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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number: 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 No.)

627 Davis Drive, Suite 400

Morrisville, NC

(Address of Principal Executive Offices)

27560

(Zip Code)

(919) 240-7133

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

HTBX

The Nasdaq Stock Market

(The Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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

Accelerated filer

Non-accelerated filer

þ

Smaller reporting company

þ

Emerging growth company

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ

As of August 4, 2020, there were 148,560,562 shares of Common Stock, $0.0002 par value per share, outstanding.


Table of Contents

HEAT BIOLOGICS, INC.

TABLE OF CONTENTS

Page No.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

2

Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2020 and June 30, 2019

3

Consolidated Statements of Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2020 and June 30, 2019

4

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2020 and June 30, 2019

6

Notes to the Consolidated Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

38

Item 6.

Exhibits

39

SIGNATURES

40


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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to raise additional capital to support our clinical development program and other operations, our ability to develop products of commercial value and to identify, discover and obtain rights to additional potential product candidates, our ability to protect and maintain our intellectual property and the ability of our licensors to obtain and maintain patent protection for the technology or products that we license from them, the outcome of research and development activities, our reliance on third-parties, competitive developments, the effect of current and future legislation and regulation and regulatory actions, as well as other risks described more fully in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (the “SEC”). Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere herein and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

As a result of these and other factors, we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

NOTE REGARDING COMPANY REFERENCES

Throughout this Quarterly Report on Form 10-Q, “Heat Biologics,” “the Company,” ‘we” and “our” refer to Heat Biologics, Inc.

1


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PART I—FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

HEAT BIOLOGICS, INC.

Consolidated Balance Sheets

    

June 30, 

December 31, 

2020

    

2019

(unaudited)

Current Assets

Cash and cash equivalents

$

20,668,241

$

9,039,887

Short-term investments

 

26,312,039

 

5,713,922

Accounts receivable

 

26,967

 

34,986

Prepaid expenses and other current assets

 

593,924

 

420,328

Total Current Assets

 

47,601,171

 

15,209,123

Property and Equipment, net

 

669,401

 

559,410

Other Assets

 

  

 

  

In-process R&D

 

5,866,000

 

5,866,000

Goodwill

 

1,452,338

 

1,452,338

Operating lease right-of-use asset

2,134,573

2,287,500

Finance lease right-of-use asset

306,643

187,573

Deposits

 

122,905

 

394,637

Total Other Assets

 

9,882,459

 

10,188,048

Total Assets

$

58,153,031

$

25,956,581

Liabilities and Stockholders' Equity

 

  

 

  

Current Liabilities

 

  

 

  

Accounts payable

$

779,642

$

1,503,342

Deferred revenue, current portion

 

1,915,924

 

3,410,319

Contingent consideration, current portion

 

1,531,636

 

1,124,970

Contingent consideration, related party - current portion

 

454,364

 

454,364

Operating lease liability, current portion

228,776

216,832

Finance lease liability, current portion

104,828

49,104

Accrued expenses and other liabilities

 

1,202,705

 

1,676,467

Total Current Liabilities

 

6,217,875

 

8,435,398

Long Term Liabilities

 

  

 

  

Other long-term liabilities

 

22,847

 

Derivative warrant liability

47,939

Deferred tax liability

 

361,911

 

361,911

Deferred revenue, net of current portion

 

200,000

 

200,000

Operating lease liability, net of current portion

 

1,402,962

 

1,519,574

Financing lease liability, net of current portion

 

215,112

 

142,667

Contingent consideration, net of current portion

1,969,538

1,653,197

Contingent consideration, related party - net of current portion

578,977

485,984

Total Liabilities

 

11,017,161

 

12,798,731

Commitments and Contingencies (Note 9 and 13)

 

  

 

  

Stockholders' Equity

 

  

 

  

Common stock, $.0002 par value; 250,000,000 shares authorized, 110,023,783 and 33,785,999 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

22,006

 

6,757

Additional paid-in capital

 

163,007,558

 

118,173,843

Accumulated deficit

 

(115,344,284)

 

(104,597,748)

Accumulated other comprehensive income (loss)

 

28,044

 

(11,250)

Total Stockholders' Equity - Heat Biologics, Inc.

 

47,713,324

 

13,571,602

Non-Controlling Interest

 

(577,454)

 

(413,752)

Total Stockholders' Equity

 

47,135,870

 

13,157,850

Total Liabilities and Stockholders' Equity

$

58,153,031

$

25,956,581

See Notes to Consolidated Financial Statements

2


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HEAT BIOLOGICS, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue:

Grant and licensing revenue

$

593,165

$

342,487

$

1,495,045

$

1,043,549

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

 

2,790,797

 

3,424,141

 

5,573,303

 

6,596,388

General and administrative

 

1,801,674

 

1,860,459

 

5,072,222

 

5,208,060

Change in fair value of contingent consideration

 

843,000

 

112,000

 

816,000

 

226,290

Total operating expenses

 

5,435,471

 

5,396,600

 

11,461,525

 

12,030,738

Loss from operations

 

(4,842,306)

 

(5,054,113)

 

(9,966,480)

 

(10,987,189)

Change in fair value of warrant liability

(24,363)

(1,002,073)

Investor relations expense

(66,767)

Interest income

 

56,080

 

124,793

 

108,790

 

275,645

Other income (expense), net

 

273,771

 

(15,585)

 

16,292

 

(7,264)

Total non-operating income (loss)

 

305,488

 

109,208

 

(943,758)

 

268,381

Net loss before income taxes

 

(4,536,818)

 

(4,944,905)

 

(10,910,238)

 

(10,718,808)

Income tax expense

 

 

 

 

(45,178)

Net loss

 

(4,536,818)

 

(4,944,905)

 

(10,910,238)

 

(10,763,986)

Net loss - non-controlling interest

 

(82,388)

 

(174,035)

 

(163,702)

 

(277,640)

Net loss attributable to Heat Biologics, Inc.

