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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2021

OR

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

26-2844103

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification Number)

 

 

627 Davis Drive, Suite 400

 

Morrisville, NC

27560

(Address of Principal Executive Offices)

(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

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0002 par value per share

Common Stock purchase rights

HTBX

NYSE American LLC

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 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

Accelerated filer

 

 

Non-accelerated filer

þ

Smaller reporting company

 

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 standard provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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 June 30, 2021, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $169,016,850 (based upon the closing sale price of the registrant’s common stock reported on that date). This calculation excludes shares held by the registrant’s current directors and executive officers and stockholders that the registrant has concluded are affiliates of the registrant.

As of March 9, 2022, the issuer had 25,649,824 shares of common stock outstanding.

Documents incorporated by reference: None.

Table of Contents

HEAT BIOLOGICS, INC.

FORM 10-K

TABLE OF CONTENTS

 

 

Page

 

 

PART I

Item 1.

Business

3

Item 1A.

Risk Factors

30

Item 1B.

Unresolved Staff Comments

60

Item 2.

Properties

60

Item 3.

Legal Proceedings

61

Item 4.

Mine Safety Disclosures

61

 

 

PART II

Item 5.

Market for Registrant’s Common Equity-Related Stockholder Matters and Issuer Purchases of Equity Securities

61

Item 6.

[Reserved]

62

Item 7.

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

62

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

75

Item 8.

Financial Statements and Supplementary Data

75

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

75

Item 9A.

Controls and Procedures

75

Item 9B.

Other Information

76

Item 9C.

Disclosure Regarding Foreign Jurisdictions That Prevent Inspections

76

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

77

Item 11.

Executive Compensation

83

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

93

Item 13.

Certain Relationships and Related Transactions, and Director Independence

94

Item 14.

Principal Accountant Fees and Services

95

 

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

96

Item 16.

Form 10-K Summary

102

Table of Contents

PART I

Forward-Looking Statements

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.

Summary Risk Factors

Our business faces significant risks and uncertainties of which investors should be aware before making a decision to invest in our common stock. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected. The following is a summary of the more significant risks relating to the Company. A more detailed description of our risk factors is set forth below under the caption “Risk Factors” in Item 1A in Part I of this Annual Report.

Risks Relating to Our Company, Financial Position and Capital Requirements

We have a limited operating history with which to compare and have incurred significant losses since our inception and expect to incur substantial and increasing losses for the foreseeable future.
We have a limited operating history conducting commercial development of bioanalytics, process development and manufacturing activities, which may limit the ability of investors to make an informed investment decision.
We will need to raise additional capital to support our long-term business plans.
We do not anticipate generating revenue for many years.
Business disruptions including coronavirus could adversely impact our business.
We currently have no product revenues and may not generate revenue at any time in the near future, if at all.
We are substantially dependent on the success of our product candidates.

Risks Relating to Our Clinical Development, Regulatory Approval and Commercialization

If we experience delays in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented
If we do not obtain the necessary regulatory approvals, we will not be able to sell our product candidates.
Our product candidates are in the early stages of development and each will require extensive testing and funding.
Clinical trials are very expensive, time-consuming, and difficult to design and implement.
Misidentification of cell lines could impact our clinical development and intellectual property rights.

1

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There is uncertainty as to market acceptance of our technology and product candidates.
We currently rely upon our gp96 platform for development of many of our product candidates.
We may not be able to compete successfully for market share against other drug companies.
We rely on our employees and third parties for our development program.
For our ongoing clinical trial of HS-110, we are administering our product candidates, in combination with other immunotherapy agents and any problems obtaining the other immunotherapy agents could result in a delay or interruption in our clinical trials.
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.
Adverse effects resulting from other immunotherapy drugs or therapies could also negatively affect the perceptions of our product candidates.
We will continue to be subject to ongoing and extensive regulatory requirements.
We have no experience selling, marketing or distributing products, and have no internal capability to do so.
We may not be successful in establishing and maintaining strategic partnerships.
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 ability to generate product revenues will be diminished if our products sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.
Legislative and regulatory changes affecting the health care industry could adversely affect our business.
We may incur substantial liabilities.
The U.S. government may have “march-in rights” to certain of our intellectual property.
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.
We rely extensively on our information technology systems and are vulnerable to damage and interruption and any failure to maintain the security of information
Any failure to maintain the security of information relating to our customers, employees and suppliers could expose us to litigation, government enforcement actions and costly response measures.
We may face particular data protection, data security and privacy risks in connection with the European Union’s Global Data Protection Regulation and other privacy regulations.
Our operating results may be adversely affected by fluctuations in foreign currency exchange rates.
We could be adversely affected by violations of the U.S. and other worldwide anti-bribery laws.

Risk Related to the Pending Merger and Elusys

If the conditions to the Merger are not met, the Merger will not occur.
The combined company may not experience the anticipated strategic benefits of the Merger.
Our Chief Executive Officer and Chairman of the Board of Directors has a conflict of interest that may influence him to support funding of Elusys.
We may be unable to successfully integrate the Elusys businesses with our current management and structure.
Elusys is substantially dependent on various US Government contracts that are material to its business.
We do not anticipate generating revenue from Anthim sales, upon consummation of the pending acquisition of Elusys, for several years.
Our ability to generate product revenues from Anthim is dependent upon government spending and compliance with the government contracts.
To date, Anthim has been sold to a limited number of customers.
In order to develop Anthim, upon consummation of the pending acquisition of Elusys, we will have to devote significant resources to Anthim.
Elusys has been manufacturing the drug product with one manufacturer pursuant to the terms of an exclusive manufacturing agreement.

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Intellectual Property Risk Factors

We have limited protection for our intellectual property, which could impact our competitive position.
The technology we license, our products or our development efforts may be found to infringe upon third-party intellectual property rights.
We rely on a license to use various technologies that are material to our business.
We may be unable to generate sufficient revenues to meet the minimum annual payments or developmental milestones required under our license agreements.

General Risk Factors

Our stock price has fluctuated in the past, has recently been volatile.
If our acquired intangible assets become impaired, we may be required to record a significant charge to earnings.
We rely on key executive officers and scientific, regulatory, and medical advisors.
Our failure to meet the continued listing requirements of The New York Stock Exchange could result in a de-listing of our common stock.
Our shares of common stock are from time to time thinly traded.
Our need for future financing may result in the issuance of additional securities that will cause dilution.

Item 1.       Business

Overview

We are a fully integrated biopharmaceutical company specializing in the end-to-end development and commercialization of therapies that arm the immune system against a wide range of diseases including cancer and infectious disease. Our newly focused discovery efforts enhance our ability to support in-house development and nomination of biologics for our preclinical and clinical development efforts.  Furthermore, our Scorpion Biological Services, Inc. (“Scorpion”) subsidiary enables us to enhance efficiency and decrease our dependence on third-party contract research and development biomanufacturing organizations (CDMO) as we advance into early and late-stage clinical trials and progress our research, development, and commercial pipeline. Finally, our anticipated acquisition of Elusys Therapeutics, Inc. supports our ability to develop critical therapeutic innovations such as RapidVax® for the biodefense sector. These efforts reinforce our goal of decreasing the time and increasing the efficiency of drug development to accelerate the delivery and commercialization of novel immune activating therapies.

Our gp96 platform and RapidVax® platforms are designed to leverage the ability of gp96 to constitutively transport predefined antigens of interest to antigen presenting cells (APCs) that in turn stimulate an antigen-specific immune response that includes B cells, CD4+ T-cells, and cytotoxic CD8+ T-cells. HS-110 (viagenpumatucel-L), an allogeneic (“off-the-shelf”) therapy, is our lead gp96 asset having completed Phase 2 enrollment of a non-small cell lung cancer (NSCLC) clinical trial. HS-130, another gp96 platform asset, is engineered to express the extracellular domain of OX40 ligand as a fusion protein (OX40L-Ig) to enhance T-cell expansion and memory cell formation. The safety of HS-130 is being evaluated in a Phase 1 solid tumor trial with findings to support the development of our RapidVax platform.

RapidVax is designed as a programmable vaccine expressing gp96-Ig and OX40L-Ig that can be manufactured in bulk, stockpiled, and rapidly customized upon identification of a biological threat to enable an accelerated time to clinic and to harness shared development, clinical safety, and manufacturing synergies. We have also formed a Biothreat Advisory Board to aid in advancing these biodefense initiatives.

Our Death Receptor 3/TNF receptor superfamily member 25 (DR3/TNFRSF25) platform is focused on the development of agents targeting this cellular receptor. In the absence of a danger or activating signal, co-stimulation of DR3 on T-cells results in the selective expansion of immunosuppressive Tregs that can reduce inflammation.  Conversely, co-stimulation of DR3 on T-cells in the presence of a danger or activating signal (arising from injury, infection, or cancer) promotes the expansion of inflammatory effector T-cells that play a critical role in mediating anti-tumor and anti-pathogen responses.  We believe therapeutic targeting of this pathway has the potential to shift the balance between immunosuppression and

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inflammation and therefore restore stability to the immune system.  PTX-35, a monoclonal antibody, is under evaluation in an open-label, dose escalation, Phase 1 clinical trial assessing safety and tolerability in patients with advanced solid tumors refractory to, or otherwise ineligible for standard of care.

Recent Developments

On December 20, 2021, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with our wholly owned subsidiary (“Merger Sub”), Elusys Therapeutics, Inc., a Delaware corporation (“Elusys”) and Fortis Advisors LLC, pursuant to which, subject to certain conditions, we will acquire Elusys through the merger (the “Merger”) of Merger Sub with Elusys. Following the closing of the Merger, Elusys will become a wholly owned subsidiary. Elusys is a company focused on the commercialization of ANTHIM® (obiltoxaximab), which is a monoclonal antibody antitoxin for the “Category A” biological warfare and bioterrorism threat anthrax designed to combat a potential anthrax attack. Elusys has key expertise in the development of biodefense agents having received over $250M of non-dilutive advanced- development contracts from National Institutes of Health (NIH), Department of Defense (DoD), and the Biomedical Advanced Research and Development Authority (BARDA) to support the development of Anthim. To prepare for the possibility of the use of Bacillus anthracis as a biological weapon, the U.S. government acquires and maintains equipment and medical countermeasures for anthrax treatment and prevention as part of CDC’s Strategic National Stockpile (SNS). The SNS is a national repository of large quantities of medicines, vaccines, and other medical supplies stored in strategic locations around the nation. Anthim has also been delivered to the US Strategic National Stockpile (“SNS”) as the result of a successful, multi-year partnership with the U.S. government. Following clearance by the U.S. Food and Drug Administration (“FDA”) in March 2016 and orphan drug exclusivity for the treatment of inhalational anthrax due to Bacillus anthracis inhalation in combination with antibiotics, and as a prophylaxis when alternative therapies are not available or are not appropriate. In July 2020, Health Canada approved ANTHIM’s New Drug Submission (NDS) for the treatment of inhalation anthrax. ANTHIM has also received marketing approval in the E.U. and the U.K., under the trade name of Obiltoxaximab SFL. The acquisition of Elusys has not been completed and is subject to several conditions.  

Anthrax is a disease caused by Bacillus anthracis.  While it is primarily a disease of animals, cases of anthrax in humans occur through contact with infected animals or animal products or through intentional spread of Bacillus anthracis spores as a biowarfare or bioterrorism agent.  Anthrax is regarded as a top (“Category A”) biological warfare and bioterrorism threat for as untreated inhalational anthrax has a high fatality rate, Bacillus anthracis is widely available and have been used in the past as a biological weapon, and multi-drug resistant (MDR) Bacillus anthracis is recognized by Public Health Emergency Medical Countermeasures Enterprise as a high-priority threat. Anthim inhibits the binding of PA to its cellular receptors, preventing the intracellular entry of the anthrax lethal factor and edema factor, the enzymatic toxin components responsible for the pathogenic effects of anthrax toxin.  

Material Terms of the Merger

Pursuant to the Merger Agreement, as merger consideration (“Merger Consideration”) we (i) agreed to pay the current equity holders of Elusys (the “Sellers”) $3,000,000 at Closing; and (ii) agreed to pay the Sellers $2,000,000, subject to reduction based on the cash balance of Elusys at Closing and other purchase price reductions specified in the Merger Agreement, at the same time as the initial pass through revenue is distributed to the Sellers as described below and (iii) earn out payments for a period of 12 years from the date of Closing equal to 10% of the gross dollar amount of payments received during each one year period during such twelve year period with respect to any sale, license or commercialization anywhere in the world of Anthim that either: (a) occurs during the first nine years after the Closing Date in any respect; or (b) occurs thereafter pursuant to any contract, agreement, commitment or order that is placed, granted, awarded or entered into during the first nine years after the Closing Date.

In addition, Elusys is expected to receive additional revenue from the future fulfillment of an existing U.S. Government contract and we have agreed to fulfill the future obligations of Elusys under such contract and pass through and distribute to the Sellers the revenue that is received under such contract minus the costs associated with such fulfillment obligations, subject to certain adjustments to the Merger Consideration specified in the Merger Agreement, including income taxes payable with respect to such payments. The Merger Agreement further provides that eighty percent of any amounts paid

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to and received by Elusys after the Closing and prior to June 30, 2023 with respect to the sale of 1,500 pre-filled vials of Anthim shall be paid to the Sellers, subject to certain adjustments specified in the Merger Agreement.

At Closing, we also agreed to contribute to the payment of 50% of certain Elusys lease termination and employee severance payments. We also agreed to use commercially reasonable efforts to maintain, finance, operate and promote Anthim and maintain the existing government contract and to continue to operate the Elusys business so as to allow the Sellers to receive the Merger Consideration.

The Merger Agreement contains customary representations, warranties and covenants of Heat, Elusys and the Merger Sub. The consummation of the Merger was subject to the satisfaction or waiver of certain conditions, including Elusys obtaining a requisite stockholder vote to approve the Merger, which approval was obtained. Subject to certain customary limitations, the Sellers have agreed to indemnify us and our officers and directors against certain losses related to, among other things, breaches of Elusys’ representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the Merger Agreement.

A special committee of Heat’s Board of Directors negotiated and approved the transaction and Cassel Salpeter & Co. provided a fairness opinion in connection with the transaction. Cassel Salpeter served as financial advisor to the special committee of Board of Directors.

Elusys was formed in 1998 by Jeff Wolf, our President, Chief Executive Officer and Chairman of the Board of Directors, who directly and through affiliated entities owns approximately 1.2% of the outstanding stock of Elusys, in the form of common stock, which is subordinate in terms of distributions to the Elusys preferred stock. Due to the potential conflict of interest, we formed a Special Committee of its Board of Directors to review and negotiate the Merger Agreement. However, pursuant to the terms governing the Elusys preferred stock, the preferred stockholders of Elusys will receive all of the initial $5 million of Merger Consideration and all of the net payments from the $31 million of revenues related to fulfillment of the existing SNS contract. While the amount of earn out payments, if any, to be made over the 12 year period following closing is very uncertain, it also presently seems likely that most if not all of such payments will also be paid to the preferred stockholders of Elusys under the terms of such preferred stock.

The foregoing summary of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement that is filed herewith as Exhibit 2.1.

Elusys Intellectual Property

Elusys has an exclusive, fully paid up, worldwide patent license, dated June 30, 2003, from the Board of Regents of the University of Texas which grants Elusys the right to use for the manufacture, offer and sale of antibodies that bind immunologically to anthrax antigens under the patent rights held by the University of Texas under U.S. patent application entitled “Neutralization of the Anthrax Toxin”, serial number 10/288,269 filed on November 5, 2001 (and subsequently issued by the U.S. Patent and Trademark Office on November 4, 2008, serial number 7,446,182) and the U.S. patent application entitled "Antibodies With Increased Affinities For Anthrax Antigens", serial number 10/620,049 filed om July 15, 2003 (and subsequently issued by the U.S. Patent and Trademark Office on March 8, 2011, serial number 7,9902,344).  The term of agreement continues until all patent rights have expired, unless terminated automatically due to bankruptcy or insolvency of Elusys or by mutual written agreement.

Elusys is the assignee of the U.S. patent application entitled “Antibodies that bind B. anthracis exotoxin, formulations thereof, and methods of use”, serial number 11/904,882 filed on September 28, 2007 (and subsequently issued by the U.S. Patent and Trademark Office on January 10, 2012, serial number 8,093,360) and the U.S. patent application entitled “Methods of preventing or treating anthrax using anti-anthrax antibodies”, serial number 13/076,082 filed on March 30, 2011 (and subsequently issued by the U.S. Patent and Trademark Office on December 31, 2013, serial number 8,617,548).

