhibitors and other cancer therapies, thereby improving outcomes for those patients less likely to benefit from
checkpoint inhibitors alone.
We believe the advantage of our approach is that our biologic agents deliver a broad range of tumor antigens that are unrecognized by the patient’s immune system prior to the
malignant rise of the patient’s tumor. TCAP combines these tumor associated antigens with a powerful, naturally occurring immune adjuvant, gp96, to actively chaperone these
antigens out of our non-replicating allogenic cell-based therapy into the local microenvironment of the skin. The treatment primes local natural immune recognition to activate
T-cells to seek and destroy the cancer cells throughout the body. These TCAP agents can be administered with a variety of immuno-modulators to enhance a patient’s immune
response through ligand specific T-cell activation.
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Unlike many other “patient specific” or autologous immunotherapy approaches, our drugs are fully-allogenic, “off-the-shelf” products, which means that we can administer
immediately without the extraction of blood or tumor tissue from each patient or the creation of an individualized treatment based on these patient materials. Our TCAP product
candidates from our ImPACT® and ComPACT ™ platforms are produced from allogeneic cell lines expressing tumor-specific proteins common among cancers. Because each
patient receives the same treatment, we believe that our immunotherapy approach offers superior speed to initiation, logistical, manufacturing and importantly, cost benefits,
compared to “personalized” precision medicine approaches.
Our ImPACT® platform is an allogenic cell-based, T-cell-stimulating platform that functions as an immune activator to stimulate and expand T-cells. The key component of
this innovative immunotherapy platform is the dual functionality of the heat shock protein, gp96.
As a molecular chaperone, gp96 is typically found within the cell’s endoplasmic reticulum and facilitates the folding of newly synthesized proteins for functionalized tasks. But
when a cell abnormally dies through necrosis or infection, gp96 is naturally released into the surrounding microenvironment. At this moment, gp96 becomes a Danger
Associated Molecular Protein or “DAMP”, a molecular warning signal for localized innate activation of the immune system. In this context gp96 serves as a potent adjuvant, or
immune stimulator, via Toll-Like Receptor 4/2 (TLR4 and TLR2) signaling which serves to activate APCs to specialized dendritic cells that upregulate T-cell costimulatory
ligands, MHC and immune activating cytokines. It is among the most powerful adjuvants found in the body and uniquely shows exclusive specificity to CD8+ “killer” T-cells
through cross-presentation of the gp96-chaperoned tumor associated peptide antigens directly to MHC class I molecules for direct activation and expansion of CD8+ T-cells.
Thus, gp96 plays a critical role in the mechanism of action for Heat’s T-cell activating platform immuno-therapies; mimicking necrotic cell death and activating a powerful,
tumor antigen-specific T-cell immune response to attack the patient’s cancer cells.
ComPACT™, our second TCAP, is a dual-acting immunotherapy designed to deliver antigen driven T-cell activation and specific co-stimulation in a single product.
ComPACT™ is designed to help unlock the body’s natural defenses and builds upon ImPACT® by providing specific co-stimulation to enhance T-cell activation and expansion.
It has the potential to simplify combination immunotherapy development for oncology patients, as it is designed to deliver the gp96 heat shock protein and a T-cell co-
stimulatory fusion protein (OX40L) as a single therapeutic, without the need for multiple, independent biologic products. The potential advantages of ComPACT™ include: (a)
enhanced activation of antigen-specific CD8+ T-cells; (b) serving as a booster to expand the number of antigen-specific CD8+ T-cells compared to OX40L alone; (c)
stimulation of T-cell memory function to remain effective in the body after treatment, even if the cancer comes back; (d) demonstration of less toxicity, as the source of cancer
associated antigens and co-stimulator are supplied at the same time locally and the draining lymph nodes, which drive targeted, cancer specific immunity towards the tumor
rather than throughout the body; and (e) a potential paradigm shift that is designed to simplify combination cancer immunotherapy versus systemic co-stimulation with
conventional monoclonal antibodies (mAbs).
Pelican, our subsidiary, is a biotechnology company focused on the development of biologic based therapies designed to activate the immune system, including the monoclonal
antibody, PTX-35. PTX-35, which is currently focused on preclinical IND enabling activities, is Pelican’s lead product candidate targeting the T-cell co-stimulator, TNFRSF25.
It is designed to harness the body's natural antigen specific immune activation and tolerance mechanisms to reprogram immunity and provide a long-term, durable clinical
effect. TNFRSF25 agonism has been shown to provide highly selective and potent stimulation of antigen experienced ‘memory’ CD8+ cytotoxic T-cells, which are the class of
long-lived T-cells capable of eliminating tumor cells in patients. Due to the preferential specificity of PTX-35 to antigen experienced CD8+ T-cells, this agent represents a
promising candidate as a T-cell co-stimulator in cancer patients.
When combined in preclinical studies with ImPACT® and ComPACT™ platform immunotherapies, PTX-35 has been shown to enhance antigen specific T-cell activation to
eliminate tumor cells. Pelican is also developing other biologics that target TNFRSF25 for various immunotherapy approaches, including PTX-45, a human TL1A-lg fusion
protein designed as a shorter half-life agonist of TNFRSF25.
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Product Candidates in Development
The following table summarizes the product candidates for which we are engaged in development activities. Heat and Pelican’s pipeline is focused on dual-acting
immunotherapies that incorporate a T-cell antigen driven activator and a T-cell co-stimulator into a single treatment.
Clinical Pipeline
HS-110 (viagenpumatucel-L) – Non-Small Cell Lung Cancer (NSCLC)
Using our licensed ImPACT® platform technology, we developed the product candidate, HS-110 (viagenpumatucel-L) as a potential treatment for patients with advanced non-
small cell lung cancer. HS-110 is our first biologic product candidate designed to stimulate a patient’s own T-cells to attack tumor cells. HS-110 is made of a lung
adenocarcinoma cancer cell line that has been genetically modified to secrete a wide range of cancer-associated antigens bound to gp96 proteins, thereby activating a broad, T-
cell medicated immune response against a patient’s cancer.
We are currently conducting a Phase 2 trial of HS-110, in combination with either nivolumab (Opdivo®), a Bristol-Myers Squibb anti-PD-1 checkpoint inhibitor or more
recently, Merck’s anti-PD1 checkpoint inhibitor, pembrolizumab (KEYTRUDA®), to treat patients with advanced NSCLC. The multicenter clinical trial evaluates the safety and
efficacy of HS-110 in combination with nivolumab in a second line or greater setting, or with pembrolizumab in the front-line maintenance setting. Promising interim results
suggest that HS-110 plays an integral role in tumor reduction and may enhance clinical benefit in patients receiving checkpoint inhibitors in therapy. Primary and secondary trial
endpoints include safety and tolerability, objective response rate, duration of response, and progression-free and overall survival. The trial has enrolled 15 patients into the
Phase 1b portion, and has enrolled 61 patients in the Phase 2 portion of the trial, with an enrollment target of 120 total patients.
In February 2018, we announced interim results from our Phase 2 study. Among the 35 patients in the Intent-to-Treat (ITT) population, 6 patients (17%) achieved a partial
response and 14 patients (40%) achieved disease stabilization. Evaluable ITT patients (those who underwent at least one follow-up scan regardless of treatment duration)
demonstrated objective response and disease control rates of 26% and 67%, respectively. Responses appeared durable and long lasting. The survival data are still maturing, and
median overall survival has not yet been reached. The combination of HS-110 and nivolumab was well tolerated, with no additional toxicities compared to what has been
observed with single agent checkpoint inhibitors. As predefined in the clinical protocol, patient subgroups were evaluated for levels of tumor infiltrating lymphocytes (TIL) and
for PD-L1 checkpoint protein expression on tumor cells. Four of 9 "cold tumor" patients with low TIL levels (<10%) at baseline had partial responses. HS-110 also showed a
durable effect in patients who were negative for PD-L1 expression (<1%), with 3 of 9 patients achieving partial response. Both of these patient populations, low TIL and
negative PD-L1, typically respond poorly to checkpoint inhibitors.
3
In September of 2018, we expanded our Phase 2 clinical trial to include combination treatment with HS-110 plus pembrolizumab, with or without chemotherapy, in the first-line
maintenance setting. Patients in these expanded cohorts will have received a minimum of 9 weeks of pembrolizumab, with or without chemotherapy, and will begin
maintenance treatment receiving HS-110 with pembrolizumab ± pemetrexed. Patients will be evaluated for objective response rate as well as progression-free and overall
survival. We expect to continue to dose patients with HS-110 in combination with nivolumab as well.
Preclinical Pipeline
HS-130
We have initiated the IND-enabling development of HS-130 for the treatment of advanced solid tumors. This product is designed to test our ComPACT™ technology approach,
intradermal delivery of both cellularly secreted cancer associated antigens bound to a secretory version of the gp96 heat shock protein, as well as a T-cell co-stimulatory fusion
protein (e.g. OX40L). We have begun preclinical characterization and manufacturing activities for this product candidate.
In August 2018, we completed a Pre-IND Type B meeting with FDA for HS-130 product and plan to file our Phase 1 Investigational New Drug (IND) in the first half of 2019.
PTX-35
Our Pelican Therapeutics subsidiary is focused on the development of monoclonal antibody and fusion-protein based therapies designed to activate antigen experienced T-cell
subsets of the immune system. Pelican is currently in preclinical studies for its lead compound PTX-35, a humanized affinity matured monoclonal antibody that is a functional
agonist of human TNFRSF25 signaling. This antibody provides highly selective and potent stimulation of antigen experienced ‘memory’ CD8+ cytotoxic T-cells. These cells
are instrumental in eliminating cancer cells recurrence. Prior to our acquisition of 80% of Pelican in 2017, Pelican had completed (1) humanization and affinity maturation of
PTX-35; (2) PTX-35 epitope mapping or mapping of the binding site on the TNFRSF25 receptor that is recognized by PTX-35; and (3) stability/development studies of PTX-
35. We have begun manufacturing activities for this product candidate.
The preclinical studies with the murine precursor to PTX-35 show advantages over competing T-cell co-stimulator programs based on the specific expansion of CD8+ cancer
specific T-cells. In June 2018, we completed a Pre-IND Type B meeting with FDA for PTX-35 product and plan to file our Phase 1 Investigational New Drug (IND) in the first
half of 2019.
PTX-45
PTX-45 (next generation improvements over PTX-15) is a human TL1A-Ig fusion protein that acts as an agonist of TNFRSF25 signaling with many of the advantages of PTX-
35 described above and a shorter in vivo half-life. We have begun preclinical candidate selection activities for PTX-45.
Additional Indications
We continue to evaluate additional indications for the ImPACT® and ComPACT™ platform technologies, along with the PTX-35 and PTX-45 compounds. Specifically, using
ComPACT™, we have developed cell lines for several other cancers with the first product candidate being a second-generation therapy with similar cancer associated antigen
overlap in multiple solid tumors (HS-130). Our decision to further pursue any product candidates, or any additional product candidates, will be based in part upon available
funding and partnering opportunities.
The success of our ImPACT® and ComPACT™ platform therapies will depend on the clinical and regulatory success of our product candidates and our ability to retain, on
commercially reasonable terms, financial and managerial resources, which are currently limited. To date, we have not received final regulatory approval for any of our product
candidates or derived any revenues from their sales. Moreover, there can be no assurance that we will ever receive regulatory approval for any of our product candidates or
derive any revenues from their sales.
On March 26, 2018, we reported 2-year recurrence rate data from the Phase 2 trial evaluating HS-410 (vesigenurtacel-L) in combination with standard of care, Bacillus
Calmette-Guérin (BCG), for the treatment of non-muscle invasive bladder cancer (NMIBC). We had previously discontinued our HS-410 program in order to focus our
resources on current and future checkpoint combination trials, including our HS-110 Phase 2 lung cancer program. However, in keeping with clinical trial guidance, we
continued to monitor all patients enrolled in the study for a 2-year duration. Within the subgroup of patients who received the low dose of HS-410 with standard of care BCG
and who demonstrated a positive immune response, 10 out of 10 (100%) remained disease free after a 2-year period. A positive immune response was defined as 2-fold or
greater increase from baseline of CD8+ T-cells in peripheral blood as measured by ELISPOT analysis.
4
Recent Clinical Developments
On January 14, 2019, we announced the dosing of the first patient with HS-110 and pembrolizumab in the front-line maintenance expansion of our Phase 2 clinical trial.
On February 28, 2019, we announced updated interim results from our ongoing Phase 2 study of HS-110 in patients with advanced NSCLC. The results were presented at the
2019 ASCO-SITC Clinical Immuno-Oncology Symposium by Daniel Morgensztern, M.D., Associate Professor of Medicine and Director of Thoracic Oncology, Washington
University School of Medicine, and Lead Investigator in the trial. Data were presented on both Cohort A and Cohort B of the trial. Cohort A enrolls only previously treated
NSCLC patients who have never received a checkpoint inhibitor (CPI), while Cohort B enrolls patients who received a minimum of 4 months of treatment with a CPI as part of
their prior therapy, but subsequently had documented progressive disease. Key highlights of Cohort A results include an objective response rate of 21% and a disease control
rate of 50% per RECIST 1.1. Median overall survival in this cohort has not yet been reached with a median follow up of 14.4 months. Survival benefit is observed in patients
with low levels of CD8+ TIL (≤10%) in their tumor at baseline (‘cold’ tumors) as compared to patients with high TIL, Hazard Ratio [HR] 0.39 (95% CI, 0.06 – 2.31); whereas
there were no differences in survival based on positive (≥1%) or negative PD-L1 expression, HR 0.85 (95% CI, 0.26 – 2.79). Key highlights of Cohort B results include an
objective response rate of 15%, disease control rate of 55%, and a median progression-free survival of 2.7 months.
The Oncology Market and Current Treatments
The American Cancer Society estimates that approximately 1.8 million people in the United States will be diagnosed with cancer in 2019. The lifetime probability of being
diagnosed with cancer is approximately 39% for men and 38% for women. It is projected that 607,000 Americans will die from cancer in 2019.
Lung cancer is the second-most commonly diagnosed cancer in the U.S. An estimated 228,150 new cases of lung cancer were diagnosed in 2018, accounting for about 13% of
all cancer diagnosis. Despite continuous advances made in the field of cancer research every year, there remains a significant unmet medical need, as the overall five-year
relative survival rate for lung cancer patients is 16% for men and 22% for women. Only 16% of lung cancers are diagnosed at a localized stage, for which the five-year survival
is 56%. The American Cancer Society estimates that one in four deaths in the United States is due to cancer.
2018 Financial Developments
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On November 26, 2018, we closed an underwritten public offering in which we raised approximately $12.7 million after deducting underwriting discounts and
commissions and other estimated offering expenses and issued and sold 9,200,000 shares of our common stock together with warrants to purchase 4,600,000 shares of
our common stock at a combined price to the public of $1.50. The warrants have an exercise price of $1.65, are exercisable upon issuance and expire five years from
the date of issuance.
On May 7, 2018, we closed an underwritten public offering in which we raised approximately $18.8 million, net of underwriting discounts and commissions and other
estimated offering expenses and 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
our 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 our 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 common stock warrants expire five years after date of issuance and have an exercise price of $1.584 per share. As of the date of
this filing, 3,054,667 common stock warrants have been exercised for an additional $4.8 million in proceeds and all pre-funded warrants have been exercised.
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On January 19, 2018, we announced a reverse stock split of our shares of common stock at a ratio of 1-for-10. All share numbers in this Annual Report on Form 10-K
have been adjusted for the split.
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ImPACT®/ComPACT™ Platform Technology Advantages
We seek to increase the percentage of patients with long-term benefit to checkpoint inhibitors with a combination treatment that is designed to activate and expand the T-cell’s
immune defense mechanisms to seek out and kill cancer cells. ImPACT® and ComPACT ™, variations of TCAP-based therapies, have been shown to stimulate an immune
response based on a full antigenic repertoire of cancer cell associated proteins, not just one or a handful of antigens. The technologies are designed to combine a broad antigen
repertoire of known tumor associated antigens, complexed with a potent immune adjuvant (gp96). The activated immune response generated by our TCAP-based therapies may
be useful in treating a wide range of cancers and infectious diseases. The advantages include:
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TCAP therapies are administered with checkpoint inhibitors and other immuno-modulators with the goal of enhancing immune response through T-cell activation.
Genetically engineered allogenic cells are injected into the dermal layers of the skin of patients to elicit an immune response against the patient’s own tumor. The
treatment primes immune recognition and triggers the body to stimulate a robust adaptive, T-cell mediated immune system to seek and destroy the cancer cells.
TCAP therapies are allogeneic, off-the-shelf treatments designed to activate the immune system to turn immunologically "cold" tumors "hot." With ImPACT®, therapies
can be administered alongside checkpoint inhibitors and other immuno-modulators to increase effectiveness. Our ComPACT™ therapy combines antigen delivery and
cross presentation with a highly selective T-cell co-stimulator within a single treatment, simplifying combination immunotherapy, while providing superior immune
activation/expansion with reduced treatment costs.
Our “off-the-shelf,” cancer-fighting therapies are designed to expand cancer reactive immune cells to recognize and kill cancer cells. They jump-start immune
recognition of common, cancer associated neo-antigens (proteins expressed normally in development prior to the upregulation of MHC expression) that are re-
expressed in the cancer upon malignant transformation. When used alongside checkpoint inhibitors, they have been shown to boost T-cell activity to more effectively
target and destroy cancer cells.
We don ’t require invasive procedures or the isolation of patient tissues. We are not extracting anything from anyone. This eliminates the inconvenience and costs
associated with securing, expanding, storing and transporting patient samples, while eliminating potential surgical risks.
Our therapies do not require an additional adjuvant, or immune stimulant. Other immunotherapies may require the addition of an adjuvant to enhance effectiveness
and reduce toxicity. Our product candidate incorporates gp96, itself a powerful biological adjuvant, ensuring that no additional immune adjuvants are necessary to
generate an activated, T-cell mediated immune response.
Custom manufacturing is not necessary. Our products are mass-produced and readily available for immediate patient use. Each patient receives the same treatment,
offering logistical, manufacturing and other cost benefits, compared to patient-specific or “personalized” medicine approaches.
PTX-35/PTX-45 Advantages
The advantages include:
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Pelican provides access to a T-cell co-stimulator in two versions that further broadens our pipeline and strengthens our portfolio within the emerging T-cell co-
stimulation space. We believe the use of these therapeutic agents, in combination with other immunotherapies, have the potential to be synergistic with our TCAP to
dramatically improve patient outcomes.
Pelican is the only company with a disclosed preclinical pipeline targeting the T-cell co-stimulator, TNFRSF25. We believe PTX-35 can activate antigen-specific
memory CD8+ cytotoxic T-cells that can lead to the elimination of patient’s tumor cells. This approach is designed to harness the body's natural antigen specific
immune activation and tolerance mechanisms to reprogram and expand antigen experienced immunity, to support a long-term, durable therapeutic effect. When
combined with immunotherapies, including the ImPACT® and ComPACT™ platform technologies, PTX-35 enhances antigen specific T-cell activation to eliminate
tumor cells.
Preclinical studies with the murine precursor to PTX-35 show advantages over competing T-cell co-stimulator programs based on CD8+ T-cell specificity.
PTX-45 is a human TL1A-Ig fusion protein that acts as an agonist of TNFRSF25 with many of the advantages of PTX-35 described above and a shorter in vivo half-
life.
6
Strategy
Our objective is to become a leading biopharmaceutical company specializing in the development and commercialization of allogeneic, “off-the-shelf” immunotherapies.
ImPACT® and ComPACT™ are designed to address synergistic mechanisms of action: natural delivery of a robust repertoire of cancer associated antigens (CTAs) coupled with
the activation, co-stimulation and expansion of cancer-specific killer T-cells to further enhance patients' immune activity and immune memory. Pelican’s lead compound, PTX-
35, is a humanized affinity matured TNFRSF25 agonist antibody, and potential best-in-class T-cell co-stimulator due to its preferential antigen specific memory CD8+ T-cells
that are considered most potent in eliminating cancer cells. Preclinical studies with systemically administered PTX-35 show advantages over competing T-cell co-stimulator
programs. In addition, Pelican is the only company with a disclosed program targeting TNFRSF25 for use in immuno-oncology, with a broad, pioneering intellectual property
estate.
We believe future cancer immunotherapies will involve multiple agents and our platforms could work synergistically with therapies, such as checkpoint inhibitors, which are
designed to reverse tumor-induced immune exhaustion and suppression. We are focused on discovering, developing, and applying the ImPACT® and ComPACT™ platform
technologies, and our PTX-35/PTX-45 compounds in combination with other immunotherapies towards a number of disease indications. The key elements of our strategy are:
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Develop and obtain regulatory approval for our product candidates. We are currently enrolling patients in the Phase 2 portion of the HS-110 trial in combination with
either nivolumab or pembrolizumab to treat patients with advanced NSCLC. Beyond NSCLC – depending upon funding and partnering opportunities – we plan to
initiate new clinical trials of combined immunotherapy agents.
Maximize commercial opportunity for the ImPACT® and ComPACT ™ technology, as well as our PTX-35 and PTX-45 compounds. Our current product candidates
target large markets with significant unmet medical needs. For each of our product candidates, we seek to maximize the economic potential of any future U.S. or
international commercialization efforts.
Enhance our partnering efforts. We are continually exploring partnerships for licensing and other collaborative relationships for Heat and Pelican and remain
opportunistic in seeking strategic partnerships that maximize Heat’s economic potential.
Further expand our broad patent portfolio. We have made a significant investment in the development of our patent portfolio to protect our technologies and programs,
and we intend to continue to do so. We have obtained exclusive rights to six different patent families directed to therapeutic compositions and methods related to our
platform and preclinical development programs for cancer, and have filed additional patent applications that are owned by us. The ImPACT®/ComPACT™ patent
portfolio comprise more than 13 issued patents and 20 pending patent applications. These patents and applications cover the United States, Europe, and Japan, as well
as several other countries having commercially significant markets. In total, Pelican holds approximately 34 granted U.S. and foreign patents, and approximately 16
U.S. and foreign patents are pending.
Manage our business with efficiency and discipline. We believe we have efficiently utilized our capital and human resources to develop and acquire our product
candidates and programs and create a broad intellectual property portfolio. We operate cross-functionally and are led by an experienced management team with
backgrounds in developing and commercializing product candidates. We use project management techniques to assist us in making disciplined strategic program
decisions and to attempt to limit the risk profile of our product pipeline.
Obtain additional non-dilutive grant funding in addition to Pelican’s $15.2 million CPRIT Grant. To more fully develop our technologies and compounds, and their
application to a variety of human diseases, we plan to continue to seek and access external sources of grant funding on our own behalf and in conjunction with our
academic and other partners to support the development of our pipeline programs. While we intend to work with our academic partners to secure additional grant
funding, these partners have no obligation to work with us to secure such funding. We also intend to continue to evaluate opportunities and, as appropriate, acquire or
license technologies that meet our business objectives.
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Pelican Acquisition
On April 28, 2017, we consummated the acquisition of 80% of the outstanding equity of Pelican, a related party, and Pelican became our majority owned subsidiary as
contemplated by the Stock Purchase Agreement (the “Purchase Agreement”) that we entered into with Pelican, and certain stockholders of Pelican holding a majority of the
outstanding shares.
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, we 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 our 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 Pelican Stockholders that sold their shares in Pelican to us (the “Participating pelican Stockholders”) included Jeff
Wolf, our Chief Executive Officer and a director, John Monahan and Edward Smith, two of our directors, the Chairman of our Scientific Advisory Committee at the time of the
closing and/or entities controlled by them. During the year ended December 31, 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 retained by us and recognized as other income in the
Consolidated Statements of Operations and Comprehensive Loss.
Under the agreement, we are 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)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
$2.0 million upon Pelican’s dosing of the first patient in its first Phase 1 trial for an oncology indication;
$1.5 million upon Pelican’s dosing of the first patient in its first Phase 2 trial for an oncology indication;
$3.0 million upon successful outcome of the first Phase 2 trial for an oncology indication;
$6.0 million upon Pelican’s dosing of the first patient in its first Phase 3 trial for an oncology indication;
$3.0 million upon Pelican’s dosing of the first patient in its first Phase 3 trial for a non-oncology indication;
$7.5 million upon successful outcome of the first Phase 3 trial for an oncology indication;
$3.0 million upon successful outcome of the first Phase 3 trial for a non-oncology indication;
$7.5 million upon acceptance of a Biologics License Application (BLA) submission for an oncology indication;
$3.0 million upon acceptance of a BLA submission for a non-oncology indication;
$7.5 million upon first product indication approval in the United States or Europe for an oncology indication; and
$3.0 million upon first product indication approval in the United States or Europe for a non- oncology indication.
Pelican has been awarded $15.2 million to fund preclinical and some clinical activities from Cancer Prevention Institute of Texas (CPRIT) grant (the “CPRIT Grant”). The
CPRIT Grant is subject to customary CPRIT funding conditions. We have provided Pelican approximately $5.2 million of which $4.1 million was used to satisfy Pelican’s
matching fund obligation under the first two years of the CPRIT Grant and Pelican has received approximately $8.3 million CPRIT Grant funding to date.
In connection with the Pelican Acquisition, the Participating Pelican Stockholders enter into a Stockholders’ Agreement (the “Stockholders’ Agreement”) with us with respect to
the Pelican common stock retained by the Participating Pelican Stockholders (the “Retained Shares”). The Stockholders’ Agreement, contains restrictions on transfer of the
Retained Shares and drag-along rights in the event of a consolidation or merger of Pelican with another entity after the date of the Purchase Agreement or the sale of all or
substantially all of Pelican’s assets or a transaction in which at least fifty percent (50%) of the voting rights attached to the Pelican securities are sold. In addition, Participating
Pelican Stockholders will have co-sale rights in connection with our transfer of the Pelican common stock that we own.
In October 2018, we entered into an agreement with the University of Miami (“UM”) whereby UM exchanged their shares of Pelican stock, of which it owned 5% equity on a
fully diluted basis for a certain number of shares along with UM shares in Heat Biologics I, Inc., of which it owned 7.5% equity (together herein the “Subsidiary Shares”) for
35,000 shares of Heat Biologics, Inc. common stock, $0.0002 par value; resulting in Heat owning 85% of Pelican and 100% of its subsidiary Heat Biologics I.
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CPRIT Grant
In May 2016, Pelican was awarded a $15.2 million CPRIT Grant from CPRIT for development of Pelican’s lead product candidate, PTX-35. The CPRIT Grant is expected to
allow Pelican to develop PTX-35 through a 70-patient Phase 1 clinical program. The Phase 1 clinical program 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.
As of December 31, 2018, CPRIT has provided $8.3 million of the total $15.2 million grant. The remaining $6.9 million will become available in the third year. As of
December 31, 2018, we have provided approximately $5.2 million of which $4.1 million was used to satisfy Pelican’s matching fund obligation under the first two years of the
CPRIT Grant and we have approximately $3.5 million remaining to provide for the third CPRIT fiscal year.
The CPRIT Grant, as is customary for all CPRIT awards, contains a requirement that Pelican pay CPRIT a royalty on sales of commercial products developed using CPRIT
funds equal to between three and five percent of revenue until such time as CPRIT has been paid an aggregate amount equal to 400% of the grant award proceeds. After 400%
of the grant award proceeds has been paid, Pelican will pay CPRIT a royalty of 0.5% in perpetuity. After the CPRIT Grant terminates, Pelican is not permitted to retain any
unused grant award proceeds without CPRIT’s approval, but Pelican’s royalty and other obligations, including its obligation to repay the disbursed grant proceeds under certain
circumstances, survive the termination of the agreement. Pelican expects to have received and expended all of the grant award proceeds by the agreement termination date.
The CPRIT Grant is subject to Pelican complying with all terms set forth in the CPRIT Grant, including Pelican maintaining its status with CPRIT as a Texas-based entity. In
order to qualify as a Texas-based entity, a company must fulfill a majority of the following seven requirements: (i) its US headquarters must be physically located in Texas;
(ii) its chief executive officer must reside in Texas; (iii) a majority of its personnel, including at least two other senior-level employees, must reside in Texas; (iv) its
manufacturing activities must take place in Texas; (v) at least 90% of its grant award funds must be paid to individuals and entities in Texas, including salaries and personnel
costs for employees and contractors: (vi) at least one clinical trial site must be in Texas; and (vii) it must collaborate with a medical research organization in Texas, including a
public or private institution of higher education. Currently, Pelican meets a majority of these seven requirements.
Intellectual Property
Our goal is to obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies; preserve our trade secrets
and exclusive rights in our unique biological materials; and operate without infringing on the proprietary rights of other parties, both in the United States and in other countries.
Our policy is to actively seek to obtain, where appropriate, the strongest intellectual property protection possible for our current product candidates (ImPACT® and ComPACT™
therapy), as well as Pelican’s product candidates and any future product candidates, proprietary information and proprietary technology through a combination of contractual
arrangements and patents, both in the United States and abroad. However, even patent protection may not always afford us with complete protection against competitors who
seek to circumvent our patents. See “Risk Factors – Risks Relating to Our Business – We have limited protection for our intellectual property, which could impact our
competitive position.”
We will continue to depend upon the skills, knowledge and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other
contractors, none of which is patentable. To help protect our proprietary know-how, which is not patentable, and for inventions for which patents may be difficult to enforce, we
currently rely and will in the future rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require all of our employees,
consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require
disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
The Heat and Pelican programs are supported by growing patent estates that are comprised of intellectual property owned by Heat or Pelican, or exclusively licensed from UM.
ImPACT®, ComPACT™, PTX-45 (next generation improvements over PTX-15), and PTX-35 are protected by issued patents and various pending patent applications. In total,
Heat holds approximately 113 granted U.S. and foreign patents and approximately 21 U.S. and foreign patents pending. In total, Pelican holds approximately 36 granted U.S.
and foreign patents and approximately 28 U.S. and foreign patents are pending.
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Heat’s foundational ImPACT® patent coverage is from the “Modified Heat Shock Proteins-Antigenic Peptide Complex” patent family, which is exclusively licensed from UM,
and granted as US Patent No. 8,685,384. This patent expires in April 2019. Further ImPACT® coverage is found in: the “Allogeneic Cancer –Based Immunotherapy” patent
family patented in the US (US Patent Nos. 8,475,785 and 9,238,064), Europe, Israel, Australia and pending (and now allowed) in Canada and the “Heat Shock Protein GP96
Vaccination and Methods of Using Same” patent family, which is granted in the US (US Patent No. 8,968,720). Both of these patent families are subject to exclusive license
agreements with UM and provide protection to 2029 (not including any patent term adjustments or extensions). Various recently filed provisional and international (PCT) patent
applications assigned to Heat and relating to ImPACT® are also pending.
Heat’s ComPACT™ technology is covered by US Patent No. 10,046,047 and a series of patents pending in the U.S. and foreign jurisdictions (i.e. Europe, Japan, China, Canada,
Australia, Brazil, Mexico, Israel, India, Korea, Russia, Singapore and South Africa) and assigned to Heat. Various recently filed provisional and international (PCT) patent
applications assigned to Heat and related to ComPACT™ are also pending and may provide coverage to 2038 or 2039.
Pelican’s PTX-45 (next generation improvements over PTX-15) and PTX-35 coverage stems from three exclusive license agreements with UM (i.e. “UM03-31 UM05-39” of
July 11, 2008; “UMI176” of December 12, 2010; and “UM-143 UMN-106” of November 19, 2013). Patents are granted or pending in the U.S. and various foreign jurisdictions
(such as Europe, Japan, China, Canada, Australia, Mexico, Korea, Israel, Singapore, and Hong Kong). US Patent No. 9,603,925, with term to 2034 (not including any patent
term adjustments or extensions), covers PTX-45 compositions in combination with additional therapies. US Patent No. 9,499,627, with term to 2030 (not including any patent
term adjustments or extensions), covers PTX-45 uses in therapies to delay transplant rejections. US Patent No. 9,839,670, with term to 2026 (not including any patent term
adjustments or extensions), covers PTX-35 compositions in combination with a tumor antigen. US Patent No. 9,017,679 with term to 2026 (not including any patent term
adjustments or extensions), covers methods of using PTX-35, among other things. Recent patent applications assigned to Pelican are intended to provide further compositional
coverage for PTX-35. US Patent Nos. 9,982,057 and 10,005,843 provide composition of matter coverage for PTX-35 and have term to 2035 (not including any patent term
adjustments or extensions).
License Agreements
The “Modified Heat Shock Proteins-Antigenic Peptide Complex” patent family is licensed pursuant to the terms of an exclusive license agreement that was entered into by Heat
in July 2008 and subsequently assigned to our subsidiary Heat Biologics I, Inc. which issued to UM shares of its common stock representing seven and one-half percent (7.5%)
of its common stock, of which UM transferred to Heat in exchange for shares of our common stock in October 2018. The term of the license is the length of the last to expire
patent, unless terminated earlier. The license agreement grants Heat Biologics I, Inc. exclusive, worldwide rights to make, use or sell licensed materials based upon the patent-
related rights. As consideration for the rights granted in the license agreement, Heat Biologics I, Inc. was obligated to pay the University an upfront license fee of $150,000,
additional yearly payments initially of $10,000 that increased to $20,000 in 2013 and a milestone payment of $500,000 upon approval of a BLA for the lung cancer vaccine
covered by the patents rights being licensed.
The “Allogeneic Cancer-Based Immunotherapy” patent family is licensed to Heat Biologics 1, Inc. pursuant to the terms of an exclusive license agreement that was entered into
with UM in February 2011 and the “Heat Shock Protein GP96 Vaccination and Methods of Using Same” patent family is licensed to Heat Biologics 1, Inc. pursuant to the terms
of an exclusive license agreement that was also entered into with UM in February 2011. No upfront, annual or milestone payments are required to be paid to the University
under either of these license agreements. The license agreements grant Heat Biologics I, Inc. exclusive, worldwide rights to make, use or sell licensed materials based upon the
patent-related rights.
As consideration for the rights granted in each of these three license agreements, Heat Biologics I, Inc. is obligated to pay royalties equal to a percentage (in the low-to-mid
single digits) of net sales of products covered by the patent-related rights in the respective license agreements. These royalty rates are subject to reduction if additional license
rights from third parties are required to commercialize licensed products. In the event of a sublicense to a third party, Heat Biologics I, Inc. is obligated to pay royalties to UM
equal to a percentage of sublicense income. Each of these additional license agreements also provides that the licensee will not have to pay more than the above-noted royalty
rates and sublicense fees if more than one license from UM is required to sell products covered by the licensed patent-related rights.
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All of the above-described license agreements provide that the licensor has the right to terminate a subject license if the licensee: (1) has not introduced, or at least used its best
efforts to introduce, a licensed product in the commercial marketplace in the United States, European Union, or Japan by December 31, 2020; (2) has not otherwise exercised
diligence to bring licensed products to market; or (3) files, or has filed against it, a proceeding under the Bankruptcy Act, is adjudged insolvent, makes an assignment for the
benefit of its creditors, or has an unreleased or unsatisfied writ of attachment or execution levied upon it. Upon an uncured material breach of an obligation under any one of the
above license agreements by a party, the other party has the right to terminate that agreement upon 90 days’ notice or 30 days’ notice if the breach relates to payments due to
UM. In the event of a termination, Heat Biologics I, Inc. will be obligated to pay all amounts that accrued prior to such termination. Each of the above license agreements also
contains other customary clauses and terms as are common in similar agreements between industry and academia, including the licensee’s agreement to indemnify UM for
liabilities arising out of the negligence of the licensee, making the license grant subject to the Bayh-Dole act (35 U.S.C. 200 et seq.), the reservation of the licensor of the right to
use the licensed intellectual property rights for its internal, non-commercial purposes, limitations/disclaimers of various warranties and representations, reporting and record-
keeping requirements, and licensee liability insurance requirements.
In July 2011, we exercised an option agreement with the University of Michigan (“U.Mich”) and entered into a license agreement with U.Mich pursuant to which we are
U.Mich’s exclusive licensee and have the right to use, market, offer for sale, sell and/or sublicense materials and processes related to certain cancer cell lines. The term of the
license is perpetual, unless terminated earlier by us or by U.Mich where U.Mich can only terminate for our material breach of this agreement. As consideration for the rights
granted in the license agreement, we agreed to pay U.Mich up-front license fees and additional yearly and milestone payments. We also assumed under the license agreement
responsibility for any infringement of third party rights caused by our use of the licensed materials. We paid an option fee of $2,000, a license issue fee of $10,000 and are
obligated to pay an annual maintenance fee of $10,000 each year until the first commercial sale of a licensed product at which time the annual maintenance fee increases to
$50,000. In addition, we are obligated to make milestone payments of $25,000, $50,000 and $75,000 upon completion of a Phase 1, Phase 2 and Phase 3 trial using a licensed
product and $250,000 upon the first commercial sale of a licensed product and $350,000 upon annual net sales of $100,000,000 or more. The license agreement provides that the
licensor has the right to terminate the license should we cease to carry on our business, fail to make a required payment or otherwise materially breach or default in our
obligations under the license agreement following the giving of notice and an opportunity to cure any such breach. The license agreement provides that if we do not achieve the
following milestones within the required period, U.Mich has the right to terminate the license agreement: completion of a Phase 1 clinical trial on or before January 1, 2015, a
Phase 2 clinical trial on or before January 1, 2017, a Phase 3 clinical trial on or before January 1, 2019 and the first commercial sale of a product that includes the materials
supplied by U.Mich on or before January 1, 2020. The license agreement also contains other customary clauses and terms as are common in similar agreements between
industry and academia.