$

(4,454,430)

$

(4,770,870)

$

(10,746,536)

$

(10,486,346)

Net loss per share attributable to Heat Biologics, Inc.-

 

  

 

  

 

  

 

  

Net loss per share attributable to Heat Biologics, Inc.-basic and diluted

$

(0.05)

$

(0.14)

$

(0.15)

$

(0.32)

Weighted-average number of common shares used in net loss per share attributable to common stockholders-

 

  

 

  

 

  

 

  

Weighted-average number of common shares used in net loss per share attributable to Heat Biologics, Inc.—basic and diluted

 

87,930,846

 

33,255,724

 

72,606,461

 

33,240,529

Comprehensive loss:

 

  

 

  

 

  

 

  

Net loss

$

(4,536,818)

$

(4,944,905)

$

(10,910,238)

$

(10,763,986)

Unrealized (loss) gain on foreign currency translation

 

(179,510)

 

16,612

 

39,294

 

8,423

Total comprehensive loss

 

(4,716,328)

 

(4,928,293)

 

(10,870,944)

 

(10,755,563)

Comprehensive loss attributable to non-controlling interest

 

(82,388)

 

(174,035)

 

(163,702)

 

(277,640)

Comprehensive loss - Heat Biologics, Inc.

$

(4,633,940)

$

(4,754,258)

$

(10,707,242)

$

(10,477,923)

See Notes to Consolidated Financial Statements

3


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HEAT BIOLOGICS INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

Three Months Ended June 30, 2020

Accumulated

Other

Total

Common

Accumulated

Comprehensive

Non-Controlling

Stockholders'

    

Stock

    

APIC

    

Deficit

    

Income

    

Interest

    

Equity

Balance at March 31, 2020

$

15,627

$

137,692,553

$

(110,889,854)

$

207,554

$

(495,066)

$

26,530,814

ATM raise

6,375

25,564,043

25,570,418

Stock issuance costs

(639,826)

(639,826)

Stock-based compensation

373,008

373,008

Exercise of warrants

 

4

 

17,780

 

 

 

 

17,784

Other comprehensive loss

 

 

 

(179,510)

 

 

(179,510)

Net loss

 

 

 

(4,454,430)

 

 

(82,388)

 

(4,536,818)

Balance at June 30, 2020

 

$

22,006

 

$

163,007,558

 

$

(115,344,284)

 

$

28,044

 

$

(577,454)

 

$

47,135,870

Six Months Ended June 30, 2020

    

Accumulated

Other

Total

Common

Accumulated

Comprehensive

Non-Controlling

Stockholders'

    

Stock

    

APIC

    

Deficit

    

(Loss) Income

    

Interest

    

Equity

Balance at December 31, 2019

$

6,757

$

118,173,843

$

(104,597,748)

$

(11,250)

$

(413,752)

$

13,157,850

January 2020 investment offering, net of underwriters discounts

4,000

4,102,148

4,106,148

ATM raise

8,973

36,989,680

36,998,653

Issuance of common stock from vesting of restricted stock awards

328

(328)

Stock Issuance costs

(1,092,760)

(1,092,760)

Stock-based compensation

1,321,200

1,321,200

Exercise of warrants

 

1,501

 

2,740,892

 

 

 

 

2,742,393

Exchange of warrants

 

447

772,883

773,330

Other comprehensive income

 

 

 

 

39,294

 

 

39,294

Net loss

 

 

 

(10,746,536)

 

 

(163,702)

 

(10,910,238)

Balance at June 30, 2020

 

$

22,006

 

$

163,007,558

 

$

(115,344,284)

 

$

28,044

 

$

(577,454)

 

$

47,135,870

See Notes to Consolidated Financial Statements

4


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HEAT BIOLOGICS INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

Three Months Ended June 30, 2019

    

Accumulated

Other

Total

Common

Accumulated

Comprehensive

Non-Controlling

Stockholders'

    

Stock

    

APIC

    

Deficit

    

Loss

    

Interest

    

Equity

Balance at March 31, 2019

$

6,819

$

116,943,119

$

(90,295,656)

$

(28,093)

$

(150,209)

$

26,475,980

Issuance of common stock

 

3

 

18,894

 

 

 

 

18,897

Exercise of stock options

 

 

2,122

 

 

 

 

2,122

Stock-based compensation

 

 

386,787

 

 

 

 

386,787

Other comprehensive loss

 

 

 

 

16,612

 

 

16,612

Net loss

 

 

 

(4,770,870)

 

 

(174,035)

 

(4,944,905)

Balance at June 30, 2019

 

$

6,822

 

$

117,350,922

 

$

(95,066,526)

 

$

(11,481)

 

$

(324,244)

 

$

21,955,493

Six Months Ended June 30, 2019

    

Accumulated

Other

Total

Common

Accumulated

Comprehensive

Non-Controlling

Stockholders'

    

Stock

    

APIC

    

Deficit

    

Loss

    

Interest

    

Equity

Balance at December 31, 2018

$

6,499

$

114,883,135

$

(84,580,180)

$

(19,904)

$

(46,604)

$

30,242,946

Issuance of common stock

 

3

 

18,894

 

 

 

 

18,897

Exercise of stock options

 

 

2,122

 

 

 

 

2,122

Stock-based compensation

 

320

 

2,446,771

 

 

 

 

2,447,091

Other comprehensive loss

 

 

 

 

8,423

 

 

8,423

Net loss

 

 

 

(10,486,346)

 

 

(277,640)

 

(10,763,986)

Balance at June 30, 2019

 

$

6,822

 

$

117,350,922

 

$

(95,066,526)

 

$

(11,481)

 

$

(324,244)

 

$

21,955,493

See Notes to Consolidated Financial Statements

5


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HEAT BIOLOGICS, INC.