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Technology Platforms

gp96 Platform

Our proprietary gp96 platform leverages the adjuvant (immune stimulatory) properties of the heat shock protein gp96 to induce the immune system’s own response against cancer and infectious disease. gp96 naturally chaperones activation peptides (antigens) to antigen-presenting cells (APCs), such as dendritic cells, under stress conditions such as infection and cell death. Extracellular gp96 can stimulate innate immune toll-like receptors 2 and 4 on APCs to promote activation and subsequent processing and presentation of chaperoned antigens to T-cells. Our platform is designed to exploit the chaperoning activity of gp96 to constitutively transport predefined antigens of interest to APCs that in turn stimulate an antigen-specific immune response that includes B cells, CD4+ T-cells, and cytotoxic CD8+ T-cells.

In the context of cancer, this platform is 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 can become an essential component of the immuno-oncology regimen 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 this is a highly differentiated approach as our platform can deliver a broad range of tumor antigens that are previously unrecognized by the patient’s immune system and that have the potential to generate a multivalent response to address tumor heterogeneity.

Our leading cancer vaccine therapeutics are replication incompetent, “off-the-shelf”, allogenic cell-based therapies that are locally delivered into the skin and can be administered with a variety of immuno-modulators to enhance a patient’s immune response. Unlike many other “patient specific” or autologous immunotherapy approaches, this fully allogeneic, “off-the-shelf” approach provides a means to quickly administer the biotherapeutic without the need to extract and expand blood or tumor tissue from individual patients or create individualized treatment based on the patient’s haplotype. Our gp96 product candidates are produced from allogeneic cell lines expressing a broad repertoire of established tumor-specific antigens. Because each patient receives the same treatment, we believe that our immunotherapy approach offers superior speed to initiation, logistics, manufacturing efficiencies, and importantly, cost benefits, compared to “personalized” precision medicine approaches.

Besides its utility in oncology, our gp96 platform has been shown to activate the human immune system to combat infectious diseases. Our collaborators have laid a solid foundation by engineering different pathogenic antigens into the platform. Previous preclinical studies using our gp96 platform includes SIV/HIV, Malaria, Zika and COVID-19.

About ComPACT®

ComPACT is designed to further enhance our gp96 platform by facilitating antigen-driven T-cell activation and specific co-stimulation in a single product. By delivering the gp96 heat shock protein and a T-cell co-stimulatory fusion protein (OX40L) as a single therapeutic, this approach has the potential to simplify combination immunotherapy development. This dual design has several potential advantages including: (a) enhanced activation of antigen-specific CD8+ T-cells; (b) boosting the number of antigen-specific CD8+ and CD4+ T-cells compared to OX40L alone; (c) stimulation of durable T-cell memory; (d) the differentiation of T follicular helper cells that facilitate antibody production by B cells; (e) demonstration of less toxicity, as the source of associated antigens and co-stimulator are supplied at the same time locally in the draining lymph nodes, which drives targeted, specific immunity rather than throughout the body; and (f) simplification of combination immunotherapy versus systemic co-stimulation with conventional monoclonal antibodies (mAbs).

RapidVax® Platform

Unveiled at the 2021 World Vaccine & Immunotherapy Antiviral Congress, RapidVax® is a flexible “plug-and-play” vaccine platform designed to enable an accelerated response to a wide variety of biological threats and is built on the foundation of our learnings from our various gp96 programs (noted above).  RapidVax leverages our vast experience developing gp96-based vaccines and couples the immune-activating properties of heat shock protein gp96 and the T-cell co-stimulator OX40L with a flexible antigen expression system to promote antigen-specific T-cell activation, the

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generation of long-lasting memory cells, and neutralizing antibody production via the interaction of T follicular helper cells with B cells.  

RapidVax is designed to utilize a common unprogrammed vaccine base that can be manufactured in bulk, stockpiled, and rapidly customized upon identification of a biological threat to enable an accelerated time to clinic and to harness shared development, clinical safety, and manufacturing synergies.

This platform has several potential advantages including but not limited to: (a) potential stockpiling capability designed to accelerate time to clinic by harnessing prior optimizations in development, safety, and manufacturing; (b) potential customization with multiple full length target antigens to increase potential protection against pathogen variants; (c) enhanced activation of antigen-specific CD8+ T-cells; (d) boosting the number of antigen-specific CD8+ and CD4+ T-cells compared to OX40L alone; (e) stimulation of durable T-cell memory; and (f) the differentiation of T follicular helper cells that facilitate antibody production by B cells.

DR3/TNFRSF25 Platform

Our Death Receptor 3/TNF receptor superfamily member 25 (DR3/TNFRSF25) platform is focused on the development of agents targeting this cellular receptor. DR3 recognizes the cytokine TNF-like ligand 1A (TL1A) secreted by several immune cell types including dendritic cells, monocytes, macrophages, and plasma cells. In the absence of a danger or activating signal, co-stimulation of DR3 on T-cells results in the selective expansion of immunosuppressive Tregs that can reduce inflammation.  Conversely, co-stimulation of DR3 on T-cells in the presence of a danger or activating signal (arising from injury, infection, or cancer) promotes the expansion of inflammatory effector T-cells that play a critical role in mediating anti-tumor and anti-pathogen responses.  We believe therapeutic targeting of this pathway has the potential to shift the balance between immunosuppression and inflammation and therefore restore stability and balance to the immune system.  

Agonists of the DR3 pathway have demonstrated benefit in several non-oncology disease models including rheumatoid arthritis, diabetic retinopathy, allergic lung inflammation, inflammatory bowel disease, infectious disease, and hematopoietic stem cell transplant.  Conversely, DR3 agonism in the presence of tumor antigens and combined with our HS-110 and HS-130 immunotherapies or an anti-PD-1 checkpoint inhibitor leads to a reduction in the suppressive activity of Tregs, compromised Treg stability, increased Treg plasticity, and an increased percentage of inflammatory CD4+ Th1, CD4+ Th17, CD8+ effector T-cells that delay disease progression in solid tumor models.  

We believe these dynamic immunomodulatory properties of the DR3 pathway make it a compelling therapeutic target with various potential medical applications for either inducing inflammatory responses or restoring stability to the immune system. To date, we are the only known company with a disclosed program targeting DR3 for use in immuno-oncology, with a broad, pioneering intellectual property estate.

Platform Assets: gp96 Platform

HS-110 (viagenpumatucel-L): Clinical Stage

Based on our gp96 platform technology, we have developed the product candidate HS-110 (viagenpumatucel-L) as a potential treatment for patients with advanced non-small cell lung cancer (NSCLC). HS-110 is an allogenic “off-the-shelf” cellular vaccine derived from a lung adenocarcinoma cancer cell line and genetically modified to secrete a wide range of cancer-associated antigens bound to the immunostimulatory chaperone gp96. This approach is designed to stimulate and facilitate uptake of these antigens by professional antigen presenting cells (APCs), which in turn activate a broad, T-cell medicated immune response against a patient’s cancer. For additional technology details, please review the gp96 platform section above.  

We have completed the enrollment of our Phase 2 trial evaluating the safety and efficacy of HS-110 in combination with either nivolumab (Opdivo®), a Bristol-Myers Squibb anti-PD-1 checkpoint inhibitor, or Merck’s anti-PD1 checkpoint inhibitor, pembrolizumab (KEYTRUDA®), for the treatment of patients with advanced NSCLC. Eligible patient

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populations included individuals in a second line or greater setting, or with pembrolizumab in a front-line maintenance setting.

On February 9, 2021, we announced positive interim data from the Phase 2 trial. A substantial survival benefit was observed in a cohort of previously treated, checkpoint inhibitor naïve patients with advanced NSCLC (Cohort A, N = 47). A median overall survival (mOS) of 24.6 months was observed with a median follow-up time of 19.4 months and a one-year survival rate of 61.7% (Cohort A). For historical reference, the BMS CheckMate 057 study evaluating a similar population of previously treated, advanced NSCLC patients who received nivolumab as a single agent reported a mOS of 12.2 months and a one-year survival rate of 50.7%.

For NSCLC patients undergoing disease progression following checkpoint inhibitor therapy, there are a limited number of therapeutic options, with chemotherapy reporting a mOS of 6.8 to 9.0 months based on the literature. As of February 9, 2021, in our Phase 2 study, we observed that HS-110 and nivolumab combinatorial treatment of NSCLC patients exhibiting disease progression following previous PD-(L)1 therapy resulted in a mOS of 11.9 months with a median follow-up time of 11.9 months (Cohort B, N = 68).

As of this February 9, 2021 data cut, 30% of the patients in Cohort A and 26% of the patients in Cohort B were still alive. HS-110 has a favorable safety profile with no treatment-related serious adverse reactions. In addition, review of immune-related adverse events reported in the study raised no safety concerns. The data to date demonstrate that combination of HS-110 and nivolumab treatment is well-tolerated.

Further subset analysis was reported on May 20, 2021 when we announced that an abstract entitled “Interim results of viagenpumatucel-L (HS-110) plus nivolumab in previously treated patients (pts) with advanced non-small cell lung cancer (NSCLC) in two treatment settings” had been accepted for poster presentation at the 2021 ASCO Annual Meeting. Announced on June 4, 2021 these findings were presented by Roger B. Cohen, MD, Professor of Medicine at the University of Pennsylvania Perelman School of Medicine at the meeting.  Analysis of a subset of Cohort A patients that experienced an injection site reaction (ISR+) revealed increased progression free survival (PFS) and median overall survival (mOS)  (hazard ratio [HR]=0.43, p=0.01; HR=0.23, p<0.001). A longer mOS was also observed in patients with PD-L1 expression level ≥ 1% (HR=0.25, p=0.02). Similarly, an increased mOS was also reported in ISR+ patients in Cohort B (HR=0.48, p=0.03).

Due to the large number of patients expected to be enrolled in any pivotal clinical trial of HS-110, we do not anticipate initiating a pivotal trial of HS-110 until after we have secured additional potential financing via a strategic partnership.

HS-130: Clinical Stage

We have completed enrollment of our first-in-human Phase 1 open label dose-escalation study evaluating the safety of HS-130 in combination with HS-110 for the treatment of advanced solid tumors. HS-130 is designed to test our ComPACT technology approach by secreting the T-cell co-stimulatory fusion protein OX40L to support the expansion of T-cells and the generation of immunological memory. The findings of this program are contributing to the development of our RapidVax platform discussed above.

Platform Assets: RapidVax®

RapidVax® Base Cell: Preclinical Stage

The RapidVax® base cell and core technology are in preclinical development. Combing the immune-activating properties of heat shock protein gp96 and the T-cell co-stimulator OX40L with a customizable antigen expression system, we are evaluating several infectious and emerging diseases as vaccine candidates. RapidVax is designed to utilize a common unprogrammed vaccine base that can be manufactured in bulk, stockpiled, and rapidly customized upon identification of a biological threat to enable an accelerated time to clinic and to harness shared development, clinical safety, and manufacturing synergies. Further details regarding the RapidVax technology can be found in the “RapidVax Platform” section above.  

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Platform Assets: DR3/TNFRSF25 Platform

PTX-35: Clinical Stage

PTX-35 is a potential first-in-class selective agonist of DR3.  This humanized monoclonal antibody is designed to harness antigen specific immune activation and tolerance mechanisms associated with the DR3 pathway to reprogram immunity and provide a long-term, durable clinical effect. In the absence of a danger or activating signal, co-stimulation of DR3 on T-cells results in the selective expansion of immunosuppressive Tregs that can reduce inflammation. Conversely, co-stimulation of DR3 on T-cells in the presence of a danger or activating signal (arising from injury, infection, or cancer) promotes the expansion of inflammatory effector T-cells that play a critical role in mediating anti-tumor and anti-pathogen responses. Further details regarding the importance of the DR3 pathway in regulating immune responses can be found above in the corresponding platform section.

Preclinical studies demonstrate that when combined with HS-110 and HS-130 immunotherapies or an anti-PD-1 checkpoint inhibitor, PTX-35 has the potential to enhance antigen specific T-cell activation to eliminate tumor cells. With this consideration, we are enrolling an open-label, dose escalation, Phase 1 clinical trial evaluating the safety and tolerability of PTX-35 intravenous administration in patients with advanced solid tumors refractory to, or ineligible for, or who refuse available standard of care. As of June 2020, we treated the first patient and are evaluating escalating dose levels of PTX-35 until an optimal immunological dose or maximum tolerated dose is established to support potential Phase 2 planning. Exploratory analyses include clinical benefit and immunological effects of PTX-35. This trial is supported by a $15.2 million grant from the Cancer Prevention and Research Institute of Texas.

PTX-35 has also been reported as a potent regulatory T-cell (Treg) expander in the absence of a danger or activating signal.  Mouse surrogate of PTX-35 (i.e., human CDRs 1-3, but mouse Ig backbone), has shown activity in mouse models of corneal allograft, beta-islet transplantation, bone marrow transplantation, auto/inflammatory models of experimental autoimmune encephalitis (EAE), colitis and asthma. Furthermore, on January 12, 2022 we announced in collaboration with Dr. James Shapiro at University of Alberta that a surrogate mouse version of PTX-35 (mPTX-35) could expand regulatory T-cells in vivo to successfully prevent the rejection of allogeneic transplanted beta-isle T-cells in an animal model of type-1 diabetes.

We are currently evaluating the clinical application for using PTX-35 to expand regulatory T-cell subsets for the treatment of various inflammatory diseases and/or conditions where regulatory T-cells are defective or required to restore immune stability.

Key Capabilities

Our Discovery Capabilities: Skunkworx Bio, Inc.

In November 2018, we formed the discovery subsidiary Skunkworx Bio, Inc. (formerly known as Delphi Therapeutics, Inc.) to support in-house nomination of biologics for preclinical and clinical development.  Our approach utilizes “Pocket Biologics” derived from diverse proprietary antibody and small protein libraries to identify and differentiate pharmacologically active “HotSpot” sites on proteins relevant to disease. Coupled with the integration of computational and bioinformatic analysis, the goal is to “improve” candidate selection and accelerate validation of innovative therapeutics and biodefense assets from discovery into preclinical development.

Our Bioanalytic, Process Development, and Biomanufacturing Capabilities: Scorpion Biological Services, Inc.

In November 2018, we formed the subsidiary Scorpion Biological Services, Inc. (“Scorpion”) (formerly known as Scorpion Biosciences, Inc.), to focus on developing bioanalytic, process development and biomanufacturing capability to support our biotherapeutics and discovery pipeline. Excess biomanufacturing capacity will also be offered to third parties as a fee-for-service model. This expansion is part of a company-wide-growth strategy to enhance efficiency and decrease our dependence on third-party contract research and development biomanufacturing organizations (CDMO) as we advance into late-stage clinical trials and translate our research, development, and commercial pipeline.

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Scorpion Biological Services is focused on cell- and gene-based therapies and large molecule biologics. Once the facility described below is operational, Scorpion plans to provide a broad array of biologics manufacturing, analytical and R&D services, offering services using American-made equipment, reagents, and materials. Scorpion plans to couple cGMP biomanufacturing and quality control expertise with cutting edge capabilities in immunoassays, molecular assays, and bioanalytical methods to support the advancement of our development and commercial programs.

We have signed a lease to occupy a 20,144 square foot facility in San Antonio, Texas where we plan to conduct services and are currently in the process of building the biomanufacturing facility.

Operations at the facility are projected to commence in the second quarter of 2022, and we expect to utilize a portion of this production capacity by immediately transitioning our outsourced manufacturing and development to Scorpion. Fee-for-service contracting with be offered to external customers.

Our Current Biodefense Capabilities:

RapidVax®: Preclinical Stage

RapidVax® is being designed as a flexible “plug-and-play” vaccine platform designed to leverage our vast experience developing gp96-based vaccines and couples the immune-activating properties of heat shock protein gp96 and the T-cell co-stimulator OX40L with a flexible antigen expression system to promote antigen-specific T-cell activation, the generation of long-lasting memory cells, and neutralizing antibody production via the interaction of T follicular helper cells with B cells. RapidVax is designed to utilize a common unprogrammed vaccine base that can be manufactured in bulk, stockpiled, and rapidly customized upon identification of a biological threat to enable an accelerated time to clinic and to harness shared development, clinical safety, and manufacturing synergies. Further details regarding RapidVax can be found in the section “Platform Assets: RapidVax” above.

 

Biothreat Advisory Board

In August 2021, we announced the formation of our Biothreat Advisory Board to support the development of our biosecurity/biodefense initiatives. The advisory board includes David Lasseter, Former Deputy Asst. Sec. of Defense for Countering Weapons of Mass Destruction, Andrew Webber, Former Asst. Sec. of Defense for Nuclear, Chemical & Biological Defense Programs, Jack Kingston, Former US Representative, Secretariat of the Alliance for Biosecurity (current), Gregor Koblentz, PhD, Professor of Biodefense at George Mason University, Expert on Chemical and Biological Weapons, and Former US Senator (AR) Mark Pryor. This panel was assembled to provide ongoing guidance on the development and commercialization of our biodefense assets and platforms.