In October 2016, our wholly-owned subsidiary, Zolovax, Inc., entered into an agreement with UM for the license and development of a portfolio of patents leveraging its gp96
platform to target the Zika virus and other infectious diseases. The preclinical studies using the licensed technology have been initiated and are progressing. The term of the
license is the length of the last to expire patent, unless terminated earlier. The license agreement grants Zolovax, Inc. exclusive, worldwide rights to make, use or sell licensed
materials based upon the patent-related rights. As consideration for the rights granted in this license agreement, the licensee paid an upfront fee, is obligated to pay annual
payments commencing on the third anniversary of the license agreement and royalties equal to a percentage (in the low-to-mid single digits) of net sales of products covered by
the patent-related rights in the respective license agreements. These royalty rates are subject to reduction if additional license rights from third parties are required to
commercialize licensed products. In the event of a sublicense to a third party, Zolovax, Inc. is obligated to pay royalties to UM equal to a percentage of sublicense income. The
license agreement provides for diligence milestones payments of up to an aggregate of $1,450,000 that include pre-IND meeting with the FDA, IND submission to the FDA and
dosing first patient in a Phase 1 clinical trial. The license agreement also provides that the licensee will not have to pay more than the above-noted royalty rates if more than
one license from UM is required to sell products covered by the licensed patent-related rights. The license agreement provides that the licensor has the right to terminate a
subject license if the licensee has engaged in certain bankruptcy events or has breached the terms of the license agreement which includes having (i) failed to make a required
payment; (ii) failed to achieve a milestone or not otherwise exercised diligence to bring licensed products to market; (iii) failed to possess insurance coverage, or (iv) filed a
false report. Upon an uncured material breach of an obligation that remains uncured for 30 days’ after notice thereof, the other party has the right to terminate that agreement.
In June 2016, we entered into an exclusive license agreement with Shattuck Labs, Inc. (“Shattuck”) pursuant to which we licensed to Shattuck certain provisional patent
applications and know-how related to fusion proteins to treat cancer and other diseases that were not being developed by us. Shattuck paid us an initial license fee of $50,000
and is obligated to pay us fees upon its receipt of sublicensing income, achievement of certain milestones and royalties upon sales of commercial products. Inasmuch as the
technology that we out-licensed is in the early stages of development and there is a low likelihood of success for any technology at such stage, there can be no assurance that
any products will be developed by Shattuck or that we will derive any revenue from Shattuck.
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Pelican License Agreements
Under license agreements with UM, Pelican has obtained exclusive rights to five different patent families each directed to therapeutic compositions and methods related to
targeting TNFRSF25/TL1A for the purpose of modulating immune responses. These families comprise approximately 36 granted U.S. and foreign patents, and approximately 28
U.S. and foreign patent applications. These patents and applications cover the United States, Europe and Japan as well as several other countries having commercially
significant markets. As partial consideration for the initial two license agreements with UM, Pelican issued UM 300,000 shares of its common stock of which UM transferred to
Heat in exchange for shares of our common stock in October 2018.
As consideration for the rights granted under the initial license agreement, Pelican is obligated to pay UM certain upfront license fees, aggregate milestone payments of
$400,000 ((i) upon submission of an IND, (ii) approval of an IND, (iii) completion of a Phase 1 clinical trial and (iv) the earlier of May 2022 or approval of a NDA), an annual
minimum royalty payment $20,000 and royalties (mid-range single digits) based on net sales on commercialized products covered by the patent-related rights set forth above.
As consideration for the rights granted under the second license agreement, Pelican is obligated to pay UM certain upfront license fees, aggregate milestone payments of
$650,000 (i) upon submission of an NDA, (ii) approval of a NDA; (iii) completion of Phase 1 clinical trial and (iv) the earlier of May 2022 or approval of an NDA), an annual
minimum royalty payment $20,000 and royalties (mid-range single digits) based on net sales on commercialized products covered by the patent-related rights set forth above.
As consideration for the rights granted in the third license agreement, Pelican is obligated to pay UM certain upfront license fees, past and future patent costs, an annual
minimum royalty payment $20,000 and royalties (mid-range single digits) based on net sales on commercialized products covered by the patent-related rights set forth above.
The third license agreement with UM provides that in the event that Pelican terminates its second license agreement with UM, Pelican is obligated to pay UM an annual
minimum royalty payment of $20,000 for each year after 2014 during the term of the third license agreement as well as milestone payments that aggregate $400,000 upon
achievement of the following milestones: (i) submission of an IND; (ii) approval of a NDA; (iii) completion of a Phase 1 clinical trial; and (iv) the earlier of May 31, 2022 or
approval of a NDA. The royalty rates are subject to reduction if additional license rights from third parties are required to commercialize licensed products. In the event of a
sublicense to a third party, Pelican is obligated to pay royalties to UM equal to a percentage of sublicense income. The third license agreement also provides that Pelican will not
have to pay more than above royalty rates and sublicense fees if more than one license from UM is required to sell products covered by the licensed patent-related rights.
All of the above-described Pelican license agreements provide that the licensor has the right to terminate a subject license if the licensee (1) has not introduced, or at least used
its best efforts to introduce, a licensed product in the commercial marketplace in the United States, European Union, or Japan by December 31, 2022 (December 2020 for the
November 2013 license agreement); (2) has not otherwise exercised diligence to bring licensed products to market; or (3) files, or has filed against it, a proceeding under the
Bankruptcy Act, is adjudged insolvent, makes an assignment for the benefit of its creditors, or has an unreleased or unsatisfied writ of attachment or execution levied upon it.
Upon an uncured material breach of an obligation under any one of the above license agreements by a party, the other party has the right to terminate that agreement upon 90
days’ notice or 30 days’ notice if the breach relates to payments due to UM. In the event of a termination, Pelican will be obligated to pay all amounts that accrued prior to such
termination. Each of the above license agreements also contains other customary clauses and terms as are common in similar agreements between industry and academia,
including the licensee’s agreement to indemnify UM for liabilities arising out of the negligence of the licensee, making the license grant subject to the Bayh-Dole act (35 U.S.C.
200 et seq.), the reservation of the licensor of the right to use the licensed intellectual property rights for its internal, non-commercial purposes, limitations/disclaimers of
various warranties and representations, reporting and record-keeping requirements, and licensee liability insurance requirements.
Manufacturing
We rely on third-party manufacturers to produce and store our product candidates for clinical use and currently do not own or operate manufacturing facilities.
We have retained Lonza, Inc. a vendor, which has provided manufacturing of HS-110 to be used in our Phase 2 and potential Phase 3 clinical trials. We entered into an eight-
year Manufacturing Services Agreement, dated October 20, 2011, with the vendor (the “Manufacturing Agreement”). The Manufacturing Agreement provides that the vendor
will manufacture products based on our ImPACT® technology intended for use in pharmaceutical or medicinal end products, including, without limitation, products in a final
packaged form and labeled for use in clinical trials or for commercial sale to end users in accordance with the terms and conditions of individual statements of work. The
Manufacturing Agreement requires that we purchase a certain minimum percentage of our annual global product requirements from the vendor. The Manufacturing Agreement
may be terminated by the parties upon mutual agreement, and by each party for a material breach by the other party that is not cured within the cure period, upon notice that a
clinical trial for which product is being produced under the agreement is suspended or terminated or upon the other party’s insolvency, dissolution or liquidation.
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The HS-110 product used in the inventor’s Phase 1, and in our Phase 2 clinical trial continues to be manufactured under cGMP (current good manufacturing practices). The
vaccine cell line is grown in large quantities, dispensed into individual doses, frozen in liquid nitrogen, irradiated to render cell replication incompetent and quality tested in
compliance with FDA guidelines. The vaccine is irradiated, which is a commonly used attenuation process that eliminates the ability of the gp96-Ig-containing vaccine cell lines
to replicate but allows them to remain metabolically active and secrete gp96-Ig. The batches of frozen, irradiated vaccine are stable for long periods of time, and are thawed
immediately prior to administration to patients. Sufficient material to dose patients in the HS-110 clinical studies has already been produced, and preparations are underway to
produce quantities required for subsequent follow-on clinical trials.
Heat has also begun development of an additional product, HS-130, for treatment of select solid tumors. This product will utilize our ComPACT™ technology concept, which is
designed to deliver the gp96 heat shock protein and a T-cell co-stimulatory fusion protein (OX40L). We have begun the cGMP manufacturing and nonclinical IND enabling
activities to support the clinical development of this product.
Pelican is focused on the development of monoclonal antibody and fusion-protein based therapies designed to activate specific T-cell subsets of the immune system. We
retained KBI Biopharma, a vendor, for development of two products; PTX-35 and PTX-45. PTX-35 is a humanized affinity matured monoclonal antibody that is a functional
agonist of human TNFRSF25. This antibody provides highly selective and potent stimulation of ‘memory’ CD8+ cytotoxic T-cells. This is a subset of the class of T-cell that is
responsible for eliminating tumor cells in patients. PTX-45 is a human TL1A-Ig fusion protein with many of the same functional qualities of PTX-35 but a shorter in vivo half-
life. Pelican has begun the nonclinical IND enabling activities to support the clinical development of these products.
Competition
The pharmaceutical industry and biologics industry are each highly competitive and characterized by a number of established large companies, and mid-sized companies, as
well as smaller companies like ours. If our competitors’ market products that are less expensive, safer or more effective than any future products developed from our product
candidates, or that reach the market before our approved product candidates, we may not achieve commercial success. Technological developments in our field of research and
development occur at a rapid rate and we expect competition to intensify as advances in this field are made. We will be required to continue to devote substantial resources and
efforts to our research and development activities. As a biotechnology company with cancer immunotherapy agents as lead product candidates, we compete with a broad range
of companies. At the highest level, cancer immunotherapy can be seen as both a complement and a potential competitor to any oncology therapy, most notably chemotherapy,
radiotherapy, biologics and small molecule drugs. Not only do we compete with companies engaged in various cancer treatments including radiotherapy and chemotherapy but
we also compete with various companies that have developed or are trying to develop immunology vaccines for the treatment of cancer. Certain of our competitors have
substantially greater capital resources, large customer bases, broader product lines, sales forces, greater marketing and management resources, larger research and development
staffs with extensive facilities and equipment than we do and have more established reputations as well as global distribution channels. Our most significant competitors, among
others, are fully integrated pharmaceutical companies such as Eli Lilly and Company, Bristol-Myers Squibb Company, Merck & Co., Inc., Novartis AG, MedImmune, LLC (a
wholly owned subsidiary of AstraZeneca plc), Johnson & Johnson, Pfizer Inc., MerckKGaA and Sanofi SA, and more established biotechnology companies such as Genentech,
Inc. (a member of the Roche Group), Amgen Inc., Celgene Corporation, Gilead Sciences, Inc. and its subsidiary Kite Pharma, Inc., and competing cancer immunotherapy
companies such as, Juno Therapeutics, Inc., Bluebird Bio, Inc., Transgene SA, Valeant Pharmaceuticals International, Inc., NewLink Genetics Corporation, Agenus Inc.,
NovaRx Corporation, Aduro Biotech, Inc., Advaxis, Inc., ImmunoCellular Therapeutics, Ltd., Immunovaccine Inc., Oxford BioMedica plc, Bavarian Nordic A/S, Celldex
Therapeutics, Inc., Telesta Therapeutics Inc. and others, some of which have substantially greater financial, technical, sales, marketing, and human resources than we do. These
companies might succeed in obtaining regulatory approval for competitive products more rapidly than we can for our products. In addition, competitors might develop
technologies and products that are less expensive, safer or more effective than those being developed by us or that would render our technology obsolete. In addition, the
pharmaceutical and biotechnology industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for
us to remain current with the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Our
competitors may render our technologies obsolete by advancing their existing technological approaches or developing new or different approaches.
We expect to compete with other pharmaceutical and biotechnology companies, and our competitors may:
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develop and market products that are less expensive, more effective or safer than our future products;
commercialize competing products before we can launch any products developed from our product candidates;
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operate larger research and development programs, possess greater manufacturing capabilities or have substantially greater financial resources than we do;
initiate or withstand substantial price competition more successfully than we can;
have greater success in recruiting skilled technical and scientific workers from the limited pool of available talent;
more effectively negotiate third-party licenses and strategic relationships; and
take advantage of acquisition or other opportunities more readily than we can.
We expect to compete for market share against large pharmaceutical and biotechnology companies, smaller companies that are collaborating with larger pharmaceutical
companies, new companies, academic institutions, government agencies and other public and private research organizations.
The primary treatments for non-small cell lung cancer are surgery, radiation, chemotherapy, checkpoint inhibitors, targeted therapies and various combinations of each of these
treatments. A large number of patients, particularly with advanced disease, are refractory to these treatments and are subsequently treated with a number of emerging biologic
agents, including immunotherapy. Some examples of therapies commonly attempted with stage IIIB/IV NSCLC patients include: Opdivo ® (nivolumab), Keytruda®
(pembrolizumab), Alimta ® (pemetrexed), Avastin ® (bevacizumab), Tarceva® (erlotinib), Gemzar® (gemcitabine), Paraplatin® (carboplatin), Taxol® (paclitaxel), Taxotere®
(docetaxel), and Navelbine® (vinorelbine). It is unlikely that biologic agents will compete with more traditional therapies in the short-term, but many oncologists believe that
such therapies will eventually become the mainstay of lung cancer therapy. None of these agents have proven particularly effective for stage IIIB/IV NSCLC patients, with the
most effective therapies only increasing survival by a few months. As a result, we do not consider these agents to be direct competitors to HS-110 because they are likely to be
given either in sequence or in conjunction with some of the agents listed. Furthermore, many patients cannot tolerate many of the chemotherapeutics listed. Thus, we believe if
HS-110 has a positive safety profile (without observation of local or systemic toxicities, none of which have been seen to date), it is possible that HS-110 would be preferred
both by physicians and patients in this stage of disease.
Our strategy is to emphasize what we believe to be our competitive advantages, which our products in development are expected to have less side effects than most other cancer
therapies, be available at lower prices than other therapies, and ultimately could work on many types of cancer and not just one specific type.
Government Regulation
FDA Approval Process
In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, (the “FDC Act”), and other federal
and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and
marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Biological products used for the prevention,
treatment, or cure of a disease or condition of a human being are subject to regulation under the FDC Act, except the section of the FDC Act which governs the approval of new
drug applications, or NDAs. Biological products are approved for marketing under provisions of the Public Health Service Act, or PHSA, via a Biologics License Application,
or BLA. However, the application process and requirements for approval of BLAs are very similar to those for NDAs, and biologics are associated with similar approval risks
and costs as drugs. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to
approve pending NDAs or BLAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil
penalties, and criminal prosecution.
Pharmaceutical product development for a new product or certain changes to an approved product in the United States typically involves preclinical laboratory and animal tests,
the submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical testing may commence, and adequate and well-
controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval
requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.
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Preclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and
efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including good laboratory practices. The results of
preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a
proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor
questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.
Clinical trials involve the administration of the investigational new drug or biologic to healthy volunteers or patients under the supervision of a qualified investigator. Clinical
trials must be conducted: (1) in compliance with federal regulations; (2) in compliance with good clinical practice, or GCP, an international standard meant to protect the rights
and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (3) under protocols detailing the objectives of the trial, the
parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments
must be submitted to the FDA as part of the IND.
The FDA may order the temporary or permanent discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being
conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients
in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either
temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical trials to support NDAs or BLAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial
introduction of the drug or biologic into healthy human subjects or patients, the product is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects
associated with increasing doses, and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to evaluate the effectiveness of
the drug or biologic for a particular indication, dosage tolerance, and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates
evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and
safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug or
biologic and to provide adequate information for the labeling of the product. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to
demonstrate the efficacy of the drug or biologic. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the study is a large multicenter
trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease
with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.
After completion of the required clinical testing, an NDA or BLA is prepared and submitted to the FDA. FDA approval of the NDA or BLA is required before marketing of the
product may begin in the United States. The NDA or BLA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the product’s
pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA or BLA is substantial. The submission of most NDAs and BLAs is
additionally subject to a substantial application user fee, currently exceeding $2.5 million, and the manufacturer and/or sponsor under an approved new drug application are also
subject to an annual program fee which is currently set at more than $309,000. These fees are typically increased annually.
The FDA undertakes to perform an initial filing review within 60 days from its receipt of an NDA or BLA to determine whether the application will be accepted for filing based
on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth
review. The FDA has agreed to certain performance goals in the review of NDAs and BLAs. Most such applications for standard review drug or biologic products are reviewed
within ten to 12 months; most applications for priority review drugs or biologics are reviewed in six to eight months. The FDA can extend these reviews by three months.
Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics,
priority review is further limited only for products intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both
standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify
information already provided in the submission.
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The FDA may also refer applications for novel drug or biologic products, or drug or biologic products that present difficult questions of safety or efficacy, to an advisory
committee – typically a panel that includes clinicians and other experts – for review, evaluation, and a recommendation as to whether the application should be approved. The
FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA or BLA, the FDA will typically
inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. FDA will not
approve the product unless compliance with current good manufacturing practice, or cGMP, is satisfactory and the NDA or BLA contains data that provide substantial evidence
that the drug or biologic is safe and effective in the indication studied.
After the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally
outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those
deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA will issue an approval letter. The FDA has committed to reviewing
such resubmissions in two or nine months depending on the type of information included.
An approval letter authorizes commercial marketing of the drug or biologic with specific prescribing information for specific indications. As a condition of NDA or BLA
approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug or biologic outweigh the potential risks. REMS
can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to,
special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement
for a REMS can materially affect the potential market and profitability of the product. Moreover, product approval may require substantial post-approval testing and
surveillance to monitor the product’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or
problems are identified following initial marketing.
Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require
submission and FDA approval of a new NDA or BLA or NDA or BLA supplement before the change can be implemented. An NDA or BLA supplement for a new indication
typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA or BLA supplements as it does in
reviewing NDAs or BLAs.
Post-Approval Requirements
Any products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of
adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, and complying with
FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting products for uses or in
patient populations that are not described in the product’s approved uses, known as ‘off-label’ use, limitations on industry-sponsored scientific and educational activities, and
requirements for promotional activities involving the internet. Although physicians may prescribe legally available products for off-label uses, if the physicians deem to be
appropriate in their professional medical judgment, manufacturers may not market or promote such off-label uses.
In addition, quality control and manufacturing procedures must continue to conform to applicable manufacturing requirements after approval to ensure the long-term stability of
the product. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the
obligation to investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the manufacture and distribution of approved products are
required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for
compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain
cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA, including, among
other things, recall or withdrawal of the product from the market. In addition, changes to the manufacturing process are strictly regulated, and depending on the significance of
the change, may require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and claims, are also
subject to further FDA review and approval.
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The FDA also may require post-marketing testing, known as Phase 4 testing, and surveillance to monitor the effects of an approved product. Discovery of previously unknown
problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative
enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered
or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may
require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the
FDA’s policies may change, which could delay or prevent regulatory approval of our product candidates under development.
Additional Controls for Biologics
To help reduce the increased risk of the introduction of adventitious agents, the PHSA emphasizes the importance of manufacturing controls for products whose attributes
cannot be precisely defined. The PHSA also provides authority to the FDA to immediately suspend licenses in situations where there exists a danger to public health, to prepare
or procure products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of regulations to prevent the introduction or spread
of communicable diseases in the United States and between states.
After a BLA is approved, the product may also be subject to official lot release as a condition of approval. As part of the manufacturing process, the manufacturer is required to
perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of
each lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests
performed on the lot. The FDA may also perform certain confirmatory tests on lots of some products, such as viral vaccines, before releasing the lots for distribution by the
manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of biological products. As
with drugs, after approval of biologics, manufacturers must address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic
inspection after approval.
Cell- and Tissue-Based Biologics
Establishments that manufacture cell and tissue-based products must comply with the FDA’s current good tissue practices, or cGTP, which are FDA regulations that govern the
methods used in, and the facilities and controls used for, the manufacture of such products. The primary intent of the cGTP requirements is to ensure that cell- and tissue-based
products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable disease. FDA regulations also include requirements for a
unified registration and listing system, donor screening and testing, adverse reaction reporting, and labeling.
Cell- and tissue-based products may also be subject to the same approval standards, including demonstration of safety and efficacy, as other biologic and drug products if they
meet certain criteria such as if the cells or tissues are more than minimally manipulated or if they are intended for a non-homologous use. Products manufactured using the
ImPACT® technology meet this threshold and therefore are considered biological drugs. Manufacture of ImPACT® products are subject to both cGTP and cGMP regulations for
manufacturing quality. Marketing of these products in the United States will require FDA approval under the BLA pathway as discussed above.
Other U.S. Healthcare Laws and Compliance Requirements
In the United States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including but not limited to, the
Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services, for instance the Office of Inspector General, the
U.S. Department of Justice, or DOJ, and individual U.S. Attorney offices within the DOJ, and state and local governments. For example, sales, marketing and
scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the false claims laws, the physician payment
transparency laws, the privacy and security provisions of HIPAA, as amended by HITECH, and similar state laws, each as amended.
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The federal anti-kickback statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any remuneration,
directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any item or
service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value. The
anti-kickback statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on
the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are
drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if
they do not qualify for an exception or safe harbor. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor.
Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor, however, does not make the conduct per se illegal under the anti-
kickback statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Violations
of this law are punishable by imprisonment, criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs.
Additionally, the intent standard under the anti-kickback statute was amended by the Affordable Care Act to a stricter standard such that a person or entity no longer needs to
have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, provides that the government may assert that a claim including items or
services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act., as discussed
below.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to
a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
Although we would not submit claims directly to payors, drug manufacturers can be held liable under the federal civil False Claims Act, which imposes civil penalties,
including through civil whistleblower or qui tam actions, against individuals or entities (including manufacturers) for, among other things, knowingly presenting, or causing to
be presented to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent, claims for items or services not
provided as claimed, or claims for medically unnecessary items or services; making a false statement or record material to payment of a false claim; or avoiding, decreasing or
concealing an obligation to pay money to the federal government. Penalties for a False Claims Act violation include three times the actual damages sustained by the
government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from participation in federal healthcare programs and, although the federal
False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes. The government may deem
manufacturers to have “caused” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a
product off-label. Claims which include items or services resulting from a violation of the federal Anti-Kickback Statute are false or fraudulent claims for purposes of the False
Claims Act. Our future marketing and activities relating to the reporting of wholesaler or estimated retail prices for our products, if approved, the reporting of prices used to
calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our product
and any future product candidates, are subject to scrutiny under this law. Pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly
providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing
false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-reimbursable, uses.
HIPAA created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or
fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit program, including private third-
party payors and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal anti-kickback statute, a person or entity does not need to
have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
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We may be subject to data privacy and security regulations by both the federal government and the states in which we conduct business. HIPAA, as amended by the HITECH
Act, and their respective implementing regulations.. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates,
defined as independent contractors or agents of covered entities, which include health care providers, health plans, and healthcare clearinghouse, that create, receive, or obtain
protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed
against covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the
federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and security of health
information in specified circumstances, some of which are more stringent and many of which differ from each other in significant ways, thus complicating compliance efforts.
Failure to comply with these laws, where applicable, can result in the imposition of significant civil and criminal penalties.
Additionally, the Federal Physician Payments Sunshine Act under the ACA, and its implementing regulations, require that certain manufacturers of drugs, devices, biological
and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to annually report to the
Centers for Medicare and Medicaid, or CMS, information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to
entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held
by physicians and their immediate family members. Failure to submit timely, accurately, and completely the required information may result in civil monetary penalties. Certain
states also mandate implementation of compliance programs, impose restrictions on pharmaceutical manufacturer marketing practices and/or require the tracking and reporting
of gifts, compensation and other remuneration to healthcare providers and entities.
In order to distribute products commercially, we must also comply with state laws that require the registration of manufacturers and wholesale distributors of drug and biological
products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of
business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including
some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have
enacted legislation requiring pharmaceutical and biotechnology companies to establish marketing compliance programs, file periodic reports with the state, make periodic
public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare
entities from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and marketing, and to prohibit certain other sales and
marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.
If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations that apply to it, we may be
subject to penalties, including without limitation, significant civil, criminal and/or administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from
participation in government programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual whistleblowers in the name of the
government, or refusal to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the
curtailment or restructuring of operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other
healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or
administrative sanctions, including exclusions from government funded healthcare programs. Ensuring business arrangements comply with applicable healthcare laws, as well
as responding to possible investigations by government authorities, can be time- and resource-consuming and can divert a company’s attention from the business.
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Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the United States and markets
in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on the extent to that third-party payors provide
coverage, and establish adequate reimbursement levels for such products. In the United States, third-party payors include federal and state healthcare programs, private
managed care providers, health insurers and other organizations. The process for determining whether a third-party payor will provide coverage for a product may be separate
from the process for setting the price of a product or for establishing the reimbursement rate that such a payor will pay for the product. Third-party payors may limit coverage to
specific products on an approved list, also known as a formulary, which might not include all of the FDA-approved products for a particular indication. Third-party payors are
increasingly challenging the price, examining the medical necessity and reviewing the cost- effectiveness of medical products, therapies and services, in addition to questioning
their safety and efficacy. We may need to conduct expensive pharmaco-economic studies in order to demonstrate the medical necessity and cost-effectiveness of our product
candidates, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s
decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a
product does not assure that other payors will also provide coverage for the product. Adequate third-party reimbursement may not be available to enable us to maintain price
levels sufficient to realize an appropriate return on investment in product development.
Different pricing and reimbursement schemes exist in other countries. Some jurisdictions operate positive and negative list systems under which products may only be marketed
once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare
the cost-effectiveness of a particular product candidate to currently available therapies. Other countries allow companies to fix their own prices for medicines, but monitor and
control company profits. The downward pressure on health care costs has become very intense. As a result, increasingly high barriers are being erected to the entry of new
products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.
The marketability of any product candidate for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide
adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect the pressure on healthcare pricing will continue
to increase. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more
products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
U.S. Healthcare Reform
In the United States and some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and regulatory changes and proposed changes
regarding the healthcare system directed at broadening the availability of healthcare, improving the quality of healthcare, and containing or lowering the cost of healthcare.
Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Among other things,
the Tax Cuts and Jobs Act of 2017, or TCJA, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on
certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a
U.S. District Court Judge in the Northern District of Texas, (the “Texas District Court Judge”), ruled that the individual mandate is a critical and inserverable feature of the
Affordable Care Act (“ACA”), and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. The Texas District Court
Judge, as well as the Trump Administration and CMS, have stated that the ruling will have no immediate effect, and on December 30, 2018 the Texas District Court Judge
issued an order staying the judgment pending appeal. It is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA.
Congress also could consider additional legislation to repeal, replace, or further modify elements of the ACA. Thus, the full impact of the ACA, or any law replacing elements of
it, and the political uncertainty regarding any repeal and replacement on the ACA, on our business remains unclear. Many of the details regarding the implementation of the
ACA are yet to be determined, and at this time, it remains unclear the full effect that the ACA would have on our business. There have been judicial and Congressional
challenges to the ACA, and we expect such challenges and amendments to continue in the future.
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Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. Additionally, there have been several recent U.S. Congressional
inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient
programs and reform government program reimbursement methodologies for drugs.
We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal, state and foreign legislative and regulatory developments are likely, and we
expect ongoing initiatives to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates and may affect our
overall financial condition and ability to develop product candidates.
We anticipate that current and future U.S. legislative healthcare reforms may result in additional downward pressure on the price that we receive for any approved product, if
covered, and could seriously harm our business. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments
from private payors.
Non-U.S. Regulation
Before our products can be marketed outside of the United States, they are subject to regulatory approval of the respective authorities in the country in which the product should
be marketed. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. No action can be
taken to market any product in a country until an appropriate application has been approved by the regulatory authorities in that country. The current approval process varies
from country to country, and the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product must also be
approved. The pricing review period often begins after market approval is granted. Even if a product is approved by a regulatory authority, satisfactory prices might not be
approved for such product.
In Europe, marketing authorizations may be submitted at a centralized, a decentralized or national level; however, the centralized procedure is mandatory for the approval of
biotechnology products and provides for the grant of a single marketing authorization that is valid in all European Union member states. There can be no assurance that the
chosen regulatory strategy will secure regulatory approval on a timely basis or at all.
While we intend to market our products outside the United States in compliance with our respective license agreements, we have not made any applications with non-U.S.
authorities and have no timeline for such applications or marketing.
Research and Development
We have built an internal and external research and development organization that includes expertise in discovery research, preclinical development, product formulation,
analytical chemistry, manufacturing, clinical development and regulatory and quality assurance. Sponsors of clinical trials of FDA-regulated products, including drugs, are
required to register and disclose certain clinical trial information. Our cancer trials have been registered on clinicaltrials.gov. Information related to the product, patient
population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated
to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has
been approved. Competitors may use this publicly available information to gain knowledge regarding the progress of development. Research and development expenses were
$16.2 million and $8.3 million during the years ended December 31, 2018 and 2017, respectively.
Emerging Growth Company
Until December 31, 2018, we were an emerging growth company. As of January 1, 2019 we are no longer an emerging growth company under the Jumpstart Our Business
Startups Act enacted in April 2012 (“JOBS ACT”), which was enacted in April 2012. Under the JOBS ACT, a company should be deemed an emerging growth company until
the earliest of:
(a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more;
(b) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective
registration statement;
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(c) the date on which we have issued more than $1.0 billion in non-convertible debt, during the previous 3-year period, issued; or
(d) the date on which we are deemed to be a large accelerated filer.
As an emerging growth company, we were subject to reduced public company reporting requirements and were exempt from Section 404(b) of Sarbanes Oxley. Section 404(a)
requires issuers to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This
statement shall also assess the effectiveness of such internal controls and procedures. Section 404(b) requires that the registered accounting firm shall, in the same report, attest
to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.
As an emerging growth company, we were also exempt from Section 14A(a) and (b) of the Exchange Act, which require stockholder approval, on an advisory basis, of
executive compensation and golden parachutes.
Our Corporate Background and Information
We were incorporated under the laws of the State of Delaware on June 10, 2008. Our principal offices are located at 801 Capitola Drive, Suite 12, Durham, North Carolina
27713. Our website address is www.heatbio.com. The information contained in, and that can be accessed through our website, is not incorporated into and is not a part of this
report. We make available on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably
practicable after those reports are filed with the U.S. Securities and Exchange Commission (the “SEC”). The following Corporate Governance documents are also posted on our
website: Code of Conduct, Code of Ethics for Financial Management and the Charters for the following Committees of the Board of Directors: Audit Committee, Compensation
Committee, and Nominating Committee. Our phone number is (919) 240-7133 and our facsimile number is (919) 305-8566. Our filings may also be read and copied at the
SEC's Public Reference Room at 100 F Street NE, Room 1580 Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. The address of that website is www.sec.gov.
References to Heat Biologics also include references to our 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., Zolovax Inc., and Pelican, unless otherwise indicated. On May 30, 2012, we formed two wholly-owned
subsidiaries, Heat Biologics III, Inc. and Heat Biologics IV, Inc. Heat formed Heat Biologics GmbH (Heat GmbH), a wholly-owned limited liability company, organized in
Germany on September 11, 2012. Heat also formed Heat Biologics Australia Pty LTD, a wholly-owned company, registered in Australia on March 14, 2014. On October 25,
2016 Heat formed a wholly-owned subsidiary, Zolovax, Inc., to focus on the development of gp96-based vaccines targeting Zika, HIV, West Nile, dengue and yellow fever. In
June 2012, we divested our 92.5% interest in Pelican (formerly known as Heat Biologics II, Inc.). On April 28, 2017, we completed the acquisition of an 80% controlling
interest in Pelican, a related party prior to acquisition. In October 2018, Heat entered into an agreement with UM whereby UM exchanged its shares of stock in Heat’s
subsidiaries, Heat I, Inc. and Pelican, resulting in us owning 100% of Heat I, Inc. and increasing its controlling ownership in Pelican from 80% to 85%. In November 2018 Heat
formed two wholly-owned subsidiaries, Delphi Therapeutics, Inc. and Scorpion Biosciences, Inc. We assigned our proprietary rights related to the development and
application of our ImPACT® therapy platform to Heat Biologics I, Inc.
Employees
As of December 31, 2018, we had a total of 30 full-time employees. We believe our relationships with our employees are satisfactory. None of our employees is represented by
a labor union. We anticipate that we will need to identify, attract, train and retain other highly skilled personnel to pursue our development program. Hiring for such personnel is
competitive, and there can be no assurance that we will be able to retain our key employees or attract, assimilate or retain the qualified personnel necessary for the development
of our business.
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Item 1A.
Risk Factors
Investors should carefully consider the risks described below before deciding whether to invest in our securities. If any of the following risks actually occur, our business,
financial condition or results of operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your
investment. Our actual results could differ materially from those anticipated in the forward-looking statements made throughout this Annual Report on Form 10-K as a result of
different factors, including the risks we face described below.
Risks Relating to our Company
We have had limited operations to date.
We are a clinical stage company and have had limited operations to date as has our subsidiary, Pelican. We have yet to demonstrate our ability to overcome the risks frequently
encountered in our industry and are still subject to many of the risks common to such enterprises, including our ability to implement our business plan, market acceptance of our
proposed business and products, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, competition from better funded and
experienced companies, and uncertainty of our ability to generate revenues. There is no assurance that our activities will be successful or will result in any revenues or profit,
and the likelihood of our success must be considered in light of the stage of our development. To date, we have not generated any revenue from product sales and our only
revenue to date has been grant revenue that Pelican has received from CPRIT and a small amount of revenue from a research funding agreement. Even if we generate revenue
from product sales, which is not anticipated for several years, if at all, there can be no assurance that we will be profitable. In addition, no assurance can be given that we will be
able to consummate our business strategy and plans, or that financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or
significantly impede the implementation of such plans. We have insufficient results for investors to use to identify historical trends. Investors should consider our prospects in
light of the risk, expenses and difficulties we will encounter as an early stage company. Our revenue and income potential is unproven and our business model is continually
evolving. We are subject to the risks inherent to the operation of a new business enterprise, and cannot assure you that we will be able to successfully address these risks.
We have a limited operating history upon which to evaluate our ability to commercialize our products.
We are a clinical stage company and our success is dependent upon our ability to obtain regulatory approval for and commercialize our products and we have not demonstrated
an ability to perform the functions necessary for the approval or successful commercialization of any product candidates. The successful commercialization of any product
candidates will require us to perform a variety of functions, including:
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continuing to undertake preclinical development and successfully enroll patients in clinical trials;
participating in regulatory approval processes;
formulating and manufacturing products; and
conducting sales and marketing activities.
While various members of our management and staff have prior significant experience in conducting cancer trials, our company, to date, we have not successfully completed
any late stage clinical trials and we have limited experience conducting and enrolling patients in clinical trials. Until recently, our operations, including the operations of Pelican,
have been limited primarily to organizing and staffing, acquiring, developing and securing our proprietary technology and undertaking preclinical trials and preparing for our
early clinical and preclinical trials of our product candidates. These operations provide a limited basis for you to assess our ability to commercialize our product candidates and
the advisability of investing in our securities.
We have incurred net losses every year since our inception and expect to continue to generate operating losses and experience negative cash flows and it is uncertain
whether we will achieve profitability.
For the years ended December 31, 2018 and 2017, we incurred a net loss of $16.6 million and $12.4 million, respectively. We have an accumulated deficit of $84.6 million
through December 31, 2018. We expect to continue to incur operating losses until such time, if ever, as we are able to achieve sufficient levels of revenue from operations. Our
ability to achieve profitability will depend on us obtaining regulatory approval for our product candidates and market acceptance of our product offerings and our capacity to
develop, introduce and sell our products to our targeted markets. There can be no assurance that any of our product candidates will be approved for commercial sale, or even if
our product candidates are approved for commercial sale that we will ever generate significant sales or achieve profitability. Accordingly, the extent of future losses and the time
required to achieve profitability, if ever, cannot be predicted at this point.
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Even if we succeed in developing and commercializing one or more product candidates, we expect to incur substantial losses for the foreseeable future and may never become
profitable. We also expect to continue to incur significant operating expenses and anticipate that our expenses will increase substantially in the foreseeable future as we:
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continue to undertake preclinical development and conduct clinical trials for product candidates;
seek regulatory approvals for product candidates;
implement additional internal systems and infrastructure; and
hire additional personnel.
We also expect to experience negative cash flows for the foreseeable future as we fund our operating losses. As a result, we will need to generate significant revenues or raise
additional financing in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or
maintain profitability would likely negatively impact the value of our securities and financing activities.
We will need to raise additional capital to operate our business and our failure to obtain funding when needed may force us to delay, reduce or eliminate our development
programs or commercialization efforts.