Consolidated Statements of Cash Flows

(Unaudited)

For the Six Months Ended

June 30, 

    

2020

    

2019

Cash Flows from Operating Activities

Net loss

$

(10,910,238)

$

(10,763,986)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Depreciation and amortization

 

153,994

 

122,012

Noncash lease expense

48,259

Noncash interest expense

9,316

Noncash investor relations expense

66,767

Stock-based compensation

 

1,321,200

 

2,447,091

Change in fair value of common stock warrants

1,002,073

Change in fair value of contingent consideration

 

816,000

 

226,290

Unrealized gain on investments

 

(61,013)

 

(5,588)

Increase (decrease) in cash arising from changes in assets and liabilities:

 

 

Accounts receivable

 

7,903

 

(49,186)

Prepaid expenses and other current assets

 

(174,274)

 

276,994

Accounts payable

 

(719,787)

 

1,004,864

Deferred revenue

 

(1,494,395)

 

(1,032,539)

Deferred tax liability

 

 

45,178

Accrued expenses and other liabilities

 

(435,338)

 

(503,417)

Other long-term liabilities

 

22,847

 

79,858

Deposits

 

271,732

 

(85,065)

Net Cash Used in Operating Activities

 

(10,074,954)

 

(8,237,494)

Cash Flows from Investing Activities

 

  

 

  

Purchase of short-term investments

 

(24,337,099)

 

(72,993)

Sale of short-term investments

3,799,995

Purchase of property and equipment

(211,401)

(45,459)

Proceeds from disposal of property and equipment

 

2,168

 

Net Cash Used in Investing Activities

 

(20,746,337)

 

(118,452)

Cash Flows from Financing Activities

 

  

 

  

Proceeds from public offering of common stock and warrants, net of issuance costs

 

6,600,970

 

Proceeds from the issuance of common stock, net of underwriting discounts and commissions

 

36,998,653

 

18,897

Proceeds from exercise of stock options

2,122

Stock issuance costs

 

(1,092,760)

 

Proceeds from PPP loan

702,000

Repayment of PPP loan

(702,000)

Repayments on principal of finance lease

(54,969)

Net Cash Provided by Financing Activities

 

42,451,894

 

21,019

Effect of exchange rate changes on cash and cash equivalents

 

(2,249)

 

8,882

Net Change in Cash and Cash Equivalents

 

11,628,354

 

(8,326,045)

Cash and Cash Equivalents – Beginning of Period

 

9,039,887

 

22,154,251

Cash and Cash Equivalents – End of Period

$

20,668,241

$

13,828,206

Supplemental Disclosure for Cash Flow Information:

 

  

 

  

Operating lease right-of-use assets obtained with lease liabilities

$

$

520,399

Finance lease right-of-use assets obtained with lease liabilities

$

173,822

$

Supplemental disclosure of non-cash investing and financing activities:

Allocation of proceeds from public offering to warrant liabilities

$

2,494,823

$

Cashless exercise of warrants classified as liabilities

$

2,742,393

$

Cashless exchange of warrants classified as liabilities

$

773,330

$

See Notes to Consolidated Financial Statements

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. Certain information or footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2020.

The consolidated financial statements as of and for the three and six months ended June 30, 2020 and 2019 are unaudited. The balance sheet as of December 31, 2019 is derived from the audited consolidated financial statements as of that date. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 (the “2019 Annual Report”).

The accompanying unaudited consolidated financial statements as of and for the three and six months ended June 30, 2020 and 2019 include the accounts of Heat Biologics, Inc. (“the Company”), and its subsidiaries, Pelican Therapeutics, Inc. (“Pelican”), Heat Biologics I, Inc. (“Heat I”), Heat Biologics III, Inc. (“Heat III”), Heat Biologics IV, Inc. (“Heat IV”), Heat Biologics GmbH, Heat Biologics Australia Pty Ltd., Zolovax, Inc., Skunkworx Bio, Inc. (formerly known as Delphi Therapeutics, Inc.) and Scorpion Biosciences, Inc. The functional currency of the entities located outside the United States of America (the foreign entities) is the applicable local currency of the foreign entities. Assets and liabilities of the foreign entities are translated at period-end exchange rates. Statement of operations accounts are translated at the average exchange rate during the period. The effects of foreign currency translation adjustments are included in other comprehensive loss, which is a component of accumulated other comprehensive loss in stockholders’ equity. All significant intercompany accounts and transactions have been eliminated in consolidation. At June 30, 2020 and December 31, 2019, Heat held 85% controlling interest in Pelican. Heat accounts for its less than 100% interest in accordance with U.S. GAAP. Accordingly, the Company presents non-controlling interest as a component of stockholders’ equity on its consolidated balance sheets and reports non-controlling interest net loss under the heading “net loss – non-controlling interest” on its consolidated statements of operations and comprehensive loss.

Liquidity and Capital Resources

The Company has an accumulated deficit of approximately $115.3 million as of June 30, 2020 and a net loss of approximately $4.5 million for the three months ended June 30, 2020 and has not generated significant operating 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 seeks marketing approval for, its product candidates. 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,

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 considering 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. On April 23, 2020, the Company filed a shelf registration statement on Form S-3 (the "Registration Statement"). Pursuant to the Registration Statement, the Company may offer and sell securities having an aggregate public offering price of up to $150 million. In connection with the filing of the Registration Statement, the Company also entered into an amendment to its sales agreement (“Common Stock Sales Agreement”) with B. Riley FBR, as sales agent, pursuant to which the Company may issue and sell shares of its common stock under an at-the-market (the “ATM”) offering program. Pursuant to the ATM, the Company will pay B. Riley FBR a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock. As of June 30, 2020, the Company had approximately $47.0 million in cash, cash equivalents and short-term investments, which it believes is sufficient to fund its operations for at least one year from date of this filing.