Anthim® (obiltoxaximab): Commercially Approved

Anthim® (obiltoxaximab) is a best-in-class monoclonal antibody antitoxin for the “Category A” biological warfare and bioterrorism threat anthrax. Anthim received FDA approval and orphan drug exclusivity in 2016 for the treatment of inhalational anthrax, in combination with antibiotics, and as a prophylaxis when alternative therapies are not available or are not appropriate.  Anthim was also approved in 2020 as the only licensed anthrax antitoxin treatment in the EU, UK, and Canada. We will add Anthim to our current biodefense capabilities upon consummation of the pending acquisition of Elusys.

Oncology and Biodefense Market and Current Treatments

Solid Tumors and Non-Small Cell Lung Cancer (NSCLC)

The American Cancer Society (ACS) estimates that approximately 1.9 million people in the United States will be diagnosed with cancer and ~609,360 cancer-related deaths will occur in 2022. Notably, this number includes approximately 350 deaths per day from lung cancer, the leading cause of cancer death and the second-most diagnosed cancer in the U.S (approximately 236,740 or 12% of all cases). Approximately 82% of all lung cancer is NSCLC.  

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Despite continuous advances in cancer screening and the adoption of promising therapies such as immune checkpoint inhibitors (CPIs), there remains a significant unmet medical need as published studies demonstrate only a minority of single agent treated patients benefit with prolonged overall survival.   Poor response to CPIs is thought to be partly attributable to properties of the tumor microenvironment and the concern that even if the “brake” set by immune checkpoints is released through CPI therapy, optimal antitumor immune responses may not be elicited due to a lack of antigen exposure. These observations have prompted the development of vaccines against cancer antigens that can generate high frequencies of tumor-specific T-cells.  We believe the idea of dual immunotherapy with cancer vaccines and CPIs has garnered particular interest based on the hypothesis that the elevated frequencies of tumor-specific T-cells generated by cancer vaccines can be expanded and protected from attenuation through blockade of T-cell checkpoint receptors.

To date, pembrolizumab (KEYTRUDA®), Merck’s anti-PD1 checkpoint inhibitor, atezolizumab (TECENTRIQ®) Roche Genetech’s anti-PD-L1 checkpoint inhibitor, and cemiplimab (LIBTAYO®), Regeneron’s anti-PD-1 inhibitor, are approved CPIs for the treatment of first-line NSCLC.  Per the CPI Global Market Report 2021 the global market for CPIs is anticipated to from approximately $18 billion in 2021 to an estimated $39.8 billion in 2025. iHealthcareAnalyst, Inc estimates the global market for NSCLC therapeutics will grow at a CAGR of 11.4% to reach $22.4 billion by 2027 with the PD-1/PD-L1 inhibitors segment expected to grow at the fastest rate during forecast period. It is also noted that immunotherapy combinations with chemotherapy, radiation therapy, or novel immunomodulatory agents are currently being examined with the hope of achieving higher response rates and improving overall survival rate.

We believe that our novel allogenic “off-the-shelf” cancer vaccine HS-110 is well-positioned as a Phase 2 clinical program with the potential for combination therapy with approved CPIs for the treatment of NSCLC. Further details regarding HS-110 can be found above in the platform asset section.

We believe that our DR3 agonist PTX-35 has the potential in the presence of activating signals (such as cancer antigens) to drive the expansion of anti-tumor lymphocytes and are currently investigating potential solid tumor applications in our Phase I clinical trial. Further details regarding PTX-35 can be found above in the platform asset section.

Strategy

Our objective is to become a fully integrated biopharmaceutical company specializing in the end-to-end discovery, development and commercialization of therapies that arm the immune system against a wide range of diseases, including cancer and infectious disease.  Through the formation of our subsidiary Skunkworx Bio, Inc, we have increased our ability to support in-house nomination of biologics for our preclinical and clinical development. Furthermore, the establishment of our subsidiary Scorpion Biological Services, Inc is part of a company-wide-growth strategy to enhance efficiency and decrease our dependence on third-party contract research and development biomanufacturing organizations (CDMO) as we advance into late-stage clinical trials and translate our other research and development into a commercial pipeline. Finally, the planned acquisition of Elusys Therapeutics, Inc and the addition of the FDA-approved anthrax antitoxin Anthim® (obiltoxaximab) as well as expertise in government funding for development and delivery should support our ability to develop critical therapeutic innovations such as RapidVax® for the biodefense sector. These proceedings reinforce our goal of decreasing the time and increasing the efficiency of drug development to accelerate the delivery of novel immune activating therapies.

We believe the effective management of cancer will involve multiple agents and that the assets of our gp96 and DR3/TNFRSF25 platforms have the potential to work synergistically with approved immunotherapies, such as checkpoint inhibitors, to re-stimulate or enhance the immune system’s own anti-tumor response. With this consideration, we are evaluating the potential of the gp96 platform allogenic “off-the-shelf” immunotherapy HS-110 in a Phase 2 NSCLC trial to stimulate tumor-specific T-cell in combination with anti-PD-1 therapies and potentially increase overall survival.  The DR3 agonist PTX-35 has been reported to promote the expansion of effector CD8+ T-cells in cancer models in the presence of a danger (activating signal) and is in a Phase 1 solid tumor clinical trial to assess safety and tolerability.

We believe the DR3 pathway has potential for the management of non-oncology immune disorders as evidenced by literature demonstrating DR3-mediated benefit in several disease models including rheumatoid arthritis, diabetic retinopathy, allergic lung inflammation, inflammatory bowel disease, infectious disease, and hematopoietic stem cell transplant.

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The key elements of our strategy are:

Establish a fully integrated biopharmaceutical company specializing in end-to-end delivery of immune stimulating therapies: With the formation of our subsidiaries Skunkworx Bio, Inc and Scorpion Biological Services Inc., we have created a drug development ecosystem designed to fuel innovation, from discovery to commercialization, with minimal reliance on external vendors.  This capability offers the potential to translate our discoveries into therapeutics with increased efficiency and quality and without compromising our agility to pursue new innovations.
Maximize commercial opportunities for Anthim® (obiltoxaximab) upon the consummation of our pending acquisition of Elusys: We believe that Anthim will continue to be a critical biodefense asset for stockpiling by the CDC’s Strategic National Stockpile (SNS) and of potential interest for increasing biosecurity preparedness in commercially approved ex-US ally territories such as the EU, UK, and Canada. Upon the acquisition of Elusys, we intend to be opportunistic in seeking strategic partnerships that maximize economic potential of this asset. We are in the process of completing the tech transfer of this asset to Scorpion for future biomanufacturing; Anthim has previously been manufactured by an external vendor.
Maximize commercial opportunities for Scorpion Biological Services, Inc: We plan to launch Scorpion Biological Services, Inc. as a contract research and development biomanufacturing organization (CDMO) focused on developing bioanalytic, process development and biomanufacturing capabilities to support our biotherapeutics and discovery pipeline. We will be opportunistic in offering biomanufacturing capacity to third parties as a fee-for-service model.
Develop and obtain regulatory approval for our product candidates: We have completed enrollment of the HS-110 trial in combination with either nivolumab or pembrolizumab to treat patients with advanced NSCLC. We have initiated enrollment of our Phase 1 trial of HS-130 in combination with H-110 for treatment of solid tumors and our Phase 1 trial of PTX-35 for the treatment of solid tumors. Beyond these trials we plan to initiate new clinical trials of combined immunotherapy agents.
Maximize commercial opportunity for our technology platforms: Our technologies support the development of product candidates targeting large markets with significant unmet medical needs. For each of our platform assets, 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 and remain opportunistic in seeking strategic partnerships that maximize our 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 expand our portfolio. 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 gp96 patent portfolio comprise more than 35 granted patents and 40 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 65 granted U.S. and foreign patents and approximately 25 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. These resources have formed our drug development ecosystem. 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.

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Obtain additional non-dilutive grant funding in addition to Pelican Therapeutic, Inc’s $15.2 million CPRIT Grant: To develop our technologies and compounds more fully, 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 external partners, including academic key opinion leaders and retention of lobbyists, to support the development of our pipeline programs. We also intend to continue to evaluate opportunities and, as appropriate, acquire or license technologies that meet our business objectives.

Pelican Acquisition

On April 28, 2017, we consummated the acquisition of 80% of the outstanding equity of Pelican Therapeutics, Inc. (“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 19,015 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 Jeffrey 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. During the year ended December 31, 2020, we distributed to the Participating Pelican Stockholders $2.0 million upon dosing of the first patient in our Phase 1 trial of PTX-35, of which approximately of 22% was distributed to our executive officers and directors who are Participating Pelican Stockholders.

Under the Purchase 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)$1.5 million upon Pelican’s dosing of the first patient in its first Phase 2 trial for an oncology indication;
(2)$3.0 million upon successful outcome of the first Phase 2 trial for an oncology indication;
(3)$6.0 million upon Pelican’s dosing of the first patient in its first Phase 3 trial for an oncology indication;
(4)$3.0 million upon Pelican’s dosing of the first patient in its first Phase 3 trial for a non-oncology indication;
(5)$7.5 million upon successful outcome of the first Phase 3 trial for an oncology indication;
(6)$3.0 million upon successful outcome of the first Phase 3 trial for a non-oncology indication;
(7)$7.5 million upon acceptance of a Biologics License Application (BLA) submission for an oncology indication;
(8)$3.0 million upon acceptance of a BLA submission for a non-oncology indication;
(9)$7.5 million upon first product indication approval in the United States or Europe for an oncology indication; and
(10)$3.0 million upon first product indication approval in the United States or Europe for a non- oncology indication.

On June 22, 2020, the Company achieved the first milestone of $2.0 million when it dosed the first patient in the first Phase 1 clinical trial of PTX-35.

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 including a matching funds requirement where Pelican will match $0.50 for every $1.00 from CPRIT, which totals $7.6 million over the life of the project.

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In connection with the Pelican Acquisition, the Participating Pelican Stockholders entered 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 its Pelican Stock shares, of which it owned 5% equity on a fully diluted basis for a certain number of shares along with UM shares in our subsidiary Heat Biologics I, Inc., of which it owned 7.5% equity (together herein the “Subsidiary Shares”) for 5,000 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.

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 40-50 patient Phase 1 clinical program. 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 life of the project.

As of December 31, 2021, CPRIT has provided $13.7 million of the total $15.2 million grant. The remaining $1.5 million will be awarded, on a reimbursement basis, after we have fulfilled grant requirements and the grant has been approved to be finalized, rather than in advance of expending the funds as in the prior grant years. As of December 31, 2021, we have provided approximately $7.6 million which was used to satisfy Pelican’s matching fund obligation under the first five years of the CPRIT Grant.

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, to maintain certain records and documentation, to notify CPRIT of certain unexpected adverse events and Pelican’s obligation to use reasonable efforts to ensure that any new or expanded preclinical testing, clinical trials, commercialization or manufacturing related to any aspect of our CPRIT project take place in Texas, survive the termination of the agreement. In addition, if Pelican relocates its principal place of business outside of Texas within the three-year period after the date of final payment of grant funds (which final payment has not yet occurred), we are required to repay to CPRIT all grant funds received. 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.

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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 and any future product candidates and our subsidiaries’, 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.

Our and our subsidiaries’ programs are supported by growing patent estates that are comprised of intellectual property owned by us and our subsidiaries’, or exclusively licensed from UM. ImPACT®, ComPACT, PTX-35, and next generation DR3/TNFRSF25 modulators are protected by issued patents and various pending patent applications. In total, Heat holds approximately 35 granted U.S. and foreign patents and approximately 40 U.S. and foreign patents pending. In total, Pelican holds approximately 65 granted U.S. and foreign patents and approximately 25 U.S. and foreign patents are pending.

Heat’s 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 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 Nos. 10,046,047 and 10,780,161 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, international (PCT), US, and foreign patent applications assigned to Heat and related to ComPACT™ are also pending and may provide coverage to 2038 to 2042, if granted (not including any patent term adjustments or extensions).

Pelican’s PTX-35 and next generation DR3/TNFRSF25 modulators coverage stems from three exclusive license agreements with UM (i.e. “UM03-31 UM05-39” of July 11, 2008; “UMI176” of December 12, 2010, as amended December 7, 2020; 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 novel DR3/TNFRSF25 modulator 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 novel DR3/TNFRSF25 modulator 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).

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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 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 license term lasts until the patent family expires, 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 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 under licensed patent rights.

The “Allogeneic Cancer-Based Immunotherapy” patent family is licensed to Heat Biologics I, 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.

All of the above-described license agreements, as amended, 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, 2025; (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 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. The technology that was out-licensed to Shattuck 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 six different patent families each directed to therapeutic compositions and methods related to targeting DR3/TNFRSF25/TL1A for the purpose of modulating immune responses. These families comprise approximately 45 granted U.S. and foreign patents, and approximately 30 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, UM03-31 and UM05-39 non-oncology, Pelican is obligated to pay UM certain upfront license fees and milestone payments of ((i) $25,000 upon submission of an IND, (ii) $25,000 upon approval of an IND, (iii) $100,000 upon completion of a Phase 1 clinical trial and (iv) $500,000 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, UMI-176, Pelican is obligated to pay UM certain upfront license fees, and aggregate milestone payments of (i) $25,000 upon submission of an NDA, (ii) $25,000 upon approval of a NDA; (iii) $100,000 upon completion of Phase 1 clinical trial and (iv) $500,000 the earlier of May 31, 2024 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, UM 143 and UM 106, 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 the following milestone payments: (i) $25,000 upon submission of an IND; (ii) $25,000 upon approval of a NDA; (iii) $100,000 upon completion of a Phase 1 clinical trial; and (iv) $250,000 the earlier of May 31, 2024 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 2025 for the UMI-176 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.

External Manufacturing

We have historically relied on third-party manufacturers to produce and store our product candidates for clinical use and currently do not operate our own manufacturing facilities. In order to promote efficiency and reduce our reliance on third-

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party vendors, we plan to enhance our in-house development of bioanalytic, process development and manufacturing capabilities and offer such services to third parties for fees. We have entered into a lease for a 20,144 square foot facility in San Antonio, TX to conduct such services and are currently building the facility. Our proposed expansion in Texas is part of a company-wide-growth strategy to enhance efficiency and decrease our dependence on third-party vendors as we advance our clinical trials and general research and development. Operations at the facility are projected to commence by the second quarter of 2022, and we expect to fill production capacity by transitioning our outsourced manufacturing and development to in-house immediately, followed by contracting with external customers. However, there can be no assurance that we will be successful in these new operations. See the Key Capabilities section above for additional details.

The HS-110 product used in the inventor’s Phase 1, and in our Phase 2 clinical trial was manufactured under cGMP (current good manufacturing practices). The gp96 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. Irradiation is a commonly used attenuation process that eliminates the ability of the gp96-Ig-containing cell lines to replicate but allows the cells to remain metabolically active and secrete gp96-Ig. The batches of frozen, irradiated drug product are stable for long periods of time and are thawed immediately prior to administration to patients.

The HS-130 product is being evaluated in a Phase I clinical trial for the treatment of select solid tumors. This product utilizes our ComPACT technology concept, which is designed to deliver the gp96 heat shock (HS-110) protein and a T-cell co-stimulatory fusion protein (OX40L) in HS-130. We have completed the cGMP manufacturing and nonclinical IND enabling activities to support the clinical development of this product.

PTX-35 is being evaluated in a Phase I clinical trial for the treatment of select solid tumors We have utilized an external vendor for the manufacture of PTX-35 and are planning the tech transfer of this asset to Scorpion for future biomanufacturing.

Anthim® (obiltoxaximab) is a best-in-class monoclonal antibody antitoxin for anthrax. Anthim received FDA approval and orphan drug exclusivity in 2016 for the treatment of inhalational anthrax, in combination with antibiotics, and as a prophylaxis when alternative therapies are not available or are not appropriate.  Anthim was also approved in 2020 as the only licensed anthrax anti-toxin treatment in the EU, UK, and Canada. Anthim has previously been manufactured by an external vendor.  We are in the process of completing the tech transfer of this asset to Scorpion for future biomanufacturing.

Competition

The pharmaceutical, biologics and the diagnostic industry is highly competitive and characterized by several established large companies, 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. If we fail to stay at the forefront of technological change, we may be unable to compete effectively.

Oncology

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. These companies might also succeed in obtaining regulatory approval for competitive products more rapidly than we can for our products.

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Our most significant oncology 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., Gilead Sciences, Inc. and its subsidiary Kite Pharma, Inc., and competing cancer immunotherapy companies such as, Bluebird Bio, Inc., Transgene SA, Agenus Inc., Advaxis, Inc., IMV Inc., Bavarian Nordic A/S, Celldex Therapeutics, Inc., and others.

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, and our competitors may 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; 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.