During the year ended December 31, 2018, our operating activities used net cash of approximately $21.7 million and as of December 31, 2018, our cash and cash equivalents
and short-term investments were approximately $27.7 million. During the year ended December 31, 2017, our operating activities used net cash of approximately $6.4 million
and as of December 31, 2017 our cash and cash equivalents were approximately $9.8 million. We have experienced significant losses since inception and have a significant
accumulated deficit. As of December 31, 2018, our accumulated deficit totaled approximately $84.6 million and as of December 31, 2017, our accumulated deficit totaled
approximately $68.8 million on a consolidated basis. We expect to incur additional operating losses in the future and therefore expect our cumulative losses to increase. We do
not expect to derive revenue from any significant source in the near future until we or our potential partners successfully commercialize our products. Despite cost-saving
measures that we implemented, we expect our expenses to increase if and when we initiate and conduct Phase 3 and other clinical trials, and seek marketing approval for our
product candidates. Until such time as we receive approval from the FDA and other regulatory authorities for our product candidates, we will not be permitted to sell our
products and therefore will not have product revenues from the sale of products. For the foreseeable future, we will have to fund all of our operations and capital expenditures
from equity and debt offerings, cash on hand, licensing fees and grants.
We expect that our current cash and cash equivalents and short-term investments will allow us to continue the enrollment of additional patients in the Phase 2 clinical trial for
HS-110; however, if the trial design or size were to change, we may need to raise money earlier than anticipated.
We will need to raise additional capital to fund our future operations and we cannot be certain that funding will be available on acceptable terms on a timely basis, or at all. To
meet our financing needs, we are considering multiple alternatives, including, but not limited to, current and additional equity financings, which we expect will include sales of
common stock through at the market issuances, debt financings and/or funding from partnerships or collaborations. Our ability to raise capital through the sale of securities may
be limited by the various rules of the SEC and the NASDAQ Capital Market that place limits on the number and dollar amount of securities that we may sell. There can be no
assurance that we will be able to meet the requirements for use of at-market-issuance agreements, especially in light of the fact that we are subject to the smaller reporting
company requirements, or to complete any such transactions on acceptable terms or otherwise. Any additional sources of financing will likely involve the issuance of our equity
or debt securities, which will have a dilutive effect on our stockholders. To the extent that we raise additional funds by issuing equity securities, our stockholders may
experience significant dilution. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct our business. If we do not succeed in
raising additional funds on acceptable terms, we may be unable to complete planned preclinical and clinical trials or obtain approval of our product candidates from the FDA
and other regulatory authorities, or continue to maintain our listing on the NASDAQ Capital Market. In addition, we could be forced to delay, discontinue or curtail product
development, forego sales and marketing efforts, and forego licensing in attractive business opportunities. Any additional sources of financing will likely involve the issuance of
our equity or debt securities, which will have a dilutive effect on our stockholders.
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We currently have no product revenues and may not generate product revenue at any time in the near future, if at all.
We currently have no products for sale and we cannot guarantee that we will ever have any drug products approved for sale. We and our product candidates are subject to
extensive regulation by the FDA, and comparable regulatory authorities in other countries governing, among other things, research, testing, clinical trials, manufacturing,
labeling, promotion, marketing, adverse event reporting and recordkeeping of our product candidates. Until, and unless, we receive approval from the FDA and other regulatory
authorities for our product candidates, we cannot commercialize our product candidates and will not have product revenues. In addition, the technology that we out-licensed is
in the early stages of development and there is a low likelihood of success for any such technology at that stage, therefore there can be no assurance that any products will be
developed by such licensee or that we will derive any revenue from such licensee. For the foreseeable future, we will have to fund all of our operations from equity and debt
offerings, cash on hand and grants. In addition, changes may occur that would consume our available capital at a faster pace than expected, including changes in and progress of
our development activities, acquisitions of additional candidates and changes in regulation. Moreover, preclinical studies and clinical trials may not start or be completed as we
forecast and may not achieve the desired results. Therefore, we expect that we will seek additional sources of funding, such as additional financing or grant funding, and
additional financing may not be available on favorable terms, if at all. Our ability to raise capital through the sale of equity may be limited by the various rules of the Securities
and Exchange Commission and The NASDAQ Capital Market that place limits on the number of shares of stock that may be sold. If we do not succeed in raising additional
funds on acceptable terms, we may be unable to complete planned preclinical and clinical trials or obtain approval of our product candidates from the FDA and other regulatory
authorities. In addition, we could be forced to delay, discontinue or curtail product development, forego sales and marketing efforts, and forego licensing in attractive business
opportunities. Any additional sources of financing will likely involve the issuance of our equity or debt securities, which will have a dilutive effect on our stockholders.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately
report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
During the second quarter of 2017, we identified a material weakness in our controls over financial reporting related to the purchase price accounting for the acquisition that
occurred during the quarter. Specifically, we did not design and maintain effective controls related to the acquisition for the purchase price of the acquired assets and liabilities
of Pelican. Although the control deficiencies were remediated by the end of the fiscal year there can be no assurance that the internal control over financial reporting, as
modified, will enable us to identify or avoid material weaknesses in the future.
We are substantially dependent on the success of our product candidates, only one of which is currently being tested in a clinical trial, and we cannot provide any
assurance that any of our product candidates will be commercialized.
Our main focus and the investment of a significant portion of our efforts and financial resources has been in the development of our product candidate, HS-110, for which we
are currently actively conducting a Phase 2 clinical trial. HS-110 is in clinical stage development. Our other product candidates are all at a pre-clinical stage. We expect that at
least one Phase 3 clinical trial of HS-110 will be required to gain approval by the FDA. Our future success depends heavily on our ability to successfully manufacture, develop,
obtain regulatory approval, and commercialize our product candidates, which may never occur. Before commercializing this product candidate, we will require additional
clinical trials and regulatory approvals for which there can be no guarantee that we will be successful. We currently generate no revenues from any of our product candidates,
and we may never be able to develop or commercialize a marketable drug.
If we experience delays in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
Our inability to locate and enroll a sufficient number of eligible patients in our clinical trials for any of our current or future clinical trials, would result in significant delays or
may require us to abandon one or more clinical trials. Our ability to enroll patients in trials is affected by many factors out of our control, including the size and nature of the
patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials, and clinicians’ and
patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the
indications we are investigating.
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Risks Relating to our Business
If we do not obtain the necessary regulatory approvals in the United States and/or other countries we will not be able to sell our product candidates.
We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates or any product candidates we acquire or develop in the
future. We will need FDA approval to commercialize our product candidates in the United States and approvals from the FDA-equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any product candidate, we must submit to the FDA a BLA,
demonstrating that the product candidate is safe, pure and potent, or effective for its intended use. This demonstration requires significant research including preclinical studies,
as well as clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate
and requires substantial resources for research, development and testing. We cannot predict whether our clinical trials will demonstrate the safety and efficacy of our product
candidates or if the results of any clinical trials will be sufficient to advance to the next phase of development or for approval from the FDA. We also cannot predict whether our
research and clinical approaches will result in drugs or therapeutics that the FDA considers safe and effective for the proposed indications. The FDA has substantial discretion in
the drug approval process. The approval process may be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that
occur prior to or during our regulatory review. Delays in obtaining regulatory approvals may:
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prevent or delay commercialization of, and our ability to derive product revenues from, our product candidates; and
diminish any competitive advantages that we may otherwise believe that we hold.
Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our BLAs. We may never obtain regulatory clearance for any of our product
candidates. Failure to obtain FDA approval of any of our product candidates will severely undermine our business by leaving us without a saleable product, and therefore
without any source of revenues, until another product candidate can be developed. There is no guarantee that we will ever be able to develop or acquire another product
candidate.
In addition, the FDA may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies, as a condition to granting marketing approval of
a product. Regulatory approval of oncology products often requires that patients in clinical trials be followed for long periods to assess their overall survival. The results
generated after approval could result in loss of marketing approval, changes in product labeling, and/or new or increased concerns about the side effects or efficacy of a product.
The FDA has significant post-market authority, including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety
information, and compliance with FDA-approved risk evaluation and mitigation strategies. The FDA’s exercise of its authority has in some cases resulted, and in the future,
could result, in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory
requirements and potential restrictions on sales of approved products.
In foreign jurisdictions, we must also receive approval from the appropriate regulatory authorities before we can commercialize any vaccines. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval procedures described above. There can be no assurance that we will receive the approvals
necessary to commercialize our product candidates for sale outside the United States.
Our product candidates are in early stages of development, and therefore they will require extensive preclinical and clinical testing.
Because our product candidates are in early stages of development they will require extensive preclinical and clinical testing. HS-110 is our only current product candidate in
clinical trials and our other product candidates are all in the preclinical stage of development. Although we have commenced a Phase 2 clinical trial for HS-110, we cannot
predict with any certainty if or when we might submit a BLA for regulatory approval for any of our product candidates or whether any such BLA will be accepted for review by
the FDA, or whether any BLA will be approved upon review.
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Even if our clinical trials are completed as planned, we cannot be certain that their results will support our proposed indications. Success in preclinical testing and early clinical
trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and
preclinical testing. The results reported for our initial 76 patients in our Phase 1b/2 clinical trial for HS-110 may not be replicated with other patients or other clinical trials. For
example, the Phase 1 HS-410 clinical trial, as well as the interim data from the Phase 2 HS-410 clinical study, showed evidence of an immune response in NMIBC patients
exposed to HS-410, however, the topline data from the Phase 2 clinical trial reported that there was no statistically significant difference in the primary endpoint between the
vaccine and placebo arms of the trial. The Phase 2 clinical trial of HS-410 used doses and dosing regimens which had not previously been tested, and combinations with other
immunotherapy agents. In addition, immune response is not an acceptable regulatory endpoint for approval, and the HS-410 Phase 1 trial involved a small sample size and was
not randomized or blinded. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for their proposed uses. This failure could cause
us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay and possibly preclude
the filing of any BLAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues.
Clinical trials are very expensive, time-consuming, and difficult to design and implement.
As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA and other
regulatory authorities. The number and design of the clinical trials that will be required varies depending upon product candidate, the condition being evaluated and the trial
results themselves. Therefore, it is difficult to accurately estimate the cost of the clinical trials. Clinical trials are very expensive and difficult to design and implement, in part
because they are subject to rigorous regulatory requirements. The clinical trial process is also time consuming. We estimate that clinical trials of our product candidates will take
at least several years to complete. Furthermore, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The
commencement and completion of clinical trials may be delayed or prevented by several factors, including:
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unforeseen safety issues;
failure to determine appropriate dosing;
greater than anticipated cost of our clinical trials;
failure to demonstrate effectiveness during clinical trials;
slower than expected rates of patient recruitment or difficulty obtaining investigators;
patient drop-out or discontinuation;
inability to monitor patients adequately during or after treatment;
third party contractors failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;
insufficient or inadequate supply or quality of product candidates or other necessary materials to conduct our trials;
potential additional safety monitoring, or other conditions required by FDA or comparable foreign regulatory authorities regarding the scope or design of our clinical
trials, or other studies requested by regulatory agencies;
problems engaging IRBs to oversee trials or in obtaining and maintaining IRB approval of studies;
imposition of clinical hold or suspension of our clinical trials by regulatory authorities; and
inability or unwillingness of medical investigators to follow our clinical protocols.
In addition, we or the FDA may suspend or terminate our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds
deficiencies in our Investigational New Drug, or IND, submissions or the conduct of these trials. Therefore, we cannot predict with any certainty when, if ever, future clinical
trials will commence or be completed.
We are at risk of a clinical hold at any time based on the evaluation of the data and information submitted to the governing regulatory authorities. On February 2, 2016, we
received notice from the FDA of a partial clinical hold on our Phase 2 HS-410 clinical trial despite the fact that we did not have a safety concern. The partial clinical hold came
after we concluded that the cell line on which HS-410 is based had been previously misidentified. The partial clinical hold was lifted on February 10, 2016. However, if in the
future we are delayed in addressing, or unable to address, any FDA concerns, we could be delayed, or prevented, from conducting our clinical trials.
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Misidentification of cell lines could impact our clinical development and intellectual property rights.
Our product candidates are based on human cell lines produced by third parties and licensed by us. Cell line characterization and contamination is a known issue in biomedical
research. For example, despite standard procedures to identify the origins and characteristics of our cell lines in early 2016 we discovered that the origin of the cell line used in
HS-410 was misidentified. The misidentification resulted in the FDA placing our HS-410 Phase 2 clinical trial on partial clinical hold while the FDA reviewed certain updated
documentation provided by us related to the misidentification. In the event we were to use a cell line in the future that is also misidentified, the clinical development of the
product candidate utilizing the mischaracterized cell line could be materially and adversely affected, we could lose the right to use the cell line and our intellectual property
rights relating to our development of product candidates based on that cell line could be materially and adversely affected. Although we have implemented certain additional
procedures to properly identify our cell lines, we may not be able to detect that a cell line has been mischaracterized or mislabeled by a third party.
There is uncertainty as to market acceptance of our technology and product candidates.
Even if the FDA approves one or more of our product candidates, the products may not gain broad market acceptance among physicians, healthcare payers, patients, and the
medical community. We have conducted our own research into the markets for our product candidates; however, we cannot guarantee market acceptance of our product
candidates, if approved, and have somewhat limited information on which to estimate our anticipated level of sales. Our product candidates, if approved, will require patients,
healthcare providers and doctors to adopt our technology. Our industry is susceptible to rapid technological developments and there can be no assurance that we will be able to
match any new technological advances. If we are unable to match the technological changes in the needs of our customers the demand for our products will be reduced.
Acceptance and use of any products we market will depend upon a number of factors including:
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perceptions by members of the health care community, including physicians, about the safety and effectiveness of our products;
limitation on use or warnings required by FDA in our product labeling;
cost-effectiveness of our products relative to competing products;
convenience and ease of administration;
potential advantages of alternative treatment methods;
availability of reimbursement for our products from government or other healthcare payers; and
effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.
Because we expect virtually all of our product revenues for the foreseeable future to be generated from sales of our current product candidates, if approved, the failure of these
therapeutics to find market acceptance would substantially harm our business and would adversely affect our revenue.
Our development program partially depends upon third-party researchers who are outside our control.
We are dependent upon independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials under agreements with us. These
collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a
priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and
resources to our development programs, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new product candidates, if
any, will be delayed if obtained at all. These collaborators may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators
assist our competitors at our expense, our competitive position would be harmed.
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We rely significantly on third parties to formulate and manufacture our product candidates.
We have developed certain expertise in the formulation, development and/or manufacturing of biologics but do not intend to establish our own manufacturing facilities. To date,
the selection and initial replication of our biological cell lines used in our trials has been performed by individuals working at third party laboratories over which we have little
process or quality control and therefore the process and replication could be subject to human error. We lack the resources and expertise to formulate or manufacture our own
product candidates. The investigational products for our clinical trials are manufactured by our contractors under current good manufacturing practices, (“cGMPs”) and we have
entered into agreements with commercial-scale manufacturers for the production and supply of investigational product for additional Phase 2 and Phase 3 clinical trials as well
as commercialization. Our agreement with the manufacturer of our HS-110 product expires in October 2019, and we have no assurance that we can extend current agreement or
renegotiate our agreement on favorable terms if at all. Manufacturing considerations which may include, lead time and capacity considerations of our third-party manufacturers
to provide clinical supply of our product candidates, could delay our clinical trials. We must also develop and validate a potency assay prior to submission of a license
application. Such assays have traditionally proven difficult to develop for cell-based products and must be established prior to initiating any Phase 3 clinical trials. If any of our
current product candidates, or any product candidates we may develop or acquire in the future, receive FDA approval, we will rely on one or more third-party contractors for
manufacturing. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:
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We may be unable to renew or renegotiate current agreements on favorable terms, or identify manufacturers on acceptable terms or at all because the number of
potential manufacturers with appropriate expertise and facilities is limited.
If we change manufacturers at any point during the development process or after approval, we will be required to demonstrate comparability between the products made
by the old and new manufacturers. If we are unable to do so, we may need to conduct additional clinical trials with product manufactured by the new manufacturer.
Accordingly, it may be necessary to evaluate the comparability of the HS-110 or other product candidates produced by the two different manufacturers at some point
during the clinical development process.
If we change the manufacturer of a product subsequent to the approval of the product, we will need to obtain approval from the FDA of the change in manufacturer.
Any such approval would likely require significant testing and expense, and the new manufacturer may be subject to a cGMP inspection prior to approval.
Our third-party manufacturers might be unable to formulate and manufacture our product candidates in the volume and with the quality required to meet our clinical
needs and commercial needs, if any.
Our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to
successfully produce, store and distribute our product candidates.
Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, and corresponding state agencies to ensure compliance with cGMPs and other
government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.
If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property
rights to the innovation.
Our contract manufacturers have in the past and may in the future encounter difficulties in achieving quality control and quality assurance and may experience
shortages in qualified personnel. Our contract manufacturers are subject to inspections by the FDA and comparable agencies in other jurisdictions to assess compliance
with applicable regulatory requirements. Any failure to follow cGMP or other regulatory requirements or delay, interruption or other issues that arise in the
manufacture, packaging, or storage of our products as a result of a failure of the facilities or operations of third parties to comply with regulatory requirements or pass
any regulatory authority inspection could significantly impair our ability to develop and commercialize our products, including leading to significant delays in the
availability of products for our clinical studies or the termination or hold on a clinical study, or the delay or prevention of a filing or approval of marketing applications
for our product candidates. Significant noncompliance could also result in the imposition of sanctions, including fines, injunctions, civil penalties, failure of regulatory
authorities to grant marketing approvals for our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products,
operating restrictions and criminal prosecutions, any of which could damage our reputation. If we or our contract manufacturers are not able to maintain regulatory
compliance, we may not be permitted to market our products and/or may be subject to product recalls, seizures, injunctions, or criminal prosecution.
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Each of these risks could delay our clinical trials, the approval, if any, of our product candidates by the FDA or the commercialization of our product candidates or could also
result in higher costs or deprive us of potential product revenues.
For our product candidates, we rely upon third parties to manufacture and supply our drug substance. Any problems experienced by either our third-party manufacturers
or their vendors could result in a delay or interruption in the supply of our product candidate to us until the third-party manufacturer or its vendor cures the problem or
until we locate and qualify an alternative source of manufacturing and supply.
For our product candidates, we currently rely on third-party manufacturers to purchase from their third-party vendors the materials necessary to produce our product candidates
and manufacture our product candidates for our clinical studies. If any of our third-party manufacturers were to experience any prolonged disruption for our manufacturing we
could be forced to seek additional third party manufacturing contracts, thereby increasing our development costs and negatively impacting our timeliness and any
commercialization costs.
For our ongoing clinical trial of HS-110, we are administering our product candidates, in combination with other immunotherapy agents. Any problems obtaining the
other immunotherapy agents could result in a delay or interruption in our clinical trials.
For our ongoing clinical trials of HS-110, we administer our product candidate in combination with another immunotherapy agent, nivolumab or pembrolizumab. Therefore, our
success will be dependent upon the continued use of these other immunotherapy agents. We expect that our other product candidates will also be administered in combination
with immunotherapy agents owned by third parties. If any of the immunotherapy agents that are used in our clinical trials are unavailable while the trials are continuing, our
timeliness and commercialization costs could be impacted. In addition, if any of these other immunotherapy agents are determined to have safety of efficacy problems, our
clinical trials and commercialization efforts would be adversely affected.
Adverse effects resulting from other immunotherapy drugs or therapies could also negatively affect the perceptions by members of the health care community, including
physicians, about the safety and effectiveness of our product candidates.
There are many other companies that have developed or are currently trying to develop immunology vaccines for the treatment of cancer. If adverse effects were to result from
any immunotherapy drugs or therapies being developed, manufactured and marketed by others it could be attributed to our products or immunotherapy protocols as a whole. In
fact, in the past biologics have been associated with certain safety risks and other companies developing biologics have had patients in trials suffer from serious adverse events,
including death. Any such attribution could negatively affect the perceptions by members of the health care community, including physicians, about the safety and effectiveness
of our product candidates and the future of immunotherapy for the treatment of cancer. Our industry is susceptible to rapid technological changes and there can be no assurance
that we will be able to match any new technological challenges presented by the adverse effects resulting from immunotherapy drugs or therapies developed, manufactured or
marketed by others.
Even if we are able to obtain regulatory approval for our product candidates, we will continue to be subject to ongoing and extensive regulatory requirements, and our
failure, or the failure of our contract manufacturers, to comply with these requirements could substantially harm our business.
If the FDA approves any of our product candidates, the labeling, manufacturing, packaging, adverse event reporting, storage, advertising, promotion and record keeping for our
products will be subject to ongoing FDA requirements and continued regulatory oversight and review. We may also be subject to additional FDA post-marketing obligations. If
we are not able to maintain regulatory compliance, we may not be permitted to market our product candidates and/or may be subject to product recalls or seizures. The
subsequent discovery of previously unknown problems with any marketed product, including AEs of unanticipated severity or frequency, may result in restrictions on the
marketing of the product, and could include withdrawal of the product from the market.
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We have no experience selling, marketing or distributing products, and have no internal capability to do so.
We currently have no sales, marketing or distribution capabilities. We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of
our proposed products, if approved. Our future success depends, in part, on our ability to enter into and maintain collaborative relationships for such capabilities, the
collaborator’s strategic interest in the products under development and such collaborator’s ability to successfully market and sell any such products. We intend to pursue
collaborative arrangements regarding the sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such
collaborative arrangements, or if able to do so, that our collaborators will have effective sales forces. To the extent that we decide not to, or are unable to, enter into
collaborative arrangements with respect to the sales and marketing of our proposed products, significant capital expenditures, management resources and time will be required
to establish and develop an in-house marketing and sales force with technical expertise. There can also be no assurance that we will be able to establish or maintain relationships
with third party collaborators or develop in-house sales and distribution capabilities. To the extent that we depend on third parties for marketing and distribution, any revenues
we receive will depend upon the efforts of such third parties, and there can be no assurance that such efforts will be successful. In addition, there can also be no assurance that
we will be able to successfully market and sell our products in the United States or overseas on our own.
We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize products.
We may seek to enter into strategic partnerships in the future, including alliances with other biotechnology or pharmaceutical companies, to enhance and accelerate the
development and commercialization of our products. We face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming
and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for any future product candidates and
programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early of a stage of development
for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy or return on
investment. Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us and we may not be able to
maintain such strategic partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product are disappointing.
If we ultimately determine that entering into strategic partnerships is in our best interest, but either fail to enter into, are delayed in entering into or fail to maintain such strategic
partnerships:
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the development of certain of our current or future product candidates may be terminated or delayed;
our cash expenditures related to development of certain of our current or future product candidates may increase significantly and we may need to seek additional
financing;
we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted;
we will bear all of the risk related to the development of any such product candidates; and
the competitiveness of any product candidate that is commercialized could be reduced.
To the extent we elect to enter into licensing or collaboration agreements to partner our product candidates, our dependence on such relationships may adversely affect our
business.
Our commercialization strategy for certain of our product candidates may depend on our ability to enter into agreements with collaborators to obtain assistance and funding for
the development and potential commercialization of these product candidates. Supporting diligence activities conducted by potential collaborators and negotiating the financial
and other terms of a collaboration agreement are long and complex processes with uncertain results. Even if we are successful in entering into one or more collaboration
agreements, collaborations may involve greater uncertainty for us, as we have less control over certain aspects of our collaborative programs than we do over our proprietary
development and commercialization programs. We may determine that continuing a collaboration under the terms provided is not in our best interest, and we may terminate the
collaboration. Our collaborators could delay or terminate their agreements, and our product candidates subject to collaborative arrangements may never be successfully
developed or commercialized.
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Further, our future collaborators may develop alternative products or pursue alternative technologies either on their own or in collaboration with others, including our
competitors, and the priorities or focus of our collaborators may shift such that our programs receive less attention or fewer resources than we would like, or they may be
terminated altogether. Any such actions by our collaborators may adversely affect our business prospects and ability to earn revenues. In addition, we could have disputes with
our future collaborators, such as the interpretation of terms in our agreements. Any such disagreements could lead to delays in the development or commercialization of any
potential products or could result in time-consuming and expensive litigation or arbitration, which may not be resolved in our favor.
If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.
The market for our product candidates is characterized by intense competition and rapid technological advances. If any of our product candidates receives FDA approval, it will
compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater
therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to
capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.
We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions,
government agencies and other public and private research organizations. Many of these competitors have oncology compounds already approved or in development. In
addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs or have substantially greater
financial resources than we do, as well as significantly greater experience in:
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developing drugs, biologics and other therapies;
undertaking preclinical testing and clinical trials;
obtaining FDA and other regulatory approvals of drugs, biologics and other therapies;
formulating and manufacturing drugs, biologics and other therapies; and
launching, marketing and selling drugs, biologics and other therapies.
We have limited protection for our intellectual property, which could impact our competitive position.
We intend to rely on a combination of common law copyright, patent, trademark, and trade secret laws and measures to protect our proprietary information. We have obtained
exclusive rights to license the technology for which patent protection has been obtained; however, certain patents expire in 2019 and such protection does not prevent
unauthorized use of such technology. In addition, our license for certain cell lines are subject to non-exclusive licenses and do not have patent protection. Trademark and
copyright protections may be limited, and enforcement could be too costly to be effective. It may also be possible for unauthorized third parties to copy aspects of, or otherwise
obtain and use, our proprietary information without authorization, including, but not limited to, product design, software, customer and prospective customer lists, trade secrets,
copyrights, patents and other proprietary rights and materials. Other parties can use and register confusingly similar business, product and service names, as well as domain
names, which could divert customers, resulting in a material adverse effect on our business, operating results and financial condition.
If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. Competitors may challenge the
validity or scope of our patents or future patents we may obtain. In addition, our licensed patents may not provide us with a meaningful competitive advantage. We may be
required to spend significant resources to monitor and police our licensed intellectual property rights. We may not be able to detect infringement and our competitive position
may be harmed. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited
in some foreign countries, which could make it easier for competitors to capture market share.
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The technology we license, our products or our development efforts may be found to infringe upon third-party intellectual property rights.
Third parties may in the future assert claims or initiate litigation related to their patent, copyright, trademark and other intellectual property rights in technology that is important
to us. The asserted claims and/or litigation could include claims against us, our licensors or our suppliers alleging infringement of intellectual property rights with respect to our
products or components of those products. Regardless of the merit of the claims, they could be time consuming, result in costly litigation and diversion of technical and
management personnel, or require us to develop a non-infringing technology or enter into license agreements. We have not undertaken an exhaustive search to discover any
third party intellectual patent rights, which might be infringed by commercialization of the product candidates described herein. Although we are not currently aware of any
such third-party intellectual patent rights, it is possible that such rights currently exist or might be obtained in the future. In the event that a third party controls such rights and
we are unable to obtain a license to such rights on commercially reasonable terms, we may not be able to sell or continue to develop our products, and may be liable for
damages for such infringement. We cannot assure you that licenses will be available on acceptable terms, if at all. Furthermore, because of the potential for significant damage
awards, which are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims resulting in large settlements. If any infringement or other intellectual
property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable
terms and conditions, our business, operating results and financial condition could be materially adversely affected.
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to:
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
abandon an infringing drug or therapy candidate;
redesign our products or processes to avoid infringement;
stop using the subject matter claimed in the patents held by others;
pay damages; or
defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and
management resources.
We rely on licenses to use various technologies that are material to our business and if the agreements were to be terminated or if other rights that may be necessary or we
deem advisable for commercializing our intended products cannot be obtained, it would halt our ability to market our products and technology, as well as have an
immediate material adverse effect on our business, operating results and financial condition.
We have licensing agreements with certain universities granting us the right to use certain critical intellectual property. The terms of the licensing agreements continue until the
end of the life of the last patent to expire. If we breach the terms of these licensing agreements, including any failure to make minimum royalty payments required thereunder or
failure to reach certain developmental milestones, using best efforts to introduce a licensed product in certain territories by certain dates, the licensor has the right to terminate
the license. If we were to lose or otherwise be unable to maintain these licenses on acceptable terms, or find that it is necessary or appropriate to secure new licenses from other
third parties, it would halt our ability to market our products and technology, which would have an immediate material adverse effect on our business, operating results and
financial condition.
We may be unable to generate sufficient revenues to meet the minimum annual payments or developmental milestones required under our license agreements.
For the years ended December 31, 2019, 2020, 2021, 2022, and 2023 our minimum annual payment obligations under our licensing agreements, (including the licenses that
Pelican has entered into), required to be paid by us with the passage of time, are approximately $0.07 million, $0.1 million, $0.2 million, $0.8 million and $0.07 million,
respectively. No assurance can be given that we will generate sufficient revenue or raise additional financing to make these minimum royalty payments or milestone payments
owed to the Participating Pelican Stockholders. The license agreements also provide for certain developmental milestones, as does the Purchase Agreement we entered into with
the Participating Pelican Stockholders, including future payments to Pelican based on the achievement of certain milestones. No assurance can be given that we will meet all of
the required developmental milestones. Any failure to make the payments or reach the milestones required by the license agreements would permit the licensor to terminate the
license. If we were to lose or otherwise be unable to maintain these licenses, it would halt our ability to market our products and technology, which would have an immediate
material adverse effect on our business, operating results and financial condition.
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Our ability to generate product revenues will be diminished if our therapies sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.
Our ability to commercialize our therapies, alone or with collaborators, will depend in part on the extent to which reimbursement will be available from:
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government and health administration authorities;
private health maintenance organizations and health insurers; and
other healthcare payers.
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, are challenging the prices charged
for medical products and services. Cost control initiatives could decrease the price that we would receive for any products in the future, which would limit our revenue and
profitability. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs and
therapeutics. We might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payers’ satisfaction. Such studies
might require us to commit a significant amount of management time and financial and other resources. Our future products might not ultimately be considered cost-effective.
Even if one of our product candidates is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover such therapies.
If government and other healthcare payers do not provide adequate coverage and reimbursement levels for one of our products, once approved, market acceptance of such
product could be reduced.
Legislative and regulatory changes affecting the health care industry could adversely affect our business.
Political, economic and regulatory influences are subjecting the health care industry to potential fundamental changes that could substantially affect our results of operations. In
many countries, the government controls the pricing and profitability of prescription pharmaceuticals. In the United States, we expect that there will continue to be federal and
state proposals to implement similar governmental controls. In addition, recent changes in the Medicare program and increasing emphasis on managed care in the United States
will continue to put pressure on pharmaceutical product pricing. It is uncertain whether or when any legislative proposals will be adopted or what actions federal, state, or
private payers for health care treatment and services may take in response to any health care reform proposal or legislation. We cannot predict the effect health care reforms
may have on our business and we can offer no assurances that any of these reforms will not have a material adverse effect on our business. These actual and potential changes
are causing the marketplace to put increased emphasis on the delivery of more cost-effective treatments. In addition, uncertainly remains regarding proposed significant reforms
to the U.S. health care system.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that
could, among other things, prevent or delay marketing approval of our clinical product candidate, restrict or regulate post-approval activities and affect our ability to profitably
sell any product candidate for which we obtain marketing approval. Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the
future by requiring, for example: (i) changes to our manufacturing arrangements, (ii) additions or modifications to product labeling, (iii) the recall or discontinuation of our
products or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect our business, financial condition and results of
operations.
Among policy makers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare
costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly
affected by major legislative initiatives. In March 2010, the ACA, was passed, which substantially changed the way healthcare is financed by both the government and private
insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things, subjects biological products to potential competition by lower-cost
biosimilars, addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused,
instilled, implanted or injected, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to
individuals enrolled in Medicaid managed care organizations, establishes annual fees and taxes on manufacturers of certain branded prescription drugs, and creates a new
Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (70% as of January 1, 2019) point-of-sale discounts off negotiated prices of
applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.
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Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Congress has
considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that
modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance and
delaying the implementation of certain ACA-mandated fees. On December 14, 2018, the Texas District Court Judge, ruled that the individual mandate is a critical and
inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Cuts and Jobs Act of 2017, the remaining provisions of the ACA are invalid as well.
While the Texas District Court Judge, as well as the Trump Administration and the Centers for Medicare & Medicaid Services, or CMS, have stated that the ruling will have no
immediate effect, it is unclear how this decision, subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business.
Moreover, the Drug Supply Chain Security Act imposes obligations on manufacturers of prescription drugs in finished dosage forms. We have not yet adopted the significant
measures that will be required to comply with this law. We are not sure whether additional legislative changes will be enacted, or whether the current regulations, guidance or
interpretations will be changed, or what the impact of such changes on our business, if any, may be.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening the availability of healthcare
and containing or lowering the cost of healthcare. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate
revenue, attain profitability, or commercialize our products. Such reforms could have an adverse effect on anticipated revenue from product candidates that we may
successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop product candidates.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments
will pay for healthcare products, which could result in reduced demand for our clinical product candidate or additional pricing pressures. Any reduction in reimbursement from
Medicare or other government programs may result in a similar reduction in payments from private payors.
We may not successfully effect our intended expansion, which would harm our business prospects.
Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management, and on our
administrative, operational and financial resources. To manage this growth, we must expand our facilities; augment our operational, financial and management systems; and
hire and train additional qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.
We may be exposed to liability claims associated with the use of biological and hazardous materials and chemicals.
Our research and development activities may involve the controlled use of biological and hazardous materials and chemicals. Although we believe that our safety procedures for
using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury
or contamination from these materials. We currently operate one laboratory in North Carolina and Pelican operates a laboratory in Texas. In our laboratory in Texas we
perform contract services for third parties that could involve the use of biological and hazardous materials and chemicals. In the event of such an accident, we could be held
liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and
local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products may require us to incur
substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.
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We rely on key executive officers and scientific and medical advisors, and their knowledge of our business and technical expertise would be difficult to replace.
We are highly dependent on our principal scientific, regulatory and medical advisors and our chief executive officer. Other than a $2.0 million insurance policy we hold on the
life of Jeffrey Wolf, we do not have “key person” life insurance policies for any of our officers or advisors. The loss of the technical knowledge, management and industry
expertise of any of our key personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which could adversely
affect our operating results.
If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.
We will need to hire additional qualified personnel with expertise in preclinical and clinical research, government regulation, formulation and manufacturing, sales and
marketing and accounting and financing. In particular, over the next 12 months, we expect to hire additional new employees both in North Carolina and for Pelican in Texas. In
fact, due to the CPRIT Grant and certain other funding we have received, we are required to hire employees located in Texas. We compete for qualified individuals with
numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for
such personnel will be successful especially in light of the CPRIT Grant requirements, including the requirement that Pelican maintain its headquarters in Texas and use certain
vendors, consultants and employees located in Texas. Attracting and retaining qualified personnel will be critical to our success.
We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.
The testing and marketing of drug and biological product candidates entail an inherent risk of product liability. Product liability claims might be brought against us by
consumers, health care providers or others selling or otherwise coming into contact with our products. We currently operate one laboratory in North Carolina and Pelican
operates a laboratory in Texas. In our laboratory in Texas we perform contract services for third parties. We could incur liability in the performance of these services, including
liability for damage to materials supplied to us. Clinical trial liability claims may be filed against us for damages suffered by clinical trial subjects or their families. If we cannot
successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products which could impact
our ability to continue as a going concern. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims
could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with collaborators. In addition, regardless of merit or eventual outcome, product
liability claims may result in:
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decreased demand for any approved product candidates;
impairment of our business reputation;
withdrawal of clinical trial participants;
costs of related litigation;
distraction of management’s attention;
substantial monetary awards to patients or other claimants;
loss of revenues; and
the inability to successfully commercialize any approved drug candidates.
International expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of
the United States.
Our business strategy incorporates international expansion, including establishing and maintaining clinician marketing and education capabilities outside of the United States
and expanding our relationships with distributors and manufacturers. Doing business internationally involves a number of risks, including:
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multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory requirements and other
governmental approvals, permits and licenses;
failure by us or our distributors to obtain regulatory approvals for the sale or use of our product candidates in various countries;
difficulties in managing foreign operations;
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complexities associated with managing multiple payor-reimbursement regimes or self-pay systems;
limits on our ability to penetrate international markets if our product candidates cannot be processed by a manufacturer appropriately qualified in such markets;
financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate
fluctuations;
reduced protection for intellectual property rights;
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business
restrictions; and
failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintaining accurate
information and control over sales and distributors’ activities.
Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, have a material adverse effect on our financial
condition, results of operations and cash flows.
We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could harm our operating results, dilute our
stockholders’ ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of businesses and assets, such as we did with the Pelican. We also may pursue strategic alliances and joint ventures
that leverage our core technology and industry experience to expand our offerings or distribution. Other than our recent acquisition of 80% of the equity of Pelican, we have no
experience with acquiring other companies and limited experience with forming strategic alliances and joint ventures. We may not be able to find suitable partners or
acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these
acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in significant write-offs or
the incurrence of debt and contingent liabilities, any of which could have a material adverse effect on our financial condition, results of operations and cash flows. Integration of
an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing our existing business. We may
experience losses related to investments in other companies, which could have a material negative effect on our results of operations. We may not identify or complete these
transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance or
joint venture.
To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. If the
price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration. Alternatively, it
may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us,
or at all.
Uncertainty regarding health care reform and declining general economic or business conditions may have a negative impact on our business.
Continuing concerns over U.S. health care reform legislation and energy costs, geopolitical issues, the availability and cost of credit and government stimulus programs in the
United States and other countries have contributed to increased volatility and diminished expectations for the global economy. If the economic climate does not improve or
continues to be uncertain, our business, as well as the financial condition of our suppliers and our third-party payors, could be adversely affected, resulting in a negative impact
on our business, financial condition and results of operations.