With the global spread of the ongoing novel coronavirus (“COVID-19”) pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. While the Company is experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, the Company’s business, financial condition, results of operations and growth prospects could be materially adversely affected. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses. With the global spread of the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its business. The extent to which the COVID-19 pandemic impacts the Company’s business, the clinical development of the Company’s products, the business of the Company’s suppliers and other commercial partners, the Company’s corporate development objectives and the value of and market for the Company’s common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease. The Company’s in human phase 1 trial of HS-130 was subject to an approximate 8 week enrollment pause in April and May 2020 due to lack of personal protection equipment (“PPE”) at a clinical site. The site ceased all non-critical/non-essential patient procedures until PPE supplies were available. Enrollment resumed and no delays in overall development milestones are expected for HS-130.

The global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces.

Cash and Cash Equivalents

The Company considers all cash and other highly liquid investments with initial maturities from the date of purchase of three months or less to be cash and cash equivalents.

Derivative Financial Instruments

The Company has issued common stock warrants in connection with the execution of certain equity financings. The fair value of the warrants, which were deemed to be derivative instruments, was recorded as a derivative liability under the provisions of ASC Topic 815 Derivatives and Hedging (“ASC 815”) because they are not considered indexed to the Company’s own stock. Subsequently, the liability is adjusted to fair value as of the end of each reporting period and the changes in fair value of derivative liabilities are recorded in the consolidated statements of operations and comprehensive loss under the caption “Change in fair value of warrant liability” See Note 3 for additional information.

The fair value of the warrants, including the warrants issued in connection with the January 2020 common stock offering and recorded as liability, was determined using the Monte Carlo simulation model, deemed to be an appropriate model due to the terms of the warrants issued.

The fair value of warrants was affected by changes in inputs to the Monte Carlo simulation model including the Company’s stock price, expected stock price volatility, the remaining term, and the risk-free interest rate. This model uses Level 3 inputs, including stock price volatility, in the fair value hierarchy established by ASC 820 Fair Value Measurement. At June 30, 2020, the fair value of such warrants was approximately $47.9 thousand, which is classified as a long-term derivative warrant liability on the Company’s consolidated balance sheets.

Short-term Investments

The Company’s short-term investments are equity securities and are carried at their fair value based on quoted market prices. Realized and unrealized gains and losses on equity securities are included in net earnings in the period earned or incurred.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, useful lives of fixed assets, contingent consideration, valuing warrants, income taxes and stock-based compensation. Actual results may differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform with current year presentation.

Segments

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed the operations and managed the business as one segment.

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Business Combinations

The Company accounts for acquisitions using the acquisition method of accounting, which requires that all identifiable assets acquired, and liabilities assumed be recorded at their estimated fair values. The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from acquired patented technology. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Goodwill and In-Process Research and Development

The Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. The Company determines the useful lives of definite-lived intangible assets after considering specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, and other economic facts; including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their estimated useful lives. Intangible assets that are deemed to have indefinite lives, including goodwill, are reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived intangibles, other than goodwill, consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis or when events or changes in circumstances indicate evidence a potential impairment exists, using a fair value-based test. Pursuant to ASU 2017-04, the Company must record a goodwill impairment charge if a reporting unit’s carrying value exceeds its fair value. No impairment existed at June 30, 2020.

In-process research and development, or IPR&D, assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. IPR&D assets represent the fair value assigned to technologies that the Company acquires, which at the time of acquisition have not reached technological feasibility and have no alternative future use. During the period that the assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval and the ability to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value.

Contingent Consideration

Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain milestones in the future (“contingent consideration”). Contingent consideration liabilities are measured at their estimated fair value as of the date of acquisition, with subsequent changes in fair value recorded in the consolidated statements of operations. The Company estimates the fair value of the contingent consideration as of the acquisition date using the estimated future cash outflows based on the probability of meeting future milestones. The milestone payments will be made upon the achievement of clinical and commercialization milestones as well as single low digit royalty payments and payments upon receipt of sublicensing income. Subsequent to the date of acquisition, the Company reassesses the actual consideration earned and the probability-weighted future earn-out payments at each balance

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

sheet date. Any adjustment to the contingent consideration liability will be recorded in the consolidated statements of operations. Contingent consideration liabilities expected to be settled within 12 months after the balance sheet date are presented in current liabilities, with the non-current portion recorded under long term liabilities in the consolidated balance sheets.

Research and Development

Research and development includes costs associated with developmental products not yet approved by the FDA as well as costs associated with bringing developmental products into advanced phase clinical trials as incurred. These costs consist primarily of pre-manufacturing and manufacturing drug costs, clinical trial execution, investigator payments, license fees, salaries, stock-based compensation and related personnel costs. Other costs include fees paid to consultants and outside service providers related to the development of the Company’s product candidates and other expenses relating to the design, development, and testing and enhancement of its product candidates.

Revenue Recognition

The Company earns substantially all its revenue from a research grant from the Cancer Prevention and Research Institute of Texas (CPRIT). The Company’s contract with CPRIT relates to developing a human TNFRSF25 agonist antibody for use in cancer patients through research and development efforts and a noncommercial license from CPRIT-funded research to CPRIT and other government agencies and institutions of higher education in Texas.

CPRIT advances grant funds upon request by the Company consistent with the agreed upon amounts and schedules as provided in the contract. Funds received are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is earned and recognized when qualifying costs are incurred.

Prepaid Expenses and Other Current Assets

The Company’s prepaid expenses and other current assets consist primarily of the amount paid in advance for manufacturing activities, clinical trial support, and insurance.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that utilization is not presently more likely than not.