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. Many patients, particularly with advanced disease, are refractory to these treatments and are subsequently treated with several emerging biologic agents, including immunotherapy. Some examples of therapies commonly attempted with stage IIIB/IV NSCLC patients include: Opdivo® (nivolumab), Keytruda® (pembrolizumab), TECENTRIQ® (atezolizumab), LIBTAYO® (cemiplimab), Alimta® (pemetrexed), Avastin® (bevacizumab), Tarceva® (erlotinib), Gemzar® (gemcitabine), Paraplatin® (carboplatin), Taxol® (paclitaxel), Taxotere® (docetaxel), and Navelbine® (vinorelbine).

Despite the promise of checkpoint inhibitors (CPIs) such as pembrolizumab, there remains a significant unmet medical need as published studies demonstrate only a minority of single agent treated patients benefit with prolonged overall survival.   Poor response to CPIs is thought to be partly attributable to properties of the tumor microenvironment and the concern that even if the “brake” set by immune checkpoints is released through CPI therapy, optimal antitumor immune responses may not be elicited due to a lack of antigen exposure. These observations have prompted the development of vaccines against cancer antigens that can generate high frequencies of tumor-specific T-cells.  We believe the idea of dual immunotherapy with cancer vaccines and CPIs has garnered particular interest based on the hypothesis that the elevated frequencies of tumor-specific T-cells generated by cancer vaccines can be expanded and protected from attenuation through blockade of T-cell checkpoint receptors.

Our strategy is to emphasize what we believe to be our competitive advantages, which is that our products in development are expected to have less side effects than most other cancer therapies, the potential for enhanced overall survival in combination with approved therapies, may be available at lower prices than other therapies, and the potential to demonstrate efficacy in a number of oncology indications.

Biodefense

We anticipate our most significant competitor for Anthim® (obiltoxaximab) will be Emergent BioSolutions, Inc (Emergent). Emergent is the provider of the anthrax anti-toxin raxibacumab. Raxibacumab received FDA approval on December 14, 2012, while Anthim received FDA approval on March 18, 2016.  Anthim and raxibacumab both inhibit the binding of anthrax toxin protective antigen (PA) to its cellular receptors, preventing the intracellular entry of the anthrax lethal factor and edema factor, the enzymatic toxin components responsible for the pathogenic effects of anthrax toxin.  However, package inserts demonstrate that Anthim has a higher affinity equilibrium dissociation constant (Kd) at 0.33 compared to 2.78 nM of raxibacumab and a long-shelf life at 7 years for the final drug product. Anthim and raxibacumab have been supplied to the CDC’s strategic national stockpile.  We anticipate based on previous delivery orders and option agreements that Anthim will continue to fulfill delivery orders as part of the Office of the Assistant Secretary for Preparedness & Response’s (ASPR) objective to diversify and acquire products with a longer shelf-life.

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Internationally, Anthim was approved in 2020 as the only licensed anthrax antitoxin treatment in the European Union, United Kingdom, and Canada. In Canada, the approval of Anthim blocks future purchases of raxibacumab without Canadian Extraordinary-Use New Drug (EUND) approval. In the European Union, orphan drug exclusivity (10 year) at time of approval blocks competitors.  We believe these approvals position Anthim well for increasing biosecurity preparedness in commercially approved ex-US ally territories and will be opportunistic in seeking strategic partnerships that maximize economic potential of this asset.

Contract Development Biomanufacturing Organization (CDMO)

We formed the subsidiary Scorpion Biological Services, Inc. to focus on developing bioanalytic, process development and biomanufacturing capability to support our biotherapeutics and discovery pipeline. We plan to offer excess biomanufacturing capacity to third parties as a fee-for-service CDMO model. Scorpion Biological Services is focused on cell- and gene-based therapies and large molecule biologics. We provide a broad array of biologics manufacturing, analytical and R&D services, offering services using American-made equipment, reagents, and materials. Scorpion couples cGMP biomanufacturing and quality control expertise with cutting edge capabilities in immunoassays, molecular assays, and bioanalytical methods to support the advancement of our development and commercial programs.

Considering our capabilities, we anticipate providing competition to established biomanufacturers including Lonza Group, Ltd and WuXi AppTec as well as recently announced biomanufacturing efforts from ThermoFisher Scientific, Inc. The COVID-19 pandemic revealed a critical shortage in US biomanufacturing capacity. Historically therapies could often take ~10 years to commercialize. However, with the implementation of the Emergency Use Authorization, complex, effective vaccines sped through pipelines at record speed and created new expectations for time to market, cost reduction, regulatory compliance, and good manufacturing performance. Considering the global cell and gene therapy clinical trials market size was valued at $9.2 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 22.3% from 2021 to 2028 per Grand View Research, we anticipate that a shortage of industry capacity may minimize the risk of direct competition.

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.

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

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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 and the manufacturer and/or sponsor under an approved new drug application are also subject to an annual program fee. 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 twelve 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-

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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.

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

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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.

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 T-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.

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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.

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

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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.

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,

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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.

Strict data privacy laws regulating the collection, transmission, storage and use of employee data and consumers’ personally-identifying information are evolving in the European Union, U.S. and other jurisdictions in which we operate. Outside of the United States, the laws, regulations and standards in many jurisdictions apply broadly to the collection, use, and other processing of personal information. For example, in the European Union, the collection and use of personal data is governed by the provisions of the General Data Protection Regulation (the “GDPR”). The GDPR, together with national legislation, regulations and guidelines of the European Union member states governing the processing of personal data, impose strict obligations on entities subject to the GDPR, including but not limited to: (i) accountability and transparency requirements, and enhanced requirements for obtaining valid consent from data subjects; (ii) obligations to consider data protection as any new products or services are developed and to limit the amount of personal data processed; (iii) obligations to comply with the data protection rights of data subjects; and (iv) obligations to report certain personal data breaches to governmental authorities and individuals. Data protection authorities from the different E.U. member states and other European countries may enforce the GDPR and national data protection laws differently, and introduce additional national regulations and guidelines, which adds to the complexity of processing European personal data. Failure to comply with the requirements of the GDPR and the related national data protection laws may result in significant monetary fines and other administrative penalties (the GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater) as well as civil liability claims from individuals whose personal data was processed. Additionally, expenses associated with compliance could reduce our operating margins.

The GDPR also prohibits the transfer of personal data from the E.U. to countries outside of the E.U. unless made to a country deemed by the European Commission to provide adequate protection for personal data or accomplished by means of an approved data transfer mechanism (e.g., standard contractual clauses). Data protection authority guidance and enforcement actions that restrict companies’ ability to transfer data may increase risk relating to data transfers or make it more difficult or impossible to transfer E.U. personal data to the U.S.

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

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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. It is unclear how these challenges and other efforts to repeal and replace the ACA will impact our business in the future.

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.

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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 $18.8 million and $12.9 million during both years ended December 31, 2021 and 2020, respectively.

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 627 Davis Drive, Suite 400, Morrisville NC 27560. 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 Business Conduct and Ethics 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) 869-2128. 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 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.), Scorpion Biological Services, Inc. (formerly Scorpion Biosciences, Inc), Blackhawk Bio, Inc., and Abacus Biotech, Inc., unless otherwise indicated. On May 30, 2012, we formed two wholly-owned subsidiaries, Heat Biologics III, Inc. and Heat Biologics IV, Inc. We formed Heat Biologics GmbH (Heat GmbH), a wholly-owned limited liability company, organized in Germany on September 11, 2012 and Heat Biologics Australia Pty LTD, a wholly-owned company, registered in Australia on March 14, 2014. On October 25, 2016, we formed a wholly-owned subsidiary, Zolovax, Inc., to focus on the development of gp96 based vaccines targeting Zika, HIV, West Nile, dengue, yellow fever, and SARS-CoV-2. 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, we 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 our controlling ownership in Pelican from 80% to 85%. We assigned our proprietary rights related to the development and application of our ImPACT® therapy platform to Heat Biologics I, Inc. In November 2018, we formed Skunkworx Bio, Inc. (formerly known as Delphi Therapeutics, Inc.) which uses a unique and proprietary platform to generate new biological entities that we may rapidly advance into clinical development. Also, in November 2018, we formed Scorpion Biological Services, Inc. (“Scorpion”) (formerly known as Scorpion Biosciences, Inc.), to focus on developing bioanalytic, process development and manufacturing capability to service our in-house requirements as well as potentially those of others. In February 2021, we formed Abacus Biotech, Inc., a wholly-owned subsidiary to pursue additional opportunities related to our business.

We are also a “smaller reporting company”, as defined in Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited

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financial statements. We will cease to be a smaller reporting company if we have (i) more than $250 million in market value of our shares held by non-affiliates as of the last business day of our most recently completed second fiscal quarter or (ii) more than $100 million of annual revenues in our most recent fiscal year completed before the last business day of our second fiscal quarter and a market value of our shares held by non-affiliates more than $700 million as of the last business day of our second fiscal quarter.

On December 11, 2020, we effected a one-for-seven- reverse stock split. All per share numbers reflect the one-for seven reverse stock split.

Human Capital

We believe that our success depends upon our ability to attract, develop, retain and motivate key personnel. Our management and scientific teams possess considerable experience in drug discovery, research and development, manufacturing, clinical and regulatory affairs and believe we directly benefit from this experience and industry knowledge. Our research team comprises B.S., M.S. and Ph.D.-level scientists with expertise in oncology, immunology, and molecular biology.

As of December 31, 2021, we had a total of 49 full-time employees, of which 14 are part of our research team located in San Antonio, Texas, 16 are part of our research team located in Morrisville, North Carolina, 4 are part of our research team located in New Brunswick, New Jersey and 15 are part of our corporate team. We anticipate increasing our headcount upon the consummation of the pending acquisition of Elusys. We consider our relationships with our employees to be good. 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.

We have no collective bargaining agreements with our employees and have not experienced any work stoppages. We consider our relations with our employees to be good. Although, management continually seeks to add additional talent to its work force, management believes that it has sufficient human capital to operate its business successfully.

Our compensation programs are designed to align the compensation of our employees with our performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. The structure of our compensation programs balances incentive earnings for both short-term and long-term performance. Specifically:

we provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location;
we engage nationally recognized outside compensation and benefits consulting firms to independently evaluate the effectiveness of our executive compensation and benefit programs and to provide benchmarking against our peers within the industry;
we align our executives’ long-term equity compensation with our shareholders’ interests by linking realizable pay with stock performance;
annual increases and incentive compensation are based on merit, which is communicated to employees at the time of hiring and documented through our talent management process as part of our annual review procedures and upon internal transfer and/or promotion; and
all employees are eligible for health insurance, paid and unpaid leaves, a 401K retirement plan with employer matching contributions (maximum of 4% match) and life and disability/accident coverage. We also offer a variety of voluntary benefits that allow employees to select the options that meet their needs, including flexible time-off, telemedicine, and paid parental leave.

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Health and Safety

The health and safety of our employees is our highest priority, and this is consistent with our operating philosophy. Accordingly, with the global spread of the ongoing novel coronavirus pandemic, we have implemented plans designed to address and mitigate the impact of the COVID-19 pandemic on the safety of our employees and our business, which include:

adding work from home flexibility;
adjusting attendance policies to encourage those who are sick to stay home;
increasing cleaning protocols across all locations; and
initiating regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures.

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 a result of different factors, including the risks we face described below.

Risks Relating to our Company, Financial Position and Capital Requirements

We have had limited operations to date.

To date, we have not generated any revenue from product sales and substantially all of our revenue to date has been grant revenue that Pelican has received from CPRIT and a small amount of revenue from a research funding agreement. We do not anticipate generating any revenue from product sales for several years as to date we do not currently have any products approved for commercial sale. Although we will acquire inventory of Anthim, upon the consummation of the pending acquisition of Elusys, we will not acquire a significant amount of inventory for sale and therefore it will require several years for us to manufacture additional quantity of Anthim and receive any regulatory approvals. Therefore, we do not anticipate generating significant revenue from Anthim sales for several years and in fact anticipate to incur additional expenses associated with such product before generating significant revenue from sales of Anthim.  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, we are entering into a new line of business, the provision of contract development and manufacturing services and no assurance can be given that we will be able to generate revenue as a contract development and manufacturing organization (“CDMO”) or that we will be able to consummate our business strategy and plans. Financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the implementation of such plans. The building of the manufacturing facility will require us to incur significant expenses before we realize any revenue from such facility. 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.

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. To date, we have not obtained approval for commercialization of any of the products we have

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developed and have not proven that we can successfully commercialize any product.  In addition, we have never provided manufacturing services as a contract development and manufacturing organization and we have no proven that we can successfully operate a CDMO facility. The successful commercialization of any product candidates will require us to perform a variety of functions, including:

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, has not successfully completed any pivotal clinical trials and we have limited experience conducting and enrolling patients in clinical trials. Until the last few years, our operations, including the operations and those of our subsidiaries, have been limited primarily to organizing and staffing, acquiring, developing and securing our proprietary technology and undertaking preclinical trials and preparing for and conducting our Phase 1 and Phase 2 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 a limited operating history conducting commercial development of bioanalytics, process development and manufacturing activities, which may limit the ability of investors to make an informed investment decision.

We plan to expand our operations by operating a facility for the development of bioanalytics, process development and manufacturing activities. To date, we have limited experience manufacturing products for third parties and ourselves. Because of the numerous risks and uncertainties associated with development and manufacturing, we are unable to predict if we will be successful in providing such services to ourselves or third parties. Although we plan to use our anticipated facility to service our internal manufacturing needs, we also intend to generate revenue to offset the expenses we incur in operating the facility as well as the initial start-up expenses from third parties. Our ability to generate this revenue will depend, in part, on our ability to attract and maintain customers for our development, manufacturing and technology transfer services and on the amount of spent by the customers on such services. If our anticipated facility fails to attract customers and operate at sufficient capacity, our margins will suffer, and we may not be able to fund the costs we incur to operate the facility. Our bioanalytics, process development and manufacturing activities will also depend, in part, on our ability to attract and retain an appropriately skilled and sufficient workforce to operate our development and manufacturing facility and our ability to comply with various quality standards and environmental, health and safety laws and regulations.

We have incurred net losses every year since our inception and expect to continue to incur increased expenses and generate operating losses and experience negative cash flows and it is uncertain whether we will achieve profitability.

For the years ended December 31, 2021 and 2020, we incurred a net loss of $35.4 million and $26.4 million, respectively. We have an accumulated deficit of $165.7 million through December 31, 2021. 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. As stated above, we do not anticipate generating significant revenue from sales of our products for several years or from our manufacturing facility until such time as it is fully operational. 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 that are under development will be approved for commercial sale, or even product candidates and products that are approved for commercial sale we will ever generate significant sales or achieve profitability. Furthermore, there can be no assurance that we generate sufficient revenue from manufacturing services to support the expenses anticipated to be incurred by the manufacturing facility. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.

Even if we succeed in developing and commercializing one or more product candidates, consummate the pending acquisition of Elusys and are successful in launching Anthim or are successful in generating revenue as a CDMO, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue

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to incur significant operating expenses and anticipate that our expenses will increase substantially in the foreseeable future as we:

continue to undertake preclinical development and conduct clinical trials for product candidates;
seek regulatory approvals for product candidates;
implement additional internal systems and infrastructure;
devote resources to constructing a facility for the development of bioanalytics, process development and manufacturing activities;  
launch Anthim and engage in commercial scale manufacturing of Anthim, upon consummation of the pending acquisition of Elusys; 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 support our long-term business plans 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, 2021, our operating activities used net cash of approximately $38.1 million and as of December 31, 2021, our cash and cash equivalents and short-term investments were approximately $96.4 million. During the year ended December 31, 2020, our operating activities used net cash of approximately $22.0 million and as of December 31, 2020 our cash and cash equivalents and short-term investments were approximately $111.8 million. We have experienced significant losses since inception and have a significant accumulated deficit. As of December 31, 2021, our accumulated deficit totaled $165.7 million and as of December 31, 2020, our accumulated deficit totaled $130.6 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 of our product candidates currently in development in the near future until we or our potential partners successfully commercialize our products and in order to generate significant revenue from Anthim sales we will need to engage in full scale manufacturing of Anthim which will take several years. 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 and if and when we consummate the pending acquisition of Elusys and commence full scale manufacturing of Anthim.  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. In addition, we expect our expenses to increase due to the build out of the manufacturing facility in San Antonio and the purchase of equipment for the facility.

We will need to raise additional capital to fund our long term operations and milestone payments and we cannot be certain that funding will be available to us 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, 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 our number of authorized shares of common stock and various rules of the SEC and the NYSE American that place limits on the number and dollar amount of securities that we may sell. 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, assuming we are able to sufficiently increase our authorized number of shares of common stock. 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 fail to raise 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 NYSE American. 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 do not anticipate generating revenue from our product sales for many years and we do not anticipate generating revenue from manufacturing services for at least one year, when the facility is operational.