The U.S. government may have “march-in rights” to certain of our intellectual property.
Because federal grant monies were used in support of the research and development activities that resulted in certain of our issued pending U.S. patent applications, the federal
government retains what are referred to as “march-in rights” to patents that are granted on these applications.
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In particular, the National Institutes of Health, which administered grant monies to the primary inventor of the technology we license, technically retain the right to require us,
under certain specific circumstances, to grant the U.S. government either a nonexclusive, partially exclusive or exclusive license to the patented invention in any field of use,
upon terms that are reasonable for a particular situation. Circumstances that trigger march-in rights include, for example, failure to take, within a reasonable time, effective steps
to achieve practical application of the invention in a field of use, failure to satisfy the health and safety needs of the public and failure to meet requirements of public use
specified by federal regulations. The National Institutes of Health can elect to exercise these march-in rights on their own initiative or at the request of a third-party.
In order to develop Pelican’s product candidates and receive the grant funding awarded by CPRIT, we will have to devote significant resources to Pelican.
Neither we nor Pelican are expected to derive revenue from any source in the near future until they or other potential partners successfully commercialize products. The CPRIT
Grant requires that Pelican provide matching funds for one half of the award amount in order for Pelican to receive the grant funding. In order to receive the full $15.2 million
award over three years, Pelican must raise matching funds in the aggregate amount of approximately $7.6 million. Pelican has received funding from us in the amount of
approximately $5.2 million as of December 31, 2018 of which $4.1 million was used to satisfy Pelican’s matching fund obligation under the first two years of the CPRIT Grant.
CPRIT has made available to Pelican an aggregate of $8.3 million. For the third year of the award Pelican must provide matching funds of approximately $3.5 million in order
for CPRIT to provide approximately $6.9 million of grant funding. In addition, Heat provided Pelican approximately $0.3 million to pay Pelican’s legal fees and expenses
incurred in connection with the Acquisition in 2017. There can be no assurance that funding will be available on acceptable terms on a timely basis, or at all. The various ways
that we could raise capital carry potential risks. Any additional sources of financing will likely involve the issuance of our equity securities, which will have a dilutive effect on
our stockholders. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our or Pelican’s technologies or
tests or grant licenses on terms that are not favorable to us. If we do not succeed in raising additional funds on acceptable terms or at all, we may be unable to complete planned
preclinical and clinical trials, access the CPRIT award or obtain approval of our product candidates from the FDA and other regulatory authorities.
Reliance on government funding for Pelican’s programs may impose requirements that limit Pelican’s ability to take certain actions, and subject it to potential financial
penalties, which could materially and adversely affect its business, financial condition and results of operations.
A significant portion of Pelican’s funding has been through a grant it received from the CPRIT Grant. The CPRIT Grant includes provisions that reflect the government’s
substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to potentially require repayment of all or a
portion of the grant award proceeds, in certain cases with interest, in the event Pelican violates certain covenants pertaining to various matters that include any potential
relocation outside of the State of Texas. After the CPRIT Grant ends, Pelican is not permitted to retain any unused grant award proceeds without CPRIT’s approval, but
Pelican’s royalty and other obligations, including its obligation to repay the disbursed grant proceeds under certain circumstances, survive the termination of the agreement.
Pelican’s award from CPRIT requires it to pay CPRIT a portion of its revenues from sales of certain products by it, or received from its licensees or sublicensees, at tiered
percentages of revenue in the low- to mid-single digits until the aggregate amount of such payments equals 400% of the grant award proceeds, and thereafter at a rate of less
than one percent for as long as Pelican maintains government exclusivity, subject to Pelican’s right, under certain circumstances, to make a one-time payment in a specified
amount to CPRIT to terminate such payment obligations. In addition, the grant contract also contains a provision that provides for repayment to CPRIT of some amount not to
exceed the full amount of the grant proceeds under certain specified circumstances involving relocation of Pelican’s principal place of business outside Texas.
The CPRIT Grant requires Pelican, as a Texas-based company, to meet certain criteria, including among other things, that Pelican maintain its headquarters in Texas and use
certain vendors, consultants and employees that are located in Texas. As Pelican expands its operations, it will need to hire additional qualified personnel with expertise in
preclinical testing, clinical research and testing, government regulation, formulation and manufacturing, sales and marketing and accounting and financing located in Texas.
Pelican will compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is
intense, and there can be no assurance that the search for such personnel will be successful, especially in light of the territorial restrictions imposed by CPRIT. Attracting and
retaining qualified personnel will be critical to Pelican’s access to the CPRIT Grant.
If Pelican fails to maintain compliance with any such requirements that may apply to it now or in the future, it may be subject to potential liability and to termination of its
contracts, including potentially the CPRIT Grant.
38
If Pelican is unable to hire additional qualified personnel, its ability to utilize the CPRIT Grant will be forfeited.
In order to access the CPRIT Grant a majority of Pelican’s employees must reside in Texas as well as its Chief Executive Officer and other executive officers. Pelican has
identified qualified individuals and will have to negotiate agreements with each identified individual and will also need to hire such additional qualified personnel with expertise
in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing, sales and marketing and accounting and financing. Pelican will
compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and
there can be no assurance that the search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to Pelican’s access to the CPRIT
Grant.
The combined company may not experience the anticipated strategic benefits of our acquisition of Pelican.
We believe that the acquisition will provide certain strategic benefits that may not be realized by each of the companies if Pelican was not acquired by us. Specifically, we
believe the acquisition provides certain strategic benefits which would enable us to accelerate our business plan through an increased access to capital in the public equity
markets. There can be no assurance that these anticipated benefits of the acquisition will materialize or that if they materialize will result in increased stockholder value or
revenue stream to the combined company.
For the years ended December 31, 2018 and 2017 we reported under an “emerging growth company,” and any decision on our part to comply with certain reduced
disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
As of January 1, 2019, we are no longer an emerging growth company under the JOBS ACT. However, for the years ended December 31, 2018 and 2017, we were an emerging
growth company. An “emerging growth company,” as defined under the JOBS ACT, and, for as long as we continued to be an emerging growth company, we could choose to
take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, not being required to comply with any new requirements adopted by the Public Company
Accounting Oversight Board (the “PCAOB”), requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide
additional information about the audit and the financial statements of the issuer, not being required to comply with any new audit rules adopted by the PCAOB after April 5,
2012 unless the SEC determines otherwise, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Under the JOBS ACT, a company should be deemed an emerging growth company until the earliest of: (i) the last day of the fiscal year in which we have total annual gross
revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an
effective registration statement; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we
are deemed to be a large accelerated filer. We elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of
the JOBS Act, that allowed us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those
standards apply to private companies. Further, as a result of these scaled regulatory requirements, our disclosure may be more limited than that of other public companies and
you may not have the same protections afforded to shareholders of such companies.
We ceased to be an “emerging growth company,” which means we will no longer be able to take advantage of certain reduced disclosure requirements in our public filings.
We ceased to be an “emerging growth company,” as defined in the JOBS Act, on December 31, 2018. As a result, we anticipate that costs and compliance initiatives will
increase as a result of the fact that we ceased to be an “emerging growth company.” In particular, we are now, or will be, subject to certain disclosure requirements that are
applicable to other public companies that had not been applicable to us as an emerging growth company. These requirements include:
·
·
·
·
compliance with the auditor attestation requirements in the assessment of our internal control over financial reporting once we are an accelerated filer or large
accelerated filer;
compliance with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing
additional information about the audit and the financial statements;
full disclosure and analysis obligations regarding executive compensation; and
compliance with regulatory requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved.
39
There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all.
Risks Related to Our Common Stock
Our failure to meet the continued listing requirements of the NASDAQ Capital Market could result in a de-listing of our common stock.
Our shares of common stock are currently listed on The NASDAQ Capital Market. If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market,
such as the corporate governance requirements, minimum bid price requirement or the minimum stockholder’s equity requirement, The NASDAQ Capital Market may take
steps to de-list our common stock. Any de-listing would likely have a negative effect on the price of our common stock and would impair stockholders’ ability to sell or
purchase their common stock when they wish to do so. In the past we have received notices from the Listing Qualifications Department of NASDAQ Stock Market LLC
(“NASDAQ”) that we failed to comply with the stockholders equity requirements and the minimum closing bid requirements. Although we have satisfied the continued listing
requirements of the NASDAQ with respect to stockholders’ equity and the minimum bid price requirements, there can be no assurance that we will continue to satisfy such
requirements.
The possible issuance of common stock subject to options, restricted stock units and warrants may dilute the interests of stockholders.
In 2009, we adopted a 2009 Incentive Stock Plan (the “2009 Plan”). In 2014, we adopted a 2014 Stock Incentive Plan (the “2014 Plan”) and, in 2016 and 2015, we increased the
number of shares of common stock that we have authority to grant under the 2014 Plan to a total of 3 million shares (300,000 shares post-reverse stock split). In 2017, we
adopted a 2017 Stock Incentive Plan (the “2017 Plan”). In addition, at our 2018 Annual Meeting of Stockholders, our 2018 Stock Incentive Plan (the “2018 Plan”) was
approved by our stockholders, which provides for the issuance of up to 4,000,000 shares of common stock as compensation awards. As of December 31, 2018, awards for (i)
23,799 shares of common stock are outstanding under the 2009 Plan, (ii) 263,484 shares of common stock are outstanding under the 2014 Plan, (iii) 234,540 shares of common
stock are outstanding under 2017 Plan and 0 shares are outstanding under the 2018 Plan, which resulted in (i) 34,290 shares of common stock, (ii) 12,358 shares, (iii) 213,567
shares, and (iv) 4,000,000 shares of common stock, respectively, remaining available for grants under the 2009 Plan, 2014 Plan, 2017, and 2018 Plan, respectively.
In addition, as of December 31, 2018, we have issued warrants exercisable for 1,738 shares of our common stock to third parties in connection with prior private placements of
our equity securities and debt and warrants exercisable for 9,028,992 shares of our common stock to third parties in connection with our public offerings. To the extent that
outstanding stock options and warrants are exercised, or additional securities are issued, dilution to the interests of our stockholders may occur. Moreover, the terms upon which
we will be able to obtain additional equity capital may be adversely affected since the holders of the outstanding options can be expected to exercise them at a time when we
would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than those provided in such outstanding options.
We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock.
Our certificate of incorporation authorizes the issuance of 100,000,000 shares of our common stock and 10,000,000 shares of preferred stock. In certain circumstances, the
common stock and preferred stock, as well as the awards available for issuance under the 2009, 2014, 2017, and 2018 Plans, can be issued by our board of directors, without
stockholder approval. Any future issuances of such stock would further dilute the percentage ownership of us held by holders of preferred stock and common stock. In addition,
the issuance of preferred stock may be used as an “anti-takeover” device without further action on the part of our stockholders, and may adversely affect the holders of the
common stock. Our board of directors is authorized to create and issue from time to time, without stockholder approval, up to an aggregate of 10,000,000 shares of preferred
stock of which 8,212,500 have been designated, in one or more series and to establish the number of shares of any series of preferred stock and to fix the designations, powers,
preferences and rights of the shares of each series and any qualifications, limitations or restrictions of the shares of each series. The authority to designate preferred stock may
be used to issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of the common stock or
could also be used as a method of determining, delaying or preventing a change of control.
40
We have never paid dividends and have no plans to pay dividends in the future.
Holders of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our
shares of our preferred or common stock and we do not expect to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, to provide funds for
operations of our business. Therefore, any return investors in our preferred or common stock may have will be in the form of appreciation, if any, in the market value of their
shares of common stock.
Certain provisions of the General Corporation Law of the State of Delaware, our bylaws and stockholder rights plan may have anti-takeover effects that may make an
acquisition of our company by another company more difficult.
We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business
combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The operation of Section 203 may have
anti-takeover effects, which could delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest. Certain provisions of our
bylaws including the ability of our board of directors to fill vacancies on our board of directors and advance notice requirements for stockholder proposals and nominations may
prevent or frustrate attempts by our stockholders to replace or remove our management. In addition, the Rights issued pursuant to our stockholder rights plan that we
implemented, if not redeemed or suspended, could result in the dilution of the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been
approved by our board of directors and therefore discouraging, delaying or preventing a change in control that stockholders may consider favorable.
Future sales of our common stock by our existing stockholders could cause our stock price to decline.
On March 28, 2019, we had 33,091,824 shares of our common stock outstanding, all of which are currently eligible for sale in the public market, subject, in certain
circumstances to the volume, manner of sale and other limitations under Rule 144 promulgated under the Securities Act. It is conceivable that stockholders may wish to sell
some or all of their shares. If our stockholders sell substantial amounts of our common stock in the public market at the same time, the market price of our common stock could
decrease significantly due to an imbalance in the supply and demand of our common stock. Even if they do not actually sell the stock, the perception in the public market that
our stockholders might sell significant shares of our common stock could also depress the market price of our common stock.
A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity
securities, and may cause stockholders to lose part or all of their investment in our shares of common stock.
Our shares of common stock are from time to time thinly traded, so stockholders may be unable to sell at or near ask prices or at all if they need to sell shares to raise
money or otherwise desire to liquidate their shares.
Our common stock has from time to time been “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any
given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown
to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention
of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such
time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We
cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels
will be sustained.
41
The trading in our stock has in the past and may continue to be very volatile.
Our stock price and the trading volume of our stock continues to be very volatile. As such, investors may find it difficult to obtain accurate stock price quotations and holders of
our stock may be unable to resell their stock at desirable prices. Sales of substantial amounts of our common stock, or the perception that such sales might occur, could
adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our stockholders could suffer
losses or be unable to liquidate holdings.
Holders of our warrants will have no rights as a common stockholder until they acquire our common stock.
Until warrant holders acquire shares of our common stock upon exercise of their warrants, the warrant holders will have no rights with respect to shares of our common stock
issuable upon exercise of their warrants. Upon exercise of the warrants, the warrant holders will be entitled to exercise the rights of a common stockholder only as to matters for
which the record date occurs after the exercise date.
Our previously issued warrants may not have any value.
Our previously issued warrants to purchase shares of our common stock may not have any value. For example, we previously issued warrants in a public offering that have an
exercise price of $10.00 per share (post-reverse stock split) and issued warrants to underwriters in connection with our initial public offering that have an exercise price of
$125.00 per share (post-reverse stock split). In the event that our common stock price does not exceed the exercise price of our previously issued warrants during the period
when the warrants are exercisable, the warrants may not have any value.
There is no established market for the warrants that we previously issued.
There is no established trading market for the warrants that we previously issued, including those issued in a public offering, and we do not expect a market to develop. In
addition, we do not intend to apply for the listing of the warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of
the warrants will be limited.
The shares of common stock offered under any at the market offering that we may engage in, and investors who buy shares at different times will likely pay different prices.
Investors who purchase shares that are sold under at-the-market-offerings at different times will likely pay different prices, and so may experience different outcomes in their
investment results. We will have discretion, subject to market demand, to vary the timing, prices, and numbers of shares sold, and there is no minimum or maximum sales price.
Investors may experience declines in the value of their shares as a result of share sales made at prices lower than the prices they paid.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price and
trading volume.
Securities research analysts, including those affiliated with our underwriters from prior offerings, establish and publish their own periodic projections for our business. These
projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match
securities research analysts’ projections. Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research
about our business or if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could
decline. While we expect securities research analyst coverage to continue going forward, if no securities or industry analysts begin to cover us, the trading price for our stock
and the trading volume could be adversely affected.
Our management team may invest or spend the proceeds of our prior offerings in ways with which stockholders may not agree or in ways that may not yield a significant
return.
Our management will have broad discretion over the use of proceeds from our November 2018 and May 2018 public offering, our at-the-market offering with H.C. Wainwright,
and additional future financings. The net proceeds from these offerings are to be used for general corporate purposes, which may include, among other things, increasing our
working capital, funding research and development, clinical trials, vendor payables, potential regulatory submissions, hiring additional personnel and capital expenditures. Our
management has considerable discretion in the application of the net proceeds, and stockholders will not have the opportunity to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not improve our operating results or enhance the value of our common stock.
42
Our need for future financing may result in the issuance of additional securities that will cause investors to experience dilution.
Our cash requirements may vary from those now planned depending upon numerous factors, including the result of future research and development activities. We expect our
expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and initiate and conduct clinical trials of, and seek
marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization
expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our
continuing operations. There are no other commitments by any person for future financing. Our securities may be offered to other investors at a price lower than the price per
share offered to current stockholders, or upon terms that may be deemed more favorable than those offered to current stockholders. In addition, the issuance of securities in any
future financing may dilute an investor's equity ownership and have the effect of depressing the market price for our securities. Moreover, we may issue derivative securities,
including options and/or warrants, from time to time, to procure qualified personnel or for other business reasons. The issuance of any such derivative securities, which is at the
discretion of our board of directors, may further dilute the equity ownership of our stockholders. No assurance can be given as to our ability to procure additional financing, if
required, and on terms deemed favorable to us. To the extent additional capital is required and cannot be raised successfully, we may then have to limit our then current
operations and/or may have to curtail certain, if not all, of our business objectives and plans.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Facilities
Our executive offices are located at 801 Capitola Drive, Suite 12, Durham, North Carolina 27713. On January 24, 2014, we entered into lease that expires September 30, 2019
for 5,303 square feet of office and laboratory space for monthly rent of $10,341 exclusive of payments required for maintenance of common areas and utilities. On September
30, 2014, the lease was amended to expand the premises by an additional 676 square feet for a total of 5,979 square feet for a monthly rent of $11,638. We are currently in the
process of evaluating our operations to determine the proper space required for our current operations, as well as that there are spaces available sufficient for any future
expansion requirements should the need arise.
In January 2018, Pelican entered into a five-year lease for 5,156 square feet of office and laboratory space located San Antonio, Texas for monthly rent of $9,238, exclusive of
payments required for maintenance of common areas and utilities.
Item 3.
Legal Proceedings
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal
proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash
flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 4.
Mine Safety Disclosures
Not applicable.
43
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Our common stock has traded on the NASDAQ Capital Market under the symbol “HTBX” since July 29, 2013. Prior to that time, there was no public market for our common
stock. As of March 28, 2019, there were approximately 43 stockholders of record of our common stock. This number does not include beneficial owners from whom shares are
held by nominees in street name.
On January 19, 2018, we announced a reverse stock split of our 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 our common stock began to trade on a post-split basis at the market open on January 22, 2018. During our annual stockholders meeting held June 29, 2017,
shareholders approved our company’s reverse stock split, and granted the board of directors the authority to implement and determine the exact split ratio. When the reverse
stock split became effective, every 10 shares of our 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 on the effective date of the reverse split from approximately 42 million shares to approximately 4.2 million. It also
subsequently adjusted outstanding options issued under our equity incentive plan and outstanding warrants to purchase common stock.
Dividend Policy
We have never paid any cash dividends on our common stock to date, and do not anticipate paying such cash dividends in the foreseeable future. Whether we declare and pay
dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Delaware corporate law. The timing, amount and form of
dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of
Directors.
Equity Compensation Plan Information
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information about our equity compensation plans as of December 31, 2018. In October 2018, our stockholders approved the 2018 Stock Incentive
Plan, which provides for a maximum of 4,000,000 awards.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders
2009 Stock Incentive Plan
2014 Stock Incentive Plan
2017 Stock Incentive Plan
2018 Stock Incentive Plan
Equity compensation plans not approved by security holders
Total
44
Number of
securities to be
issued upon
exercise of
outstanding
options
(a)
23,799
263,484
234,540
—
—
521,823
Weighted-average
exercise price of
outstanding
options
(b)
$25.61
$15.56
$ 2.93
—
—
$10.34
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
(c)
34,290
12,358
213,567
4,000,000
—
4,260,215
Subsequent to December 31, 2018, we issued Jeff Wolf, Jeff Hutchins, and Ann Rosar options exercisable for 800,000, 356,860, and 110,570 shares of common stock,
respectively, that vested 50% on the grant date, with the remaining options vesting 30% on the second anniversary of the grant date and 10% each of the third and fourth
anniversary of the grant date as part of their 2018 bonus compensation. Subsequent to December 31, 2018, we also issued: (i) Jeff Wolf, Jeff Hutchins, and Ann Rosar 800,000,
143,140, and 89,430 restricted stock awards that vested 50% on the grant date, with the remaining restricted stock units vesting 30% on the second anniversary of the grant date
and 10% each of the third and fourth anniversary of the grant date.
Recent Sales of Unregistered Securities
On October 30, 2018, we issued 35,000 shares of our common stock to UM in exchange for the return to us by UM of certain shares of capital stock it held in our subsidiaries,
Heat Biologics I, Inc. and Pelican Therapeutics, Inc.
These shares were issued upon the exemption from the registration provisions of the Securities Act provided for by Section 4(a)(2) thereof for transactions not involving a public
offering. Use of this exemption is based on the following facts:
·
·
·
·
Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.
At the time of the purchase, the firm was an accredited investor, as defined in Rule 501(a) of the Securities Act.
The firm has had access to information regarding our company and is knowledgeable about us and our business affairs.
Shares of common stock issued to the firm were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from
registration in compliance with federal and state securities laws.
Purchase of Equity Securities
We have not purchased any of our equity securities during the period covered by this Annual Report on Form 10-K.
Item 6.
Selected Financial Data
Not applicable because we are a smaller reporting company.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the audited financial statements and notes thereto for the years
ended December 31, 2017 and December 31, 2016 found in this Annual Report. In addition to historical information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward-looking statements by using words such as “may,”
“should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. Our actual results could differ materially
from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item
1A of this Report.
Company Overview
We are a biopharmaceutical company developing immunotherapies focused on activating a patient’s immune system against cancer through T-cell activation and expansion.
Our T-cell Activation Platform (TCAP), includes two variations for intradermal administration Immune Pan-antigen Cytotoxic Therapy ( ImPACT®) and Combination Pan-
antigen Cytotoxic Therapy (ComPACT™). To further augment antigen experienced T-cell activation and expansion, we are also developing a novel T-cell co-stimulator PTX-
35 for systemic administration. These programs are designed to harness the body's natural antigen specific immune activation and tolerance mechanisms to reprogram immunity
and provide a long-term, durable clinical effect. Currently we are enrolling patients in our HS-110 combination immunotherapy trial, preparing IND submissions for HS-130
and PTX-35 programs, and providing pre-clinical, CMC development, and administrative support for these operations; while constantly focusing on protecting and expanding
our intellectual property in areas of strategic interest.
45
We continue to enroll patients in our Phase 2 clinical trial for advanced non-small cell lung cancer (NSCLC), in combination with either Bristol-Myers Squibb’s nivolumab
(Opdivo®) or more recently, Merck &Co., Inc’s (Merck’s) anti-PD1 checkpoint inhibitor, pembrolizumab (KEYTRUDA ®). Our other programs are in pre-clinical and CMC
development with two IND filings anticipated during 2019.
Our T-cell Activation Platform (TCAP), includes a variation of two TCAPs, ImPACT® and ComPACT™ which are designed to activate and expand tumor antigen specific
“killer” T-cells to destroy a patient’s cancer. By turning immunologically “COLD tumors HOT,” we believe our platform will become an essential component of the immuno-
oncology cocktail to enhance the effectiveness and durability of checkpoint inhibitors and other cancer therapies, thereby improving outcomes for those patients less likely to
benefit from checkpoint inhibitors alone.
We believe the advantage of our approach is that our biologic agents deliver a broad range of tumor antigens that are unrecognized by the patient’s immune system prior to the
malignant rise of the patient’s tumor. TCAP combines these tumor associated antigens with a powerful, naturally occurring immune adjuvant, gp96, to actively chaperone these
antigens out of our non-replicating allogenic cell-based therapy into the local microenvironment of the skin. The treatment primes local natural immune recognition to activate
T-cells to seek and destroy the cancer cells throughout the body. These TCAP agents can be administered with a variety of immuno-modulators to enhance a patient’s immune
response through ligand specific T-cell activation.
Unlike many other “patient specific” or autologous immunotherapy approaches, our drugs are fully-allogenic, “off-the-shelf” products which means that we can administer
immediately without the extraction of blood or tumor tissue from each patient or the creation of an individualized treatment based on these patient materials. Our TCAP product
candidates from our ImPACT® and ComPACT ™ platforms are produced from allogeneic cell lines expressing tumor-specific proteins common among cancers. Because each
patient receives the same treatment, we believe that our immunotherapy approach offers superior speed to initiation, logistical, manufacturing and importantly, cost benefits,
compared to “personalized” precision medicine approaches.
Our ImPACT® platform is an allogenic cell-based, T-cell-stimulating platform that functions as an immune activator to stimulate and expand T-cells. The key component of this
innovative immunotherapy platform is the dual functionality of the heat shock protein, gp96.
As a molecular chaperone, gp96 is typically found within the cell’s endoplasmic reticulum and facilitates the folding of newly synthesized proteins for functionalized tasks. But
when a cell abnormally dies through necrosis or infection, gp96 is naturally released into the surrounding microenvironment. At this moment, gp96 becomes a Danger
Associated Molecular Protein or “DAMP”, a molecular warning signal for localized innate activation of the immune system. In this context gp96 serves as a potent adjuvant, or
immune stimulator, via Toll-Like Receptor 4/2 (TLR4 and TLR2) signaling which serves to activate APCs to specialized dendritic cells that upregulate T-cell costimulatory
ligands, MHC and immune activating cytokine. It is among the most powerful adjuvants found in the body and uniquely shows exclusive specificity to CD8+ “killer” T-cells
through cross-presentation of the gp96-chaperoned tumor associated peptide antigens directly to MHC class I molecules for direct activation and expansion of CD8+ T-cells.
Thus, gp96 plays a critical role in the mechanism of action for Heat’s T-cell activating platform immuno-therapies; mimicking necrotic cell death and activating a powerful,
tumor antigen-specific T-cell immune response to attack the patient’s cancer cells.
ComPACT™, our second TCAP, is a dual-acting immunotherapy designed to deliver antigen driven T-cell activation and specific co-stimulation in a single product.
ComPACT™ helps unlock the body’s natural defenses and builds upon ImPACT® by providing specific co-stimulation to enhance T-cell activation and expansion. It has the
potential to simplify combination immunotherapy development for oncology patients, as it is designed to deliver the gp96 heat shock protein and a T-cell co-stimulatory fusion
protein (OX40L) as a single therapeutic, without the need for multiple, independent biologic products. The potential advantages of ComPACT™ include: (a) enhanced
activation of antigen-specific CD8+ T-cells; (b) serving as a booster to expand the number of antigen-specific CD8+ T-cells compared to OX40L alone; (c) stimulation of T-cell
memory function to remain effective in the body after treatment, even if the cancer comes back; (d) demonstration of less toxicity, as the source of cancer associated antigens
and co-stimulator are supplied at the same time locally and the draining lymph nodes, which drive targeted, cancer specific immunity towards the tumor rather than throughout
the body; and (e) a potential paradigm shift that is designed to simplify combination cancer immunotherapy versus systemic co-stimulation with conventional monoclonal
antibodies (mAbs).
46
Pelican, our subsidiary, is a biotechnology company focused on the development of biologic based therapies designed to activate the immune system, including the monoclonal
antibody, PTX-35. PTX-35, which is currently focused on preclinical IND enabling activities, is Pelican’s lead product candidate targeting the T-cell co-stimulator, TNFRSF25.
It is designed to harness the body's natural antigen specific immune activation and tolerance mechanisms to reprogram immunity and provide a long-term, durable clinical
effect. TNFRSF25 agonism has been shown to provide highly selective and potent stimulation of antigen experienced ‘memory’ CD8+ cytotoxic T-cells, which are the class of
long-lived T-cells capable of eliminating tumor cells in patients. Due to the preferential specificity of PTX-35 to antigen experienced CD8+ T-cells, this agent represents a
promising candidate as a T-cell co-stimulator in cancer patients.
When combined in preclinical studies with ImPACT® and ComPACT™ platform immunotherapies, PTX-35 has been shown to enhance antigen specific T-cell activation to
eliminate tumor cells. Pelican is also developing other biologics that target TNFRSF25 for various immunotherapy approaches, including PTX-45, a human TL1A-lg fusion
protein designed as a shorter half-life agonist of TNFRSF25.
We continue to enroll patients in our HS-110 combination immunotherapy trial, preparing for IND submission of HS-130 (ComPACT™), advancing pre-clinical development of
Pelican assets in anticipation of an IND submission, providing general and administrative support for these operations and protecting our intellectual property. We currently do
not have any products approved for sale and we have not generated any significant revenue since our inception and no revenue from product sales. We expect to continue to
incur significant expenses and to incur increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:
·
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complete the ongoing clinical trials of our product candidates;
maintain, expand and protect our intellectual property portfolio;
seek to obtain regulatory approvals for our product candidates;
continue our research and development efforts;
add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts;
and
operate as a public company.
2018 Financial Developments
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On November 26, 2018, we closed an underwritten public offering in which we raised approximately $12.7 million after deducting underwriting discounts and
commissions and other estimated offering expenses and issued and sold 9,200,000 shares of our common stock together with warrants to purchase 4,600,000 shares of
our common stock at a combined price to the public of $1.50. The warrants have an exercise price of $1.65, are exercisable upon issuance and expire five years from
the date of issuance.
On May 7, 2018, we closed an underwritten public offering in which we raised approximately $18.8 million, net of underwriting discounts and commissions and other
estimated offering expenses and 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
our 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 our 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 common stock warrants expire five years after date of issuance and have an exercise price of $1.584 per share. As of the date of
this filing, 3,054,667 common stock warrants have been exercised for an additional $4.8 million in proceeds and all pre-funded warrants have been exercised.
·
On January 19, 2018, we announced a reverse stock split of our shares of common stock at a ratio of 1-for-10.
47
Funding/Liquidity
We commenced active operations in June 2008. Our operations to date have been primarily limited to organizing and staffing our company, business planning, raising capital,
acquiring and developing our technology, identifying potential product candidates and undertaking preclinical and clinical studies of our most advanced product candidates. To
date, we have primarily financed our operations with net proceeds from the sale of our securities including, our July 2013 initial public offering in which we received net
proceeds of $24.3 million, our March 2015 public offering in which we received net proceeds of $11.1 million, our March 2016 public offering in which we received net
proceeds of $6.1 million, an additional $3.9 million from the exercise of 386,343 warrants, our March 2017 public offering in which we received net proceeds of approximately
$4.1 million, our November 2017 public offering in which we received net proceeds of approximately $2.4 million, our May 2018 public offering in which we received net
proceeds of approximately $18.8 million and an additional $4.8 million from the exercise of warrants, and our November 2018 public offering in which we received net
proceeds of approximately $12.7 million. In addition, we received $7.5 million from our debt facility, which has subsequently been paid back in full as of December 31, 2016
and have received an aggregate of $9.3 million of net proceeds from sales of shares of our common stock through the At Market Issuance Sales Agreement (the “FBR Sales
Agreement”) with FBR Capital Markets & Co. through December 31, 2017. As of December 31, 2018, we have received $8.3 million in grant funding from the CPRIT Grant
through Pelican. On January 18, 2018, we entered into the H.C. Wainwright Sales Agreement which replaced the FBR Sales Agreement and which has been subsequently
terminated. To date, we received net proceeds of approximately $3.8 million from the sale of shares of our common stock through the H.C. Wainwright Sales Agreement. As of
December 31, 2018, we had an accumulated deficit of $84.6 million. We had net losses of $16.6 million and $12.4 million for the years ended December 31, 2018 and 2017,
respectively.
We expect to incur significant expenses and continued losses from operations for the foreseeable future. We expect our expenses to increase in connection with our ongoing
activities, particularly as we continue the research and development and advance our clinical trials of, and seek marketing approval for, our product candidates and as we
continue to fund the Pelican matching funds required in order to access the CPRIT Grant. In addition, if we obtain marketing approval for any of our product candidates, we
expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Although we currently have sufficient funds to
complete our Phase 2 clinical trials, as currently planned, and expect that we will have sufficient funds to fund our operations through mid-year 2020, we will need to obtain
substantial additional future funding in connection with our future planned clinical trials. Adequate additional financing may not be available to us on acceptable terms, or at all.
If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future
commercialization efforts. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, which include sales of
our common stock under at-the-market offerings, if available, debt financings, partnerships, collaborations and other funding transactions. This is based on our current
estimates, and we could use our available capital resources sooner than we currently expect. We are continually evaluating various cost-saving measures in light of our cash
requirements in order to focus our resources on our product candidates. We may take additional action to reduce our immediate cash expenditures, including re-visiting our
headcount, offering vendors equity in lieu of the cash due to them and otherwise limiting our other research expenses, in order to focus our resources on our product candidates.
We will need to generate significant revenues to achieve profitability, and we may never do so.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific
areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have
been reasonable—could have been used, which would have resulted in different financial results.
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and
make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The notes to our audited consolidated financial statements contain a summary of our significant accounting policies. We consider the following accounting policies critical to
the understanding of the results of our operations:
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Revenue;
Deferred revenue;
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In-process R&D;
Goodwill impairment;
Income tax;
Contingent consideration;
Stock-based compensation;
Research and development costs, including clinical and regulatory cost; and
Recent accounting pronouncements.
Revenue
Our 2018 revenue consists of research funding from our CPRIT Grant and in 2017 revenue included revenue from a research funding agreement with Shattuck that terminated
on January 31, 2017. 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.
Deferred Revenue
Deferred revenue is comprised of proceeds of $1.0 million received from CPRIT for which the costs have not been incurred or the conditions of the award have not been met
and grant funds received from an economic development grant agreement with the City of San Antonio (“Economic Development Grant”) that we entered into on November 1,
2017. Under the Economic Development Grant, we received $0.2 million in state enterprise fund grants for the purpose of defraying costs toward the purchase of laboratory
equipment. As part of the agreement, we will provide the city of San Antonio with a purchase money security interest in the equipment to secure the repayment of grant funds
should we fail to perform under the terms and conditions of the agreement. Our obligations under the agreement include meeting certain employment levels for a period of not
less than seven years commencing on or before December 31, 2017 and establishing Pelican’s corporate headquarters in San Antonio. The Economic Development Grant funds
will be recognized as income upon the achievement of the performance criteria and determination that the cash is no longer refundable to the State of Texas.
In-process R&D
In-process research and development (“IPR&D”) assets represent the fair value assigned to technologies that were acquired, which at the time of acquisition have not reached
technological feasibility and have no alternative future use. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research
and development projects. During the period that the IPR&D 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 Company is able 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. The IPR&D assets were
acquired on April 28, 2017 when we acquired Pelican.
Goodwill and Impairment
Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. We use widely
accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. Our valuation is primarily based on qualitative
and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value.
Income Tax
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act lowered the Federal corporate tax rate from 34% to 21% and made numerous
other tax law changes. We have measured deferred tax assets at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled.
Under the guidance of SAB 118, we are required to recognize the effect of tax law changes in the period of enactment. Reasonable estimates were made based on our analysis
of the Tax Act. These provisional amounts were adjusted during 2018 when additional information was obtained with no material adjustments.
49
Contingent Consideration
Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. Contingent consideration
is measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and
an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities
of success or changes in expected timelines for achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively,
and commensurate changes to the associated liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the
consolidated statements of operations and comprehensive loss.
Stock-Based Compensation
Calculating stock-based compensation expense requires the input of highly subjective assumptions. The fair value of restricted stock units is estimated based on the closing
price of our stock on the date of grant, and for the purposes of expense recognition, the total new number of shares expected to vest is adjusted for estimated forfeitures. We
apply the Black-Scholes-Merton option pricing model to determine the fair value of our stock options awards. Inherent in this model are assumptions related to expected stock-
price volatility, expected option life, risk-free interest rate and dividend yield. We do not have sufficient history to estimate the volatility of our common stock, therefore we
have elected to utilize a peer group of similar publicly traded companies for which the historical information is available. We estimate the expected life of our options using the
simplified method. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options.
The dividend rate is based on our historical rate, which we anticipate to remain at zero. We account for forfeitures as they occur. The assumptions used in calculating the fair
value of stock options represent our best estimates, however these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors
change and different assumptions are used, the stock-based compensation expense could be materially different in the future.
Research and Development Costs
We expense research and development costs associated with developmental products not yet approved by the FDA as well as costs associated with bringing our developmental
products into advanced phase clinical trials as incurred. These costs consist primarily of pre-manufacturing and manufacturing drug costs, clinical trial execution, investigator
payments, license fees, salaries, stock-based compensation and related personnel costs. Other costs include fees paid to consultants and outside service providers related to the
development of our product candidates, and other expenses relating to the design, development, and testing and enhancement of our product candidates.
Recent Accounting Pronouncements
In November 2018, the FASB issued ASU 2018-18: Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU, in part,
requires that certain transactions with collaboration partners be excluded from revenue recognized under Topic 606. ASU 2018-18 is effective for fiscal years beginning after
December 15, 2019. We are evaluating the impact of this standard and we do not plan early adoption of this standard.