Significant Accounting Policies

The significant accounting policies used in preparation of these interim financial statements are disclosed in the 2019 Annual Report and have not changed significantly since such filing.

Recently Issued Accounting Pronouncements

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force), which addresses the accounting for the

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements upon adoption.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, Income Taxes, and also improves consistency of application by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of this standard but does not expect it to have a material impact on its consolidated financial statements upon adoption.

In November 2019, the FASB issued ASU No. 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606). The guidance identifies, evaluates, and improves areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided. The amendments in that ASU expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. For entities that have adopted the amendments in Update 2018-07, the updated guidance is effective for annual periods beginning after December 15, 2019. The Company adopted this ASU in the first quarter of 2020 and there was no material effect on the recognition or measurement of revenue in the Company’s financial statements.

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 adopted this ASU in the first quarter of 2020 and there was no material effect on the recognition or measurement of revenue in the Company’s financial statements.

2. Acquisition of Pelican Therapeutics

In 2017, the Company consummated the acquisition of 80% of the outstanding equity of Pelican, a related party, and Pelican became a majority owned subsidiary of the Company. During the quarter ended March 31, 2018, cash consideration of approximately $300,000 was distributed to the participating Pelican stockholders and the remainder of approximately $200,000 for certain Pelican liabilities not satisfied was recognized as other income in the statements of operations and comprehensive loss for the period. In October 2018, 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. The stock exchange resulted in the Company increasing its controlling ownership in Pelican from 80% to 85%.

Under the Pelican stock acquisition agreement, the Company is also obligated to make future payments based on the achievement of certain clinical and commercialization milestones, as well as low single digit royalty payments and payments upon receipt of sublicensing income. The fair value of these future milestone payments is reflected in the contingent consideration account under current liabilities with the non-current portion under long term liabilities on the balance sheet. The estimated fair value of the contingent consideration was determined using a probability-weighted income approach, at a discount of 8.87% based on the median yield of publicly traded non-investment grade debt of companies in the pharmaceutical industry. The Company estimates the fair value of the contingent consideration on a quarterly basis. At the time of the Pelican acquisition, the Company’s CEO and certain affiliated entities as well as two of the Company’s directors and certain affiliated entities directly or indirectly owned shares of Pelican common stock purchased by the Company. As a result, approximately 20.4% of any such milestone payments will be paid to the Company’s CEO, 2.0% to Edward B. Smith, and 0.3% to John Monahan. On June 22, 2020, we achieved the first milestone when we dosed the first patient in the first Phase 1 clinical trial of PTX-35.

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Goodwill was calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill resulting from this acquisition related largely to synergies expected from combining the operations. The goodwill is not deductible for income tax purposes. In-process R&D assets are treated as indefinite-lived until the completion or abandonment of the associated R&D program, at which time the appropriate useful lives will be determined. The Company calculated the fair value of the non-controlling interest acquired in the acquisition as 20% of the equity interest of Pelican, adjusted for a minority interest discount.

As discussed in Note 10, in May 2016, Pelican was awarded a $15.2 million CPRIT Grant from CPRIT for development of Pelican’s lead product candidate, PTX-35. The CPRIT Grant is expected to support Pelican in developing PTX-35 through a Phase 1 clinical trial designed to evaluate PTX-35 in combination with other immunotherapies.

3. Fair Value of Financial Instruments

The carrying amount of certain of the 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 changes in the fair value of liability classified warrants are included in net loss for the respective periods. Because some of the inputs to our valuation model are either not observable or are not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy. The Company’s cash equivalents are classified within Level I of the fair value hierarchy.

As June 30, 2020 and December 31, 2019, 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 quarters ended June 30, 2020 or 2019.

In January 2020, the Company issued warrants in connection with the public offering of common stock (the “January 2020 Warrants”). Pursuant to the terms of the warrants, the warrants are not considered indexed to the Company’s own stock and therefore are required to be measured at fair value and reported as a liability in the consolidated balance sheets. Additionally, upon the closing of the January 2020 offering, 3,357,166 warrants were required to be classified as a liability. The fair value of the warrant liability is based on the Monte Carlo methodology. The Company is required to revalue the warrants at each reporting date with any changes in fair value recorded on our consolidated statement of operations and

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

comprehensive loss. The valuation of the warrants is classified under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. In order to calculate the fair value of the warrants, certain assumptions were made, including the selling price or fair market value of the underlying common stock, risk-free interest rate, volatility, and remaining life. Changes to the assumptions could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing a weighted average of comparable published betas of peer companies. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.

The Black Scholes model was used to value these warrants before the reclassification and the Monte Carlo simulation was used to value the warrants after reclassification. The following weighted average assumptions were used:

January 21, 2020

Current stock price

$

0.33

Estimated volatility of future stock price

124

%

Risk free interest rate

1.53

%

Expected term

3.7

years

During the six months ended June 30, 2020, 3,291,666 warrants were exchanged for 2,238,332 shares of common stock. As of June 30, 2020, there were a total of 73,000 warrants outstanding that were reported as a liability in the consolidated balance sheet.