We currently do not have regulatory approvals for the sale of any products that we have been developing and we do not expect to derive significant revenue from the sale of Anthim upon consummation of the pending acquisition of Elusys until we can manufacture a sufficient quantity of Anthim which we expect will take several years after the acquisition of Elusys is consummated to obtain the necessary approvals and secure a manufacturing slot.  Although the Merger Agreement provides that we will acquire some inventory of Anthim, the inventory acquired will not be a significant amount and is not expected to generate significant revenue. In addition, until our manufacturing facility that we are building is fully operational, we do not expect to generate significant revenue from services and expect to incur significant expenses for the next several years.

Business Disruptions could seriously harm our business, financial condition, and results of operations.

Our operations, and those of our CROs and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, public health pandemics or epidemics (including, for example, the ongoing COVID-19 pandemic), geopolitical events, including civil or political unrest (such as the ongoing conflict between Ukraine and Russia), terrorism, insurrection or war, and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

 

Our business and the business of the supplier of our clinical product candidate and the suppliers of the standard of care drugs that are administered in combination with our clinical product candidate could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the recent outbreak of novel coronavirus (COVID-19). A significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect our planned operations. Such events could result in the complete or partial closure of one or more manufacturing facilities which could impact our supply of our clinical product candidate or the standard of care drugs that are administered in combination with our clinical product candidate. In addition, an outbreak near where our clinical trial sites are located would likely impact our ability to recruit patients, delay our clinical trials, and could affect our ability to complete our clinical trials within the planned time periods. In addition, it could impact economies and financial markets, resulting in an economic downturn that could impact our ability to raise capital or slow down potential partnering relationships.

Coronavirus could adversely impact our business, including our clinical trials.

Since December 2019, a novel strain of coronavirus, COVID-19, has spread to multiple countries, including the United States where we have planned or active clinical trial sites. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations.

As the COVID-19 pandemic continues to spread around the globe, we could experience disruptions that could severely impact our business and clinical trials, including:

delays in initiation of or difficulties in enrolling patients in our clinical trials due to a lack of personal protection equipment supply for patients and subsequent temporary cessation of non-essential patient procedures;
delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

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diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;
interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others;
limitations in employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;
delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials;
interruption in global shipping that may affect the transport of clinical trial materials, such as investigational drug product used in our clinical trials;
changes in local regulations as part of a response to the COVID-19 outbreak which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;
delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;
delay in the timing of interactions with the FDA due to absenteeism by federal employees or by the diversion of their efforts and attention to approval of other therapeutics or other activities related to COVID-19; and
refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.

In addition, the COVID-19 outbreak could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or laboratory facilities, or due to quarantines. COVID-19 illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.

The global outbreak of COVID-19 continues to rapidly evolve. The extent to which the COVID-19 outbreak may impact our business and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.

We currently have no product revenues and may not generate product revenue at any time in the near future, if at all.

None of the product candidates for which we have conducted clinical trials are currently approved for sale and we cannot guarantee that they will ever have any drug products approved for sale. The Anthim product that we intend to acquire upon consummation of the Merger, although approved for commercial sale, will not be manufactured at the facility that manufactured the Anthim previously sold by Elusys and therefore the facility will require regulatory approval. 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,

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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. 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 NYSE American 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.

We are substantially dependent on the success of our product candidates, only three of which are currently being tested in clinical trials, and we cannot provide any assurance that any of our product candidates being tested in clinical trials will be commercialized.

To date, 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, HS-130 and PTX-35 are our only current products in clinical trials. 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 any 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.

Our stock price has fluctuated in the past, has recently been volatile and may be volatile in the future, and as a result, investors in our common stock could incur substantial losses and our ability to raise fuds may be impacted.

Our stock price has fluctuated in the past, has recently been volatile and may be volatile in the future. On February 9, 2021, the reported low sale price of our common stock was $11.51 per share and the reported high sales price was $17.00 per share. For comparison purposes, on December 31, 2021, the price of our common stock closed at $3.04 per share. We may incur rapid and substantial decreases in our stock price in the foreseeable future that are unrelated to our operating performance or prospects. In addition, the recent outbreak of the novel strain of coronavirus (COVID-19) has caused broad stock market and industry fluctuations. The stock market generally and the market for biotechnology and pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may experience losses on their investment in our common stock. The market price for our common stock may be influenced by many factors, including the following:

investor reaction to our business strategy;
the success of competitive products or technologies;
our continued compliance with the listing standards of the NYSE American;
regulatory or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our products;
results of our clinical trials;
actions taken by regulatory agencies with respect to our products, clinical studies, manufacturing process or sales and marketing terms;
variations in our financial results or those of companies that are perceived to be similar to us;
the success of our efforts to acquire or in-license additional products or product candidates;

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developments concerning our collaborations or partners;
developments or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our products;
our ability to consummate the acquisition of Elusys and generate revenue from Anthim sales;
our ability to generate revenue from our CDMO facility;
our ability or inability to raise additional capital and the terms on which we raise it;
declines in the market prices of stocks generally;
trading volume of our common stock;
sales of our common stock by us or our stockholders;
general economic, industry and market conditions; and
other events or factors, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, such as the recent Russian invasion of Ukraine as well as continued and nay new sanctions against Russia by, among others, the European Union and the Unites States, which restrict a wide range of trade and financial dealings with Russia and Russia parties, public health issues including health epidemics or pandemics, such as the recent outbreak of the novel coronavirus (COVID-19), and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations, disrupt the operations of our suppliers or result in political or economic instability.

These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Since the stock price of our common stock has fluctuated in the past, has been recently volatile and may be volatile in the future, investors in our common stock could incur substantial losses. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. There can be no guarantee that our stock price will remain at current prices or that future sales of our common stock will not be at prices lower than those sold to investors.

If our acquired intangible assets become impaired, we may be required to record a significant charge to earnings.

We regularly review acquired intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. We test goodwill and indefinite-lived intangible assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of the intangible assets may not be recoverable, include: macroeconomic conditions, such as deterioration in general economic conditions; industry and market considerations, such as deterioration in the environment in which we operate; cost factors, such as increases in labor or other costs that have a negative effect on earnings and cash flows; our financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; other relevant entity-specific events, such as changes in management, key personnel, strategy, or customers; and sustained decreases in share price. During the year ended December 31, 2021, we recorded a non-cash goodwill impairment charge and indefinite-lived intangible assets impairment charge totaling $3.8 million.

Risks Related to Our Clinical Development, Regulatory Approval and Commercialization

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

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to other available therapies, including any new drugs that may be approved for the indications we are investigating. As we seek to advance our clinical programs, we remain in close contact with our CROs and clinical sites and intend to monitor and assess the impact of COVID-19 on our studies, current timelines and the costs of our studies. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of enrollment in clinical trials, and no assurance can be given that the impact of COVID-19 will not seriously disrupt our ability to enroll patients in our clinical trials.

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 currently in clinical trials or any product candidates we acquire or develop in the future, including obtaining necessary approvals for the sale of Anthim, upon consummation of  the pending acquisition of Elusys, in light of the fact that the manufacturing of the Anthim will not be at the facility that manufactured the Anthim previously sold by Elusys and therefore the facility will require regulatory approval. 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:

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.

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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, HS-130 and PTX-35 are our only current product candidates in clinical trials and our other product candidates are all in the preclinical stage of development. Although we have completed enrollment for a Phase 2 clinical trial for HS-110 and a Phase 1 clinical trial of HS-130, 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.

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 or initial data in our Phase 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:

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;

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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 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.

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 T-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:

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.

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We currently rely upon our gp96 platform for development of many of our product candidates, which if unsuccessful may impact the success of several of our product candidates.

We are currently developing two product candidates HS-110 and HS-130 based upon our gp96 platform. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted to our gp96 platform. Accordingly, our business currently depends heavily on the successful development, regulatory approval and commercialization of our gp96 platform, which may not receive regulatory approval or be successfully commercialized even if regulatory approval is received. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of product candidates are and will remain subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries that each have differing regulations. We are not permitted to market any product in the United States unless and until we receive approval of a BLA, from the FDA, or in any foreign countries unless and until we receive the requisite approval from regulatory authorities in such countries. We have never submitted a BLA to the FDA or comparable applications to other regulatory authorities and do not expect to be in a position to do so for the foreseeable future. Obtaining approval of a BLA is an extensive, lengthy, expensive and inherently uncertain process, and the FDA may delay, limit or deny approval of its product for many reasons.

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 oncology competitors have oncology compounds already approved or in development and there are currently a few approved COVID-19 vaccines and one other approved Anthrax therapeutic. 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:

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.

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.

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; however to date we have relied on third parties for substantially all of our manufacturing needs. To date, the selection and initial replication

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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 currently lack all of the necessary 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 expired in October 2019. In addition, the manufacturer of our HS-110 has closed its facility where it manufactured our HS-110 and therefore future manufacture of HS-110 by such manufacturer will require additional regulatory approvals for the new manufacturing site. Any future orders with such manufacturer for HS-110 will be pursuant to the terms of purchase orders unless a new definitive agreement is entered into. If not renegotiated, we may experience longer manufacturing lead times for any purchase orders we place with either such manufacturer under purchase orders or any new manufacturer, especially in light of additional regulatory requirements due to the change in the manufacturing facility. In addition, our manufacturer for many of our other product candidates, do not currently have the capacity to engage in large scale manufacturing of our products and therefore we will be required to engage new manufacturers for many of our current early stage product candidates. 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. We have performed assay development work at our Texas laboratory to support our clinical needs as well as those of third parties. Elusys’s agreement with the manufacturer of Anthim is an exclusive agreement that expires ten years after regulatory approval of Anthim at a 6,000 liter scale for the manufacture of Anthim at a new facility at a higher scale. To date, the manufacturer has only manufactured Anthim at a 5,000 liter scale. Therefore, future manufacture of Anthim by such manufacturer will require additional regulatory approvals for the new manufacturing site and new scale. In an effort to decrease our dependence upon third party manufacturers and enhance efficiency, we are exploring the establishment of process development and manufacturing capability to support our clinical trials and potentially third party manufacturing needs. If any of our current product candidates, or any product candidates we may develop or acquire in the future, receive FDA approval, we may 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:

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, which for several of our product candidates we expect to be required to do for later stage clinical trials and commercialization, 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 our 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 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.

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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.

If we establish in-house development and manufacturing capabilities, there are a number of risks that could impact our financial condition, operating results and cash flows due to disruption of operations at the location or facility which may impede our ability to deliver assays or manufacture our products.

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.

We rely on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm our business.

We rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials, and we expect to have limited influence over their actual performance.

We also rely upon CROs to monitor and manage data for our clinical programs, as well as the execution of future nonclinical studies. We expect to control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities.

We and our CROs will be required to comply with the Good Laboratory Practices and GCPs, which are regulations and guidelines enforced by the FDA and are also required by the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities in the form of International Conference on Harmonization of Technical Requirements for Pharmaceuticals for Human Use guidelines for any of our product candidates that are in preclinical and clinical development. The Regulatory authorities enforce GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of subjects, we may be required to repeat clinical trials, which would delay the regulatory approval process.

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Our CROs will not be our employees, and we will not control whether or not they devote sufficient time and resources to our future clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities which could harm our competitive position. We face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may reduce our trade secret protection and allow our potential competitors to access and exploit our proprietary technology. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize any product candidate that we develop. As a result, our financial results and the commercial prospects for any product candidate that it develops would be harmed, its costs could increase, and our ability to generate revenues could be delayed.

If our relationship with these CROs terminate, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or adding additional CROs involves substantial cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we intend to carefully manage our relationships with our CROs, there can be no assurance that it will not encounter challenges or delays in the future or that these delays or challenges will not have an adverse impact on our business, financial condition and prospects.

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. We currently depend on third-party suppliers for key materials and services used in its research and development, as well as manufacturing processes, and are subject to certain risks related to the loss of these third-party suppliers or their inability to supply us with adequate materials and services. We do not control the manufacturing processes of the CDMOs, with whom it contracts and is dependent on these third parties for the production of its therapeutic candidates in accordance with relevant regulations (such as current Good Manufacturing Practices, or “cGMP”, which includes, among other things, quality control, quality assurance and the maintenance of records and documentation.

To succeed, clinical trials require adequate supplies of study material, which may be difficult or uneconomical to procure or manufacture and there can be no assurance that we will successfully procure such study material or even if procured, that we can do so in quantities and in a timely manner to allow our clinical trials to proceed as planned. We and our suppliers and vendors may not be able to (i) produce our study material to appropriate standards for use in clinical studies, (ii) perform under any definitive manufacturing, supply or service agreements with us, or (iii) remain in business for a sufficient time to successfully produce and market our product candidates. If we do not maintain important manufacturing and service relationships, we may fail to find a replacement supplier or required vendor or manufacturer which could delay or impair our ability to obtain regulatory approval for our products and substantially increase our costs or deplete profit margins, if any. Although we believe additional manufacturers and vendors are available, if any of our manufacturers or vendors were to limit or terminate production or otherwise fail to meet the quality or delivery requirements needed to satisfy the supply commitments, the process of locating and qualifying alternate sources could require up to several months, during which time our production could be delayed. Any such curtailment in the availability of products could have a material adverse effect on our business, financial position and results of operations. In addition, because regulatory authorities must generally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays or higher raw material costs. Although we do believe that replacement manufacturers and vendors are available, we may not be able to enter into agreements with them on terms and conditions favorable to us and there could be a substantial delay before a new facility could be qualified and registered with the FDA and foreign regulatory authorities. If we are unable to establish in-house development and manufacturing capabilities, we may not be able to reduce our dependency on third-party manufacturers.

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For our 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 current clinical trial 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. As stated above, our manufacture of Anthim upon consummation of the pending acquisition of Elusys will require additional regulatory approval. 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.

We have no experience selling, marketing or distributing products, and have no internal capability to do so.

To date, we have not had any sales, marketing or distribution capabilities. Although we intend to hire some of the Elusys employees who have such experience, we do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of our other 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 Anthim and 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

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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:

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 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.

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.

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Our ability to generate product revenues will be diminished if our products sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.

Our ability to commercialize our products, alone or with collaborators, will depend in part on the extent to which reimbursement will be available from:

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 Patient Protection and Affordable Care Act (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

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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 70% 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.

Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. It is unclear how these challenges and other efforts to replace the ACA will impact our business in the futures.

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 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, one laboratory in New Jersey and Pelican operates a laboratory in Texas. In our laboratory in Texas, we will 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.

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, one laboratory in New Jersey 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

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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:

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, expanding our relationships with distributors and manufacturers and expanding sales of Anthim upon consummation of the pending acquisition of Elusys. Doing business internationally involves a number of risks, including:

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;
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 or new lines of business 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 may also make investments in other companies of technologies, new lines of business, or expansion of research bioanalytical development and manufacturing capacities. 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 acquisition of the equity of Pelican in 2017 and planned acquisition of Elusys, 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 or investments in other companies or technologies or

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new lines of business 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.

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 CPRIT. 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, to maintain certain records and documentation, to notify CPRIT of certain unexpected adverse events and our obligation to use reasonable efforts to ensure that any new or expanded preclinical testing, clinical trials, commercialization or manufacturing related to any aspect to our CPRIT project take place in Texas, 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. 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.

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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. 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.

We rely extensively on our information technology systems and are vulnerable to damage and interruption.

We rely on our information technology systems and infrastructure to process transactions, summarize results and manage our business, including maintaining client and supplier information. Additionally, we utilize third parties, including cloud providers, to store, transfer and process data. Our information technology systems, as well as the systems of our suppliers and other partners, whose systems we do not control, are vulnerable to outages and an increasing risk of continually evolving deliberate intrusions to gain access to company sensitive information. Likewise, data security incidents and breaches by employees and others with or without permitted access to our systems pose a risk that sensitive data may be exposed to unauthorized persons or to the public. A cyber-attack or other significant disruption involving our information technology systems, or those of our vendors, suppliers and other partners, could also result in disruptions in critical systems, corruption or loss of data and theft of data, funds or intellectual property. We may be unable to prevent outages or security breaches in our systems. We remain potentially vulnerable to additional known or yet unknown threats as, in some instances, we, our suppliers and our other partners may be unaware of an incident or its magnitude and effects. We also face the risk that we expose our vendors or partners to cybersecurity attacks. Any or all of the foregoing could adversely affect our results of operations and our business reputation.

Any failure to maintain the security of information relating to our customers, employees and suppliers, whether as a result of cybersecurity attacks or otherwise, could expose us to litigation, government enforcement actions and costly response measures, and could disrupt our operations and harm our reputation We are a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicable to smaller reporting companies will make our common stock less attractive to investors.