In June 2018, the FASB issued ASU 2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU
expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-
based payments to non-employees will be substantially aligned. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within
that fiscal year, early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. We do not anticipate ASU 2018-07 to have a material impact to our
consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and
Contributions Made, which is intended to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments
in ASU No. 2018-08 should assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transaction) within the scope of Topic
958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. This amendment
applies to all entities that make or receive grants or contributions. This ASU is effective for public companies serving as a resource recipient for fiscal years beginning after June
15, 2018, including interim periods within that fiscal year. We do not anticipate ASU 2018-08 to have a material impact to our consolidated financial statements.
50
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. We do not anticipate ASU 2017-01 to have a material the impact to our consolidated financial statements.
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. We 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 $101,176 for the years ended December 31, 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 lessee’s 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 lessee’s 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. We currently anticipate 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. Grant revenue is recognized as work is performed and qualifying costs are incurred. We adopted the
modified retrospective method of adoption in early 2018 and there was no material effect on the timing and measurement of revenue.
RESULTS OF OPERATIONS
Year Ended December 31, 2018 and 2017
Revenues
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.
As of December 31, 2018, CPRIT has provided $8.3 million of the total $15.2 million grant. The remaining $6.9 million is expected to become available in the third CPRIT
fiscal year (June 2018 through May 2019). As of December 31, 2018, we have provided approximately $5.2 million in funding of which $4.1 million was used to satisfy
Pelican’s matching fund obligation under the first two years of the CPRIT Grant and we have approximately $3.5 million remaining to provide for the third CPRIT fiscal year.
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.
We recognized grant revenue of approximately $5.8 million for the year ended December 31, 2018 for qualified expenditures under the grant. We recognized $1.5 million grant
revenue related to CPRIT during the year ended December 31, 2017. As of December 31, 2018, we had short term deferred revenue of $1.0 million for proceeds received but
for which the costs had not been incurred or the conditions of the award had not been met.
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During the year ended December 31, 2017 we also recognized research funding revenue in 2017 of approximately $0.02 million for research and development services, which
included labor and supplies, provided to Shattuck Labs, Inc. (“Shattuck”) which research funding agreement ended January 31, 2017. We continue our efforts to secure future
non-dilutive grant funding to subsidize ongoing research and development costs.
Operating Expenses
Total operating expenses for the year ended December 31, 2018 increased 59% to $23.7 million compared to $14.9 million for the year ended December 31, 2017. For the year
ended December 31, 2018 operating expenses are primarily comprised of research and development, and general and administrative expenses, as well as change in the fair value
of contingent consideration due to our initial acquisition of an 80% controlling interest in Pelican in 2017. Research and development expenses were $16.2 million, general and
administrative expenses were $7.0 million and the change in fair value of contingent consideration was $0.5 million for the year ended December 31, 2018 as compared to
research and development expenses of $8.3 million, general and administrative expenses were $6.4 million and the change in fair value of contingent consideration was $0.2
million for the year ended December 31, 2017. For the year ended December 31, 2018, research and development expenses represented approximately 68% of operating
expenses, general and administrative expenses represented approximately 30% and change in fair value of contingent consideration 2% of operating expenses. For the year
ended December 31, 2017, research and development expenses represented approximately 56% of operating expenses, general and administrative expenses represented
approximately 43% and change in fair value of contingent consideration 1% of operating expenses.
Research and development expense
Research and development expenses increased by 95% to $16.2 million for the year ended December 31, 2018 compared to $8.3 million for the year ended December 31, 2017.
The components of R&D expense are as follows, in millions:
Programs
HS-110
HS-410
HS-130
PTX 35/other biologics against TNFRSF25
Other programs
Unallocated research and development expenses
Year ended December 31,
2017
2018
$
$
3.5 $
0.2
0.8
7.5
0.4
3.8
16.2 $
2.6
0.7
0.2
0.0
0.8
4.0
8.3
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HS-110 expense increased $0.9 million, as we increase patient enrollment in the phase 2 portion of our multi-arm clinical trial.
HS-410 expense decreased $0.5 million due to completion of long-term follow up and program close-out.
HS -130 expense increased by $0.6 million as we continue CMC (chemistry, manufacturing and control) development, and prepare for production of clinical trial
material for this program.
PTX expense for the year ended December 31, 2018 was $7.5 million as we continue pre-clinical development of PTX-35 and other biologics against TNFRSF25 for
testing in patients.
Other programs include preclinical costs associated with our Zika program, T-cell costimulatory programs, and laboratory supplies. These costs decreased by
approximately $0.4 million related to the variability and timing of collaborative programs focused on T-cell costimulatory programs including the Zika program.
Unallocated expenses include personnel-related expenses, professional and consulting fees, and travel and other costs. These costs decreased approximately $0.2 million
primarily related to the classification of consultant fees to the appropriate program.
General and administrative expense
General and administrative expense increased approximately 9% to $7.0 million for the year ended December 31, 2018 compared to $6.4 million for the year ended December
31, 2017. The variance of $0.6 million is primarily due to the increase in personnel and operations as we establish our Texas operations associated with our Pelican subsidiary
offset by the acquisition costs of Pelican during the year ended December 31, 2017.
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Change in fair value of contingent consideration
We reassess the actual consideration earned and the probability-weighted future earn-out payments at each balance sheet date. The change in the fair value of contingent
consideration was $0.5 million for the year ended December 31, 2018 compared to the contingent consideration of $0.2 million for the year ended December 31, 2017.
Interest income
Interest income was $0.3 million for the year ended December 31, 2018 compared to $0.02 million for the year ended December 31, 2017. The increase is due to the increased
cash equivalent balance as well as investment in various short-term financial instruments that generated interest income during the year ended December 31, 2018.
Income Tax Benefit
Income tax benefit for the year ended December 31, 2018 consists of $1.0 million federal tax benefit due to the application of the tax benefit calculated on indefinite-lived 2018
NOLs. Income tax benefit for the year ended December 31, 2017 consists of $0.8 million federal tax benefit related to the tax rate change in connection to the purchase
accounting intangibles with our acquisition of Pelican.
Net loss attributable to Heat Biologics, Inc.
We had a net loss attributable to Heat Biologics, Inc. of $15.7 million, or ($0.90) per basic and diluted share for the year ended December 31, 2018 compared to a net loss
attributable to Heat Biologics, Inc. of $11.8 million, or ($3.08) per basic and diluted share for the year ended December 31, 2017.
BALANCE SHEET AS OF DECEMBER 31, 2018 AND 2017
Short-term Investments
Short-term investments were $5.6 million as of December 31, 2018. There were no short-term investments as of December 31, 2017. The Company invested cash in higher
yield investments to generate interest income.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets was approximately $1.0 million as of December 31, 2018 and $2.0 million as of
December 31, 2017. The $1.0 million decrease was primarily attributable to the amount recognized for cGMP as we continue our manufacture of PTX-35 antibody.
In-Process R&D and Goodwill. As of December 31, 2018 and December 31, 2017, we had in-process R&D of $5.9 million and goodwill of $2.2 million from our acquisition
of Pelican. The fair value of these assets did not change during the year ended December 31, 2018.
Accounts Payable. Accounts payable was approximately $1.0 million as of December 31, 2018 and December 31, 2017. Accounts payables primarily consist of payables for
CMC as well as investigator site payments for our clinical trials.
Deferred Revenue. We had short term deferred revenue of $1.0 million and $7.0 million as of December 31, 2018 and December 31, 2017, respectively. This short term
deferred revenue represents proceeds received for the CPRIT grant but for which the costs had not been incurred or the conditions of the award had not been met. We had long
term deferred revenue of $0.2 million as of December 31, 2018, related to an economic development grant received from San Antonio for the purchase of lab equipment.
Accrued Expenses and Other Liabilities. Accrued expenses were approximately $1.7 million as of December 31, 2018 compared to approximately $2.3 million as of
December 31, 2017. The decrease of approximately $0.6 million was related primarily to investigator site payments made during 2018.
Other Long-Term Liabilities. Other long term liabilities were $0.2 million as of December 31, 2018 and December 31, 2017. Other long-term liabilities mainly consist of the
percentage of investigator site fees that are held back until a clinical study is complete.
Deferred Tax Liability. Deferred tax liability was approximately $0.3 million as of December 31, 2018 compared to approximately $1.3 million as of December 31, 2017. The
decrease of approximately $1.0 million was related to application of the tax benefit calculated on indefinite-lived 2018 NOLs.
53
Contingent Consideration. As of December 31, 2018, we had contingent consideration of $3.1 million compared to $2.6 million for the year ended December 31, 2017 related
to our acquisition of Pelican which is recorded on our consolidated balance sheets. This amount represents the fair value of future milestone payments to Pelican shareholders
which were discounted in accordance with ASC 805. We perform an analysis on a quarterly basis and as of December 31, 2018, we determined the change in the estimated fair
value of the contingent consideration to be approximately $0.5 million due to the effect of the change in discount rate, probability of achieving milestones, and passage of time
on the fair value measurement.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
Since our inception in June 2008, we have incurred significant losses and we have financed our operations with net proceeds from the private placement of our preferred stock,
common stock and debt. More recently, we have primarily financed our operations with net proceeds from the public offering of our common stock and to a lesser extent, the
proceeds from the exercise of warrants. During May 2018, we closed a public offering of shares of our common stock and warrants to purchase shares of our common stock in
which we received net proceeds of approximately $18.8 million and after the closing of the offering, an additional $4.8 million from the exercise of 3,054,667 warrants issued in
this offering. During November 2018, we closed a public offering of shares of our common stock and warrants to purchase shares of our common stock in which we received
net proceeds of approximately $12.7 million. In addition, from August 2016 through July 2017 we received an aggregate of $9.3 million of net proceeds through our At Market
Issuance Sales Agreement (the “FBR Sales Agreement”) with B. Riley FBR, Inc. formerly known as FBR Capital Markets & Co. On January 18, 2018, we entered into the H.C.
Wainwright Sales Agreement that replaced the FBR Sales Agreement and which has subsequently been terminated. To date, we received net proceeds of approximately $3.8
million from the sale of shares of our common stock through the H.C. Wainwright Sales Agreement. As of December 31, 2018, we had an accumulated deficit of $84.6 million.
We had net losses of $16.6 million and $12.4 million for the years ended December 31, 2018 and 2017, respectively.
We expect to incur significant expenses and continued losses from operations for the foreseeable future. We expect our expenses to increase in connection with our ongoing
activities, particularly as we continue the research and development and advance our clinical trials of, and seek marketing approval for, our product candidates and as we
continue to fund the Pelican matching funds required in order to access the CPRIT Grant. In addition, if we obtain marketing approval for any of our product candidates, we
expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial
additional funding in connection with our continuing operations. Although we currently have sufficient funds to complete our Phase 2 clinical trials, as currently planned, and
expect that we will have sufficient funds to fund our operations through mid-year 2020, we will need to obtain substantial additional future funding in connection with our future
planned clinical trials. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive
terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. To meet our capital needs, we intend
to continue to consider multiple alternatives, including, but not limited to, additional equity financings such as sales of our common stock under at-the-market offerings, if
available, debt financings, partnerships, collaborations and other funding transactions. This is based on our current estimates, and we could use our available capital resources
sooner than we currently expect. We are continually evaluating various cost-saving measures in light of our cash requirements in order to focus our resources on our product
candidates. We will need to generate significant revenues to achieve profitability, and we may never do so. As of December 31, 2018, we had approximately $27.7 million in
cash and cash equivalents and short-term investments.
Cash flows
Operating activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital. The
significant increase in cash used in operating activities for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to an increase
in pre-clinical activities associated with our PTX programs.
Investing activities. Cash used by investing activities during the year 2018 was related to purchase of short term investments and the purchase of lab equipment as we establish
our San Antonio facilities as required per the CPRIT Grant. Cash used in investing activities during the year 2017 included the purchase of Pelican Therapeutics net of cash
acquired and purchases of property and equipment.
54
Financing activities. Cash provided by financing activities during the year ended December 31, 2018 was primarily from the May 7, 2018 public offering which generated net
proceeds of approximately $18.8 million and an additional $4.8 million from the exercise of warrants, the November 21, 2018 public offering which generated net proceeds of
approximately $12.7 million, as well as approximately $3.8 million net proceeds from the HCW sales agreement. Cash provided by financing activities during the year ended
December 31, 2017 was primarily from the March 2017 public offering which generated net proceeds of approximately $4.1 million, $2.4 million net proceeds from the FBR
Sales Agreement, and net proceeds of approximately $2.4 million after deducting underwriting discounts and commissions and other estimated offering expenses from our
November 2017 public offering.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
Current and Future Financing Needs
We have incurred an accumulated deficit of $84.6 million through December 31, 2018. We have incurred negative cash flows from operations since we started our business.
We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts,
our clinical trials, and our research and discovery efforts.
We intend to meet our financing needs through multiple alternatives, including, but not limited to, additional equity financings, debt financings and/or funding from
partnerships or collaborations.
However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
·
·
·
·
·
·
·
·
·
the progress of our research activities;
the number and scope of our research programs;
the progress of our preclinical and clinical development activities;
the progress of the development efforts of parties with whom we have entered into research and development agreements;
our ability to maintain current research and development licensing arrangements and to establish new research and development and licensing arrangements;
our ability to achieve our milestones under licensing arrangements;
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights;
the costs and timing of regulatory approvals; and
profitability of our clinical laboratory diagnostic and microbiology services business.
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate.
Potential sources of financing include strategic relationships, public or private sales of our equity or debt and other sources. We may seek to access the public or private equity
markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether
additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other
securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be
unable to carry out our business plan, including accessing the CPRIT Grant. As a result, we may have to significantly limit our operations and our business, financial condition
and results of operations would be materially harmed.
License and Contractual Agreement Obligations
License agreements for each year are associated with the University of Miami and in 2020 an additional $25,000 for the University of Michigan cell line agreement.
Our principal property is our corporate headquarters located in Durham, NC. We lease this space (5,979 square feet) under a lease agreement that has a term that runs through
September 30, 2019. During 2018, Pelican entered into a five-year lease for a total of 5,156 square feet in San Antonio, Texas.
55
Below is a table of our contractual obligations for the years 2019 through 2023 as of December 31, 2018 (in thousands).
License agreements
Lease agreements
Total
Additional In-Licensed Programs
2019
2020
2021
2022
2023
Total
$
$
74 $
310
384 $
103 $
116
219 $
228 $
118
346 $
784 $
120
904 $
74 $
20
94 $
1,263
684
1,947
We may enter into additional license agreements relating to new product candidates.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable because we are a smaller reporting company.
Item 8.
Financial Statements and Supplemental Data
See pages F-1 through F-30.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Our management has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in
the reports filed under the Exchange Act, such as this Form 10-K, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the
SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions
regarding required disclosure. As required under Exchange Act Rule 13a-15, our management, including the Principal Executive Officer and Principal Financial Officer has
conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Principal
Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15. Our internal control
over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published
financial statements. Management conducted an assessment of our internal control over financial reporting based on the framework and criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on the assessment, management concluded that, as
of December 31, 2018, our internal controls over financial reporting were effective based on those criteria.
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures and our internal control
processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of error or fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and
that the breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
56
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to
provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our
last quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Other Information
We have terminated the H.C. Wainwright Sales Agreement and intend to enter into a new at-the-market offering agreement.
57
Item 10.
Directors, Executive Officers and Corporate Governance
Below is certain information regarding our directors and executive officers.
PART III
Name
Jeffrey Wolf
Jeff T. Hutchins, Ph.D.
Ann A. Rosar
Age
55
60
67
Position
Chairman of the Board of Directors, Chief
Executive Officer and President
Chief Scientific Officer and Chief
Operating Officer
Vice President of Finance, Controller and
Secretary
John Monahan, Ph.D.
72
Director
John K.A. Prendergast, Ph.D.
65
Director
Edward B. Smith, III
43
Director
Served as an Officer
or Director Since
2008
2017
2016
2009
2016
2010
Jeffrey Wolf, Chairman of the Board of Directors, Chief Executive Officer and President
Mr. Wolf has served our Chairman of the Board of Directors, Chief Executive Officer and President since our inception. He founded Heat Biologics in August 2008. Mr. Wolf
served from June 1997 to March 2011, as managing director at Seed-One Ventures, LLC a venture firm focused on launching and growing exceptional healthcare companies
from the ground up. Since founding Seed-One, Mr. Wolf has founded and run several biomedical companies. Mr. Wolf’s start-ups include Avigen, a gene therapy company
where he was a co-founder and director; TyRx Pharma, a company focused on the development of bio-compatible polymers where he was a co-founder and Chairman; and
EluSys Therapeutics, a company focused on the development of a novel technology to remove blood-borne pathogens where he was a co-founder, Chairman and Chief
Executive Officer. Mr. Wolf received his M.B.A. from Stanford Business School, his J.D. from New York University School of Law and his B.A. from the University of
Chicago, where he graduated with honors in Economics. Mr. Wolf serves as a director of several Seed-One portfolio companies and serves as a director of Synthetic Biologics,
Inc., a clinical stage company developing therapeutics to protect the gut microbiome.
We selected Mr. Wolf to serve on our Board as our Chairman because he brings to the board extensive knowledge of the pharmaceutical and biotechnology industries. Having
served in senior corporate positions in several biomedical companies, he has a vast knowledge of the industry and brings to the board significant executive leadership and
operational experience. His business experience provides him with a broad understanding of the operational, financial and strategic issues facing public companies and his
service on other public company boards provides him with extensive corporate governance knowledge.
Jeff T. Hutchins, Ph.D., Chief Scientific Officer and Chief Operating Officer
Dr. Hutchins joined our company on January 1, 2017 as Chief Scientific Officer and Senior Vice President of Pre-Clinical Development and in June 2017 he was appointed as
both Chief Scientific Officer and Chief Operating Officer. Dr. Hutchins oversees our research efforts, bringing over 27 years of research and clinical development experience
from both large pharmaceutical and biotechnology companies. Most recently and since 2012, Dr. Hutchins served as Vice President of Preclinical Research for Peregrine
Pharmaceuticals, Inc., a biopharmaceutical company developing therapeutics to fight cancer and infectious diseases. Dr. Hutchins was responsible for building out the research
program for Peregrine's lead product candidate, bavituximab, a chimeric monoclonal antibody designed to target phosphatidylserine. Prior to joining Peregrine in 2012, from
2001 until 2012, Dr. Hutchins served as Vice President, Preclinical Development at Inhibitex Inc, which was acquired by Bristol-Myers Squibb. From 1991 to 2000, Dr.
Hutchins held several senior scientist positions in Discovery Research at Burroughs Wellcome and Glaxo Wellcome, with a visiting professor appointment at Rush Medical
College.
58
Dr. Hutchins earned a B.S. in Biology from Oral Roberts University, a Ph.D. in Biomedical Sciences from the University of Texas, Health Science Center at the M.D.
Anderson Cancer Center and conducted postdoctoral training in the University of Southern California's Department of Microbiology at the Norris Cancer Center. Dr. Hutchins'
publications and patents span the fields of oncology, infectious disease, osteoarthritis and immunology.
Ann A. Rosar, M.B.A., Vice President of Finance, Controller and Secretary
Ms. Rosar joined our company as Controller in January 2015 and in April 2016 was named our Vice President of Finance, Controller and Secretary. Ms. Rosar has over twenty
years of experience in finance with publicly held companies and more than fifteen years of experience regarding regulatory reporting requirements. Prior to serving as our
Controller, Ms. Rosar served as Manager of Financial Reporting and Accounting for LipoScience, Inc. (acquired by LabCorp), a provider of specialized cardiovascular
diagnostic tests, from 2013 to 2015. From 2007 until 2013 she served in various roles at DARA Biosciences, Inc. (now Midatech Pharma US), an oncology supportive care
pharmaceutical company, including as the Vice President of Finance, Chief Accounting Officer and Controller. Ms. Rosar was the Manager of Financial Reporting and
Accounting with Cicero, Inc. (formerly Level 8 Systems), a provider of business integration software, from June 2000 until November 2007, where she was responsible for
Securities and Exchange Commission reporting, audits and budget analysis. Prior to that position, she served as Senior Financial Analyst-Business Operations for Nextel
Communications. Ms. Rosar received a M.B.A. in Finance from the University of Houston and received her undergraduate degrees from North Carolina State University.
Effective March 31, 2019, Ann A. Rosar is going into retirement and Robert J. Jakobs will serve as our Vice President of Finance. See ‘Executive Compensation-Employment
Agreements” in Item 11 below.
John Monahan, Ph.D., Director
Dr. Monahan has served on our Board since November 2009 and is currently a consultant to Synthetic Biologics, Inc., a clinical stage company developing therapeutics to
protect the gut microbiome (NYSE MKT: SYN). Dr. Monahan Co-Founded Avigen Inc. (NASDAQ: AVGN) in 1992, a company which has become a leader in its sector for
the development of novel pharmaceutical products for the treatment of serious human diseases. Over a 12 year period as CEO of Avigen he raised over $235M in several private
and public financings including its IPO. From 1989-1992, he was VP of R&D at Somatix Therapy Corp., Alameda, CA and from 1985-1989 he was Director of Molecular &
Cell Biology at Triton Biosciences Inc., Alameda, CA. Prior to that from 1982-1985, he was Research Group Chief, Department of Molecular Genetics, Hoffmann-LaRoche,
Inc. Nutley, NJ, and from 1975 to 1977 he was an Instructor at Baylor College of Medicine, Houston TX. He received his Ph.D. in Biochemistry in 1974 from McMaster
University, Canada and his B.Sc. from University College Dublin, Ireland in 1969. Dr. Monahan is a Scientific Advisory Board member of Agilis Biotherapeutics. He is also a
board member of the biotech company ITUS Corporation and also a board member of a number of Irish biotech companies including Genable, Cellix, Luxcel, and GK
Technologies.
We selected Dr. Monahan to serve on our Board because he brings extensive knowledge of the pharmaceutical and biologics industry. Having served in senior corporate
positions in many medical companies he has a vast knowledge of the industry.
John K. A. Prendergast, Ph.D., Lead Director
Dr. Prendergast has served on our Board since April 2016. Dr. Prendergast is co-founder of Palatin Technologies, Inc. (“Palatin”), a biopharmaceutical company developing
targeted, receptor-specific peptide therapeutics for the treatment of diseases with significant unmet medical need and commercial potential (NYSE MKT: PTN). Dr.
Prendergast has been Chairman of the Board of Palatin since June 14, 2000, and a director since August 1996. Dr. Prendergast has been president and sole stockholder of
Summercloud Bay, Inc., an independent consulting firm providing services to the biotechnology industry, since 1993. Dr. Prendergast is a director and executive chairman of
the board of directors of Antyra, Inc., a privately-held biopharmaceutical firm. He was previously a member of the board of the life science companies AVAX Technologies,
Inc., Avigen, Inc. and MediciNova, Inc. From October 1991 through December 1997, Dr. Prendergast was a managing director of The Castle Group Ltd., a medical venture
capital firm. Dr. Prendergast received his M.Sc. and Ph.D. from the University of New South Wales, Sydney, Australia and a C.S.S. in administration and management from
Harvard University.
We selected Dr. Prendergast to serve on our Board because he brings extensive industry experience in corporate development and finance in the life sciences field. His prior
service on other publicly traded company boards provides experience relevant to good corporate governance practices.
59
Edward B. Smith, III, Director
Mr. Smith has served on our Board since November 2010. Since January 1, 2015, Mr. Smith has also been Managing Member of Aristar Capital Management, LLC, a New
York-based investment firm founded in 2015. From April 14, 2017 through July 14, 2017, Mr. Smith served as the interim Chief Executive Officer and interim Chief Financial
Officer Agritech Worldwide, Inc. (“Agritech,” formerly Z Trim Holdings, Inc.) (OTCPink: FBER), a manufacturer of environmentally friendly agricultural functional
ingredients, From January 2015 until May 2016, Mr. Smith also served as the Chief Executive Officer of Agritech and from 2009 through July 2017 he served as a board
member of Agritech. From April 2005 through December 2014, Mr. Smith served as the Managing Partner of Brightline Capital Management, LLC (“BCM”), a New York-
based investment firm founded in 2005. Prior to founding BCM, Mr. Smith worked at Gracie Capital from 2004-2005, GTCR Golder Rauner from 1999-2001 and Credit Suisse
First Boston from 1997-1999. Mr. Smith holds a Bachelor of Arts in Social Studies from Harvard College and a Masters in Business Administration from Harvard Business
School.
We selected Mr. Smith to serve on our Board because he brings a strong business background to our company, and adds significant strategic, business and financial experience.
Mr. Smith’s business background provides him with a broad understanding of the issues facing us, the financial markets and the financing opportunities available to us. His
service on other public company boards provides him with extensive corporate governance knowledge and insight into issues faced by companies similar to ours.
The Board of Directors has a standing Audit Committee, Compensation Committee, and Nominating and Governance Committee. The following table shows the directors who
are currently members or Chairman of each of these committees.
Committees of the Board of Directors
Board Members
Jeff Wolf
John Monahan, Ph.D.
Edward Smith
John K.A. Prendergast, Ph.D.*
———————
* Dr. Prendergast serves as our independent Lead Director.
Audit Committee
Audit
Committee
—
Member
Chairman
Member
Compensation
Committee
—
Chairman
Member
Member
Nominating
and
Governance
Committee
—
Member
Chairman
Member
Our common stock is listed on the NASDAQ Capital Market. Under the rules of NASDAQ, independent directors must comprise a majority of a listed company’s board of
directors and all members of our audit, compensation and nominating and governance committees must be independent. Audit committee members must also satisfy the
independence criteria set forth in Rule 10A-3 under the Exchange Act. Under the rules of the NASDAQ Stock Market, a director will only qualify as an “independent director”
if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director.
In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a
member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from
the listed company or any of its subsidiaries or (2) be an affiliated person of the listed company or any of its subsidiaries.
Our Board undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and
provided by each director concerning his background, employment and affiliations, including family relationships, our Board has determined that Dr. Monahan, Mr. Smith and
Dr. Prendergast, representing three of our four directors, do not have a relationship that would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director and that each of these directors is “independent” as that term is defined under the rules of the NASDAQ Stock Market. In making this
determination, our Board considered the relationships that each non-employee director has with us and all other facts and circumstances our Board deemed relevant in
determining their independence, including the beneficial ownership of our capital stock by each non-employee director. We intend to comply with the other independence
requirements for committees within the time periods specified above
60
Dr. Monahan, Mr. Smith, and Dr. Prendergast currently serve as members of the Audit Committee. The Board has determined that Dr. Monahan, Mr. Smith and Dr. Prendergast
are each “independent” in accordance with the NASDAQ definition of independence and each is an “audit committee financial expert”, as defined by the SEC regulations, and
each has the related financial management expertise within the meaning of the NASDAQ rules. The primary purpose of the Audit Committee is to act on behalf of the Board of
Directors in its oversight of all material aspects of our accounting and financial reporting processes, internal controls and audit functions, including our compliance with Section
404 of the Sarbanes-Oxley Act of 2002. Pursuant to its charter, our Audit Committee reviews on an on-going basis for potential conflicts of interest, and approves if
appropriate, all our “Related Party Transactions.” For purposes of the Audit Committee Charter, “Related Party Transactions” shall mean those transactions required to be
disclosed pursuant to SEC Regulation S-K, Item 404. In addition, the Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing
and accounting matters, including the selection of the Company’s independent registered public accounting firm, the scope of the annual audits, fees to be paid to the
independent registered public accounting firm, the performance of the Company’s independent registered public accounting firm and the accounting practices of the Company
and the Company’s internal controls and legal compliance functions. The Committee also reviews, prior to publication, our quarterly earnings releases and our reports to the
Securities and Exchange Commission on Forms 10-K and 10-Q. The Audit Committee operates pursuant to a written charter adopted by the Board of Directors, which is
available on the Company’s website at www.heatbio.com. The charter describes the nature and scope of responsibilities of the Audit Committee.
Compensation Committee
Our Compensation Committee is comprised of Dr. Monahan, Mr. Smith, and Dr. Prendergast, each of whom is deemed to be independent in accordance with the NASDAQ
definition of independence. Compensation Committee members must also satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act. This Committee
determines, approves, and reports to the Board of Directors on all elements of compensation of our executive officers. The Compensation Committee also has the power to
prescribe, amend, and rescind rules relating to our stock incentive plans, to recommend the grant of options and other awards under the stock incentive plans, and to interpret
the stock incentive plans.
The Compensation Committee operates under a formal charter that governs its duties and standards of performance. A copy of the charter is available on our website at
www.heatbio.com.
Our Compensation Committee annually reviews the compensation program for our Chief Executive Officer and other members of senior management and then makes
recommendations to the full board for determination. In each case, the Committee takes into account the results achieved by the executive, his or her future potential, and his or
her scope of responsibilities and experience. During our fiscal year ended December 31, 2018, the Committee evaluated the performance of our executives and considered the
compensation levels and equity programs at comparable companies and related industries and the analysis of its outside consultant before it made its compensation
recommendations to the full board, including recommendations regarding salary increases, awards of cash bonuses and awards of stock options.
The Committee administers our equity incentive plans, including review and recommendation of long-term incentive compensation for each executive, director and employee,
including grants of stock options. The Committee believes that this long-term incentive compensation aligns the interests of our executives with those of our stockholders and
furthers executive retention.
The Committee also reviews and recommends to the Board of Directors appropriate director compensation programs for service as directors, committee chairs and committee
members.
Nominating and Governance Committee
The Nominating and Governance Committee is comprised of Dr. Monahan, Mr. Smith, and Dr. Prendergast.
The functions performed by the Nominating and Governance Committee include:
·
·
·
·
recommending to the Board of Directors individuals for appointment to vacancies on any committee of the Board of Directors;
recommending to the Board of Directors regarding any changes to the size of the Board of Directors or any committee;
reporting to the Board of Directors on a regular basis; and
performing any other duties or responsibilities expressly delegated to the committee by the Board of Directors relating to board or committee members.
61
Candidates for director should have certain minimum qualifications, including the ability to understand basic financial statements, being over 21 years of age, having relevant
business experience (taking into account the business experience of the other directors), and having high moral character. The Committee retains the right to modify these
minimum qualifications from time to time.
In evaluating an incumbent director whose term of office is set to expire, the Nominating and Governance Committee reviews such director’s overall service to the Company
during such director’s term, including the number of meetings attended, level of participation, quality of performance, and any transactions with the Company engaged in by
such director during his term.
When selecting a new director nominee, the Committee first determines whether the nominee must be independent for NASDAQ purposes or whether the candidate must
qualify as an “audit committee financial expert.” The Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems
appropriate, a professional search firm to assist in the identification of qualified director candidates. The Committee also will consider nominees recommended by our
stockholders. The Nominating and Governance Committee does not distinguish between nominees recommended by our stockholders and those recommended by other parties.
The Committee evaluates the suitability of potential nominees, taking into account the current board composition, including expertise, diversity and the balance of inside and
independent directors. The Nominating and Governance Committee endeavors to establish a diversity of background and experience in a number of areas of core competency,
including business judgment, management, accounting, finance, knowledge of our industry, strategic vision, research and development and other areas relevant to our business.
In considering any person recommended by one of our stockholders, the Committee will look for the same qualifications that it looks for in any other person that it is
considering for a position on the Board of Directors. The Nominating and Governance Committee operates under a formal charter that governs its duties and standards of
performance. A copy of the charter is available on our website at www.heatbio.com.
Board Leadership Structure
Mr. Wolf, the Company’s Chief Executive Officer, also serves as Chairman of the Board of Directors. We have a separate, independent Lead Director. Although we do not
have a formal policy addressing the topic, we believe that when the Chairman of the Board is an employee of the Company or otherwise not independent, it is important to have
a separate Lead Director, who is an independent director.
Dr. Prendergast serves as the Lead Director. In that role, he presides over the Board’s executive sessions, during which our independent directors meet without management,
and he serves as the principle liaison between management and the independent directors of the Board. The Lead Director also:
·
·
·
·
·
confers with the Chairman of the Board regarding Board meeting agenda;
chairs meetings of the independent directors including, where appropriate, setting the agenda and briefing the Chairman of the Board on issues discussed during the
meeting;
oversees the annual performance evaluation of the CEO;
consults with the Nominating and Governance Committee and the Chairman of the Board regarding assignment of Board members to various committees; and
performs such other functions as the Board may require.
We believe the combination of Mr. Wolf as our Chairman of the Board and an independent director as our Lead Director is an effective structure for our company. The division
of duties and the additional avenues of communication between the Board and our management associated with this structure provide the basis for the proper functioning of our
Board and its oversight of management.
62
Risk Oversight
The Board has an active role, as a whole and also at the committee level, in overseeing management of our company’s risks. The Board regularly reviews information regarding
our company’s strategy, finances and operations, as well as the risks associated with each. The Audit Committee is responsible for oversight of Company risks relating to
accounting matters, financial reporting, internal controls and legal and regulatory compliance. The Audit Committee undertakes, at least annually, a review to evaluate these
risks. The members then meet separately with management responsible for such area, including our Chief Financial Officer, and report to the Audit Committee on any matters
identified during such discussions with management. In addition, the Compensation Committee considers risks related to the attraction and retention of talent as well as risks
relating to the design of compensation programs and arrangements. In addition, the Nominating and Governance Committee manages risks associated with the independence of
the Board. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board is regularly informed through
committee reports about such risks. The full Board considers strategic risks and opportunities and regularly receives detailed reports from the committees regarding risk
oversight in their respective areas of responsibility.
Code of Conduct
The Board of Directors has adopted a Code of Conduct that applies to our directors, executives (including our Chief Executive Officer and Vice President of Finance) and
employees. The Code is posted on our website at www.heatbio.com.
Compensation of Directors
2018 Director Compensation
The following table sets forth information for the fiscal year ended December 31, 2018 regarding the compensation of our directors who at December 31, 2018 were not also
named executive officers.
Fees Earned
or Paid
in Cash
$ 61,500
$221,000
$ 72,500
Option
Awards
$ 25,912
$ 51,821
$ 25,912
Other
Compensation
—
—
—
Totals
$87,412
$272,821
$98,412
Name and Principal Position
John Monahan, PhD (1)
John K. A. Prendergast, PhD (2)
Edward Smith (1)
———————
(1)
The stock options are computed in accordance with FASB ASC 718 and reflect the value of an option to purchase 9,530 granted on January 8, 2018 to Dr. Monahan and Mr.
Smith with 100% of these options vesting on the one year anniversary of the date of the grant, subject to remaining on the Board of Directors. The fair value of the options
was calculated in accordance with FASB ASC 718, and the assumptions used are described in Note 10 to the Company’s audited consolidated financial statements for the
years ended December 31, 2018 and 2017.
(2)
The stock options are computed in accordance with FASB ASC 718 and reflect the value of an option to purchase 19,059 shares of common stock granted on January 8,
2018 to Dr. Prendergast as lead independent director with 100% of these options vesting on the one year anniversary of the date of the grant, subject to remaining on the
Board of Directors. The fair value of the options was calculated in accordance with FASB ASC 718, and the assumptions used are described in Note 10 to the Company’s
audited consolidated financial statements for the years ended December 31, 2018 and 2017.
As of December 31, 2018, the following table sets forth the number of aggregate outstanding option awards held by each of our directors who were not also named executive
officers:
Name
John Monahan, Ph.D.
John K. A. Prendergast, Ph.D.
Edward Smith
63
Aggregate
Number of
Option Awards
25,018
41,059
24,257
Our Compensation Committee conducted an evaluation of the compensation of the members of our board of directors with assistance from Korn Ferry. As described in
additional detail below under Item 11. “Executive Compensation,” Korn Ferry is the Compensation Committee’s independent compensation advisor and was engaged to provide
analysis, guidance and considerations pursuant to our director pay program. Based on Korn Ferry’s review last year, the Compensation Committee determined that the director
pay program was consistent with competitive market practices (relative to Heat Biologic’s publicly-traded peer group at that time), aligned with our overall philosophy and
approach to director pay and reflective of desired competitive positioning. During the year ended December 31, 2018, and anticipated to remain the same for 2019, directors
who are not employees receive an annual cash fee of $35,000 as well as a cash fee of $8,000 for service on the Audit Committee and $5,000 for service on each of the
Compensation Committee and the Nominating and Governance Committee. In addition, the Chairman of each of the Audit, Compensation and Nominating and Governance
Committees will each receive an additional cash fee of $12,500, $8,500 and $7,000, respectively. The lead independent director receives a monthly fee of $14,000 for his
services as lead independent director.
However, due to the price of our common stock, it was determined that the equity portion of our director pay program was not consistent with competitive market practices
(relative to Heat Biologic’s publicly-traded peer group at that time). Accordingly, on January 9, 2019, after consultation with Korn Ferry, Dr. Monahan and Mr. Smith received
an option grant each to purchase 150,000 shares of our common stock (having a value of $140,400) vesting 50% immediately, 30% on the one year anniversary of the grant
date, 10% shall vest on the two-year anniversary grant date, and the remaining 10% shall vest on the three-year anniversary grant date. For his services as lead independent
director Dr. Prendergast received a grant of 300,000 restricted shares of common stock (having a value of $318,000) vesting 50% immediately, 30% on the one year anniversary
of the grant date, 10% shall vest on the two-year anniversary of the grant date, and the remaining 10% shall vest on the three-year anniversary of the grant date. These stock
option grants provided to Dr. Monahan and Mr. Smith will expire (10) years from the date of the grant, unless terminated earlier.
Item 11.