The fair value of financial instruments measured on a recurring basis is as follows:

As of June 30, 2020

Description

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

Short-term investments

$

26,312,039

$

26,312,039

 

 

Liabilities:

 

  

 

  

 

  

 

  

Contingent consideration

$

4,534,515

 

$

4,534,515

Warrant liability

$

47,939

 

 

$

47,939

As of December 31, 2019

Description

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

Short-term investments

$

5,713,922

$

5,713,922

 

 

Liabilities:

 

  

 

  

 

  

 

  

Contingent consideration

$

3,718,515

 

$

3,718,515

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 six months ended June 30, 2020:

Contingent 

 

Warrant

    

Consideration

 

Liability

Balance at December 31, 2019

$

3,718,515

$

Fair value at issuance

2,494,823

Reclassification of warrants from equity to liability due to modification

869,078

Reclassification of warrant liability to equity upon exercise of warrants

(2,742,393)

Reclassification of warrant liability to equity upon exchange of warrants

(1,575,642)

Change in fair value

 

816,000

1,002,073

Balance at June 30, 2020

$

4,534,515

$

47,939

The change in the fair value of the contingent consideration for the six months ended June 30, 2020 was primarily due to the increase in the estimated probability of achieving the initial milestone, a change in discount rate and the passage of time on the fair value measurement. The change in fair value of the warrant liability for the six months ended June 30, 2020 was primarily due to increases in the fair value of the underlying stock. Adjustments associated with the change in fair value of contingent consideration and warrant liability are included in the Company’s consolidated statement of operations and comprehensive loss.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of contingent consideration classified as Level 3 as of June 30, 2020:

As of June 30, 2020

Valuation 

Significant 

Weighted Average 

    

 Methodology

    

 Unobservable Input

    

 (range, if applicable)

Contingent Consideration

 

Probability weighted income approach

 

Milestone dates

 

2020-2031

 

 

Discount rate

 

8.87%

 

  

 

Probability of occurrence

 

2.6% to 100%

The following table presents quantitative information about the inputs used in the Monte Carlo simulation for the Company’s fair value measurement of the warrant liability classified as Level 3 as of June 30, 2020:

June 30, 2020

Current stock price

$

0.84

Estimated volatility of future stock price

223.90

%

Risk free interest rate

0.18

%

Contractual term

0.73

years

The Company measures certain non-financial assets on a non-recurring basis, including goodwill and in-process R&D. As a result of those measurements, during the year ended December 31, 2019, goodwill with a total carrying value of $2.2 million was written down to its estimated fair value of $1.5 million and an impairment charge of $0.7 million was recorded. The Company uses a present value technique to estimate the fair value of these assets. This analysis requires significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital.

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Short-Term Investments

Short-term investments consist of equity securities with a maturity of greater than three months when acquired. The Company holds its securities at fair value as of June 30, 2020 and December 31, 2019. Unrealized gains and losses on securities are reported in the statement of operations and comprehensive loss. Short-term investments at June 30, 2020 and December 31, 2019 consisted of mutual funds with fair values of $26.3 million and $5.7 million, respectively.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following at:

June 30, 

December 31, 

    

2020

    

2019

Prepaid manufacturing expense

$

367,262

$

148,156

Prepaid insurance

 

11,905

 

120,851

Other prepaid expenses and current assets

 

214,757

 

132,162

Other current assets

19,159

$

593,924

$

420,328

6. Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives, ranging generally from five to seven years. Expenditures for maintenance and repairs are charged to expense as incurred.

Property and equipment consist of the following at:

June 30, 

December 31, 

    

2020

    

2019

Lab equipment

$

1,496,969

$

1,311,853

Computers

 

62,380

 

53,065

Furniture and fixtures

 

62,747

 

50,453

Leasehold improvements

 

17,403

 

14,259

Total

 

1,639,499

 

1,429,630

Accumulated depreciation

 

(970,098)

 

(870,220)

Property and equipment, net

$

669,401

$

559,410

Depreciation expense was $56,670 and $99,242 for the three and six months ended June 30, 2020, respectively, and $54,826 and $122,012 for the three and six months ended June 30, 2019, respectively.

7. Goodwill and In-Process R&D

Goodwill of $2.2 million and in-process R&D of $5.9 million were recorded in connection with the acquisition of Pelican, as described in Note 2. The Company performs an annual impairment test at the reporting unit level as of April 1st of each fiscal year. As of April 1, 2020, the Company qualitatively assessed whether it is more likely than not that the respective fair value of the reporting unit is less than its carrying amount, including goodwill. Based on that assessment, the Company

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

determined that this condition does not exist. As such, performing the first step of the two-step test impairment test was unnecessary. No impairment was recorded during the quarter ended June 30, 2020.

However, during the year ended December 31, 2019, the Company experienced a sustained decline in the quoted market price of the Company’s common stock and as a result the Company determined that as of December 31, 2019 it was more likely than not that the carrying value of these acquired intangibles exceeded their estimated fair value. Accordingly, the Company performed an interim impairment analysis as of that date using the income approach. This analysis required significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital. Pursuant to ASU 2017-04, the Company recorded a goodwill impairment charge for the excess of the reporting unit’s carrying value over its fair value. During the year ended December 31, 2019, goodwill with a total carrying value of $2.2 million was written down to its estimated fair value of $1.5 million and an impairment charge of $0.7 million was recorded.

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

June 30, 

December 31, 

    

2020

    

2019

Accrued clinical trial expenses

$

447,674

$

1,156,618

Compensation and related benefits

183,498

303,870

Other expenses

 

571,533

 

215,979

$

1,202,705

$

1,676,467

9. Stockholders’ Equity

Underwritten Registered Offering

On January 21, 2020, the Company closed on a public offering consisting of 20,000,000 shares of common stock together with Warrants to purchase 10,000,000 shares of common stock. The gross proceeds to the Company from this offering were approximately $7,000,000, before deducting underwriting discounts, commissions, and other offering expenses.

The Company has accounted for the warrants as liabilities and recorded them at fair value in our consolidated balance sheets (see Note 3).

At-The-Market-Offering

From January 1, 2020 to June 30, 2020 the Company sold approximately 44,864,076 shares of common stock under the Common Stock Sales Agreement, as applicable, at an average price of approximately $0.82 per share, raising aggregate net proceeds of approximately $36,072,869 after deducting an aggregate commission of approximately 3%.