In connection with the sales and marketing of our products and services, we may from time to time transmit confidential information. We also have access to, collect or maintain private or confidential information regarding our clinical trials and the patients enrolled therein, employees, and suppliers, as well as our business. Cyberattacks are rapidly evolving and becoming increasingly sophisticated. In addition, as the manufacturer of biodefense product sold to the U.S. government, Elusys has access to highly confidential government information. It is possible that computer hackers and others might compromise our security measures, or security measures of those parties that we do business with now or in the future and obtain the personal information of patients in our clinical trials, vendors, employees and suppliers or our business information. A security breach of any kind, including physical or electronic break-ins, computer viruses and attacks by hackers, employees or others, could expose us to risks of data loss, litigation, government enforcement actions, regulatory penalties and costly response measures, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation, which could cause us to lose market share and have an adverse effect on our results of operations.

We may face particular data protection, data security and privacy risks in connection with the European Union’s Global Data Protection Regulation and other privacy regulations.

Outside of the United States, the laws, regulations and standards in many jurisdictions apply broadly to the collection, use, and other processing of personal information. If we should engage in business in the European Union, including selling products such as Anthim, upon consummation of the acquisition of Elusys, we will be subject to such laws. For example, in the European Union, the collection and use of personal data is governed by the provisions of the General Data Protection Regulation (the “GDPR”). The GDPR, together with national legislation, regulations and guidelines of the European Union member states governing the processing of personal data, impose strict obligations on entities subject to the GDPR,

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including but not limited to: (i) accountability and transparency requirements, and enhanced requirements for obtaining valid consent from data subjects; (ii) obligations to consider data protection as any new products or services are developed and to limit the amount of personal data processed; (iii) obligations to comply with the data protection rights of data subjects; and (iv) obligations to report certain personal data breaches to governmental authorities and individuals. Data protection authorities from the different E.U. member states and other European countries may enforce the GDPR and national data protection laws differently, and introduce additional national regulations and guidelines, which adds to the complexity of processing European personal data. Failure to comply with the requirements of the GDPR and the related national data protection laws may result in significant monetary fines and other administrative penalties (the GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater) as well as civil liability claims from individuals whose personal data was processed. Additionally, expenses associated with compliance could reduce our operating margins.

The GDPR also prohibits the transfer of personal data from the E.U. to countries outside of the E.U. unless made to a country deemed by the European Commission to provide adequate protection for personal data or accomplished by means of an approved data transfer mechanism (e.g., standard contractual clauses). Data protection authority guidance and enforcement actions that restrict companies’ ability to transfer data may increase risk relating to data transfers or make it more difficult or impossible to transfer E.U. personal data to the U.S.

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 potential international expansion, including sales of Anthim, upon consummation of the pending acquisition of Elusys, outside of the United States. Doing business internationally involves a number of risks, including:

multiple, conflicting and changing laws and regulations such as tax and transfer pricing laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
being subject to additional privacy and cybersecurity laws;
failure by us or distributors to obtain regulatory approvals for the sale or use of products in various countries;
difficulties in managing foreign operations;
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 future international expansion and operations and, consequently, have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

Our operating results may be adversely affected by fluctuations in foreign currency exchange rates and restrictions on the deployment of cash across global operations.

Although we report operating results in U.S. dollars, if we engage in sales of products internationally, our revenues and expenses are or will be denominated in currencies other than the U.S. dollar, particularly in Europe. Fluctuations in foreign currency exchange rates can have a number of adverse effects on us. Because our consolidated financial statements are presented in U.S. dollars, we will be required to translate revenues, expenses and income, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, changes in the value of the U.S. dollar against other currencies will affect revenues, income from operations, other income (expense), net and the value of balance sheet items originally denominated in other currencies. There is no guarantee that our financial results will not be adversely affected by currency exchange rate fluctuations. In addition, in some countries we could be subject

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to strict restrictions on the movement of cash and the exchange of foreign currencies, which could limit our ability to use these funds across its global operations.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.

The FCPA and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our policies mandate compliance with these anti-bribery laws, which often carry substantial penalties, including criminal and civil fines, potential loss of export licenses, possible suspension of the ability to do business with the federal government, denial of government reimbursement for products and exclusion from participation in government health care programs. We may operate in jurisdictions that have experienced governmental and private sector corruption to some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. We cannot assure that the internal control policies and procedures always will protect us from reckless or other inappropriate acts committed by affiliates, employees or agents. Violations of these laws, or allegations of such violations, could have a material adverse effect on our business, financial position and results of operations.

Risk Related to the Pending Merger and Elusys.

If the conditions to the Merger are not met, the Merger will not occur.

Specified conditions must be satisfied or waived in order to complete the Merger, including, among others:

the respective representations and warranties of us and Elusys shall be true and correct in all material respects as of the date of the Merger Agreement and the closing;
performance or compliance in all material respects by us and Elusys with their respective covenants and obligations in the Merger Agreement;
Elusys shall have obtained any consents and waivers of approvals required in connection with the Merger; and
no material adverse effect with respect to us or Elusys or its subsidiaries shall have occurred since the date of the Merger Agreement.

The combined company may not experience the anticipated strategic benefits of the Merger.

The Merger is expected to provide certain strategic benefits to both parties that would not be realized  if Elusys was not acquired by Heat. Specifically, we believe the Merger should provide certain strategic benefits which would enable us to accelerate our business plan to combat infectious disease. The market price of our common stock however may decline as a result of the Merger if the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by us or Elusys or investors, financial analysts, or industry analysts. There can be no assurance that these anticipated benefits of the Merger will materialize or that if they materialize will result in increased stockholder value or revenue stream to the combined company.

Our Chief Executive Officer and Chairman of the Board of Directors has a conflict of interest that may influence him to support funding of Elusys.

Jeffrey Wolf, the Chief Executive Officer and Chairman of the Board of Directors is the founder of Elusys, served on its  Board of Directors, and received a financial interest in the surviving subsidiary. Mr. Wolf has a direct or indirect financial interest in both Elusys and our company.

We may be unable to successfully integrate the Elusys businesses with our current management and structure.

Our failure to successfully complete the integration of Elusys could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. Integration challenges may include the following:

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assimilating Elusys’s technology and retaining personnel;

estimating the capital, personnel and equipment required for Elusys based on the historical experience of management with the businesses they are familiar with; and

minimizing potential adverse effects on existing business relationships.

Elusys is substantially dependent on various US Government contracts that are material to its business and if the agreements were to be terminated, it would have an immediate material adverse effect on its business, operating results and financial condition.

Elusys expects to receive approximately $80 million in the aggregate from the SNS upon fulfillment of existing U.S. Government contracts CLIN 0001-0007 for ANTHIM, all of which subject to adjustments is to be paid over to the shareholders of Elusys. Elusys also intends to continue to seek other U.S. Government contracts for Anthim. If Elusys breaches the terms of its U.S. Government contracts, the U.S. Government has the right to terminate the agreement. If Elusys were to lose or otherwise be unable to maintain these contracts or be unable to secure new U.S. Government contracts in the future for Anthim, it would have an immediate material adverse effect on its business, operating results and financial condition.

Even if the Merger is consummated, we do not anticipate generating revenue from Anthim sales for several years.

Even if the Merger is consummated, we do not expect to derive revenue from the sale of Anthim for several years.  Although after the consummation of the Merger, we will receive payments from orders for Anthim previously contracted for prior to Closing, we will not retain such payments and instead will redistribute such payments to the stockholders of Elusys, subject to adjustments. Since substantially all of the current Anthim inventory is earmarked for contracts that have been previously entered into, we will be required to manufacture a new batch of Anthim before any new contracts for sales of Anthim can be fulfilled. Since it is not anticipated that we will have regulatory approvals or be able to complete manufacturing of Anthim for several years, it is not anticipated that we will generate revenue from Anthim sales for many years and there can be no assurance that regulatory approvals will be received or if received that they will be received when anticipated.  

Our ability to generate product revenues from sale of Anthim after consummation of the Merger is dependent upon government spending and compliance with the government contracts.

To date, all of Elusys’ revenue has been derived from sale of Anthim to U.S. Governmental agencies.  If the U.S. government were to cut its healthcare spending and in particular its biodefense spending, our ability to generate revenue after consummation of the Merger from Anthim sales will be adversely impacted.

To date, Anthim has been sold to a limited number of customers and there can be no assurance that after consummation of the Merger we will be successful in expanding the number of Anthim customers.

To date, all of the sales of Anthim have been a limited number of sales to agencies of the United States. Our strategy is to expand the number of sales to such agencies as well as expand the customer base outside of the United States. To date, we have not had any experience with distribution and sales of commercial products.  There can be no assurance that there will be additional demand for Anthim or that we will be successful in our distribution and sale efforts.

In order to develop Anthim, wet will have to devote significant resources to Anthim.

Pursuant to the terms of the Merger Agreement, we have agreed to use reasonable efforts to commercialize Anthim.  Obtaining requisite regulatory approvals for the manufacture and sale of Anthim and manufacturing costs are anticipated to be significant. We have incurred significant losses from operations to date and expect our expenses to increase in connection with our ongoing activities, and the addition of Elusys’ activities. There can be no assurance that funding will be available on acceptable terms on a timely basis, or at all.

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Elusys has been manufacturing the drug product with one manufacturer pursuant to the terms of an exclusive manufacturing agreement

To date, all Anthim bulk drug substance has been manufactured by a one manufacturer at a 5,000 liter scale pursuant to the terms of an exclusive manufacturing agreement.  Elusys’ ability to manufacture additional batches of bulk drug substance will be dependent upon the slotting availability of the manufacturer.  In addition, the manufacturer has decommissioned its 5,000 liter assets and therefore any further manufacturing by the manufacturer will be at a 6,000 liter scale.  This new scale will require new regulatory approval from the FDA, the timing of approval, if obtained cannot be certain.  In addition, there is no assurance that the bulk drug substance can be successfully manufactured at a 6,000 liter scale in a cost efficient manner.

Risks Related to Intellectual Property

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 expired in 2019 and such protection does not prevent unauthorized use of such technology. In addition, our licenses 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.

Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. As a result, in response to the COVID-19 pandemic, it is possible that certain countries may take steps to facilitate compulsory licenses that permit the distribution of a COVID-19 vaccine in those countries. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the relevant patent rights. If we or any of our licensors is forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affected.

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. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. In addition, competitors may design around our technology or develop competing technologies.

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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:

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, 2022, and 2023 our minimum annual payment obligations under our licensing agreements required to be paid by us or our subsidiaries with the passage of time, are approximately $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 Pelican Stockholders pursuant to the terms of the stock purchase agreement that we entered into with Pelican and certain stockholders of Pelican in March 2017. The license agreements also provide for certain developmental milestones, as does the purchase agreement that we entered into

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with Pelican and certain stockholders of Pelican in March 2017, 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 or have sufficient funds to make required payments under the purchase agreement. Any failure to make the payments or reach the milestones required by the license agreements would permit the licensor to terminate the license and any failure to make payments under the purchase agreement would constitute a default under the purchase agreement. 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.

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.

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.

General Risk Factors

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 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. Over the next 12 months, we expect to hire additional new employees both in North Carolina and for Scorpion in Texas. In fact, due to the CPRIT Grant and tax incentives in Texas, we are required to hire and maintain employees 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.

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We are a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicable to smaller reporting companies will make our common stock less attractive to investors.

We are a smaller reporting company under Rule 12b-2 of the Exchange Act. For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. However, our status as a smaller reporting company will not exempt us from the requirement to provide the annual attestation report from our independent registered public accounting firm regarding the effectiveness of our internal control over financial reporting. We cannot predict if investors will find our common stock less attractive because we may rely on smaller reporting company exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all.

Our failure to meet the continued listing requirements of The NYSE American LLC (the “NYSE American”) could result in a de-listing of our common stock.

Our shares of common stock are currently listed on the NYSE American. If we fail to satisfy the continued listing requirements of the NYSE American, such as the corporate governance requirements, minimum bid price requirement or the minimum stockholder’s equity requirement, NYSE American 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 our common stock was listed on the Nasdaq Capital Market and we received notices from the Listing Qualifications Department of Nasdaq Stock Market LLC (“Nasdaq”) that we failed to comply with the stockholder’s equity requirements and the minimum closing bid requirements. On June 21, 2019, we received written notice from the Listing Qualifications Department of the Nasdaq Stock Market LLC notifying us that for the preceding 30 consecutive business days (May 9, 2019 through June 20, 2019), our common stock did not maintain a minimum closing bid price of $1.00 per share (“Minimum Bid Price Requirement”) as required by Nasdaq Listing Rule 5550(a)(2). On July 24, 2020, we received written notice from The Nasdaq Capital Market that from July 10, 2020 through July 23, 2020, the closing bid price of our common stock has been at $1.00 per share or greater and accordingly we had regained compliance with Nasdaq Listing Rule 5550(a)(2) and the matter was now closed. There can be no assurance given that we will be able to continue to satisfy our continued listing requirements and maintain the listing of our common stock on the NYSE American going forward.

The possible issuance of common stock subject to options, restricted stock units and warrants may dilute the interests of stockholders.

As of March 9, 2022, awards for 2,925,664 shares of common stock are outstanding under our equity compensation plans and 423,225 shares of common stock remain available for grants under the plans. In addition, as of March 9, 2022, we have warrants exercisable for 747,383 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 250,000,000 shares of our common stock and 10,000,000 shares of preferred stock. In certain circumstances, the common stock, as well as the awards available for issuance under the incentive 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. Our Board of Directors is authorized to create and issue from time to time, only with stockholder approval, up to an aggregate of

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10,000,000 shares of preferred stock of which 8,212,500 have been designated. 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.

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.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for certain types of state actions that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the exclusive forum for (i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine, except, in each case for claims arising under the Securities Act of 1933, as amended, the Exchange Act, or other federal securities laws for which there is exclusive federal or concurrent federal and state jurisdiction.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, employees, control persons, underwriters, or agents, which may discourage lawsuits against us and our directors, employees, control persons, underwriters, or agents. Additionally, a court could determine that the exclusive forum provision is unenforceable, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find these provisions of our amended and restated bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.

Future sales of our common stock by our existing stockholders could cause our stock price to decline.

On March 9, 2022, we had 25,649,824 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

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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.

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 $11.55, $11.09 and $5.78 per share. 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.

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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 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, manufacture acquired product candidates and we build our CDMO facility. 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 other than limited grant funding for the CDMO facility. 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 627 Davis Drive, Suite 400, Morrisville, North Carolina 27560. In October 2019, we entered into a lease that expires October 31, 2027 for 7,492 square feet of office and laboratory space for monthly rent of $17,525 exclusive of payments required for maintenance of common areas and utilities. In June 2021, we entered into a lease that expires 96 months from rent commencement date for 15,996 square feet of expanded office and laboratory space for monthly rent of $43,656 exclusive of payments required for maintenance of common areas and utilities. On the day immediately preceding the rent commencement date, the current lease will terminate.

In January 2018, Pelican entered into a five-year lease for 5,156 square feet of office and laboratory space located in San Antonio, Texas for monthly rent of $9,668, exclusive of payments required for maintenance of common areas and utilities.

In July 2020, and amended August 2021, we entered into a lease for our Skunkworx subsidiary in North Brunswick, New Jersey that is expected to expire July 1, 2023 for 2,725 square feet of laboratory space for monthly rent of $7,232 exclusive of payments required for utilities.

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On October 5, 2021, Scorpion entered into a lease for approximately 20,144 square feet of office and lab space located at 1305 E. Houston Street, San Antonio, Texas 78205 for general office, laboratory, research, analytical, and/or biomanufacturing purposes for monthly base rent starting at $50,360.00 and increasing at the rate of three percent (3%) on an annual basis up to a maximum monthly base rent of $76,174.02.

We believe our existing properties are adequate for our current needs.

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.

PART II

Item 5.        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity

Market Information

Since February 14, 2022, our common stock has traded on the NYSE American under the symbol “HTBX”. Prior to February 14, 2022, our common stock traded on the Nasdaq Capital Market under the symbol “HTBX”.

Holders

As of March 9, 2022, there were approximately 21 stockholders of record of our common stock. The number of holders of record is based on the actual number of holders registered on the books of our transfer agent and does not reflect holders of shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

On December 10, 2020, we announced a reverse stock split of our shares of common stock at a ratio of one-for-seven. The reverse stock split took effect at 12:01 a.m. ET on December 11, 2020, and our common stock began to trade on a post-split basis at the market open on December 11, 2020. During our annual stockholders meeting held February 27, 2020, 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 seven 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 159.8 million shares to approximately 22.8 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.

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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, 2021.

Equity Compensation Plan Information

    

    

    

Number of 

securities

 remaining

 available for 

Number of

future issuance

 securities to be

 under equity 

 issued upon 

Weighted-average 

compensation 

exercise of 

exercise price of

plans (excluding 

outstanding

 outstanding 

 

securities reflected 

Plan Category

 options

options

 

in column (a))

 

(a)

 

(b)

 

(c)

Equity compensation plans approved by security holders

 

  

 

  

 

  

2009 Stock Incentive Plan (1)

 

2,622

$

204.97

 

2014 Stock Incentive Plan

 

21,368

$

158.60

 

16,620

2017 Stock Incentive Plan

 

38,227

$

18.51

 

19,018

2018 Stock Incentive Plan (2)

 

2,847,755

$

6.09

 

323,259

Total

 

2,909,972

$

7.55

 

358,897

———————

(1)The 2009 Stock Incentive Plan terminated, such that no further awards are available for issuance under this plan. Outstanding awards under this plan continue in accordance with the respective terms of such grants.
(2)The 2018 Stock Incentive Plan has 750,000 shares authorized for issuance which are subject to forfeiture if not approved at the 2022 annual shareholder meeting.