Executive Compensation
Overview of Our Compensation Program
A. Philosophy and Objectives
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
Our primary objective with respect to executive compensation is to design compensation programs that will align executives’ compensation with our overall business strategies
for the creation of stockholder value and attract, motivate and retain highly qualified executives.
Our executive compensation program is based on the following philosophies and objectives:
·
·
·
Compensation Should Align with Stockholders’ Interests — The Compensation Committee believes that executives’ interests should be aligned with those of the
stockholders. Executives are granted stock options so that their total compensation is tied directly to the same value realized by our stockholders. Executive bonuses are
tied directly to the value that we gain from an executive’s contribution to our success as a whole.
Compensation is Competitive — The Compensation Committee seeks to provide a total compensation package that attracts, motivates and retains the executive talent
that we need in order to maximize the return to stockholders. To accomplish this objective, executive compensation is reviewed annually to ensure that compensation
levels are competitive and reasonable given our level of performance and other comparable companies with which we compete for talent.
Compensation Motivates and Rewards the Achievement of Goals — Our executive compensation program is designed to appropriately reward both individual and
collective performance that meets and exceeds our annual, long-term and strategic goals. To accomplish this objective, a substantial percentage of total compensation
is variable, “at risk”, both through annual incentive compensation and the granting of long-term incentive awards.
64
We seek to achieve these objectives through three key compensation elements:
·
·
·
a base salary;
a performance-based annual cash incentive (i.e., annual cash incentive compensation); and
equity awards.
In order to enhance the Compensation Committee’s ability to carry out its responsibilities effectively, as well as maintain strong links between executive pay and performance,
the Compensation Committee reviews compensation information for each Named Executive Officer (as defined below), which includes the following information:
·
·
·
the annual compensation and benefit values that are being offered to each executive;
the value of all outstanding equity awards; and
the Compensation Committee also meets with our Chairman, Chief Executive Officer and other senior management in connection with compensation matters, and may
retain and meet in executive session with, compensation and other advisors from time to time.
B. Compensation Administration
Roles and Responsibilities of Compensation Committee
The primary purpose of the Compensation Committee is to conduct reviews of our general executive compensation policies and strategies and oversee and evaluate our overall
compensation structure and programs. The Compensation Committee seeks to confirm that total compensation paid to (i) Jeff Wolf, our Chief Executive Officer, (ii) Ann Rosar,
our Vice President of Finance, and (iii) Jeff Hutchins, our Chief Scientific Officer and Chief Operating Officer (collectively, our “Named Executive Officers”), is reasonable
and competitive. Responsibilities of the Compensation Committee include, but are not limited to:
·
·
·
·
·
·
Establishing on an annual basis performance goals and objectives for purposes of determining the compensation of our Chief Executive Officer and other senior
executive officers, evaluating the performance of such officers in light of those goals and objectives, and setting the compensation level for those officers based on this
evaluation.
Recommending to the Board the compensation for Board members (including retainer, committee and committee chair’s fees, stock options and other similar items as
appropriate).
Reviewing the competitive position of, and making recommendations to the Board with respect to, the cash-based and equity-based compensation plans and other
programs relating to compensation and benefits.
Reviewing our financial performance and operations as well as our major benefit plans.
Overseeing the administration of our stock option and other executive compensation plans, including recommending to the Board of Directors the granting of options
and awards under the plans, and the approval or disapproval of the participation of individual employees in those plans.
Reviewing and approving for our Chief Executive Officer and other senior executive officers: (a) employment agreements; (b) severance agreements; (c) change in
control agreements/provisions; (d) any other material perquisites or other in-kind benefits.
Additional information regarding the Compensation Committee’s responsibilities is set forth in its charter, which is posted on our website at www.heatbio.com.
Use of Compensation Consultant
As noted above, the Compensation Committee retained Korn Ferry, a nationally-recognized global human resources consulting firm, as its independent compensation advisor
for 2018. Korn Ferry principally provides analysis, advice and recommendations regarding Named Executive Officer and non-employee director compensation as well as
guidance and considerations on our long-term incentive program for all eligible employees. Korn Ferry reports to the Chairman of the Compensation Committee and has direct
access to the other members of the Compensation Committee. Korn Ferry does not provide any other services to the Company other than in its role as the Compensation
Committee’s independent advisor.
65
Competitive Considerations
In making compensation decisions with respect to each element of compensation for our Named Executive Officers, the Compensation Committee considers the competitive
market pay data from both our publicly-traded peer group (14 similarly -situated biotechnology, pharmaceuticals and biopharma companies) and a premier compensation
survey which is specific to our size and industry. In setting 2018 and 2019 target total direct compensation levels for our Named Executive Officers, the Compensation
Committee relied in part on reports prepared by Korn Ferry in December 2017 and December 2018, respectively.
For each of our Named Executive Officers in context of competitive market data, the Compensation Committee generally targets total direct compensation that is within a
competitive range of market (+/- 15% of median) relative to executives in similar positions and with similar responsibilities and experience. The Compensation Committee’s
desired competitive positioning and its pay program decision-making (in terms of both compensation levels and overall mix of pay which is focused on variable or “at risk”
compensation) is reflective of our pay for performance philosophy and provides alignment of executive and shareholder interests.
We believe that, given the industry in which we operate and our compensation philosophy and objectives, our approach to executive compensation is sufficient to retain our
current executive officers and to hire new executive officers when and as required.
Role of the Chief Executive Officer
Our Chief Executive Officer, Mr. Wolf, makes recommendations to the Compensation Committee regarding the compensation of our other Named Executive Officers. Mr. Wolf
does not participate in any discussions or processes concerning his own compensation, and participates in a non-voting capacity in discussions or processes concerning the
compensation of our Principal Financial Officer and other members of management.
1. Base Salaries
We provide our Named Executive Officers a base salary commensurate with their position, responsibilities and experience. In setting the base salary, the Compensation
Committee considers the scope and accountability associated with each Named Executive Officer’s position and such factors as performance and experience of each Named
Executive Officer. We design base pay to provide the essential reward for an employee’s work and are required to be competitive in attracting talent. Once base pay levels are
initially determined, increases in base pay may be provided to recognize an employee’s specific performance achievements. The base salaries are targeted to be competitive with
other similar biotechnology companies. Base salaries for the Named Executive Officers are set by their respective employment contracts and are reviewed annually by the
Compensation Committee. Our Chief Executive Officer, Vice President of Finance and Chief Scientific Officer/ Chief Operating Officer typically make performance
assessments of our other employees throughout the year, and provide ongoing feedback to employees, provide resources and maximize individual and team performance levels.
Based on the analysis provided to us by Korn Ferry and other comparative research performed by the Committee, the Committee was able to compare the base salary for the
Chief Executive Officer, Vice President of Finance and Chief Scientific Officer/ Chief Operating Officer. It was determined that our Chief Executive’s Officer’s, Vice President
of Finance and Chief Scientific Officer’s/ Chief Operating Officer’s 2018 base salary levels were within a competitive range of market relative to competitive market data and
therefore only modest merit-related base salary increases were provided for 2019. The 2018 and 2019 base salaries for our Named Executive Officers are as follows:
Named Executive Officer
Jeff Wolf, Chief Executive Officer
Ann Rosar, Vice President of Finance
Jeff Hutchins, Chief Scientific Officer and Chief Operating Officer
Base Salary 2018
$417,150
$260,000
$335,000
Base Salary 2019
$427,579
$266,500
$343,375
66
2. Bonuses
The Compensation Committee also makes recommendations to the full Board of Directors for determining bonuses. For the year ended December 31, 2018, the Compensation
Committee approved a $208,575 cash bonus for Jeff Wolf (50% of pro-rated gross base salary), a $100,500 cash bonus for Jeff Hutchins (30% of pro-rated gross base salary)
and a $65,000 cash bonus for Ann Rosar (25% of pro-rated gross base salary). In addition, on January 1, 2019, the Board granted the following one time supplemental cash
bonuses to the executive officers for significant strategic and operational achievements in 2018: (i) Mr. Wolf a one-time supplemental cash bonus equal to $208,576; (ii) Ms.
Rosar a one-time cash supplemental bonus equal to $65,000 and (iii) Dr. Hutchins a one-time supplemental cash bonus equal to $100,500.
The employment agreement with Jeff Wolf that was in effect during 2018 provided that he was eligible for a cash performance bonus of up to fifty percent of his base as well an
equity bonus in the sole discretion of the board of directors, with the actual amount of any such bonus increased or decreased in the sole discretion of the board of directors. Dr.
Hutchins employment agreement was amended in January 2019 to increase his bonus such that he is eligible for a cash performance bonus of up to thirty percent of his base and
as well an equity bonus in the sole discretion of the board of directors, with the actual amount of any such bonus increased or decreased in the sole discretion of the board of
directors. Ann Rosar’s employment agreement provides that she is eligible for an annual bonus, payable in cash and/or equity, in the discretion of the board of directors. The
bonuses are to be rewarded based on whether, in the discretion of the Compensation Committee and the board of directors, our company and the Named Executive Officer met
certain objectives established by the Compensation Committee. The Compensation Committee believes that the granting of a bonus is appropriate to motivate the Named
Executive Officers. The Compensation Committee focuses on individual performance, which enables the Compensation Committee to differentiate among executives and
emphasize the link between personal performance and compensation. Although the Compensation Committee does not use any fixed formula in determining bonuses, it does
link them to financial objectives of importance to it.
3. Long-Term Incentives
The Compensation Committee believes that a substantial portion of the Named Executive Officer’s compensation should be awarded in equity-based compensation since
equity-based compensation is directly linked to the interests of stockholders. The Compensation Committee has elected to grant a combination of stock options and restricted
stock awards to the Named Executive Officers and other key employees as the primary long-term incentive vehicles. In making this determination, the Compensation
Committee considered a number of factors including: the accounting impact, potential value of stock option grants versus other equity instruments and cash incentives, and the
alignment of equity participants with stockholders. The Compensation Committee determined to grant a combination of stock options and restricted stock awards to:
·
·
·
·
enhance the link between the creation of stockholder value and executive compensation;
provide an opportunity for equity ownership;
act as a retention tool; and
provide competitive levels of total compensation.
The Board’s rationale for making equity awards was to use the awards to encourage retention and better align the interest of the Names Executive Officers with the stockholders.
In 2018 and 2019 the Board also considered each Named Executive Officer prior long terms service and the fact that there was a lack of realizable value from their prior
awards since substantially all of the prior awards were of significant low value. Each of Jeff Wolf, Jeff Hutchins and Ann Rosar were granted options to purchase 800,000,
356,860 and 110,570 shares of common stock, respectively, in January 2019 as part of their long term incentive compensation for the year ended December 31, 2018. In
addition, Jeff Wolf, Jeff Hutchins, and Ann Rosar were issued 800,000, 143,140, and 89,430 restricted stock awards, respectively in January 2019, as part of their long term
incentive compensation. The stock options and restricted stock awards granted vest 50% immediately, 30% on the one year anniversary of the grant date, 10% shall vest on the
two-year anniversary grant date, and the remaining 10% shall vest on the three-year anniversary grant date. The stock options have a term of ten years.
The Compensation Committee reviews the performance, potential burn rates and dilution levels to create an option pool that may be awarded to employee participants. Grants
to the Named Executive Officers were determined by the Compensation Committee after reviewing market data, including the reports and analysis discussed above and after
considering each executive’s performance, role and responsibilities.
67
The Compensation Committee does not seek to time equity grants to take advantage of information, either positive or negative, about our company that has not been publicly
disclosed. Option grants are effective on the date the award determination is made by the Compensation Committee, and the exercise price of options is the closing market price
of our common stock on the business day of the grant or, if the grant is made on a weekend or holiday, on the prior business day.
Set forth below is the compensation paid or accrued to our named executive officers during the years ended December 31, 2018 and December 31, 2017 that exceeded
$100,000.
Name and Principal Position
Jeffrey Wolf
Chairman and Chief Executive Officer
Jeff T. Hutchins
Chief Scientific Officer and Chief Operating officer
Ann A. Rosar
Vice President of Finance
Summary Compensation Table
Year
2018
2017
2018
2017
2018
2017
$
$
$
$
$
$
Salary
417,150
417,150
Bonus
Stock
Awards (8)
Options (8) Other
$ 171,533 $
$ 417,150(1) $ 160,785
$ 208,575(2) $ 213,038(3) $ 125,000 $
Total
$1,166,618
$ 963,763
—
—
335,000
309,442
$ 201,000(4) $
77,361 (5) $
$
—
—
260,000
212,500
$ 135,000(7) $
53,125 (5) $
$
19,060
60,900
$
$
$
$
85,386 $
94,583 $
—
$ 621,386
66,000 (6) $ 547,386
17,865 $
52,975 $
—
—
$ 431,925
$ 379,500
———————
(1)
(2)
Mr. Wolf’s annual 2018 bonus of $208,575 was paid in 2018. The one-time supplemental cash bonus of $208,575 was accrued in 2018 and paid in 2019.
Mr. Wolf agreed to accept 26,072 restricted stock units in lieu of $52,144 of his cash bonus (25% of his cash bonus). The restricted stock units received in lieu of the cash
bonus had a value at the time of grant of $104,288.
Includes the value of the restricted stock units ($52,144) that exceed the value of the bonus foregone. The restricted stock units vest immediately but may not be sold until
the one year anniversary of their grant date. Each restricted stock units represents a contingent right to receive one share of common stock.
Dr. Hutchins’ annual 2018 bonus of $100,500 was paid in 2018. The one-time supplemental cash bonus of $100,500 was accrued in 2018 and paid in 2019.
This bonus was accrued in 2017 and paid in 2018.
This is the sign-on bonus per Dr. Hutchins’ January 2017 employment agreement.
Ms. Rosar’s annual 2018 bonus of $65,000 was paid in 2018. Ms. Rosar received a performance bonus of $5,000 in June 2018. The one-time supplemental cash bonus of
$65,000 was accrued in 2018 and paid in 2019.
For all stock options and stock awards, the values reflect the aggregate grant date fair value computed in accordance with FASB ASC 718. Assumptions made in the
calculation of these amounts are described in Note 10 to the Company’s audited consolidated financial statements for the years ended December 31, 2018 and 2017.
(3)
(4)
(5)
(6)
(7)
(8)
68
Outstanding Equity Awards at Fiscal Year-End (December 31, 2018)
Option Awards
Stock Awards
Number of
securities
underlying
unexercised
options/
exercisable
Number of
securities
underlying
unexercised
options/
unexercisable
Option
exercise
price
Option
expiration
date
Number of
shares or
units of
stock that
have not
vested
Market
value of
shares or
units of
stock that
have not
vested
1,097(1)
10,000 (2)
1,251(3)
7,057(4)
3,611(5)
6,044(7)
13,651 (9)
9,583(11)
3,958(12)
6,794(13)
979 (14)
463 (15)
1,375(16)
3,354(17)
989 (19)
1,516(20)
— $
— $
— $
2,349 $
3,889 $
6,497 $
45,909 $
10,417 $
6,042 $
22,854 $
21 $
155 $
625 $
3,646 $
1,511 $
5,102 $
23.00 12/18/2019
86.20 6/11/2024
45.30 1/12/2025
24.70 1/11/2026
8.60 12/30/2026
8.70 1/03/2027
3.97 1/07/2028
8.70 1/03/2027
6.60 6/28/2027
3.97 1/07/2028
45.30 1/12/2025
24.70 1/11/2026
6.60 4/5/2026
8.70 1/03/2027
6.60 6/28/2027
3.97 1/07/2028
—
—
—
—
1,875(6) $
6,250(8) $
30,375 (10) $
—
—
—
—
—
—
3,500(18) $
—
3,375(21) $
—
—
—
—
1,838
6,125
29,768
—
—
—
—
—
—
3,430
—
3,308
Name and Principal Position
Jeffrey Wolf
Chairman and
Chief Executive Officer
Jeff T. Hutchins
Chief Scientific Officer and
Chief Operating Officer
Ann A. Rosar
Vice President of
Finance, Controller
and Secretary
———————
(1)
(2)
(3)
(4)
(5)
(6)
All shares are fully vested as of December 2013.
All shares as full vested as of January 2016.
All shares as full vested as of December 2018.
Issued on January 11, 2016, these options vest over a four-year period and will be fully vested in December 2019.
Issued on December 30, 2016, these options vest over a four-year period and will be fully vested in January 2020.
Issued on December 30, 2016, 3,750 restricted stock units vested as of December 30, 2017; 1,875 will vest December 30, 2018; and 1,875 will vest December 30, 2019.
Amount represents the value of shares at December 31, 2018.
Issued on January 3, 2017, these shares vest over a 46-month period and will be fully vested in January 2021.
Issued on January 3, 2017, 3,125 restricted stock units vested January 3, 2017; 3,125 vested January 3, 2018; 3,125 will vest January 3, 2019; and 3,125 will vest January 3,
2020. Amount represents the value of shares at December 31, 2018.
Issued on January 7, 2018, these shares vest over a 46-month period and will be fully vested in January 2022.
Issued on January 7, 2018, 10,125 restricted stock units vested January 8, 2018; 10,125 will vest January 8, 2019; 10,125 will vest January 7, 2020; and 10,125 will vest
January 8, 2021. Amount represents the value of shares at December 31, 2018.
Issued on January 3, 2017, these shares vest over a 46-month period and will be fully vested in January 2021.
Issued on June 28, 2017, these shares vest over a 46-month period and will be fully vested in May 2021.
Issued January 7, 2018, , these shares vest over a 46-month period and will be fully vested in January 2022.
Issued January 12, 2015, these shares vest over a four-year period and will be fully vested in January 2019.
Issued on January 11, 2016, these options vest over a four-year period and will be fully vested in December 2019.
Issued on April 5, 2016, these options vest over a four-year period and will be fully vested in March 2020.
Issued on January 3, 2017, these shares vest over a 46-month period and will be fully vested in January 2021.
Issued on January 3, 2017, 1,750 restricted stock units vested January 3, 2017; 1,750 vested January 3, 2018; 1,750 will vest January 3, 2019; and 1,750 will vest January 3,
2020. Amount represents the value of shares at December 31, 2018.
Issued on June 28, 2017, these shares vest over a 46-month period and will be fully vested in May 2027.
Issued on January 7, 2018, these shares vest over a 46-month period and will be fully vested in January 2022.
Issued on January 7, 2018, 1,125 restricted stock units vested January 7, 2018; 1,125 will vest January 8, 2019; 1,125 will vest January 7, 2020; and 1,125 will vest January
7, 2021. Amount represents the value of shares at December 31, 2018.
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
69
The chart above does not include the grant on January 2, 2019 of (i) options exercisable for 800,000, 356,860, and 110,570 shares of common stock issued to each of Mr. Wolf,
Dr. Hutchins, and Mrs. Rosar, respectively; and (ii) 800,000, 143,140, and 89,430 restricted stock awards that were issued to Mr. Wolf, Dr. Hutchins, and Ms. Rosar,
respectively, which vest 50% on grant date, 30% on the one year anniversary of the grant date, 10% shall vest on the two-year anniversary of the grant date, and the remaining
10% shall vest on the three-year anniversary of the grant date and expire (10) years from the date of the grant, unless terminated earlier.
Employment Agreements
On December 18, 2009, we entered into an employment agreement with Jeffrey Wolf to act as our Chief Executive Officer, which agreement was amended on November 22,
2011, and further amended on each of January 20, 2014, January 11, 2016 and January 1, 2017. Mr. Wolf receives an annual base salary of $417,150 per year. He also may
receive, at the sole discretion of the board, an additional cash performance-based bonuses equal to up to 50% of his then outstanding base salary at the end of each year and a
discretionary equity award, with the actual amount of his bonus to be increased or decreased in the sole discretion of the Board of Directors. Upon execution of the agreement,
Mr. Wolf was issued options exercisable for 119,661 shares of our common stock. In addition, he is to receive certain options to purchase 2% of our fully diluted equity at an
exercise price equal to the then current market price if our stock is traded on a nationally recognized exchange or NASDAQ and our market capitalization is at least $250
million for at least 5 days. If Mr. Wolf’s employment contract is terminated for death or disability (as defined in the agreement), he (or his estate in the event of death) will
receive six month’s severance. If Mr. Wolf’s employment is terminated by us other than for cause, he will receive 12 month’s severance. In addition, if Mr. Wolf’s employment
is terminated by us other than for cause all Restricted Shares, common stock and options to purchase common stock that would have vested shall immediately vest. Mr. Wolf
will not be entitled to any additional severance in the event he is terminated for cause or voluntarily resigns. Under his employment agreement, Mr. Wolf has also agreed to non-
competition provisions.
On January 2, 2017, we approved the entry into a four-year employment agreement, effective as of January 1, 2017, with Jeff T. Hutchins, Ph.D., which agreement was
amended on June 29, 2017 and January 1, 2018 (collectively, the “Hutchins Employment Agreement”), who was initially appointed to serve as the Chief Scientific Officer and
Senior Vice President of Pre-Clinical Development of the Company. Pursuant to the Hutchins Employment Agreement that was amended on June 29, 2017, Dr. Hutchins was
appointed to serve as both Chief Scientific Officer and Chief Operating Officer. Pursuant to the Hutchins Employment Agreement, as amended, Dr. Hutchins is entitled to an
annual base salary of $335,000 and will be eligible for a cash performance bonus equal to approximately 25% of his then outstanding base salary at the end of each year in
addition to an equity bonus in the sole discretion of Board, with the actual amount of any such bonus increased or decreased in the sole discretion of the Board. Additionally, in
connection with the execution of the initial Hutchins Employment Agreement, we granted Dr. Hutchins an option to purchase 200,000 shares of our common stock (20,000
shares on a split-adjusted basis), with an exercise price equal to $0.87 per share (or $8.70 per share on a split-adjusted basis). These options will vest pro rata, on a monthly
basis, over forty-eight months.
If Dr. Hutchins’ employment is terminated for any reason, he or his estate as the case may be, is entitled to receive the accrued base salary, vacation pay, expense
reimbursement and any other entitlements accrued by him to the extent not previously paid (the “Hutchins Accrued Obligations”); provided, however, that if his employment is
terminated by us without Just Cause (as defined in the Hutchins Employment Agreement) then in addition to paying the Hutchins Accrued Obligations, (i) we will shall continue
to pay his then current base salary for a period of six (6) months; and (ii) the vesting on all unvested options shall be accelerated so that all options shall become fully vested. If
his employment is terminated within one year of a Change of Control (as defined in our Amended and Restated 2014 Stock Incentive Plan), he will be paid his then current base
salary for a period of nine (9) months.
On April 5, 2016, we entered into a four-year employment agreement with Ann Rosar to serve as our Vice President of Finance, Controller and Corporate Secretary, which
agreement was amended on January 1, 2017, June 29, 2017 and January 1, 2018 (collectively, the “Rosar Employment Agreement”). Pursuant to the Rosar Employment
Agreement, as amended, Ms. Rosar receives an annual base salary of $260,000 and is eligible for a discretionary performance bonus. Additionally, in connection with the
execution of the initial Rosar Employment Agreement, we granted Ms. Rosar was a ten-year option exercisable for 20,000 shares of our common stock (which is 2,000 shares
on a split-adjusted basis), vesting pro rata on a monthly basis over a four year period. In addition, if Ms. Rosar’s employment is terminated for any reason, she or her estate as
the case may be, are entitled to receive the accrued base salary, vacation pay, expense reimbursement and any other entitlements accrued by her to the extent not previously paid
(“Rosar Accrued Obligations”); provided, however, that if her employment is terminated by the Company without Just Cause (as defined in the employment agreement) or by
Ms. Rosar for Good Reason (defined as a material breach of the terms of the employment agreement by us, which breach is not cured within thirty (30) days) then in addition to
paying the Accrued Obligations, we will continue to pay her then current base salary for a period of four (4) months.
70
On March 12, 2019, we announced that effective March 31, 2019, Ann A. Rosar is going into retirement. Ms. Rosar will assist us through year-end to transition the role and
continue as a consultant. On March 7, 2019, we entered into an agreement with (the “Rosar Agreement”) pursuant to which, among other things, she will be retained as our
consultant, effective as of April 30, 2019. In consideration of her continued services as a consultant, Ms. Rosar will be paid her current monthly compensation for services
performed for the month of April, an hourly rate thereafter for providing consulting services, will receive payment for unused paid time off and all vested options at the
expiration of her provision of services will terminate five years from the date of grant (subject to her execution of a general release).
Effective April 1, 2019 Robert J. Jakobs, will serve as our Vice President of Finance and Secretary. Mr. Jakobs joined our company on March 4, 2019 as Controller. Pursuant to
our offer letter with Mr. Jakobs (the “Offer Letter”), Mr. Jakobs will be entitled to an annual base salary of $220,000 and is eligible to receive an annual bonus of up to 20% of
his annual salary. In addition, Mr. Jakobs will be granted 75,000 incentive stock options to purchase shares of common stock that will vest pro rata over four (4) years. Mr.
Jakobs will also be eligible for other benefits consistent with those received by our other executives. Mr. Jakobs, age 64, most recently served as Vice President Accounting and
Finance of Anutra Medical, Inc. from 2014 to February 2019. Prior to that, he served as an Independent Chief Financial Officer/Controller Partner at Rankin McKenzie Partners
from 2012 through 2014. Mr. Jakobs also served as Senior Director Accounting and Finance at Icagen, Inc. from 1996 through 2012. Previously, Mr. Jakobs served as
Corporate Controller of Sphinx Pharmaceuticals, a publicly traded biotechnology company that was acquired by Eli Lilly in 1994, and worked in various accounting positions
in the chemical and equipment manufacturing companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors and persons who beneficially own more than 10 percent of a registered class of
the Heat Biologics’ equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Such officers, directors and
persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms that they file with the SEC.
Based solely on a review of the copies of such forms that were received by us, or written representations from certain reporting persons that no Forms 5 were required for those
persons, we are not aware of any failures to file reports or report transactions in a timely manner during the year ended December 31, 2018.
Code of Ethics
We have long maintained a Code of Conduct that is applicable to all of our directors, officers and employees. In addition, we have adopted a Code of Ethics for Financial
Management that applies to our Chief Executive Officer, and our Vice President of Finance/Controller. We undertake to provide a printed copy of these codes free of charge to
any person who requests. Any such request should be sent to our principal executive offices attention: Corporate Secretary.
Item 12.
Security Ownership of Certain Beneficial Owners
The following table sets forth information, as of March 31, 2019, or as otherwise set forth below, with respect to the beneficial ownership of our common stock (i) all persons
know to us to be the beneficial owners of more than 5% of the outstanding shares of our common stock, (ii) each of our directors and our executive officer named in the
Summary Compensation Table, and (iii) all of our directors and our executive officer as a group. As of March 28, 2019, we had 33,091,824 shares of common stock
outstanding.
71
Unless otherwise indicated the mailing address of each of the stockholders below is c/o Heat Biologics, Inc., 801 Capitola Drive, Suite 12, Durham, North Carolina 27713.
Except as otherwise indicated, and subject to applicable community property laws, except to the extent authority is shared by both spouses under applicable law, the Company
believes the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.
Principal Stockholders Table
Name of Beneficial Owner
Executive Officers & Directors
Jeff T. Hutchins (Chief Scientific Officer and Chief Operating Officer)
John Monahan, Ph.D. (Director)
John K. A. Prendergast, Ph.D. (Director)
Ann A. Rosar (Vice President of Finance, Controller and Secretary)
Edward Smith (Director) (5)
Jeffrey Wolf (Chairman of the Board of Directors, Chief Executive Officer and President) (6)
Common
Stock
Shares
subject to
Options (1)
Total
Number of
Shares
Beneficially
Owned
Percentage
Ownership
143,140 (2)
516
300,000 (3)
96,254 (4)
104,305
1,012,235 (7)
204,977
100,018
40,225
65,933
99,257
451,957
348,117
100,534
340,225
62,187
203,562
1,464,192
1.0%
*
1.0%
*
*
4.4%
1,656,450
962,367
2,618,817
7.7%
All Executive Officers and Directors, as a group (6 persons)
————————
* less than 1%
(1)
(2)
(3)
(4)
(5)
Represents shares subject to options that are currently vested and options that will vest and become exercisable within 60 days of March 31, 2019.
Dr. Hutchins was granted 143,140 restricted stock award January 2, 2019 of which 50% vested on grant date and the remaining 71,570 is subject to forfeiture.
Dr. Prendergast was granted 300,000 restricted stock award January 2, 2019 of which 50% vested on grant date and the remaining 150,000 is subject to forfeiture.
Includes 89,430 Restricted Stock Award granted January 2, 2019 of which 50% vested on grant date and the remaining 44,715 is subject to forfeiture.
Includes 69,730 shares of common stock owned by Aristar Capital Management, LLC, an entity of which Mr. Smith is the managing member and exercises investment
discretion. Mr. Smith disclaims beneficial ownership of the 69,730 shares of common stock, except to the extent of any pecuniary interest (as defined in Rule 16a–1(a)(2)
promulgated under the Exchange Act) that he may have in such entities.
Includes 77,172 shares of common stock held by Orion Holdings V, LLC and 71,620 shares of common stock held by Seed-One Holdings VI, LLC, entities for which
Mr. Wolf serves as the managing member. Mr. Wolf is deemed to beneficially own the shares held by such entities as in his role as the managing member he has the control
over the voting and disposition of any shares held by these entities. Does not include 26,468 shares of common stock beneficially owned by Mr. Wolf’s children’s trust of
which Mr. Wolf is not the trustee. Mr. Wolf disclaims beneficial ownership of these shares except to the extent of any pecuniary interest (as defined in Rule 16a – 1(a)(2)
promulgated under the Exchange Act) that he may have in such entities. In addition, if our company is traded on a recognized national exchange or NASDAQ while
Mr. Wolf is employed by us and the market capitalization of our company is in excess of $250 million for at least five consecutive trading days, then Mr. Wolf will be
entitled to receive an additional stock option equal to 2% of the then outstanding shares of our common stock, at an exercise price equal to the then current market price as
determined in good faith by the board.
Includes 800,000 Restricted Stock Award granted January 2, 2019 of which 50% vested on grant date and the remaining 400,000 is subject to forfeiture.
(6)
(7)
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Pursuant to our charter, our Audit Committee shall review on an on-going basis for potential conflicts of interest, and approve if appropriate, all our “Related Party
Transactions” as required by of NASDAQ Rule 4350(h). For purposes of the Audit Committee Charter, “Related Party Transactions” shall mean those transactions required to
be disclosed pursuant to SEC Regulation S-K, Item 404.
72
The following is a summary of transactions since January 1, 2017 to which we have been a party in which the amount involved exceeded $120,000 and in which any of our
executive officers, directors or beneficial holders of more than five percent of our capital stock had or will have a direct or indirect material interest, other than compensation
arrangements which are described under the sections of this Annual Report on Form 10-K entitled Part III, Item 10. “Directors, Executive Officers and Corporate Governance—
2017 Director Compensation” and Part III, Item 11. “Executive Compensation:”
On March 8, 2017, we entered into a Stock Purchase Agreement with Pelican, and the majority of the stockholders of Pelican to purchase outstanding capital stock of Pelican.
On April 28, 2017, we completed the acquisition of 80% of Pelican’s common stock. 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. Pelican has been awarded a $15.2 million grant to fund preclinical
and some clinical activities from CPRIT. Jeff Wolf, through one or more of his affiliated entities, and Edward B. Smith, III and entities controlled by Mr. Smith sold
approximately 84.7% of their shares of the capital stock of Pelican. Mr. Wolf was the managing member of a limited liability company (the “LLC”) that at the time of the
Pelican Acquisition owned 60.1% of the outstanding capital stock of Pelican and Mr. Wolf directly and through entities owned by him owned 31.6% of the membership
interests of the LLC. Mr. Smith directly and through entities that he controlled held approximately 10.2% of Pelican’s outstanding capital stock at the time of the Pelican
Acquisition and Mr. Smith directly and indirectly through an entity he controlled at the time of the Pelican Acquisition owned an aggregate of 23.1% of the membership
interests of the LLC. Taylor Schreiber, M.D., Ph.D. our former Chief Scientific Officer, held less than 1% of Pelican’s total outstanding capital stock at the time of the Pelican
Acquisition and indirectly through an entity he controlled, at the time of the Pelican Acquisition owned 5% of the limited liability company at the time of the Pelican
Acquisition. Dr. Schreiber also sold approximately 84.7% of his shares of the capital stock of Pelican in order to meet the 80% closing condition, on the same terms as the other
participating Pelican stockholders. John Monahan, Ph.D. owned 0.46% of the LLC. In addition, a trust for which Mr. Wolf does not serve as the trustee for the benefit of Mr.
Wolf’s children directly owned 2.2% of Pelican’s total outstanding capital stock and at the time of the Pelican Acquisition owned 10% of the membership interests of the LLC.
Mr. Wolf disclaims beneficial ownership of all shares held by the trust.
Compensation paid to our executive officers during 2018 and 2019, equity awards granted to our executive officers and directors during 2018 and on January 2, 2019, as well as
the terms of our consulting arrangement with Ann Rosar are disclosed under the sections of this Annual Report on Form 10-K entitled Part III, Item 10. “Directors, Executive
Officers and Corporate Governance—2018 Director Compensation” and Part III, Item 11. “Executive Compensation.”
Item 14.
Principal Accountant Fees and Services
Independent Registered Public Accounting Firm Fees and Services
The following table sets forth the aggregate fees including expenses billed to us for the years ended December 31, 2018 and 2017 by BDO USA, LLP.
December 31,
2018
December 31,
2017
$
310,000
$
289,000
Audit Fees and Expenses (1)
———————
(1)
Audit fees and expenses were for professional services rendered for the audit and reviews of the consolidated financial statements of the Company, professional services
rendered for issuance of consents and assistance with review of documents filed with the SEC.
The Audit Committee has adopted procedures for pre-approving all audit and non-audit services provided by the independent registered public accounting firm, including the
fees and terms of such services. These procedures include reviewing detailed back-up documentation for audit and permitted non-audit services. The documentation includes a
description of, and a budgeted amount for, particular categories of non-audit services that are recurring in nature and therefore anticipated at the time that the budget is
submitted. Audit Committee approval is required to exceed the pre-approved amount for a particular category of non-audit services and to engage the independent registered
public accounting firm for any non-audit services not included in those pre-approved amounts. For both types of pre-approval, the Audit Committee considers whether such
services are consistent with the rules on auditor independence promulgated by the SEC and the PCAOB. The Audit Committee also considers whether the independent
registered public accounting firm is best positioned to provide the most effective and efficient service, based on such reasons as the auditor’s familiarity with our business,
people, culture, accounting systems, risk profile, and whether the services enhance our ability to manage or control risks, and improve audit quality. The Audit Committee may
form and delegate pre-approval authority to subcommittees consisting of one or more members of the Audit Committee, and such subcommittees must report any pre-approval
decisions to the Audit Committee at its next scheduled meeting. All of the services provided by the independent registered public accounting firm were pre-approved by the
Audit Committee.
73
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a)(1)
The following financial statements are included in this Annual Report on Form 10-K for the fiscal years ended December 31, 2018 and 2017:
1.
2.
3.
4.
5.
6.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
(a)(2) All financial statement schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related
notes.
(a)(3)
The following exhibits are either filed as part of this report or are incorporated herein by reference:
Exhibit No.
Description
1.1
1.2
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
At Market Issuance Sales Agreement, by and between Heat Biologics, Inc. and FBR Capital Markets & Co. dated August 15, 2016 (previously filed as an exhibit
to the Current Report on Form 8-K with the Securities and Exchange Commission on August 15, 2016 (File No. 001-35994))
Common Stock Sales Agreement, dated January 18, 2018, by and between Heat Biologics, Inc. and H.C. Wainwright & Co., LLC (previously filed as an exhibit
to the Current Report on Form 8-K with the Securities and Exchange Commission on January 19, 2018 (File No. 001-35994))
Third Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and
Exchange Commission on May 6, 2013 (File No. 333-188365))
Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation filed on May 29, 2013 (previously filed as an exhibit to the Registration
Statement on Form S-1 with the Securities and Exchange Commission on May 30, 2013 (File No. 333-188365))
Amended and Restated Bylaws, dated January 11, 2016 (previously filed as an exhibit to the Current Report on Form 8-K with the Securities and Exchange
Commission on January 15, 2016 (File No. 001-35994))
Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Current Report on Form 8-K with
the Securities and Exchange Commission on July 17, 2017 (File No. 001-35994))
Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Current Report on Form 8-K with
the Securities and Exchange Commission on January 19, 2018 (File No. 001-35994))
Amended and Restated Bylaws, dated July 20, 2018 (previously filed as an exhibit to the Current Report on Form 8-K with the Securities and Exchange
Commission on July 20, 2018 (File No. 001-35994))
2009 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6,
2013 (File No. 333-188365))
First Amendment of the 2009 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange
Commission on May 6, 2013 (File No. 333-188365))
Second Amendment of the 2009 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange
Commission on May 6, 2013 (File No. 333-188365))
Third Amendment of the 2009 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange
Commission on May 6, 2013 (File No. 333-188365))
Fourth Amendment of the 2009 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange
Commission on May 6, 2013 (File No. 333-188365))
Specimen Common Stock Certificate of Heat Biologics, Inc. (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and
Exchange Commission on May 6, 2013 (File No. 333-188365))
74
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Stock Purchase Agreement by and among Heat Biologics, Inc. and the Series B investors (Portions of the exhibit have been omitted pursuant to a request
for confidential treatment. The omitted portions have been filed with the Commission) ## (previously filed as an exhibit to the Registration Statement on Form S-1
with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
2014 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-8 with the Securities and Exchange Commission on June 13,
2014 (File No. 333-196763))
Amended and Restated Heat Biologics, Inc. 2014 Stock Incentive Plan## (previously filed as Appendix A to the Definitive Proxy Statement on Schedule 14A
filed with the Securities and Exchange Commission on June 22, 2015))
Form of Warrant (previously filed as an exhibit to the Current Report on Form 8-K with the Securities and Exchange Commission on March 3, 2016 (File No. 001-
35994))
2017 Stock Incentive Plan## (previously filed as an exhibit to the Registration Statement on Form S-8 with the Securities and Exchange Commission on July 11,
2017 (File No. 333-219238))
Rights Agreement between Heat Biologics, Inc. and Continental Stock Transfer & Trust Company dated March 11, 2018 (previously filed as an exhibit to the
Current Report on Form 8-K with the Securities and Exchange Commission on March 12, 2018 (File No. 001-35994))
2018 Stock Incentive Plan (previously filed as an exhibit to the Registration Statement on Form S-8 with the Securities and Exchange Commission on October 4,
2018 (File No. 333-219238))
Warrant Agency Agreement between Heat Biologics, Inc. and Continental Stock Transfer & Trust Company dated May 2, 2018 (previously filed as an exhibit to
the Current Report on Form 8-K with the Securities and Exchange Commission on May 7, 2018 (File No. 001-35994))
Common Stock Purchase Warrant (previously filed as an exhibit to the Current Report on Form 8-K with the Securities and Exchange Commission on May 7,
2018 (File No. 001-35994))
Form of Warrant (previously filed as an exhibit to the Current Report on Form 8-K with the Securities and Exchange Commission on November 21, 2018 (File No.