Common Stock Warrants

During the six months ended June 30, 2020, 9,992,500 January 2020 warrants were exercised for 7,494,375 shares of common stock, and 3,291,666 previously outstanding warrants were exchanged for 2,238,332 shares of common stock. As of June 30, 2020, the Company has outstanding warrants to purchase 5,746,564 shares of common stock issuable at a weighted-average exercise price of $2.04 per share.

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HEAT BIOLOGICS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the warrant activity of the Company’s common stock warrants.

    

Common Stock 

Warrants

Outstanding, December 31, 2019

 

9,030,730

Issued

 

10,000,000

Exercised

 

(9,992,500)

Exchanged

 

(3,291,666)

Outstanding, June 30, 2020

 

5,746,564

Equity Compensation Plans

The Company maintains various equity compensation plans with substantially similar provisions under which it may award employees, directors and consultants incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock based awards with terms established by the Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the plans. In July 2019, the Company’s shareholders approved an increase of 4,000,000 shares in the number of shares available for grant. At the 2020 Special Meeting of Stockholders, the stockholders approved an amendment to the Plan to increase the number of shares by 4,000,000. As of June 30, 2020, there were 2,310,884 shares remaining available for grant under these plans.

Accounting for Stock-Based Compensation:

Stock Compensation Expense - For the three and six months ended June 30, 2020, the Company recorded $0.4 million, and $1.3 million of stock-based compensation expense, respectively. For the three and six months ended June 30, 2019, the Company recorded $0.4 million, and $2.4 million of stock-based compensation expense respectively. No compensation expense of employees with stock awards was capitalized during the three and six months ended June 30, 2020 and 2019.

Stock Options - Under the Plan, the Company has issued stock options. A stock option granted gives the holder the right, but not the obligation to purchase a certain number of shares at a predetermined price for a specific period of time. The Company typically issues options that vest over four years in equal installments beginning on the first anniversary of the date of grant. Under the terms of the Plan, the contractual life of the option grants may not exceed ten years. During the six months ended June 30, 2020 and 2019, the Company issued options that expire ten years from the date of grant.

Fair Value Determination – The Company has used the Black-Scholes-Merton option pricing model to determine fair value of our stock option awards on the date of grant. The Company will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.

The following weighted-average assumptions were used for option grants during the three and six months ended June 30, 2020 and 2019:

Volatility 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 a limited to no trading history for its common stock.

Expected life of optionsThe 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

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(Unaudited)

term. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Risk-free interest rateThe rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with the expected life of the stock options.

Dividend yieldThe expected dividend yield was considered to be 0% in the option pricing formula since the Company had not paid any dividends and had no plan to do so in the future.

ForfeituresAs required by ASC 718, the Company reviews recent forfeitures and stock compensation expense. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Additionally, the Company conducts a sensitivity analysis of the forfeiture rate. Based on these evaluations the Company currently does not apply a forfeiture rate.

The following table summarizes weighted-average assumptions used in our calculations of fair value for the six months ended June 30, 2020 and 2019:

    

2020

2019

Dividend yield

 

%  

%

Expected volatility

 

89.61

%  

131.10

%

Risk-free interest rate

 

0.86

%  

2.50

%

Expected lives (years)

 

5.9

years

5.5

years

Stock Option Activity - The weighted-average fair value of options granted during the six months ended June 30, 2020 and 2019, as determined under the Black-Scholes valuation model, was $0.42 and $0.80, respectively.

The following is a summary of the stock option activity for the six months ended June 30, 2020:

    

    

Weighted

 

Weighted

Average

 

Average

Exercise

 

Remaining

Shares

Price

 

Contractual Life

Stock options outstanding at December 31, 2019

3,063,636

$

2.56

Granted

 

2,567,000

 

0.58

Forfeited/Expired

 

(38,200)

 

2.20

Stock options outstanding at June 30, 2020

 

5,592,436

$

1.65

8.9

Years

Stock options exercisable at June 30, 2020

2,357,128

$

2.83

8.2

Years

Unrecognized compensation expense related to unvested stock options was $2.1 million as of June 30, 2020, which is expected to be recognized over a weighted-average period of 1.7 years and will be adjusted for forfeitures as they occur.

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Restricted Stock - Under the Plan, the Company has issued restricted stock. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted stock issued to members of our Board of Directors and Executives vest 50% on grant date, 30% on the first anniversary and 10% each anniversary thereafter. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.

The following is a summary of restricted stock award activity for the three months ended June 30, 2020:

Weighted

Average

Shares

Fair Value

Restricted stock at December 31, 2019

1,254,653

$

0.86

Granted

2,380,000

0.46

Vested

(1,622,720)

0.62

Restricted stock at June 30, 2020

2,011,933

$

0.58

Restricted Stock Units - Under the Plan, the Company issued time-based RSUs. RSUs are not actual shares, but rather a right to receive shares in the future. The shares are not issued and the employee cannot sell or transfer shares prior to vesting and has no voting rights until the RSUs vest. The employees' time-based RSUs vest 25% on the award date and 25% each anniversary thereafter. The grant date fair value of the RSUs is equal to the closing market price of our common stock on the grant date. The Company recognizes the grant date fair value of RSUs of shares the Company expects to issue as compensation expense ratably over the requisite service period.