Recent Sales of Unregistered Securities

Except as previously disclosed in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, we had no sales of unregistered equity securities during the year ended December 31, 2021.

Purchase of Equity Securities

We have not purchased any of our equity securities during the period covered by this Annual Report.

Item 6. [Reserved]

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, 2021 and December 31, 2020 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 Annual Report.

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Company Overview

We are a biopharmaceutical company primarily engaged in the development of immune therapies and vaccines. Our gp96 platform is designed to activate the immune system. This platform has broad applications in cancer and infectious disease. Our platform leverages gp96’s role as a natural molecular warning system that presents antigens to the immune system. HS-110 (viagenpumatucel-L) is our first allogeneic (“off-the-shelf”) cell line biologic product candidate in a series of proprietary immunotherapies designed to stimulate a patient’s T-cells to destroy cancer. HS-130 is an allogeneic cell line engineered to express the extracellular domain of OX40 ligand fusion protein (OX40L-Fc), a key costimulator of T-cells, with the potential to augment antigen-specific CD4+ T-cell and CD8+ T-cell responses. We have initiated development of a new COVID-19 vaccine program under our Zolovax, Inc. subsidiary that utilizes our gp96 platform to secrete SARS-CoV-2 antigens. Our subsidiary Pelican Therapeutics, Inc. (“Pelican”), is developing PTX-35, a novel T-cell co-stimulator agonist antibody targeting DR3/TNFRSF25 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. We have completed the following clinical milestones:  patient enrollment completed for our HS-110 Phase 2 non-small cell lung cancer (NSCLC) clinical trial, enrollment and dosing of fifteen patients in our HS-130 Phase 1 clinical trial, and dosing of fifteen patients in our PTX-35 Phase 1a clinical trial.

We are also providing pre-clinical, CMC development, and administrative support for these programs, while constantly focusing on protecting and expanding our intellectual property in areas of strategic interest. As we advance our clinical programs, we are in close contact with our CROs and clinical sites to monitor the impact of COVID-19 on our studies, current timelines, and costs.

In an effort to decrease our dependence upon third party manufacturers and enhance efficiency, we are designing and building a cGMP facility in San Antonio, Texas for bioanalytics, process development and manufacturing activities. We will also offer external customers fee-for-service contracting after completion of the build out.

Our gp96 Platform includes ImPACT® and ComPACTwhich 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 regimen 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 this is a highly differentiated approach as our platform delivers a broad range of tumor antigens that are previously unrecognized by the patient’s immune system. Our platform combines these tumor antigens with a powerful, naturally occurring immune adjuvant, gp96, to actively chaperone these antigens. Our gp96 product candidates are non-replicating, “off-the-shelf”, allogenic cell-based therapies that are locally administered into the skin. The treatment is designed to prime local natural immune recognition to activate T-cells to seek and destroy the cancer cells throughout the body. These agents can be administered with a variety of immuno-modulators to enhance a patient’s immune response through 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 drug immediately without the extraction of blood or tumor tissue from each patient or the creation of an individualized treatment based on patient materials. Our gp96 product candidates are produced from allogeneic cell lines expressing tumor-specific proteins common among cancers. Because each patient is dosed with the same medication, 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.

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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. 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 antigen presenting cells (APCs), such as dendritic cells that upregulate T-cell costimulatory ligands, major histocompatibility (MHC) molecules 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 our 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 gp96-based program, delivers antigen-driven T-cell activation and specific co-stimulation in a single product by providing specific co-stimulation to enhance T-cell activation and expansion. This approach 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. This dual approach has several potential advantages including: (a) enhanced activation of antigen-specific CD8+ T-cells; (b) boosting the number of antigen-specific CD8+ and CD4+ T-cells compared to OX40L alone; (c) stimulation of T-cell memory function to remain effective 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 in the draining lymph nodes, which drives targeted, cancer specific immunity towards the tumor rather than throughout the body; and (e) simplification of combination cancer immunotherapy versus systemic co-stimulation with conventional monoclonal antibodies (mAbs).

Pelican, our subsidiary, is a biotechnology company focused on developing an agonist mAb, PTX-35, against a T-cell costimulatory receptor, DR3/TNFRSF25. PTX-35 has completed IND-enabling activities in preparation for a first-in-human (FIH) trial for oncology. Pelican has initiated its first clinical trial site for PTX-35 and began dosing patients in the Phase 1 clinical trial. PTX-35 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. DR3/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 Heat’s gp96 platform immunotherapies and an anti-PD-1 checkpoint inhibitor, PTX-35 has been shown to enhance antigen specific T-cell activation to eliminate tumor cells. Pelican is also developing other biologics that target DR3/TNFRSF25 for various immunotherapy approaches.

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:

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.

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Recent Developments

On December 20, 2021, we entered into the Merger Agreement with Merger Sub, Elusys and Fortis Advisors LLC, pursuant to which, subject to certain conditions, we will acquire Elusys through the Merger of Merger Sub with Elusys. The acquisition of Elusys has not been completed and is subject to several conditions.  See “Potential Elusys Acquisition” below for additional information regarding the Merger Agreement.

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 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, our November 2018 public offering in which we received net proceeds of approximately $12.7 million and our January 21, 2020 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 $6.4 million. As of December 31, 2021, we have received $13.7 million in grant funding from the CPRIT Grant through Pelican. We have also raised an aggregate of $140.1 million through at-the-market offerings, including $25.6 million during the year ended December 31, 2021. Cash and cash equivalents at March 9, 2022 were approximately $86.8 million. As of December 31, 2021, we had an accumulated deficit of $165.7 million. We had net losses of $35.4 million and $26.4 million for the years ended December 31, 2021 and 2020, respectively.

We expect to continue to incur significant expenses and continued losses from operations for the foreseeable future and we do not anticipate to generate revenue from any product sales for several years, including Anthim upon consummation of the pending acquisition of Elusys, which will take several years to conduct full scale manufacturing for commercial sale and obtain required regulatory approvals and anticipate only generating minimal revenue from our manufacturing facility in the next few years until the facility is fully operational and we develop a customer base. 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 add to our product candidate pipeline and continue construction of the cGMP manufacturing facility in San Antonio, Texas and related equipment expenses. Furthermore, we anticipate increased costs associated with the manufacture of Anthim, upon completion of the pending Elusys acquisition, and the increase in headcount upon completion of the pending acquisition of Elusys. In addition, if we expand our operations we will incur additional expenses which could be significant. Furthermore, 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. As currently planned, we expect to have sufficient funds to fund our operations into 2024. We will need to obtain substantial additional future funding in connection with our future planned clinical trials, the manufacturing facility that we are building out in San Antonio, Texas, full scale manufacturing of Anthim upon completion of the pending Elusys acquisition, and any new opportunities we may pursue. We also expect our general and administrative expenses to increase upon the consummation of our planned acquisition of Elusys due to increased headcount and cash consideration and other expenses set forth in the Merger Agreement that we have agreed to pay.  Adequate additional financing may not be available to us on acceptable terms, or at all. 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 will need to generate significant revenues to achieve profitability, and we may never do so.

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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:

Revenue;
Deferred revenue;
In-process R&D;
Goodwill impairment;
Income tax;
Contingent consideration;
Stock-based compensation;
Derivative financial instruments;
Research and development costs, including clinical and regulatory cost; and
Recent accounting pronouncements.

Grants Receivable and Revenue

Our 2021 and 2020 revenue primarily consisted of research funding from our CPRIT Grant. 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. When grant funds are received after costs have been incurred, the Company records revenue and a corresponding grants receivable until grant funds are received.

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. See Note 7 regarding impairment at December 31, 2021. The IPR&D assets were acquired on April 28, 2017 when we acquired Pelican.

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Goodwill and In-Process R&D Impairment

Goodwill and in process R&D may result from our business acquisitions. In-process research and development is considered an indefinite-lived intangible asset and is not subject to amortization until the associated projects are completed or terminated. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or when their useful lives are determined to be no longer indefinite.

 

We test goodwill and in-process R&D for impairment each year as of April 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, we recognize a goodwill loss in an amount equal to any excess.

 

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues, launch costs and operating costs, which take into consideration expectations of competitive, business, and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.

Determining the fair value of IPR&D is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows risk-adjusted discount rates and estimated future revenues, launch costs and operating costs, which take into consideration expectations of competitive, business, and economic environments. The fair value is then compared to the carrying value and if the carrying value exceeds fair value an impairment charge is recognized.

 

Changes in market demand, fluctuations in the markets in which we operate, the volatility and decline in the worldwide equity markets, and a decline in our market capitalization could unfavorably impact the remaining carrying value of our goodwill and in process R&D, which could have a significant effect on our current and future results of operations and financial position.

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.

In accordance with FASB ASC 740, Accounting for Income Taxes, we reflect 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, 2021 and 2020, we had no unrecognized income tax benefits and correspondingly there is no impact on our effective income tax rate associated with these items. Our 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, 2021 and 2020, we had no such accruals.

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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 probability-weighted income approach 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 as they occur. 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 use an average historical stock price volatility of our own data plus an analysis of reported data for a peer group of comparable companies that have issued stock options with substantially similar terms. 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 remaining 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.

Derivative Financial Instruments

We 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 2 to the consolidated financial statements for additional information.

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, in-process R&D impairment, 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2022 and we are currently evaluating the expected impact of this standard but do not expect it to have a material impact on its consolidated financial statements upon adoption.

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In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for convertible instruments. This ASU also requires entities to use the if-converted method for all convertible instruments in calculating diluted earnings-per-share. The ASU is effective for annual periods beginning after December 15, 2021 with early adoption permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.

RESULTS OF OPERATIONS

Year Ended December 31, 2021 and 2020

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 was required to raise $7.6 million in matching funds over the life of the project.

As of December 31, 2021, CPRIT has provided $13.7 million of the total $15.2 million grant. The remaining $1.5 million will become available on a reimbursement basis, rather than in advance of expending the funds as in prior grant years. As of December 31, 2021, we have provided Pelican with approximately $7.6 million which was used to satisfy Pelican’s matching fund obligation under the first four years of the CPRIT Grant.

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 $2.1 million for the year ended December 31, 2021 for qualified expenditures under the grant. We recognized $2.8 million grant revenue related to CPRIT during the year ended December 31, 2020. As of December 31, 2021, we have a remaining $1.5 million to be awarded, on a reimbursement basis, after the Company has fulfilled every requirement of the grant and the grant has been approved to be finalized. Funds received are reflected in deferred revenue as a liability until revenue is earned. When grant funds are received after costs have been incurred, the Company records revenue and a corresponding grants receivable. Grant revenue is recognized when qualifying costs are incurred.

Operating Expenses

Total operating expenses for the years ended December 31, 2021 and 2020, were $37.5 million and $29.1 million, respectively. For the year ended December 31, 2021 operating expenses are primarily comprised of research and development, general and administrative expenses, goodwill impairment loss, and a change in the fair value of contingent consideration related to Pelican. Research and development expenses were $18.8 million, general and administrative expenses were $16.8 million, goodwill impairment loss was $1.5 million, and the change in fair value of contingent consideration was $0.4 million for the year ended December 31, 2021 as compared to research and development expenses of $12.9 million, general and administrative expenses of $14.9 million, and the change in fair value of contingent consideration of $1.2 million for the year ended December 31, 2020. For the year ended December 31, 2021, research and development expenses represented approximately 50% of operating expenses, general and administrative expenses represented approximately 45%, goodwill impairment loss represented approximately 4%, and change in fair value of contingent consideration 1% of operating expenses. For the year ended December 31, 2020, research and development expenses represented approximately 45% of operating expenses, general and administrative expenses represented approximately 51%, and change in fair value of contingent consideration 4% of operating expenses.

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Research and development expense

Research and development expenses increased to $18.8 million from $12.9 million for the years ended December 31, 2021 and December 31, 2020. The components of R&D expense are as follows, in millions:

For the Year Ended

December 31, 

2021

    

2020

Programs

 

  

 

  

HS-110

$

1.7

$

1.3

HS-130

 

0.9

 

0.8

PTX-35

 

2.9

 

2.0

COVID-19

1.8

0.5

RapidVax

0.1

Other programs

 

0.1

 

0.5

In-process R&D Impairment

2.4

Unallocated research and development expenses

 

8.9

 

7.8

$

18.8

$

12.9

HS-110 increased by $0.4 million, reflecting the current period mix of development activities, primarily due to increased costs associated with the transition of patients from active treatment into long-term follow-up, and increased manufacturing costs.
HS-130 expense increased by $0.1 million due to the completion of enrollment of patients, third-party regulatory consulting, and investigator site payments for the ongoing Phase 1 clinical trial.
PTX-35 expense increased by $0.9 million, primarily consisting of manufacturing development and patient dosing.
COVID-19 program increased by $1.3 million, which primarily represents an increase in sponsored research agreement costs and manufacturing costs.
RapidVax was initiated in Q4 2021 and primarily consists of consulting costs.
Other programs expenses decreased by $0.4 million and include preclinical costs associated with our Zika program, T-cell costimulatory programs, and laboratory supplies.
In-process R&D had a $2.4 million impairment loss recorded in 2021.
Unallocated research expenses increased by $1.1 million primarily from increased clinical and CMC consulting expenses and Skunkworx lab and personnel costs.

General and administrative expense

General and administrative expense increased approximately 13% to $16.8 million for the year ended December 31, 2021 compared to $14.9 million for the year ended December 31, 2020. The increase of $1.9 million is primarily due to the increase in salaries, D&O insurance expense, and legal fees.

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 $0.4 million for the year ended December 31, 2021 compared to the change in fair value of contingent consideration of $1.2 million for the year ended December 31, 2020. The decrease in fair value for the year ended December 31, 2020 was primarily due to the payment of the first milestone to the Pelican stockholders in 2020 and fewer adjustments to the probability of achieving milestones and holding timelines constant.

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Goodwill impairment loss

During the year ended December 31, 2021, we experienced a sustained decline in the quoted market price of our common stock and as a result we determined that it was more likely than not that the carrying value of goodwill exceeded its estimated fair value. Accordingly, we performed an impairment analysis 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. As a result, we recorded a goodwill impairment loss of $1.5 million on the goodwill during the year ended December 31, 2021. No impairment was recorded during the year ended December 31, 2020.

Change in fair value of warrant liability

During the year ended December 31, 2020, we 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, were recorded as a derivative liability and was adjusted to fair value at the end of the reporting period resulting in $1.0 million of warrant expense. The adjustment to the fair value of the derivative liability for the year ended December 31, 2021 was de minimis.

Interest Income

Interest income was $0.8 million for the year ended December 31, 2021 compared to $0.6 million for the year ended December 31, 2020. The increase is due to the investment in various short-term financial instruments that generated interest income during the year ended December 31, 2021.

Other (expense) income, net

Other income (expense), net was $1.0 million expense for the year ended December 31, 2021, compared to $0.3 million income for the year ended December 31, 2020. This change was primarily due to unrealized losses associated with our short-term investments.

Income tax benefit (expense)

Income tax benefit of $0.1 million for the year ended December 31, 2021 related to the ASC 350 impairment charge against our IPR&D asset. Since that is an indefinite-lived intangible asset, we recognized a net deferred tax liability of $0.2 million due to the asset value decreasing.

Net loss attributable to Heat Biologics, Inc.

We had a net loss attributable to Heat Biologics, Inc. of $35.1 million, or ($1.41) per basic and diluted share for the year ended December 31, 2021 compared to a net loss attributable to Heat Biologics, Inc. of $26.0 million, or ($1.63) per basic and diluted share for the year ended December 31, 2020.

BALANCE SHEET AS OF DECEMBER 31, 2021 AND 2020

Short-term Investments. Short-term investments were $88.3 million as of December 31, 2021 compared to $100.8 million as of December 31, 2020. The decrease is primarily due the sale of investments and transferring the cash to fund clinical trials and other operations.

Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets was approximately $2.9 million as of December 31, 2021 and $1.8 million as of December 31, 2020. The $1.1 million increase was primarily attributable to our upfront payments to certain vendors for our clinical trials related to PTX-35.

Property, Plant & Equipment. PP&E was approximately $2.2 million as of December 31, 2021, and $0.7 million as of December 31, 2020. The increase is attributed to a $1.5 million increase in lab equipment purchased for Heat and Skunkworx.