001-35994))
Amendment No. 1 to Rights Plan (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 12, 2019 (File No. 001-35994))
License Agreement (UMJ110) between the University of Miami and Heat Biologics, Inc. effective February 18, 2011** (previously filed as an exhibit to the
Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
License Agreement (97-14) between the University of Miami and its School of Medicine and Heat Biologics, Inc. effective July 11, 2008**(previously filed as an
exhibit to the Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
License Agreement (143) between the University of Miami and its School of Medicine and Heat Biologics I, Inc. effective February 11, 2011** (previously filed
as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
License Agreement (D-107) between the University of Miami and its School of Medicine and Heat Biologics I, Inc. effective February 18, 2011** (previously
filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
License Agreement (SS114A) between the University of Miami and its School of Medicine and Heat Biologics I, Inc. effective February 18, 2011** (previously
filed as an exhibit to the Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
Common Stock Subscription Agreement between the University of Miami and Heat Biologics I, Inc. dated July 7, 2009 (previously filed as an exhibit to the
Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
Employment Agreement with Jeffrey Wolf dated December 18, 2009## (previously filed as an exhibit to the Registration Statement on Form S-1 with the
Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
Amendment to Employment Agreement with Jeffrey Wolf dated as of January 1, 2011## (previously filed as an exhibit to the Registration Statement on Form S-1
with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
Non-Exclusive Evaluation and Biological Material License Agreement with American Type Culture Collection effective April 12, 2011** (previously filed as an
exhibit to the Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
10.10
Manufacturing Services Agreement with Lonza Walkersville, Inc. dated as of October 20, 2011 (previously filed as an exhibit to the Registration Statement on
Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
10.11
Assignment and Assumption Agreement dated June 26, 2009 (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and
Exchange Commission on May 6, 2013 (File No. 333-188365))
75
10.12
Termination Agreement UM97-114 dated June 26, 2009 (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities and
Exchange Commission on May 6, 2013 (File No. 333-188365))
10.13
Amendment to License Agreement (UM97-14) dated April 29, 2009 (previously filed as an exhibit to the Registration Statement on Form S-1 with the Securities
and Exchange Commission on May 6, 2013 (File No. 333-188365))
10.14
Exclusive License between Heat Biologics, Inc. and the University of Michigan dated July 22, 2011 (previously filed as an exhibit to the Registration Statement
on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
10.15
Option Contract for Exclusive License between Heat Biologics, Inc. and the University of Miami dated April 1, 2013 (previously filed as an exhibit to the
Registration Statement on Form S-1 with the Securities and Exchange Commission on May 6, 2013 (File No. 333-188365))
10.16
Amendment to Employment Agreement, dated as of January 20, 2014 between the Company and Jeffrey Wolf## (previously filed as an exhibit to the Current
Report on Form 8-K with the Securities and Exchange Commission on January 21, 2014 (File No. 001-35994))
10.17
Lease Agreement dated January 24, 2014 (previously filed as an exhibit to the Annual Report on Form 10-K with the Securities and Exchange Commission on
March 31, 2014 (File No. 001-35994))
10.18
License Agreement (UMK-161) between the University of Miami and its School of Medicine and Heat Biologics I, Inc. effective March 4, 2014** (previously
filed as an exhibit to the Annual Report on Form 10-K with the Securities and Exchange Commission on March 31, 2014 (File No. 001-35994))
10.19
First Amendment to Lease (previously filed as an exhibit to the Annual Report on Form 10-K with the Securities and Exchange Commission on March 27, 2015
(File No. 001-35994))
10.20
Second Amendment to Lease (previously filed as an exhibit to the Annual Report on Form 10-K with the Securities and Exchange Commission on March 27, 2015
(File No. 001-35994))
10.21
Form of Incentive Stock Option Agreement under the 2014 Stock Incentive Plan, as amended## (previously filed as an exhibit to the Current Report on Form 8-K
with the Securities and Exchange Commission on July 27, 2015 (File No. 001-35994))
10.22
Form of Non-Statutory Stock Option Agreement under the 2014 Stock Incentive Plan, as amended## (previously filed as an exhibit to the Current Report on Form
8-K with the Securities and Exchange Commission on July 27, 2015 (File No. 001-35994))
10.23
Amendment to Employment Agreement between the Company and Jeffrey Wolf, dated January 11, 2016## (previously filed as an exhibit to the Current Report on
Form 8-K with the Securities and Exchange Commission on January 15, 2016 (File No. 001-35994))
10.24
Amendment to Employment Agreement between the Company and Jeffrey Wolf, dated April 1, 2016## (previously filed as an exhibit to the Current Report on
Form 8-K with the Securities and Exchange Commission on April 7, 2016 (File No. 001-35994))
10.25
Employment Agreement between the Company and Ann Rosar, dated April 1, 2016 ## (previously filed as an exhibit to the Current Report on Form 8-K with the
Securities and Exchange Commission on April 7, 2016 (File No. 001-35994))
10.26
Amendment to License Agreement (UM97-14) between the University of Miami and Heat Biologics, Inc. effective July 26, 2016 (previously filed as an exhibit to
the Quarterly Report on Form 10-Q with the Securities and Exchange Commission on August 15, 2016 (File No. 001-35994))
10.27
Form of Indemnification Agreement by and between Heat Biologics, Inc. and its directors and officers (previously filed as an exhibit to the Quarterly Report on
Form 10-Q with the Securities and Exchange Commission on August 15, 2016 (File No. 001-35994))
10.28
Exclusive License Agreement (UMIP-114/Strbo) between the University of Miami and Zolovax, Inc., a wholly-owned subsidiary of Heat Biologics effective
October 24, 2016 (previously filed as an exhibit to the Quarterly Report on Form 10-Q with the Securities and Exchange Commission on November 10, 2016 (File
No. 001-35994))
10.29
Amendment to Employment Agreement between the Company and Jeffrey Wolf, dated January 1, 2017## (previously filed as an exhibit to the Current Report on
Form 8-K with the Securities and Exchange Commission on January 4, 2017 (File No. 001-35994)
10.30
Amendment to Employment Agreement between the Company and Ann Rosar, dated January 1, 2017## (previously filed as an exhibit to the Current Report on
Form 8-K with the Securities and Exchange Commission on January 4, 2017 (File No. 001-35994))
10.31
Employment Agreement between the Company and Jeff T. Hutchins, dated January 1, 2017## (previously filed as an exhibit to the Current Report on Form 8-K
with the Securities and Exchange Commission on January 4, 2017 (File No. 001-35994))
10.32
Form of Restricted Stock Unit Award Agreement## (previously filed as an exhibit to the Current Report on Form 8-K with the Securities and Exchange
Commission on January 4, 2017 (File No. 001-35994))
76
10.33
Stock Purchase Agreement by and among Heat Biologics, Inc., with Pelican Therapeutics, Inc. (“Pelican”), and certain stockholders in Pelican (previously filed as
an exhibit to the Current Report on Form 8-K with the Securities and Exchange Commission on March 8, 2017 (File No. 001-35994))
10.34
First Amendment to Exclusive License Agreement between The Regents of The University of Michigan and Heat Biologics, Inc. (UM File Number 3680) dated
December 1, 2016 (previously filed as an exhibit to the Annual Report on Form 10-K with the Securities and Exchange Commission on March 31, 2017 (File No.
001-35994))
10.35
First Amendment to Stock Purchase Agreement dated March 29, 2017 by and among Heat Biologics, Inc., Pelican Therapeutics, Inc. and Josiah Hornblower as
representative of the Stockholders (previously filed as an exhibit to the Annual Report on Form 10-K with the Securities and Exchange Commission on March 31,
2017 (File No. 001-35994))
10.36
Funding Commitment issued by Heat Biologics, Inc. dated April 6, 2017 (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 7, 2017 (File No. 001-35994)
10.37
License Agreement by and between University of Miami and Pelican Therapeutics, Inc. (f/k/a Heat Biologics II, Inc.) dated July 11, 2008 (UM03-31, UM05-
39)** (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2017
(File No. 001-35994))
10.38
License Agreement by and between University of Miami and Pelican Therapeutics, Inc. (f/k/a Heat Biologics II, Inc.) dated December 12, 2010 (UMI176)**
(previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2017 (File No.
001-35994))
10.39
License Agreement by and between University of Miami and Pelican Therapeutics, Inc. (f/k/a Heat Biologics II, Inc.) dated November 19, 2013 (UM-143 and
UMN-106)** (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3,
2017) (File No. 001-35994))
10.40
Amendment to License Agreement between Heat Biologics, Inc. and University of Miami dated April 20, 2009** (previously filed as an exhibit to Heat Biologics,
Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2017 (File No. 001-35994))
10.41
Assignment and Assumption Agreement between Heat Biologics, Inc. and Pelican Therapeutics, Inc. (f/k/a Heat Biologics II, Inc.) dated June 26, 2009 (UM03-
31, UM05-39)** (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May
3, 2017 (File No. 001-35994))
10.42
Second Amendment to License Agreement between Pelican Therapeutics, Inc. (f/k/a Heat Biologics II, Inc.) and University of Miami dated August 11, 2009
(UM03-31, UM05-39)** (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission
on May 3, 2017 (File No. 001-35994))
10.43
Payment Agreement between Pelican Therapeutics, Inc. (f/k/a Heat Biologics II, Inc.) dated December 19, 2012 (UMI176)** (previously filed as an exhibit to
Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2017 (File No. 001-35994))
10.44
CPRIT Grant (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3,
2017** (File No. 001-35994))
10.45
Amendment to Employment Agreement with Jeff T. Hutchins dated as of June 29, 2017## (filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on June 30, 2017 (File No. 001-35994))
10.46
Amendment to Employment Agreement with Ann Rosar dated as of June 29, 2017## (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 30, 2017 (File No. 001-35994))
10.47
Amendment to Employment Agreement with Jeff T. Hutchins dated as of January 1, 2018## (previously filed as an exhibit to Heat Biologics, Inc.’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2018 (File No. 001-35994))
10.48
Amendment to Employment Agreement with Ann Rosar dated as of January 1, 2018## (previously filed as an exhibit 1to Heat Biologics, Inc.’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 10, 2018 (File No. 001-35994))
10.49
Form of Incentive Stock Option Agreement under the 2017 Stock Incentive Plan## (previously filed as an exhibit 1to Heat Biologics, Inc.’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 2, 2018 (File No. 001-35994))
77
10.50
Form of Non-Statutory Stock Option Agreement under the 2017 Stock Incentive Plan## (previously filed as an exhibit 1to Heat Biologics, Inc.’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 2, 2018 (File No. 001-35994))
10.51
Form of Restricted Stock Unit Award Agreement under the 2017 Stock Incentive Plan## (previously filed as an exhibit 1to Heat Biologics, Inc.’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 2, 2018 (File No. 001-35994))
10.52
Form of Incentive Stock Option Agreement under the 2018 Stock Incentive Plan (previously filed as an exhibit to the Registration Statement on Form S-8 with the
Securities and Exchange Commission on October 4, 2018 (File No. 333-219238))
10.53
Form of Non-Statutory Stock Option Agreement under the 2018 Stock Incentive Plan (previously filed as an exhibit to the Registration Statement on Form S-8
with the Securities and Exchange Commission on October 4, 2018 (File No. 333-219238))
10.54
Form of Notice of Award under the 2018 Stock Incentive Plan (previously filed as an exhibit to the Registration Statement on Form S-8 with the Securities and
Exchange Commission on October 4, 2018 (File No. 333-219238))
10.55
Form of Restricted Stock Agreement under the 2018 Stock Incentive Plan (previously filed as an exhibit to the Registration Statement on Form S-8 with the
Securities and Exchange Commission on October 4, 2018 (File No. 333-219238))
10.56
Amendment to Employment Agreement between Heat Biologics, Inc. and Jeffrey T. Hutchins, effective as of January 1, 2019 ## (previously filed as an exhibit to
Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2019 (File No. 001-35994))
10.57
Heat Biologics, Inc. Form of Restricted Stock Agreement (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 3, 2019 (File No. 001-35994))
10.58
Agreement with Ann Rosar dated March 7, 2019## (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 7, 2019 (File No. 001-35994))
10.59
Offer Letter with Bob Jakobs dated March 7, 2019## (previously filed as an exhibit to Heat Biologics, Inc.’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 7, 2019 (File No. 001-35994))
List of Subsidiaries *
Consent of Independent Registered Public Accounting Firm (BDO USA, LLP)*
Certification of Jeffrey Wolf, Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) *
Certification of Ann Rosar, Principal Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a)/15d-14(a) *
Certification of Jeffrey Wolf, Principal Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 *
Certification Ann Rosar, Principal Financial Officer and Principal Accounting Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 *
XBRL Instance Document *
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
XBRL Taxonomy Extension Definition Linkbase Document *
101.DEF
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
———————
*
##
**
XBRL Taxonomy Extension Presentation Linkbase Document *
Item 16.
Form 10-K Summary
Not applicable.
78
Filed herewith.
Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report.
Confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 28th day of March, 2019.
SIGNATURES
HEAT BIOLOGICS, INC.
By: /s/ Jeffrey Wolf
Jeffrey Wolf
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Date: March 28, 2019
By: /s/ Ann A. Rosar
Ann A. Rosar
Vice President of Finance
(Principal Financial and Principal Accounting Officer)
Date: March 28, 2019
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeff Wolf, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report,
and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
/s/ Jeffrey Wolf
Jeffrey Wolf
/s/ John Monahan, Ph.D.
John Monahan, Ph.D.
/s/ John K.A. Prendergast, Ph.D.
John K.A. Prendergast, Ph.D.
/s/ Edward B. Smith
Edward B. Smith
Title
Date
Chief Executive Officer,
President and Chairman of the Board
(Principal Executive Officer)
Director
Director
Director
79
March 28, 2019
March 28, 2019
March 28, 2019
March 28, 2019
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statement of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Heat Biologics, Inc.
Durham, North Carolina
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Heat Biologics, Inc. (the “Company”) and subsidiaries as of December 31, 2018 and 2017, the related
consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December
31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2012.
Raleigh, North Carolina
March 28, 2019
F-2
HEAT BIOLOGICS, INC.
Consolidated Balance Sheets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Prepaid expenses and other current assets
Total Current Assets
Property and Equipment, net
Other Assets
Restricted cash
In-process R&D
Goodwill
Deposits
Deferred financing costs
Total Other Assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Deferred revenue, current portion
Contingent consideration, current portion
Accrued expenses and other liabilities
Total Current Liabilities
Long Term Liabilities
Other long-term liabilities
Deferred tax liability
Deferred revenue, net of current portion
Contingent consideration, net of current portion
Total Liabilities
Commitments and Contingencies
Stockholders' Equity
Common stock, $.0002 par value; 100,000,000 shares authorized, 32,492,144 and 4,200,310 issued and outstanding at December 31, 2018
and 2017, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total Stockholders' Equity - Heat Biologics, Inc
Non-Controlling Interest
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See Notes to Consolidated Financial Statements
F-3
December 31,
2018
2017
$ 22,154,251 $
5,570,027
28,538
961,317
28,714,133
9,763,067
—
14,833
1,967,257
11,745,157
643,146
286,891
—
5,866,000
2,189,338
351,220
—
8,406,558
2,292
5,866,000
2,189,338
69,798
30,000
8,157,428
$ 37,763,837 $ 20,189,476
$
974,619 $
1,032,539
1,187,000
1,678,051
4,872,209
1,033,680
7,026,388
—
2,276,431
10,336,499
213,724
316,733
200,000
1,918,225
7,520,891
160,559
1,302,220
—
2,609,289
14,408,567
6,499
114,883,135
(84,580,180)
(19,904
840
76,382,262
(68,846,326)
)
30,289,550
(46,604)
30,242,946
(166,025 )
7,370,751
(1,589,842)
5,780,909
$ 37,763,837 $ 20,189,476
HEAT BIOLOGICS INC.
Consolidated Statements of Operations and Comprehensive Loss
Revenue:
Grant and licensing revenue
Operating expenses:
Research and development
General and administrative
Change in fair value of contingent consideration
Total operating expenses
Loss from operations
Interest income
Other income, net
Total non-operating income, net
Net loss before income tax benefit
Income tax benefit
Net loss
Net loss - non-controlling interest
Net loss attributable to Heat Biologics, Inc.
Net loss per share attributable to Heat Biologics, Inc.-
basic and diluted
Weighted-average number of common shares used in net loss per share attributable to common stockholders -
basic and diluted
Other comprehensive loss:
Net loss
Unrealized gain (loss) on foreign currency translation
Total comprehensive loss
Comprehensive loss - non-controlling interest
Comprehensive loss attributable to Heat Biologics, Inc.
See Notes to Consolidated Financial Statements
F-4
Year ended,
December 31,
2018
2017
$
5,793,849 $
1,519,943
16,233,014
7,025,212
495,936
23,754,162
8,267,549
6,370,954
224,289
14,862,792
(17,960,313)
(13,342,849)
265,752
117,780
383,532
22,167
101,276
123,443
(17,576,781)
985,488
(16,591,293)
(857,439 )
(13,219,406)
809,540
(12,409,866)
(568,195)
$ (15,733,854) $ (11,841,671)
$
(0.90) $
(3.08)
17,485,461
3,845,342
(16,591,293)
146,121
(16,445,172)
(857,439 )
(12,409,866)
(93,794)
(12,503,660)
(568,195)
$ (15,587,733) $ (11,935,465)
HEAT BIOLOGICS INC.
Consolidated Statements of Stockholders’ Equity
$
Balance at December 31, 2016
Public offering, 575,000 shares, net of underwriters discounts
Public offering, 620,650 shares, net of underwriters discounts
Issuance of common stock, 234,858 shares
Issuance of common stock for acquisition of Pelican, 133,106 shares
Acquisition of non-controlling interest of Pelican
Stock issuance costs
Stock-based compensation
Other comprehensive loss
Net loss
Balance at December 31, 2017
Public offering, 14,375,000 shares, net of underwriters discounts
Public offering, 9,200,000 shares, net of underwriters discounts
Exercise of warrants, 3,054,667 shares
Issuance of common stock, 1,566,997
Acquisition of non-controlling interest of Heat I/Pelican
Stock issuance costs
Stock-based compensation
Other comprehensive income
Net loss
Balance at December 31, 2018
$
Common
Stock
Accumulated
Other
Accumulated Comprehensive Non-Controlling
Gain (Loss)
Deficit
524 $
115
124
47
27
—
—
3
—
—
840
2,875
1,840
611
314
7
—
12
—
—
APIC
65,872,943 $ (57,004,655) $
—
4,182,885
—
2,446,855
—
2,463,133
—
1,051,973
—
—
—
(324,654 )
—
689,127
—
—
(11,841,671)
—
(68,846,326)
76,382,262
—
20,697,122
—
13,798,160
—
4,837,982
—
3,909,779
—
(2,400,684)
—
(3,130,133)
—
788,647
—
—
(15,733,854)
—
6,499 $ 114,883,135 $ (84,580,180) $
Total
Stockholders
Equity
6,839,934
4,183,000
2,446,979
2,463,180
1,052,000
935,000
(324,654 )
689,130
(93,794)
(12,409,866)
5,780,909
20,699,997
13,800,000
4,838,593
3,910,093
—
(3,130,133)
788,659
146,121
(16,591,293)
30,242,946
Interest
(1,956,647) $
—
—
—
—
935,000
—
—
—
(568,195 )
(1,589,842)
—
—
—
—
2,400,677
—
—
—
(857,439 )
(46,604) $
(72,231) $
—
—
—
—
—
—
—
(93,794)
—
(166,025 )
—
—
—
—
—
—
—
146,121
—
(19,904) $
See Notes to Consolidated Financial Statements
F-5
HEAT BIOLOGICS, INC.
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
Stock based compensation
Change in fair value of contingent consideration
Unrealized loss on investments
Increase (decrease) in cash arising from changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Deposits
Deferred financing costs
Accounts payable
Deferred revenue
Deferred tax liability
Accrued expenses and other liabilities
Other long-term liabilities
Net Cash Used in Operating Activities
Cash Flows from Investing Activities
Purchase of Pelican, net
Purchase of short-term investments
Purchase of property and equipment
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Proceeds from public offerings, net of underwriting discounts
Proceeds from the issuance of common stock, net of commissions
Proceeds from the exercise of warrants
Stock issuance costs
Net Cash Provided by Financing Activities
Effect of exchange rate changes on cash and cash equivalents
Net Increase in Cash and Cash Equivalents and Restricted Cash
Cash and Cash Equivalents and Restricted Cash - Beginning of Period
Cash and Cash Equivalents and Restricted Cash - End of Period
Supplemental Disclosure for Cash Flow Information
Contingent consideration
Issuance of common stock for purchase of Pelican
Acquisition of non-controlling interest of Heat I/Pelican
See Notes to Consolidated Financial Statements
F-6
For the year ended
December 31,
2018
2017
$ (16,591,293) $ (12,409,866)
237,318
788,659
495,936
131
(14,094)
1,000,961
(281,422 )
30,000
(55,820)
(5,793,849)
(985,487 )
(595,896 )
53,165
(21,711,691)
134,084
689,130
224,289
—
67,767
(1,624,185)
—
(30,000)
(175,901 )
7,026,388
(809,540 )
806,158
(300,875 )
(6,402,551)
—
(5,570,158)
(593,573 )
(6,163,731)
(468,801 )
—
(61,383)
(530,184 )
34,499,997
3,910,093
4,838,593
(3,130,133)
40,118,550
6,629,979
2,463,180
—
(324,654 )
8,768,505
145,764
(14,249)
12,388,892
1,821,521
9,765,359
7,943,838
$
22,154,251 $
9,765,359
$
$
$
— $
— $
2,400,677 $
2,385,000
1,052,000
—
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
Heat Biologics, Inc. (“Heat” or “the Company”) is a biopharmaceutical company developing immunotherapies with the goal of activating a patient’s immune system against
cancer through T-cell activation. Our T-cell Activation Platform (TCAP), includes two variations for intradermal administration, Immune Pan-antigen Cytotoxic Therapy
(ImPACT®) and Combination Pan-antigen Cytotoxic Therapy (ComPACT™). To further augment antigen experienced T-cell activation and expansion we are also developing a
novel T-cell co-stimulator PTX-35 for systemic administration. These programs are designed to harness the body's natural antigen specific immune activation and tolerance
mechanisms to reprogram immunity and provide a long-term, durable clinical effect. Currently we are enrolling patients in our HS-110 combination immunotherapy trial,
preparing IND submissions for our HS-130 and PTX-35 programs, and providing pre-clinical, CMC development, and administrative support for these operations; while
constantly focusing on protecting and expanding our intellectual property in areas of strategic interest.
We continue to enroll patients in our Phase 2 clinical trial for advanced non-small cell lung cancer (NSCLC), in combination with either Bristol-Myers Squibb’s nivolumab
(Opdivo®) or more recently, Merck &Co., Inc’s (Merck’s) anti-PD1 checkpoint inhibitor, pembrolizumab (KEYTRUDA ®). Our other programs are in pre-clinical and CMC
development with two IND filings anticipated during 2019.
Our T-cell Activation Platform (TCAP), includes two variations, ImPACT® and ComPACT™ which are designed to activate and expand tumor antigen specific “killer” T-cells
to destroy a patient’s cancer. By turning immunologically “COLD tumors HOT,” we believe our platform will become an essential component of the immuno-oncology cocktail
to enhance the effectiveness of checkpoint inhibitors and other cancer therapies, thereby improving outcomes for those patients least likely to respond to checkpoint inhibitors
alone.
We believe the advantage of our approach is that our biologic agents deliver a broad range of tumor antigens that are unrecognized by the patient’s immune system prior to the
malignant rise of the patient’s tumor. TCAP combines these tumor associated antigens with a powerful, naturally occurring immune adjuvant, gp96, to actively chaperone these
antigens out of our non-replicating allogenic cell-based therapy into the local microenvironment of the skin. The treatment primes immune recognition to activate T-cells to
seek and destroy the cancer cells throughout the body. These TCAP agents can be administered with a variety of immuno-modulators to enhance a patient’s immune response
through ligand specific T-cell activation.
Unlike many other “patient specific” or autologous immunotherapy approaches, our drugs are fully-allogenic, “off-the-shelf,” products which means that we can administer
immediately without the extraction of blood or tumor tissue from each patient or the creation of an individualized treatment based on these patient materials. Our TCAP product
candidates from our ImPACT® and ComPACT™ platforms are produced from allogeneic cell lines expressing tumor-specific proteins common among cancers. Because each
patient receives the same treatment, we believe that our immunotherapy approach offers superior speed to initiation, logistical, manufacturing and importantly, other cost
benefits, compared to “personalized” precision medicine approaches.
In October 2018, Heat entered into an agreement with the University of Miami (“UM”) whereby UM exchanged its shares of stock in Heat’s subsidiaries, Heat I, Inc. and
Pelican Therapeutics, Inc. (“Pelican”), a related party prior to acquisition. The stock exchange resulted in Heat owning 100% of Heat I, Inc. and increasing its controlling
ownership in Pelican from 80% to 85%. On May 30, 2012, Heat formed two-wholly owned subsidiaries, Heat Biologics III, Inc. (“Heat III”) and Heat Biologics, IV, Inc.
(“Heat IV”). Heat formed Heat Biologics GmbH (Heat GmbH), a wholly-owned limited liability company, organized in Germany on September 11, 2012. Heat also formed
Heat Biologics Australia Pty LTD, a wholly-owned proprietary company, registered in Australia on March 14, 2014. On October 25, 2016, Heat formed a wholly-owned
subsidiary, Zolovax, Inc., to focus on the development of gp96-based vaccines targeting Zika, HIV, West Nile, and dengue and yellow fever. In November 2018 Heat formed
two wholly-owned subsidiaries, Delphi Therapeutics, Inc. and Scorpion Biosciences, Inc. Operations of Pelican are included in the consolidated statement of operations and
comprehensive loss from the acquisition date.
Heat’s product candidates require clinical trials and approvals from regulatory agencies, as well as acceptance in the marketplace. Part of Heat’s strategy is to develop and
commercialize some of its product candidates by continuing existing arrangements with academic and corporate collaborators and licensees and by entering into new
collaborations.
All share numbers in the consolidated financial statements and footnotes below have been adjusted for the one-for-ten reverse stock split effective January 19, 2018.
F-7
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Heat Biologics, Inc. 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, Inc. Additionally, beginning April 28, 2017 the accompanying
consolidated financials include Pelican. As of December 31, 2018 there was no activity for Delphi Therapeutics, Inc. or Scorpion Biosciences, Inc. The functional currency of
the entities located outside the United States of America (the foreign entities) is the applicable local currency of the foreign entities. Assets and liabilities of the foreign entities
are translated at period-end exchange rates. Statement of operations accounts are translated at the average exchange rate during the period. The effects of foreign currency
translation adjustments are included in other comprehensive loss, which is a component of accumulated other comprehensive loss in stockholders’ equity. All significant
intercompany accounts and transactions have been eliminated in consolidation. At December 31, 2018 and 2017, Heat held 100% and 92.5% controlling interest respectively in
Heat I. The December 31, 2018 year-end financials include 85% controlling interest in Pelican and the December 31, 2017 year-end financials include 80% controlling interest
in Pelican as of April 28, 2017. Heat accounts for its less than 100% interest in the consolidated financial statements in accordance with U.S. GAAP. Accordingly, the Company
presents non-controlling interest as a component of stockholders’ equity on its consolidated balance sheets and reports non-controlling interest net loss under the heading “net
loss – non-controlling interest” in the consolidated statements of operations and comprehensive loss.
Liquidity and Capital Resources
The Company has an accumulated deficit of approximately $84.6 million as of December 31, 2018 and a net loss of approximately $16.6 million for the twelve months ended
December 31, 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 at-the-market offerings, if available, debt financings, partnerships, collaborations and other funding transactions. This is
based on the Company’s current estimates, and the Company could use its available capital resources sooner than it currently expects. The Company is continually evaluating
various cost-saving measures 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 December 31, 2018, the Company had approximately $27.7 million in cash, cash equivalents and short term investments and
believes it has the ability to fund its operations within one year from the date these financial statements are issued.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Estimates are used for, but not limited to, useful lives of fixed assets, contingent consideration, income taxes and stock-based
compensation. Actual results may differ from those estimates.
Segments
The Company has one reportable segment – the development of immunotherapies designed to activate and expand a patient’s T-cell mediated immune system against cancer.
F-8
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents and Restricted Cash
The Company considers all cash and other highly liquid investments with initial maturities from the date of purchase of three months or less to be cash and cash
equivalents. The Company had a restricted cash balance of $0 and $2,292 at December 31, 2018 and 2017, respectively.
Concentration of Credit Risk
At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits. The Company has never experienced any losses related to these
balances. As of December 31, 2018 and 2017, cash amounts in excess of $250,000 were not fully insured. The uninsured cash balance as of December 31, 2018 was
$21,904,251. The Company does not believe it is exposed to significant credit risk on cash and cash equivalents.
Property and Equipment
Property and equipment are stated at cost and are capitalized. Depreciation is calculated using the straight-line method and is based on estimated useful lives of five years for lab
equipment and computer equipment, and seven years for furniture and fixtures.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during each year. Fully diluted net loss per share is
computed using the weighted average number of common shares and dilutive securities outstanding during each year. Dilutive securities having an anti-dilutive effect on
diluted loss per share are excluded from the calculation.
Fair Value of Financial Instruments
The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and
other payables approximate fair value due to their short maturities.
As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value as follows:
Level I – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level II – Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and
liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of
the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The
Company's cash equivalents are classified within Level I of the fair value hierarchy.
As of December 31, 2018 and 2017, the fair values of cash, accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of
these assets or liabilities. The Company’s short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair
value of the short-term investments was based on quoted market prices. There were no transfers between fair value hierarchy levels during the years ended December 31, 2018
or 2017.
F-9
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of financial instruments measured on a recurring basis is as follows:
Description
Assets:
Short-term investments
Liabilities:
Contingent consideration
Description
Liabilities:
Contingent consideration
Total
As of December 31, 2018
Level 2
Level 1
Level 3
$
5,570,027 $
5,750,027
—
—
3,105,225
—
— $
3,105,225
Total
As of December 31, 2017
Level 2
Level 1
Level 3
$
2,609,289
—
— $
2,609,289
The following table summarizes the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the year ended
December 31, 2018:
Balance at December 31, 2016
Acquisition of Pelican
Change in fair value
Balance at December 31, 2017
Change in fair value
Balance at December 31, 2018
Contingent
Consideration
—
2,385,000
224,289
2,609,289
495,936
3,105,225
$
$
The change in the fair value of the contingent consideration of $495,936 and $224,289 for the years ended December 31, 2018 and 2017 was primarily due to the effect of the
change in discount rate, probability of achieving milestones, and passage of time on the fair value measurement. Adjustments associated with the change in fair value of
contingent consideration are included in the Company’s consolidated statement of operations and comprehensive loss.
The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of contingent
consideration classified as Level 3 as of December 31, 2018:
Valuation
Methodology
Significant
Unobservable Input
Weighted Average
(range, if applicable)
Contingent Consideration
Probability weighted
income approach
Milestone dates
2019-2025
Discount rate
Probability of occurrence
13.82% to 3.66%
23% to 86%
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 carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
F-10
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the 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 December
31, 2018 and 2017, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with
these items. The Company’s 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 consolidated statements of operations and comprehensive loss. As of December 31, 2018 and 2017, the Company had no such accruals.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act lowered the Federal corporate tax rate from 34% to 21% 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. Under the guidance of SAB 118, the Company is required to recognize the effect of tax law changes in the period of enactment. Reasonable estimates were made based
on the Company’s analysis of the Tax Act. These provisional amounts were adjusted during 2018 when additional information was obtained with no material adjustments.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees and non-employee directors using a fair value method that requires the recognition of
compensation expense for costs related to all stock-based payments, including stock options and restricted stock units. The fair value method requires the Company to estimate
the fair value of stock-based payment awards on the date of grant using an option pricing model. The fair value of restricted stock units is estimated based on the closing price of
the Company's stock on the date of grant, and for the purposes of expense recognition, the total new number of shares expected to vest is adjusted for estimated forfeitures.
Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes-Merton option pricing model on the date of grant for
stock options and are recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. Determining the appropriate fair value model
and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected term. The expected volatility rates are estimated based on the
actual volatility of comparable public companies over the expected term. The expected term for the years ended December 31, 2018 and 2017 represents the average time that
options are expected to be outstanding based on the average of the vesting term and the contractual term of the option. Forfeitures are estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has not paid dividends and does not anticipate paying a cash dividend in the
foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent
with the estimated expected term of the awards. The measurement of nonemployee share-based compensation is subject to periodic adjustments as the underlying equity
instruments vest and is recognized as an expense in the period over which services are received.
Net loss attributable to non-controlling interests
Net loss attributable to non-controlling interests is the result of the Company's consolidation of subsidiaries of which it does not own 100%. In October 2018, the Company
entered into an agreement with the University of Miami (“UM”) whereby UM exchanged its shares of stock in the Company’s subsidiaries, Heat I, Inc. and Pelican, a related
party prior to acquisition, for 35,000 shares of the Company’s common stock. The stock exchange resulted in the Company owning 100% of Heat I, Inc. and increasing its
controlling ownership in Pelican from 80% to 85%. The Company's net loss attributable to non-controlling interests relates to the 15% and 20% ownership of Pelican that Heat
does not own as of December 31, 2018 and 2017, respectively and University of Miami’s ownership in Heat I, for the year ended December 31, 2017.
Revenue Recognition
Effective January 1, 2018, the Company has adopted on a modified retrospective basis Accounting Standards Codification (ASC) Topic 606.
F-11
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company’s sole source of 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.
The performance obligations of the 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 three-year period from June 1, 2017 through May 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 early 2019. Funds received
are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is recognized when qualifying costs are incurred. As of December 31, 2018, the deferred
revenue balance was $1.0 million with $7.3 million recognized as revenue since contract inception.
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. Management’s estimates of fair value are based upon assumptions believed to be reasonable,
but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may
change as additional information becomes available regarding the assets acquired and liabilities assumed (see Note 4).
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 on the anniversary of the
Pelican acquisition which is April 1, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived
intangibles, other than goodwill, consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount exceeds the fair value, an
impairment charge is recognized in an amount equal to that excess. Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying
amounts of goodwill for recoverability on an annual basis or when events or changes in circumstances indicate evidence a potential impairment exists, using a fair value based
test. The Company performed a qualitative assessment during the annual impairment review for fiscal 2018 and concluded that it was more likely than not that the fair value of
the Company’s single reporting unit is greater than its carrying amount. Therefore, the two-step goodwill impairment test for the reporting unit was not necessary at December
31, 2018.
F-12
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 7). The Company performed a qualitative assessment
during the annual impairment review for fiscal 2018 as of December 31, 2018 and concluded that it was more likely than not that the fair value of the Company’s IPR&D is
greater than its carrying amount. Therefore, the two-step IPR&D impairment test for the reporting unit was not necessary at December 31, 2018.
Deferred Revenue
Deferred revenue is comprised of proceeds of $1.0 million received from CPRIT for which the costs have not been incurred or the conditions of the award have not been met
and grant funds received from an economic development grant agreement with the City of San Antonio (“Economic Development Grant”) that we entered into on November 1,
2017. Under the Economic Development Grant, we received $0.2 million in state enterprise fund grants for the purpose of defraying costs toward the purchase of laboratory
equipment. As part of the agreement, we will provide the city of San Antonio with a purchase money security interest in the equipment to secure the repayment of grant funds
should we fail to perform under the terms and conditions of the agreement. Our obligations under the agreement include meeting certain employment levels for a period of not
less than seven years commencing on or before December 31, 2017 and establishing Pelican’s corporate headquarters in San Antonio. The Economic Development Grant funds
will be recognized as income upon the achievement of the performance criteria and determination that the cash is no longer refundable to the State of Texas.