The following is a summary of stock unit activity for the three months ended June 30, 2020:

Weighted

Average

Shares

Fair Value

RSUs at December 31, 2019

30,026

$

4.33

Vested

 

(16,406)

 

4.73

Cancelled

 

(338)

 

5.20

RSUs at June 30, 2020

 

13,282

$

3.80

10. Grant Revenue

In June 2016, Pelican entered into a cancer research grant contract or Grant Contract with CPRIT, under which CPRIT awarded a grant not to exceed $15.2 million for use in developing cancer treatments by targeting a novel T-cell costimulatory receptor (namely, TNFRSF25). The Grant Contract covers a period from June 1, 2016 through November 30, 2020, as amended. The first tranche of funding of $1.8 million was received in May 2017, and a second tranche of funding of $6.5 million was received in October 2017 and a third tranche of funding of $5.4 million was received in December 2019. The remaining $1.5 million will be awarded after the Company has fulfilled every requirement of the grant and the grant has been approved to be closed.

The grant is subject to customary CPRIT funding conditions including a matching funds requirement where Pelican will match $0.50 for every $1.00 from CPRIT. Consequently, Pelican is required to provide $7.6 million in matching funds over the life of the project. Upon commercialization of the product, the terms of the grant require Pelican to pay tiered royalties in the low to mid-single digit percentages. Such royalties reduce to less than one percent after a mid-single-digit multiple of the grant funds have been paid to CPRIT in royalties.

Through June 30, 2020, $11.8 million of grant funding received to date has been recognized as revenue.

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11. Net Loss Per Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the periods. Fully diluted net loss per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and warrants that are computed using the treasury stock method.

For the quarters ended June 30, 2020 and 2019, 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.

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The following table reconciles net loss to net loss attributable to Heat Biologics, Inc.:

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Net loss

$

(4,536,818)

$

(4,944,905)

$

(10,910,238)

$

(10,763,986)

Net loss - Non-controlling interest

 

(82,388)

 

(174,035)

 

(163,702)

 

(277,640)

Net loss attributable to Heat Biologics, Inc.

$

(4,454,430)

$

(4,770,870)

$

(10,746,536)

$

(10,486,346)

Weighted-average number of common shares used in net loss per share attributable to common stockholders —basic and diluted

 

87,930,846

 

33,255,724

 

72,606,461

 

33,240,529

Net loss per share attributable to Heat Biologics, Inc —basic and diluted

$

(0.05)

$

(0.14)

$

(0.15)

$

(0.32)

The following potentially dilutive securities were excluded from the calculation of diluted net loss per share in the three and six months ended June 30, 2020 and 2019 due to their anti-dilutive effect:

    

2020

    

2019

Outstanding stock options

 

5,592,436

 

3,008,754

Restricted stock subject to forfeiture and restricted stock units

 

2,025,215

 

838,679

Outstanding common stock warrants

 

5,746,564

 

9,030,730

12. Income Tax

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As of June 30, 2020, $0.9 million of the deferred tax asset arising from the generation of 2018 net operating losses has been utilized to offset a portion of the previously recorded deferred tax liability associated with indefinite lived R&D in process costs. Specifically, the prior & current year net operating losses gave rise to an indefinite-lived deferred tax asset which provided sufficient support to offset a portion of the Company’s indefinite-lived deferred tax liability.

In accordance with FASB ASC 740, Accounting for Income Taxes, the Company reflects in the accompanying unaudited condensed consolidated financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered ‘more-likely-than-not’ that the position taken will be sustained by a taxing authority. As of June 30, 2020, and December 31, 2019, 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 operations and comprehensive loss. As of June 30, 2020, and December 31, 2019, the Company had no such accruals.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act includes numerous provisions such as permitting NOL carryovers to offset 100% of taxable income for taxable years beginning before 2021 and a technical correction to the Tax Cuts and Jobs Act allowing immediate expensing for Qualified Improvement Property through bonus depreciation. At this time management does not expect a substantial impact to deferred taxes.

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The Company has determined, based on its preliminary analysis, that the provisions of CARES Act are not expected to impact our 2020 financials. The Company will monitor the updates, both to our business as well as guidance issued with respect to CARES Act that could impact the current interpretation of the issued provisions.

13. Leases

Effective January 1, 2019, the Company adopted ASC 842 using the optional transition method, applying no practical expedients. In accordance with the optional transition method, the Company did not recast the prior period consolidated financial statements. The lease term is the noncancelable period of the lease. There are no termination provisions or renewal periods reasonably certain of exercise or options controlled by the lessor.

The Company conducts its operations from leased facilities in Morrisville, North Carolina, and San Antonio, Texas, the leases for which will expire in 2027 and 2023. The leases are for general office space and require the Company to pay property taxes, insurance, common area expenses and maintenance costs.

On October 1, 2019, the commencement date of our Morrisville, North Carolina lease, a right-of-use asset of $2.0 million and a liability of $1.4 million were recorded on our balance sheet. Total cash paid for operating leases during the three and six months ended June 30, 2020 was $0.08 million and $0.2 million and is included within cash flows from operating activities within the consolidated statement of cash flows.

The Company leases furniture and specialized lab equipment under finance leases. The related right-of-use assets are amortized on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. The effective interest rate is 6.17%.

The Company’s lease cost is reflected in the accompanying statements of operations and comprehensive loss as follows:

For the Three Months Ended June 30, 2020

For the Six
Months Ended
June 30, 2020

Operating lease cost

$

103,956

$

207,912

Finance lease cost

Amortization of lease assets

29,725

54,752

Interest on lease liabilities

4,903

9,315

Total finance lease cost

$

34,628

$

64,067

The weighted average remaining lease term and incremental borrowing rate as of June 30, 2020 were as follows:

Weighted average remaining lease term

Operating leases

6.5

years

Finance leases

2.5

years

Weighted average discount rate

Operating leases

6.55

%

Finance leases

6.17

%

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(Unaudited)

Maturities of operating and finance lease liabilities as of June 30, 2020 were as follows:

Operating Leases

    

Finance Leases

    

Total

2020 (excluding the six months ended June 30, 2020)

$

161,619

$

60,342

$

221,961

2021

330,032

120,684

450,716

2022

338,960

&#