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Grants Receivable. We had grants receivable of $1.3 million as of December 31, 2021 compared to no grants receivable as of December 31, 2020. The CPRIT grant will award the remaining grant funds, on a reimbursement basis, after Heat has fulfilled every requirement of the grant and the grant has been approved to be finalized. The receivable relates to reimbursable costs incurred related to PTX-35.

Other assets. Other assets was approximately $12.2 million and $0 as of December 31, 2021 and 2020, respectively. The $12.2 million increase is directly attributable to equipment purchases in 2021 for Scorpion’s new facility in San Antonio, Texas, which is expected to commence operations in the second quarter of 2022.

In-Process R&D. As of December 31, 2021 and 2020, we had in-process R&D of $3.5 million and $5.9 million from our acquisition of Pelican, respectively. The carrying value of this asset decreased by $2.4 million due to an in-process R&D impairment charge for the year ended December 31, 2021.

Goodwill. As of December 31, 2021 and December 31, 2020, we had goodwill of $0.0 million and $1.5 million, respectively, from our acquisition of Pelican. The carrying value of this asset decreased by $1.5 million due to a full impairment charge for the excess of the reporting unit’s carrying value over its fair value in 2021.

Accounts Payable. Accounts payable was approximately $0.9 million and $1.1 million as of December 31, 2021 and December 31, 2020. Accounts payable remaining steady with only a $0.2 million decrease is due to payables for investigator site payments for our clinical trials remained steady.

Deferred Revenue. We had short term deferred revenue of $0 and $0.6 million as of December 31, 2021 and December 31, 2020, 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 $35,000 and $0.2 million as of December 31, 2021 and 2020. The decrease of $0.2 million was due to recognition of grant revenue from termination of a City of San Antonio economic development grant agreement for Pelican.

Accrued Expenses and Other Liabilities. Accrued expenses were approximately $2.4 million at December 31, 2021 compared to $1.6 million at December 31, 2020. The increase is primarily due to higher clinical expense accruals.

Operating and financing lease liabilities. Current and long term liabilities related to operating and finance leases was $1.9 million as of December 31, 2021 and $1.8 million as of December 31, 2020. These balances are related to our office lease and equipment leases.

Deferred Tax Liability. Deferred tax liability was approximately $0.2 million and $0.4 million for the years ended December 31, 2021 and December 31, 2020, respectively. The decrease is a result of the ASC 350 impairment charge against our IPR&D asset.

Contingent Consideration. As of December 31, 2021, we had contingent consideration of $3.3 million compared to $2.9 million for the year ended December 31, 2020 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 for the year ended December 31, 2021, we determined the change in the estimated fair value of the contingent consideration to be approximately $0.4 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

Current and Future Financing Needs

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. Since our initial public offering, we have primarily financed our operations with net proceeds from the public offering of our securities and to a lesser extent,

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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 436,381 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. For the year ended December 31, 2018 and 2019, we received net proceeds of approximately $3.8 million from sales of our common stock in at-the-market offerings. On January 21, 2020, we closed an underwritten public offering of shares of our common stock and warrants to purchase shares of our common stock pursuant to which we received net proceeds of approximately $6.4 million. For the year ended December 31, 2021, we received net proceeds of $25.6 million from the sale of 2,106,027 shares of our common stock in at-the-market offerings. As of December 31, 2021, we had an accumulated deficit of approximately $165.7 million. We had net losses of $35.4 million and $26.4 million for the years ended December 31, 2021 and 2020, respectively.

In order to promote efficiency and reduce our reliance on third-party vendors, we plan to enhance our in-house development of bioanalytic, process development and manufacturing capabilities and offer such services to third parties for fees. We have entered into a lease for a 20,144 square foot facility in San Antonio, TX to conduct such services and

are currently building the facility. Our proposed expansion in Texas is part of a company-wide-growth strategy to enhance efficiency and decrease our dependence on third-party vendors as we advance our clinical trials and general research and development. The future forecasted investment to build out the facility with labs, equipment, and staff will be approximately $23.5 million, without taking into account federal new market tax credits based on the location in San Antonio, federal and state historical tax credits based on the historical designation of the facility, as well as city and county tax abatement incentives with the City of San Antonio and Bexar County. Scorpion reimbursements to Merchants Ice, who is purchasing the equipment for the CDMO facility, has paid $12.2 million for equipment through the fourth quarter of 2021 and approximately $7.5 million is expected to be spent in the first quarter of 2022 is included in the $23.5 million. We intend to fund this initiative with current working capital. The potential value of tax credits and tax incentives to Scorpion are estimated to be up to approximately $4.5 million based on the total cost of the build out, employees hired, real property, and other factors. Operations at the facility are projected to commence by second quarter of 2022, and we expect to fill production capacity by transitioning our outsourced manufacturing and development to in-house immediately and followed by contracting with external customers. However, there can be no assurance that we will be successful in these new operations. As of February 28, 2022 we have spent $15.8 million on laboratory related manufacturing equipment for the San Antonio facility. We intend to meet our financing needs through multiple alternatives, including, but not limited to, cash on hand, additional equity financings, debt financings and/or funding from partnerships or collaborations and potential revenue, if any, from our planned development and manufacturing facility.

Furthermore, upon consummation of our pending acquisition of Elusys, we anticipate increased costs associated with the manufacture of Anthim and the increase in headcount due to the acquisition of Elusys. Pursuant to the terms of the Merger Agreement we agreed to cash consideration at Closing of $3 million plus additional expenses of $1.6 million that we were obligated to pay and are obligated to pay an additional $2 million, subject to adjustment upon attainment of certain milestones.

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 into 2024, we will need to obtain substantial additional future funding in connection with our future planned clinical trials, manufacture of Anthim, upon consummation of our pending acquisition of Elusys, and our manufacturing facility construction and set up.

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;

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the progress of the development efforts of parties with whom we have entered into research and development agreements;
our expansion plans and cash needs of any new projects;
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;
the receipt of grant funding if any;
clinical laboratory development and testing;
manufacturing facility construction costs and equipment costs; and
manufacturing costs of Anthim upon consummation of the pending acquisition of Elusys.

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, such as through the Amended and Restated Common Stock Sales Agreement with B. Riley FBR, Inc. and Cantor Fitzgerald & Co., 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. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. While we are 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, our business, financial condition, results of operations and growth prospects could be materially adversely affected.

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 will need to generate significant revenues to achieve profitability, and we may never do so.  As of December 31, 2021, we had approximately $96.4 million in cash and cash equivalents and short-term investments.

Cash Flows

Operating activities. The use of cash in both periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities during the year ended December 31 2021 was $38.1 million compared to $22.0 million during the same period in 2020. The increase was primarily due to an increased net loss of $9.0 million, a decrease in the change in fair value of common stock warrants of $1.0 million, a decrease in the change in fair value of contingent consideration of $0.8 million, an increase in other assets of 12.2 million.

Investing activities. Net cash provided by investing activities was $9.8 million during year ended December 31, 2021 compared to $95.4 million used during the same period in 2020. The increase is from the change in net purchases of short-term investment purchases and sales of $106.8 million from 2021 to 2020.

Financing activities. Net cash provided by financing activities was $25.5 million during the year ended December 31, 2021 compared to $119.3 million during the year ended December 31, 2020. The decrease of $93.8 million was primarily due to a $91.1 million net decrease of sales of our common stock through an at-the-market Common Stock Sales Agreement with B. Riley FBR, Inc. and Cantor Fitzgerald & Co., net of the decrease in related stock issuance costs of $2.4 million, partially offset by a public offering of shares that occurred in 2020 of $6.6 million.

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On April 23, 2020, Heat and Pelican received loan proceeds of $0.7 million from Regions Bank, N.A, pursuant to the Paycheck Protection Program, or the PPP Loan, under the CARES Act, administered by the U.S. Small Business Administration. On April 28, 2020, we returned all $0.7 million in proceeds from the PPP Loan in order to make those funds available to other borrowers that may be in greater need.

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.

Additional In-Licensed Programs

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-32.

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 Annual Report, 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 at the reasonable assurance level as of December 31, 2021.

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, 2021, our internal controls over financial reporting were effective at the reasonable assurance level based on those criteria.

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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.

This Annual Report 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.

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, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.      Other Information

None.

Item 9C.     Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable.

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PART III

Item 10.        Directors, Executive Officers and Corporate Governance

Below is certain information regarding our directors and executive officers.

Name

    

Age

    

Position

    

Served as an Officer
or Director Since

Jeffrey Wolf

 

58

 

Chairman of the Board of Directors, Chief Executive Officer and President

 

2008

William L. Ostrander

54

Chief Financial Officer and Secretary

2019

John Monahan, Ph.D.

 

75

 

Director

 

2009

John K.A. Prendergast, Ph.D.

68

Director

2016

Edward B. Smith, III

 

46

 

Director

 

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, Inc., a gene therapy company where he was a co-founder and director; TyRx Pharma, a Princeton-based company focused on the development of bio-compatible polymers where he was a co-founder and Chairman and Elusys, where he was for several years a co-founder, Chairman and Chief Executive Officer; and Generation One, a company focused on mobile-based collaborative care, where he was the 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.

William L. Ostrander, Chief Financial Officer and Secretary

Mr. Ostrander currently serves as our Chief Financial Officer, a position he was appointed to on January 4, 2021 and has served as our Secretary since September 25, 2019 when he joined our company as Vice President of Finance. Mr. Ostrander has over 22 years of experience in financial management at public and private companies. From November 2014 until joining our company, Mr. Ostrander served as Executive Director of Finance at Liquidia Technologies, Corporation, a publicly-traded biopharmaceutical company. Prior to that, he served as Senior Director of Finance and Accounting at KBI Biopharma, a biopharmaceutical contract services company. He also served as Manager of Finance at LexisNexis Risk Solutions, a data analytics solutions company. Prior to that, he served as Controller of Seisint Inc., a private information products company that was acquired by LexisNexis. He also served as Senior Manager, Finance and held other accounting and finance positions for Boca Research, a data communications hardware manufacturer. Mr. Ostrander holds a B.S. in Finance from Central Michigan University.

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John Monahan, Ph.D., Director

Dr. Monahan has served on our Board of Directors since November 2009. Dr. Monahan Co-Founded Avigen Inc. in 1992, a pharmaceutical company. Over a 12 year period as CEO of Avigen he raised over $235M in several private and public financings including its IPO. From 1989 to 1992, he was VP of R&D at Somatix Therapy Corp., and from 1985 to 1989 he was Director of Molecular & Cell Biology at Triton Biosciences Inc. Prior to that, from 1982 to 1985, he was Research Group Chief, Department of Molecular Genetics, Hoffmann-LaRoche AG. and from 1975 to 1977 he was an instructor at Baylor College of Medicine located in Houston, Texas. He received his Ph.D. in Biochemistry in 1974 from McMaster University in Canada and his B.Sc. from University College in Dublin, Ireland in 1969. Dr. Monahan is a Scientific Advisory Board member of Agilis Biotherapeutics, LLC. Dr. Monahan currently is a board member of Synthetic Biologics, Inc., and served as a scientific advisory consultant to Synthetic Biologics, Inc. from 2015 to November 10, 2020, prior to his appointment as a board member, and from 2010 through 2015 he was the Senior Executive Vice President of Research & Development at Synthetic Biologics, Inc He is also a board member of a number of Irish biotech companies including Genable Technologies Ltd., Cellix Ltd., Luxcel Biosciences Ltd., and GK Technologies, Inc. and from August 2016 until May 2021, also was a board member of Anixa Biosciences, Inc. (formerly ITUS Corporation).

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. He was previously a member of the board of the life science companies AVAX Technologies, Inc., Avigen, Inc. and MediciNova, Inc and previously executive chairman of the Board of Directors of Antyra, Inc., a privately-held biopharmaceutical firm. 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.

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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.), 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.

Committees of the Board of Directors

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.

Board Members

    

Audit
Committee

    

Compensation
Committee

    

Nominating
and
Governance
Committee

Jeffrey Wolf

John Monahan, Ph.D.

Member

Chairman

Member

Edward B. Smith, III

Chairman

Member

Chairman

John K.A. Prendergast, Ph.D.*

Member

Member

Member

Dr. Prendergast serves as our independent Lead Director.

Audit Committee

Our common stock is listed on the NYSE American. Under the rules of NYSE American, 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 NYSE American, 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 NYSE American. In making this determination, our Board considered the relationships that

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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

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 NYSE American 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 NYSE American 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 NYSE American 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, 2021, 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.

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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.

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 NYSE American 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.

Ad Hoc Committees

From time to time we establish ad hoc committees to address particular matters. During 2021, we established a Special Committee comprised of Dr. Monahan, Dr. Prendergast, and Mr. Smith to review and negotiate the Merger Agreement with Elusys.

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.

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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 principal 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.

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.

Delinquent Section 16(a) Reports

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, 2021.

Code of Business Conduct and Ethics

We have long maintained a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and employees. 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. The code is posted on our website at www.heatbio.com.

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Item 11.        Executive Compensation

We are a “smaller reporting company” and the following compensation disclosure is intended to comply with the requirements applicable to smaller reporting companies. Although the rules allow us to provide less detail about our executive compensation program, the Compensation Committee is committed to providing the information necessary to help stockholders understand its executive compensation-related decisions. Accordingly, this section includes supplemental narratives that describe the 2021 executive compensation program for our named executive officers.

Set forth below is the compensation paid or accrued to our Named Executive Officers during the years ended December 31, 2021 and December 31, 2020:

Summary Compensation Table

Name and Principal Position

    

Year

    

Salary

    

Bonus

  

Stock Awards (9)

Options (9)

    

Other

    

Total

Jeffrey Wolf

2021

$

539,623

$

270,000

$

2,633,525

(1)

$

1,964,424

(2)

$

500,000

(3)

$

5,907,572

Chairman and Chief Executive Officer

 

2020

$

440,406

$

220,203

$

910,800

(4)

$

4,348,528

(5)

$

500,000

(6)

$

6,419,937

William L. Ostrander

 

2021

$

274,817

$

96,250

$

$

451,602

(7)

$

$

822,669

Chief Financial Officer

 

2020

$

226,600

$

45,321

$

$

66,427

(8)

$

$

338,348

(1)Mr. Wolf was issued 288,100 shares of restricted stock on January 4, 2021 and 246,305 shares of restricted stock on December 13, 2021.
(2)Mr. Wolf was issued 147,980 option awards on January 4, 2021, 42,216 option awards on August 2, 2021 for the subsidiary plans as described in Note 11 to the Company’s audited consolidated financial statements for the years ended December 31, 2021 and 2020, 161,774 option awards on December 13, 2021 and 231,987 option awards on December 30, 2021. The December 31, 2021 option grant is subject to forfeiture if an amendment to the 2018 Stock Incentive Plan to increase the number of shares of common stock available for grant is not approved by our stockholders.
(3)This is a special bonus to cover the estimated taxes from the 246,305 restricted share award granted on December 13, 2021.
(4)Mr. Wolf was issued 282,857 shares of restricted stock on January 2, 2020.
(5)Mr. Wolf was issued 285,714 option awards on July 28, 2020 and 201,728 option awards on August 24, 2020 pursuant to a contract obligation in his employment agreement that entered into in 2009.
(6)This is a special bonus to cover the estimated taxes from the 288,100 restricted share award granted on January 4, 2021.
(7)Mr. Ostrander was issued 51,487 option awards on January 4, 2021, 2,127 option awards on August 2, 2021 for the subsidiary plans as described in Note 11, to the Company’s audited financial statements for the years ended December 31, 2021 and 2020, and 68,807 option awards on December 13, 2021.
(8)Mr. Ostrander was issued 21,428 option awards on March 12, 2020.
(9)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 11 to the Company's audited consolidated financial statements for the years ended December 31, 2021 and 2020.

Narrative Disclosure To Summary Compensation Table

Overview of Our Compensation Program

A. Philosophy and Objectives

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.

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Our executive compensation program is based on the following philosophies and objectives:

Compensation Should Align with Stockholders’ Interests — The Compensation Committee and our Board believes that executives’ interests should be aligned with those of the stockholders. Executives are granted restricted stock and stock options so that the majority of their total compensation is tied directly to the value realized by our stockholders. Executive bonuses are tied directly to company strategy and operational execution which contributed to our success as a whole.
Compensation is Competitive — The Compensation Committee and Board seek 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 and execute our operational and scientific strategy. To accomplish this objective, executive compensation is reviewed annually to ensure that compensation levels are competitive and reasonable in relation to 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 and long-term strategic and operational 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.

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
long term 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, 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
discussions with our Chairman, Chief Executive Officer and other senior management in connection with compensation matters, as well as compensation consultants 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 confirmed that total compensation paid to our Named Executive Officers during the year ended December 31, 2021, was reasonable and competitive. The following were our Named Executive Officers for the year ended December 31, 2021: Jeffrey Wolf, our Chief Executive Officer and William L. Ostrander, our Chief Financial Officer (collectively, our “Named Executive Officers”). 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

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