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 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 expected to be settled within 12 months after the balance sheet date are presented in current
liabilities, with the non-current portion recorded under long term liabilities in the consolidated balance sheets (see Note 4).
Research and Development
Research and development costs associated with developmental products not yet approved by the FDA as well as costs associated with bringing developmental products into
advanced phase clinical trials as incurred. These costs consist primarily of pre-manufacturing and manufacturing drug costs, clinical trial execution, investigator payments,
license fees, salaries, stock-based compensation and related personnel costs. Other costs include fees paid to consultants and outside service providers related to the
development of the Company’s product candidates and other expenses relating to the design, development, and testing and enhancement of its product candidates.
Impact of Recently Issued Accounting Standards:
In November 2018, the FASB issued ASU 2018-18: Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU, in part,
requires that certain transactions with collaboration partners be excluded from revenue recognized under Topic 606. ASU 2018-18 is effective for fiscal years beginning after
December 15, 2019. The Company is evaluating the impact of this standard and does not plan early adoption of this standard.
F-13
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 entity’s adoption date of Topic 606. The Company does not anticipate ASU 2018-07 to have a material impact
to our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-08 , Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and
Contributions Made, which is intended to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments
in ASU No. 2018-08 should assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transaction) within the scope of Topic
958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. This amendment
applies to all entities that make or receive grants or contributions. This ASU is effective for public companies serving as a resource recipient for fiscal years beginning after June
15, 2018, including interim periods within that fiscal year. The Company does not anticipate ASU 2018-08 to have a material impact to our 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 does not anticipate ASU 2017-01 to have a material impact to our consolidated financial statements.
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 $101,176 for the years ended December 31,
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 lessee’s 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 lessee’s 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. Grant revenue is recognized as work is performed and qualifying costs are incurred. The Company
adopted the modified retrospective method of adoption in early 2018 and there was no material effect on the timing and measurement of revenue.
F-14
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.
Short-Term Investments
Investments in certain securities may be classified into three categories:
·
·
·
Held-to-maturity - Debt securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost.
Trading securities - Debt and equity securities that are bought and held principally for the purpose of selling in the near term are reported at fair value with
unrealized gains and losses included in earnings.
Available-for-sale - Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains
or losses excluded from earnings and reported as a separate component of stockholders’ equity.
The Company reassesses the appropriateness of the classification of its investments at the end of each reporting period. The Company has determined that its debt securities
should be classified as held-to-maturity as of December 31, 2018. We had no debt securities as of December 31, 2017. This classification was based upon management’s
determination that it has the positive intent and ability to hold the securities until their maturity dates, as all of the investments mature within 3-6 months and the underlying cash
invested in these securities is not required for current operations before the investments maturity.
Investments consist of short-term FDIC insured certificates of deposit, commercial paper rated A1/P1 or above and corporate notes rated A and above carried at amortized cost
using the effective interest method.
The following summarizes information about short term investments at December 31, 2018 and 2017, respectively:
2017
Certificates of deposit, commercial paper
2018
Certificates of deposit, commercial paper
Amortized
Cost
Gross
Unrealized
Losses
Estimated
Fair Value
$
$
— $
— $
—
5,570,158 $
(131) $
5,570,027
As of December 31, 2018, the estimated fair value of the investments was less than the amortized cost. Because management intends to hold the investments until their maturity
dates, these unrealized losses were not recorded in the consolidated financial statements.
4.
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 Company’s 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 year ended December 31, 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.
F-15
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
$2.0 million upon Pelican’s dosing of the first patient in its first Phase 1 trial for an oncology indication;
$1.5 million upon Pelican’s dosing of the first patient in its first Phase 2 trial for an oncology indication;
$3.0 million upon successful outcome of the first Phase 2 trial for an oncology indication;
$6.0 million upon Pelican’s dosing of the first patient in its first Phase 3 trial for an oncology indication;
$3.0 million upon Pelican’s dosing of the first patient in its first Phase 3 trial for a non- oncology indication;
$7.5 million upon successful outcome of the first Phase 3 trial for an oncology indication;
$3.0 million upon successful outcome of the first Phase 3 trial for a non-oncology indication;
$7.5 million upon acceptance of a Biologics License Application (BLA) submission for an oncology indication;
$3.0 million upon acceptance of a BLA submission for a non-oncology indication;
$7.5 million upon first product indication approval in the United States or Europe for an oncology indication;
$3.0 million 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 current liabilities with the non-current portion under long term
liabilities on the balance sheet. The estimated fair value of the contingent consideration was determined using a probability-weighted income approach, at a discount of 7.2%
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 December 31, 2018, the Company determined the change in the estimated fair value of the contingent consideration was approximately $0.5 million and $0.2 million
for the years ended December 31, 2018 and 2017, respectively.
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 approximately $2.2 million. The identifiable indefinite-lived intangible assets 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. Fees and expenses associated with the acquisition were approximately $0.6 million for the twelve months ended December 31, 2017 and
are reported in our general and administrative expense.
The purchase price has been allocated to the assets and liabilities as follows:
Aggregate consideration:
Cash consideration
Stock consideration
Contingent consideration
Total Consideration
Purchase price allocation:
Cash acquired
In-process R&D
Goodwill
Deferred tax liability
Net liabilities assumed
Fair value of non-controlling interest
Total purchase price
F-16
$
$
$
$
500,000
1,052,000
2,385,000
3,937,000
31,199
$
5,866,000
$
$
2,189,338
$ (2,111,760)
$ (1,102,777)
(935,000 )
$
3,937,000
$
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 CPRIT Grant from CPRIT for development of Pelican’s 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.
As of December 31, 2018, CPRIT has provided $8.3 million of the total $15.2 million grant. The remaining $6.9 million will become available in the third CPRIT fiscal year
(June 2018 through May 2019). As of December 31, 2018, we have provided approximately $5.2 million funding to Pelican which includes matching CPRIT funds and we have
$3.5 million remaining to provide for the third CPRIT fiscal year (June 2018 through May 2019).
After its acquisition on April 28, 2017, Pelican contributed net revenue and net loss of approximately $1.5 million and $1.7 million, respectively, for the year ended December
31, 2017, which are included in the Company’s consolidated statement of operations and exclude acquisition and integration related expenses which are included in non-
recurring and acquisition-related costs.
The following unaudited pro forma information presents the combined results of operations for the year ended December 31, 2017, as if we had completed the Pelican
acquisition at the beginning of fiscal 2017. The pro forma financial information is provided for comparative purposes only for the year ended December 31, 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.
(in millions except per share value)
Grant and licensing revenue
Net loss
Net loss: Non-controlling interest
Net loss attributable to Heat Biologics, Inc.
Net loss per share attributable to Heat Biologics, Inc.—basic and diluted
5.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at:
Prepaid manufacturing expense
Prepaid insurance
Other prepaid expenses
Other current assets
F-17
December 31,
2017
(unaudited)
$
$
$
1.5
(12.8)
(0.6 )
(12.2)
(3.16)
December 31,
2018
559,110 $
284,931
117,261
15
961,317 $
2017
1,551,597
218,750
87,937
108,973
1,967,257
$
$
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over 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 at:
Lab equipment
Leasehold improvements
Computers
Furniture and fixtures
Total
Accumulated depreciation
Property and equipment, net
Depreciation expense totaled $237,318 and $134,084 for the years ended December 31, 2018 and 2017, respectively.
7.
Goodwill and In-process R&D
The following table provides a rollforward of the Company’s goodwill as of December 31, 2017 and 2018:
Goodwill from acquisition of Pelican
Balance at December 31, 2017
Purchase accounting adjustments
Balance at December 31, 2018
The following table provides a rollforward of the Company’s in-process R&D as of December 31, 2017 and 2018:
In-process R&D from acquisition of Pelican
Balance at December 31, 2017
Purchase accounting adjustments
Balance at December 31, 2018
$
December 31,
2018
1,218,532 $
9,445
38,589
58,146
2017
645,433
—
41,333
55,883
1,324,712
(681,566 )
742,649
(455,758 )
$
643,146 $
286,891
Goodwill
2,189,338
2,189,338
—
2,189,338
In-process
R&D
5,866,000
5,866,000
—
5,866,000
$
$
$
$
The Company performed a qualitative assessment for goodwill and IPR&D during the annual impairment review for fiscal 2018 as of December 31, 2018 and concluded that it
was more likely than not that the fair value of the Company’s single reporting unit and IPR&D are greater than their carrying amount. Therefore, the two-step goodwill
impairment test and the two-step IPR&D impairment test for the reporting unit was not necessary at December 31, 2018 and 2017, respectively.
F-18
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
2018
2017
$
$
919,750 $
628,147
40,000
7,854
82,300
1,678,051 $
1,504,240
542,434
40,000
27,457
162,300
2,276,431
8.
Accrued Expenses
Accrued expenses consist of the following at:
Accrued clinical trial expenses
Compensation and related benefits
Patent fees
Deferred rent
Other expenses
9.
License Agreements
·
University of Miami
·
·
·
·
·
·
·
Beginning in 2008, the Company has entered into various agreements with the University of Miami (“UM”) for intellectual and tangible property rights relating to
the ImPACT®, technology activities (“License Agreement 03-31, 05-39” and “License Agreement 97-14”, or collectively “License Agreements”). These license
agreements were subsequently assigned to the Company’s subsidiary Heat Biologics I, Inc. (Heat I) which issued to UM shares of its common stock representing
seven and one-half percent (7.5%) of its common stock. The term of the license is the length of the last to expire patent, unless terminated earlier.
The Company agreed to make minimum royalty payments of $10,000 for three years beginning in 2010 that are due on the anniversary date of the agreement for
License Agreement 97-14. Beginning in 2013, and thereafter for the life of the agreement, the minimum royalty payment shall be $20,000 due on the same date. In
July 2016, the Company and UM entered into an amendment which replaced the milestone payment of $250,000 by approval of a BLA for the lung cancer vaccine
with a payment of $500,000 upon approval of an NDA for a lung cancer vaccine covered by Patent Rights.
In August 2009, Heat I and UM entered into a second amendment (“Amendment 2”) to License Agreement 97-14 to extend the foregoing payment due dates for all
past due license fees and patent costs.
On February 18, 2011, Heat I entered into a license agreement (“SS114A”) with UM to obtain additional technology related to License Agreement 97-14. Heat I
agreed to reimburse UM for all past patent costs of $37,381. As partial consideration for SS114A, Heat II agreed to grant back certain exclusive rights to UM.
On February 18, 2011, Heat I entered into a license agreement (“143”) with UM to obtain additional technology related to License Agreement 97-14. In
consideration for 143, Heat I agreed to pay UM a fee of $50,000 and reimburse them for past patent costs of $14,158.
On February 18, 2011, Heat I entered into a license agreement (“J110”) with UM to obtain additional technology related to License Agreement 97-14. In
consideration for J110, Heat I agreed to pay UM a fee of $10,000 and reimburse them for past patent costs of $1,055.
In addition, Heat entered into an agreement for “Modified Heat Shock Proteins-Antigenic Peptide Complex” with UM in September 2014 for a cancer cell line where
UM agreed not to license the cell line to third parties while the Company is in good standing and in compliance of its patent license agreements with UM relating to
our ImPACT® platform. There is no financial obligation on the Company’s part under the arrangement.
F-19
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
·
On October 25, 2016, the Company entered into an exclusive license agreement with UM for the license and development of intellectual property related to its gp96
platform to target the Zika virus and other infectious diseases. As consideration for the rights granted in this license agreement the Company is obligated to pay UM
an upfront license fee of $20,000 and nominal annual maintenance fees over the initial ten years that total $82,000 and increasing thereafter. The Company is
obligated to pay royalties equal to a percentage (mid-single digits) of net sales of products covered by the patent-relayed rights, subject to reduction if additional
licenses from third parties are required to commercialize licensed products.
·
University of Miami - Pelican
For each agreement, the Company agreed to make minimum royalty payments of $10,000 for three years beginning 2010 due on the anniversary date of the agreements to the
University of Miami. Beginning in 2013, and thereafter for the life of the agreements, the minimum royalty payments shall be $20,000 due on the same date.
License 0331, 0539
·
·
·
·
Pelican is obligated to make milestone payments as follows: $150,000 due upon submission and approval of an IND and the completion of a Phase 1 clinical trial and
$250,000 due upon the earlier of May 2022 or approval of an NDA. The Company has the right to terminate this Agreement without obligation for future unpaid
milestones.
In August 2009, Pelican and UM entered into a second amendment (“Amendment 2”) to License Agreement 0331, 0539 to extend the foregoing payment due dates for all
past due license fees and patent costs.
In February 2010, Pelican and UM entered into a third amendment (“Amendment 3”) to License Agreement 0331, 0539 to grant back to UM a certain nonexclusive
license. In all other respects, the original agreement remained the same.
In October 2010, Pelican and UM entered into a fourth amendment (“Amendment 4”) to License Agreement 0331, 0539 to grant to the licensor a nonexclusive license
right for certain technology as research reagents and research tools.
License I176
On December 12, 2010, Pelican entered into another license agreement (“I176”) with UM for one component of complimentary technology to the July 11, 2008
agreement. Pelican agreed to pay UM a license fee of $50,000 and a reimbursement of $15,797 for past patent fees. Pelican also agreed to make a minimum royalty
payment of $10,000 during 2012 through 2014 and then $20,000 every year thereafter. Pelican is obligated to make milestone payments as follows: $150,000 due upon
submission and approval of an IND and the completion of a Phase 1 clinical trial and $500,000 due upon the earlier of May 2022 or approval of an NDA. The Company
has the right to terminate this Agreement without obligation for future unpaid milestones.
In August 2012, Pelican and UM entered into a second amendment (“I176 Amendment 2”) to License Agreement I176 to extend the foregoing payment due dates for all
past due license fees and patent costs.
·
·
UMM143
·
On November 19, 2013, Pelican entered into another license agreement (“UMM143”) with UM for an exclusive license of complimentary technology and patent rights.
Pelican agreed to pay UM a license issue fee of $35,000, and agreed to make minimum royalty payments if the I176 license agreement is terminated. No minimum
royalty payments or milestone payments are due for any year in which the I176 license agreement is in force. The Company has the right to terminate this Agreement
without obligation for future unpaid milestones.
F-20
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
·
Other License Agreements
·
·
·
On April 12, 2011, Heat entered into a non-exclusive evaluation and biological material license agreement with a not-for-profit corporation for evaluation and
production of vaccines. In consideration for the evaluation and commercial use license, Heat agreed to pay the not-for-profit corporation a fee of $5,000 and
$50,000, respectively. Heat has the option to renew the license once the original term has expired. Milestone payments are due upon certain events agreed upon by
Heat and the not-for-profit corporation. In December 2015, Heat amended the evaluation and biological material license agreement to add additional cell lines in
exchange for a one-time payment of $1,000.
On August 30, 2010, Heat entered into an option agreement with the University of Michigan (“University”) to acquire the right to negotiate an exclusive license for
certain materials which include cancer cells and all unmodified derivatives of these cells. An option fee of $2,000 was paid on September 8, 2010 to grant a period of
nine months for this consideration. In July 2011, the Company exercised the option to acquire the license for $10,000.
In June 2016, the Company entered into an exclusive license agreement with Shattuck Labs, Inc. (“Shattuck”) pursuant to which the Company licensed certain
provisional patent applications and know-how related to fusion proteins to treat cancer and other diseases that were not being developed by us. Shattuck paid the
Company an initial license fee of $50,000 and is obligated to pay the Company fees upon its receipt of sublicensing income, achievement of certain milestones and
royalties upon sales of commercial products. Inasmuch as the technology that the Company out-licensed is in the early stages of development and there is a low
likelihood of success for any technology at such stage, there can be no assurance that any products will be developed by Shattuck or that we will derive any revenue
from Shattuck.
Future minimum royalty payments by the Company for licenses as of December 31, 2018 are as follows (in thousands):
Year ended December 31,
2019
2020
2021
2022
2023
Total
$
$
74
103
228
784
74
1,263
10.
Stockholders’ Equity
Authorized Capital
Heat has authorized 10,000,000 shares of Preferred Stock (par value $0.0001) as of December 31, 2018 and 2017. As of December 31, 2018 and 2017, there were no
outstanding shares of Preferred Stock.
Heat had 100,000,000 shares of common stock (par value $0.0002) authorized as of December 31, 2018 and 2017. On January 19, 2018, Heat announced a reverse stock split
of its shares of common stock at a ratio of 1-for-10. The reverse stock split took effect as of 11 p.m. ET on January 19, 2018, to trade on a post-split basis at the market open on
January 22, 2018. During the Company’s annual shareholder meeting held June 29, 2017, shareholders approved the Company’s reverse stock split, and granted the board of
directors the authority to implement and determine the exact split ratio. When the reverse stock split became effective, every 10 shares of the Company’s 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. Therefore, of the 100,000,000 common stock shares authorized, 32,492,144 and 4,200,310 common stock shares
were issued and outstanding as of December 31, 2018 and 2017, respectively.
F-21
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financings
On January 18, 2018, the Company entered into a Common Stock Sales Agreement (the “Underwriting 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 $3.7 million of shares of the Company’s
common stock and on March 15, 2018 filed with the SEC a prospectus supplement for an additional aggregate offering of up to $1.3 million shares of Common Stock. Sales of
shares of Common Stock have been made pursuant to the Company’s 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 December 31, 2018, the Company sold an aggregate of 1,566,997 shares of common stock under the HCW
Sales Agreement resulting in net proceeds of approximately $3.8 million.
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
December 31, 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, 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.
On November 26, 2018, the Company closed an underwritten public offering in which it issued and sold 8,000,000 shares of the Company’s common stock together with
warrants to purchase 4,000,000 shares of the Company’s common stock at a combined price to the public of $1.50. The warrants have an exercise price of $1.65, are exercisable
upon issuance and expire five years from the date of issuance. In addition, the underwriter exercised the over-allotment option to purchase an additional 1,200,000 shares of
common stock and warrants to purchase 600,000 shares of common stock. Net proceeds to Heat from this offering are approximately $12.7 million after deducting underwriting
discounts and commissions and other estimated offering expenses payable by Heat. A.G.P./Alliance Global Partners acted as the sole book-running manager for the offering.
During 2016 the Company had entered into an at-the-market Issuance Sales Agreement with FBR Capital Markets Co. pursuant to which it has sold 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 Company’s 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 have
been made pursuant to the Company’s shelf registration statement on Form S-3 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 was 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. For the year ended December 31, 2017, the Company sold 234,858
shares of common stock under the Sales Agreement resulting in net proceeds of approximately $2.3 million after FBR’s commission and other expenses. On November 3, 2017,
the Company terminated its At Market Issuance Sales Agreement with FBR.
On March 28, 2017, the Company sold pursuant to the terms of an Underwriting Agreement (the “Underwriting Agreement”) the Company sold pursuant to the terms of an
Underwriting Agreement (the “Underwriting Agreement (“Aegis”), as representative of the several underwriters named therein (the “Underwriters”), 500,000 shares of the
Company’s common stock and 75,000 additional shares of the common stock to cover over-allotments at an offering price of $8.00 per share, (the “March Offering”). The net
proceeds to the Company from the March 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.
F-22
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 2017, the Company sold pursuant to the terms of an Underwriting Agreement (the “Underwriting Agreement”) the Company sold pursuant to the terms of an
Underwriting Agreement (the “Underwriting Agreement (“Aegis”), as representative of the several underwriters named therein (the “Underwriters”), 581,395 shares of the
Company’s common stock, and 39,255 additional shares of the common stock to cover over-allotments at an offering price of $4.30 per share, (the “Offering”). The net
proceeds to the Company from the Offering were approximately $2.4 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.
Restricted Stock
In January 2018, the Company granted 60,375 restricted stock units to the employees of the Company in which 25%, (15,092 restricted stock units) vested immediately and the
remainder will vest on each anniversary of the grant date over a three-year period contingent on continued employment with the Company. Additionally, the Company issued
35,989 restricted stock units to certain employees who chose to use a portion of their 2017 monetary bonus in lieu of restricted stock units that vested immediately, but are
subject to a one year restriction on transferability. In January 2017, the Company granted 42,850 restricted stock units to the employees of the Company in which 25%, (10,713
restricted stock units) vested immediately and the remainder will vest on each anniversary of the grant date over a three-year period contingent on continued employment with
the Company. The Company recognized $318,186 and $169,517 in stock-based compensation expense for employees related to restricted stock awards during the years ended
December 31, 2018 and 2017.
In January 2018, the Company granted 3,250 restricted stock units to nonemployees in exchange for services in which 25%, (812 restricted stock units) vested immediately and
the remainder will vest on each anniversary of the grant date over a three-year period contingent on continued association with the Company. The Company recognized stock-
based compensation related to the grant of restricted stock units to nonemployees totaling $6,369. There were no restricted stock units granted to nonemployees during 2017.
The Company recognized stock-based compensation related to issuance of restricted stock to nonemployees in exchange for services totaling $0 and $31,000 for the years ended
December 31, 2018 and 2017, respectively.
Common Stock Warrants
In connection with the November 26, 2018 public offering, the Company issued 4,600,000 common stock warrants of which are exercisable for one share of common stock.
The common stock warrants have an exercise price of $1.65 per share and expire five years from the issuance date. The warrants have been accounted for as equity instruments.
The fair value of the common stock warrants of approximately $5.6 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 2.89%, 0% dividend yield, volatility of 133.26%, and share price of $1.42 per share based on the trading price of the
Company’s common stock.
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 December 31, 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 December 31, 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 Company’s common stock.
In connection with the March 23, 2016 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 Company’s 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.
F-23
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 2018, 3,054,667 common stock warrants have been exercised and 12,500 common stock warrants have expired. No warrants were issued
or exercised during the same period in 2017. As of December 31, 2018 the Company has outstanding warrants to purchase 4,600,000 shares of common stock issuable at $1.65
per share, 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.
The Company has a total of 9,030,730 warrants outstanding at a weighted average exercise price of $1.89 to purchase its common stock as of December 31, 2018. These
warrants are summarized as follows:
Issuance Date
3/10/2011
3/23/2016
5/7/2018
11/26/2018
Number of Shares
1,738
296,159
4,132,833
4,600,000
Exercise Price
$ 4.80
$ 10.00
$ 1.58
$ 1.65
Expiration Date
3/10/2021
3/23/2021
5/8/2023
11/26/2023
The following table summarizes the warrant activity of the Company’s common stock warrants:
Outstanding, December 31, 2016
Exercised
Expired
Outstanding, December 31, 2017
Issued
Exercised
Expired
Outstanding, December 31, 2018
Equity Compensation Plans
2009 Stock Incentive Plan
Common Stock
Warrants
310,397
—
—
310,397
11,787,500
3,054,667
(12,500)
9,030,730
In 2009, the Company adopted the 2009 Stock Option Plan of Heat Biologics, Inc. (the “2009 Plan”), under which stock options to acquire 21,739 common shares could be
granted to key employees, directors, and independent contractors. Under the 2009 Plan, both incentive and non-qualified stock options could be granted under terms and
conditions established by the Board of Directors. The exercise price for incentive stock options was the fair market value of the related common stock on the date the stock
option was granted. Stock options granted under the 2009 Plan generally have terms of 10 years and have various vesting schedules.
The Company amended the 2009 Stock Option Plan and all related addendum agreements in April 2011. This second amendment increased the number of shares available for
issuance from 21,739 to 65,217. The Company amended the 2009 Plan to increase the number of shares available for issuance to 86,957. As of December 31, 2018 and 2017,
there were 23,799 and 24,042 stock options outstanding under the 2009 Plan, respectively.
2014 Stock Incentive Plan
In June 2014, the stockholders approved the 2014 Stock Option Plan of Heat Biologics, Inc. (the “2014 Plan”), under which the Company is authorized to grant 50,000 awards
in the form of both incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock based awards with terms established by the
Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the 2014 Plan. In 2015, the stockholders approved an
amendment to the Plan to increase the number of shares by 60,000 and in 2016, the stockholders approved an amendment that allowed the Company to grant up to 300,000
awards in total. As of December 31, 2018 and 2017, there were 263,484 and 232,768 stock options outstanding under the 2014 Plan, respectively.
F-24
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2017 Stock Incentive Plan
In June 2017, the stockholders approved the 2017 Stock Incentive Plan of Heat Biologics, Inc. (the “2017 Plan”), under which the Company is authorized to grant 500,000
awards in the form of both incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock based awards with terms established by the
Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the 2017 Plan. As of December 31, 2018 and 2017 there
were 234,540 and 10,000 stock options outstanding under the 2017 Plan, respectively.
2018 Stock Incentive Plan
In October 2018, the stockholders approved the 2018 Stock Incentive Plan of Heat Biologics, Inc. (the “2018 Plan”), under which the Company is authorized to grant 4,000,000
awards in the form of both incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock based awards with terms established by the
Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the 2018 Plan. As of December 31, 2018 there were no
stock options outstanding under the 2018 Plan.
There are 4,260,215 stock options remaining available for grant under the Plans. The following table summarizes the components of the Company’s stock-based compensation
included in net loss:
Employee stock options
Non-employee stock options
Employee stock awards
Non-employee stock awards
Stock Options
For the years ended
December 31,
2018
443,684 $
20,420
318,186
6,369
788,659 $
2017
474,251
14,362
169,517
31,000
689,130
$
$
The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions for stock options
granted during the years ended:
Dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
December 31,
2018
2017
0.0%
83.63-121.81 %
2.32-2.98%
5.1-6.3
0.0%
76.35-79.08%
1.86-2.26%
5.8-7.8
The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with the expected life of the stock options. The Company used
an average historical stock price volatility based on an analysis of reported data for a peer group of comparable companies that have issued stock options with substantially
similar terms, as the Company had limited to no trading history for its common stock. Expected term represents the period that the Company’s stock option grants are expected
to be outstanding. The Company elected to utilize the “simplified” method to estimate the expected term. Under this approach, the weighted-average expected life is presumed
to be the average of the vesting term and the contractual term of the option.
Expected dividend yield was considered to be 0% in the option pricing formula since the Company had not paid any dividends and had no plans to do so in the future. As
required by ASC 718, the Company reviews recent forfeitures and stock compensation expense. Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Additionally, the Company conducts a sensitivity analysis. Based on these evaluations the Company
currently does not apply a forfeiture rate.
The Company recognized $464,104 and $488,613 in stock-based compensation expense for the years ended December 31, 2018 and 2017, respectively, for the Company’s
stock option awards.
F-25
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize the stock option activity for the year ended December 31, 2018:
Outstanding, December 31, 2017
Granted
Exercised
Forfeited/Expired
Outstanding, December 31, 2018
Weighted
Average
Exercise
Price
19.57
3.57
—
26.97
11.60
Shares
266,810 $
221,410 $
— $
(22,917) $
465,303 $
The weighted average grant-date fair value of stock options granted during the years ended December 31, 2018 and 2017 was $2.65 and $5.33, respectively.
The following table summarizes information about stock options outstanding at December 31, 2018:
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
(Years)
8.17
Balance
as of
12/31/2018
465,303
Weighted
Average
Exercise
Price
$11.60
Options Vested and Exercisable
Weighted
Average
Remaining
Contractual
Life
(Years)
7.21
Weighted
Average
Exercise
Price
$20.48
Balance
as of
12/31/2018
198,957
As of December 31, 2018, the unrecognized stock-based compensation expense related to unvested stock options was approximately $2.3 million that is expected to be
recognized over a weighted average period of approximately 11.0 months.
Total stock-based compensation expense including restricted stock, stock options, and common stock was $788,659 and $689,130 for the years ended December 31, 2018 and
2017, respectively.
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 statements carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the 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 December
31, 2018 and 2017, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with
these items. The Company’s 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 consolidated statements of operations. As of December 31, 2018 and 2017, the Company had no such accruals.
F-26
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of income tax expense (benefit) attributable to continuing operations are as follows:
Current Expense:
Federal
State
Foreign
Deferred Expense:
Federal
State
Foreign
Total
2018
2017
$
$
— $
—
—
—
—
—
—
—
(985,488 ) $
—
—
(762,580 )
(46,960)
—
$
(985,488 ) $
(809,540 )
The differences between the company’s income tax expense attributable to continuing operations and the expense computed at the 21 % United States statutory income tax rate
were as follows:
Federal income tax expense at statutory rate:
Increase (reduction) in income tax resulting from:
State Income Taxes
Foreign Rate Differential
Nondeductible Expenses
Prior Period True-Up - Pelican
Research & Development Credit
Stock Based Compensation
Acquisition Costs
Reserve for Loss Carryforwards Limited by Sec. 382
Tax Reform Impact
Other
Increase (Decrease) in Valuation Allowance
2018
2017
$ (3,577,000) $ (4,495,000)
(207,000 )
(17,000)
7,000
208,000
(763,000 )
60,000
—
22,000
—
25,512
3,256,000
(194,000 )
(16,000)
9,000
—
(409,000 )
84,000
96,000
(541,000 )
(8,024,000)
45,460
(3,445,000)
$
(985,488 ) $
(809,540 )
The tax effects of temporary differences and operating loss carryforwards that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as
follows at December 31, 2018 and December 31, 2017:
Deferred tax assets:
Net Operating Loss Carryfowards
R&D Credits
Stock Compensation
Contingent Consideration
Other Accrued Expenses
Deferred tax assets
Deferred tax liabilities:
Property, plant and equipment, primarily due to differences in depreciation
Other Accrued Expenses
Intangible Assets
Deferred tax liabilities
Valuation allowance
Net deferred tax assets (liabilities)
F-27
2018
2017
$ 18,731,555 $ 15,117,487
1,966,964
629,447
599,343
128,522
2,729,737
744,506
713,259
—
22,919,057 18,441,763
(127,140 )
(11,926)
(1,302,220)
(26,307)
—
(1,302,220)
(1,441,286)
(1,328,527)
(21,794,504) (18,415,456)
$
(316,733 ) $ (1,302,220)
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2018 and December 31, 2017, the Company evaluated all significant available positive and negative evidence, including the existence of losses in recent years
and management’s forecast of future taxable income, and, as a result, determined it was more likely than not that federal and state deferred tax assets, including benefits related
to net operating loss carryforwards, would not be realized. The valuation allowance was increased from $18,415,456 at December 31, 2017 to $21,794,504 at December 31,
2018. Net Operating Losses created in years beginning after 2017 now only offset 80% of Taxable Income but no longer have a 20 year expiration. As such, NOL’s created
after 2017 can be used to offset indefinite lived liabilities up to 80%. This change in tax law created a reduction of the deferred tax liability by $985,488 during 2018.
At December 31, 2018, the Company has federal net operating loss carryforwards of approximately $84,517,142, including $3,027,284 acquired from Pelican Therapeutics,
which are available to offset future taxable income. However, due to potential Section 382 limitations (discussed in further detail below) a reserve has been set up for the
Pelican Therapeutics NOL of $(2,344,952). The federal net operating loss carryforwards begin to expire in 2029. The Company has various state net operating loss
carryforwards totaling approximately $73,861,907 including $2,922,000 from Pelican Therapeutics, which are available to offset future state taxable income. State net operating
losses begin to expire in 2024. The Company has various foreign net operating loss carryforwards of approximately $122,605. The foreign net operating loss carryforwards are
carried forward indefinitely. Because the Company has incurred cumulative net operating losses since inception, all tax years remain open to examination by U.S. federal, state,
and foreign income tax authorities.
In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the 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 December
31, 2018 and 2017, the Company had no unrecognized income tax benefits and correspondingly there is no impact on the Company’s effective income tax rate associated with
these items. The Company’s 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 income. As of December 31, 2018 and 2017, the Company had no such accruals.
The Company files income tax returns in the United States, various state and foreign jurisdictions. The Company is subject to examination by taxing authorities for the tax years
ended December 31, 2009 through 2017.
Potential 382 Limitation
The Company’s ability to utilize its net operating loss (NOL) and research and development (R&D) credit carryforwards may be substantially limited due to ownership changes
that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state
provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax,
respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in
an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups.
The Company has not completed a study to assess whether one or more ownership changes have occurred since the Company became a loss corporation under the definition of
Section 382. If the Company has experienced an ownership change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation, which is
determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to
additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until a study is
completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC-740. Any
carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations of the Company.
F-28
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.
Non-Controlling Interest
In October 2018, Heat entered into an agreement with the University of Miami (“UM”) whereby UM exchanged its shares of stock in Heat’s subsidiaries, Heat I, Inc. and
Pelican Therapeutics, Inc. (“Pelican”), a related party prior to acquisition. The stock exchange resulted in Heat owning 100% of Heat I, Inc. and increasing its controlling
ownership in Pelican from 80% to 85%.
13.
Related Party Transactions
The Company compensates its board members. Board members received cash compensation between approximately $61,500 and $221,000 and $77,000 and $242,000, for
services rendered during 2018 and 2017, respectively. Board members also received equity compensation.
The Company acquired 80% of the outstanding equity of Pelican, a related party, during the year ended December 31, 2017, see Note 4; and an additional 5% during the year
ended December 31, 2018 see Note 12.
14.
Net Loss Per Share
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during
the periods. Fully diluted net loss per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the
periods. Common equivalent shares consist of stock options and warrants that are computed using the treasury stock method.
For the years ended December 31, 2018 and 2017, all of the Company’s common stock options, unvested restricted stock units and warrants are anti-dilutive and therefore have
been excluded from the diluted calculation.
The following table reconciles net loss to net loss attributable to Heat Biologics, Inc.:
Net loss
Net loss - Non-controlling interest
Net loss attributable to Heat Biologics, Inc.
Weighted-average number of common shares used in net loss per share attributable to common stockholders —basic and diluted
Net loss per share attributable to Heat Biologics, Inc —basic and diluted
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
Outstanding stock options
Unvested restricted stock units
Outstanding common stock warrants
15.
Commitments and Contingencies
For the years ended
December 31,
2018
2017
$ (16,591,293) $ (12,409,866)
(568,195 )
$ (15,733,854) $ (11,841,671)
(857,439 )
17,485,461
$
(0.90) $
3,845,342
(3.08)
For the years ended
December 31,
2018
465,303
56,520
9,030,730
2017
266,810
21,779
310,397
During 2014, the Company entered into a five-year lease for a total of 5,979 square feet. The lease expires September 30, 2019 and the Company is currently in the process of
evaluating its operations to determine the proper space required for its current operations, as well as that there are spaces available sufficient for any future expansion
requirements should the need arise.
F-29
HEAT BIOLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense was $ 305,391 and $226,001 for the years ended December 31, 2018 and 2017, respectively. In 2018, Pelican entered into a five-year lease for a total of 5,156
square feet. The Company’s approximate future minimum payments for its operating lease obligations that have initial remaining non-cancelable terms in excess of one year are
as follows:
Years ending December 31,
2019
2020
2021
2022
2023
Total
309,729
115,580
118,158
120,736
20,194
684,397
$
F-30
Name of Subsidiary
Heat Biologics I, Inc
Heat Biologics III, Inc.
Heat Biologics IV, Inc.
Heat Biologics GmbH.
Heat Biologics Australia Pty LTD
Zolovax, Inc.
Pelican Therapeutics, Inc.
Delphi Therapeutics, Inc.
Scorpion Biosciences, Inc.
Subsidiaries
EXHIBIT 21.1
Jurisdiction
Delaware
Delaware
Delaware
Germany
Australia
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
Heat Biologics, Inc.
Durham, North Carolina
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 (No. 333-224039), Form S-3 (No. 333-214868, and No. 333-221201) and Form
S-8 (No. 333-193453, No. 333-196763, No. 333-207108, No. 333-213133, No. 333-219238 and No. 333-227699) of Heat Biologics, Inc. of our report dated March 28, 2019,
relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ BDO USA, LLP
BDO USA, LLP
Raleigh, NC
March 28, 2019
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 OR RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Jeffrey Wolf, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Heat Biologics, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 28, 2019
By:
/s/ Jeffrey Wolf
Name: Jeffrey Wolf
Title: Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14 OR RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Ann Rosar, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Heat Biologics, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 28, 2019
By:
/s/ Ann Rosar
Name: Ann Rosar
Title: Vice President of Finance
(Principal Financial and Principal Accounting Officer)
CERTIFICATION PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Heat Biologics, Inc. (the “Registrant”) hereby certifies,
to such officer’s knowledge, that:
(1)
(2)
the accompanying Annual Report on Form 10-K of the Registrant for the year ended December 31, 2018 (the “Report”) fully complies with the requirements of Section
13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 28, 2019
By:
/s/ Jeffrey Wolf
Name: Jeffrey Wolf
Title: Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Heat Biologics, Inc. (the “Registrant”) hereby certifies,
to such officer’s knowledge, that:
(1)
(2)
the accompanying Annual Report on Form 10-K of the Registrant for the year ended December 31, 2018 (the “Report”) fully complies with the requirements of Section
13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 28, 2019
By:
/s/ Ann Rosar
Name: Ann Rosar
Title: Vice President of Finance
(Principal Financial and Principal Accounting Officer)