PDS Biotechnology Corp 10-K

ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s periodic SEC filings. Our officers have concluded that as of December 31, 2020 our disclosure controls and procedures are designed, and are effective, to ensure that information required to be disclosed by our company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the commission’s rules and forms, and are also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. 75 Index Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a—15(f) and 15d-15(f) under the Exchange Act).Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived, operated, tested and monitored, can provide only reasonable, not absolute, assurance that the objectives of the control system are met because of inherent limitations. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013), or the COSO Framework. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our internal control over financial reporting were effective. Our independent registered public accounting firm has not performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. Changes in Internal Control over Financial Reporting In 2020 we continued the integration of our pre-Merger business into the pre-established internal control framework of Edge Therapeutics through the acquisition, including internal controls and information systems. This work began upon completion of the Merger in March 2019 and was completed in calendar year 2020. As of December 31, 2019, we identified a material weakness in four components of internal control as defined by COSO 2013. Throughout 2020 we undertook various remediation activities as previously disclosed and an evaluation of their effectiveness, which was completed during the fourth quarter of 2020. Based on that evaluation, we have concluded that the material weaknesses previously identified have been fully remediated as of December 31, 2020. ITEM 9B. Other Information Not applicable. 76 Index PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive Proxy Statement for the Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the Proxy Statement), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and the applicable information included in the Proxy Statement is incorporated herein by reference. ITEM 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated herein by reference to the Proxy Statement. ITEM 11. Executive Compensation The information required by this Item is incorporated herein by reference to the Proxy Statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the Proxy Statement. ITEM 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the Proxy Statement. ITEM 14. Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference to the Proxy Statement. PART IV ITEM 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Loss Consolidated Statements of Convertible Preferred Stock and Changes in Stockholders’ Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (2) Financial Statement Schedules: All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto. (3) Exhibits. The exhibits filed as part of this Annual Report are set forth on the Exhibit Index immediately following our consolidated financial statements. The Exhibit Index is incorporated herein by reference. ITEM 16. Form 10-K Summary We may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summary information. 77 Index Exhibit Number Exhibit Description 2.1 Agreement and Plan of Merger and Reorganization, dated November 23, 2018, by and among Edge Therapeutics, Inc., Echos Merger Sub, Inc. and PDS Biotechnology Corporation (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 26, 2018, and incorporated by reference herein). 2.2 Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated January 24, 2019, by and among Edge Therapeutics, Inc., Echos Merger Sub, Inc. and PDS Biotechnology Corporation (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 30, 2019, and incorporated by reference herein). 3.1 Eighth Amended and Restated Certificate of Incorporation of Edge Therapeutics, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 6, 2015, and incorporated by reference herein). 3.2 Second Amended and Restated Bylaws of Edge Therapeutics, Inc. (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 6, 2015, and incorporated by reference herein). 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on March 18, 2019, and incorporated by reference herein). 3.4 Certificate of Amendment to Amended and Restated Certificate of Incorporation (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K on March 18, 2019, and incorporated by reference herein). 4.1 Form of Certificate of Common Stock (filed as Exhibit 4.1 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein). 4.2 Description of Securities (filed as Exhibit 4.10 to the Company’s Annual Report on Form 10-K filed on March 27, 2020, and incorporated by reference herein). 4.3 Form of Indenture (filed as Exhibit 4.3 to the Company’s registration statement on Form S-3 (File No. 333-240011) on July 22, 2020, and incorporated by reference herein). 10.1+ Employment Agreement, dated October 11, 2018, by and between PDS Biotechnology Corporation and Frank K. Bedu-Addo (filed as Exhibit 10.19 to the Company’s Registration Statement on Form S-4 on December 21, 2018, and incorporated by reference herein). 10.2 Clinical Trial Collaboration and Supply Agreement, dated May 19, 2017, by and between PDS Biotechnology Corporation and MSD International GmbH (filed as Exhibit 10.24 to the Company’s Registration Statement on Form S-4/A on January 25, 2019, and incorporated by reference herein). 10.3 Patent License Agreement, dated January 5, 2015, by and between PDS Biotechnology Corporation and National Institutes of Health, as amended by First Amendment, dated August 5, 2015 (filed as Exhibit 10.25 to the Company’s Registration Statement on Form S-4/A on January 25, 2019, and incorporated by reference herein). 10.4 Cost Reimbursement Agreement, dated November 1, 2015, by and between PDS Biotechnology Corporation and University of Kentucky Research Foundation (filed as Exhibit 10.26 to the Company’s Registration Statement on Form S-4/A on January 25, 2019, and incorporated by reference herein). 10.5 Cost Reimbursement Agreement, dated November 1, 2015, by and between PDS Biotechnology Corporation and University of Kentucky Research Foundation (filed as Exhibit 10.27 to the Company’s Registration Statement on Form S-4/A on January 25, 2019, and incorporated by reference herein). 10.6 Public Health Service Cooperative Research & Development Agreement for Intramural-PHS Clinical Research, dated effective as of February 2, 2015, by and between the National Cancer Institute and PDS Biotechnology Corporation (filed as Exhibit 10.28 to the Company’s Registration Statement on Form S-4/A on January 25, 2019, and incorporated by reference herein). 78 Index 10.7 DOTAP Chloride Enantiomer License Agreement effective November 1, 2008, between Merck Eprova AG and PDS Biotechnology Corporation (filed as Exhibit 10.29 to the Company’s Registration Statement on Form S-4/A on January 25, 2019, and incorporated by reference herein). 10.8+ Employment Agreement, effective June 1, 2019, by and between PDS Biotechnology Corporation and Gregory Conn (filed as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q on August 1, 2019, and incorporated by reference herein). 10.9** Licensing Agreement by and between Evonik Corporation (as successor in interest to SurModics Pharmaceuticals, Inc.) and Edge Therapeutics, Inc., dated as of October 20, 2010 (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 on August 14, 2015, and incorporated by reference herein). 10.10** Amendment No. 1 to the License Agreement, effective as of September 21, 2015, by and between Edge Therapeutics, Inc. and Evonik Corporation (filed as Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A on September 21, 2015, and incorporated by reference herein). 10.11+ PDS Biotechnology 2010 Equity Incentive Plan, and forms of agreement thereunder (filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1/A on September 21, 2015, and incorporated by reference herein). 10.12+ Amended and Restated PDS Biotechnology Corporation 2014 Equity Incentive Plan (filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8 on June 4, 2019, and incorporated by reference herein). 10.13+ Second Amended and Restated PDS Biotechnology Corporation 2014 Equity Incentive Plan (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K on December 9, 2020, and incorporated by reference herein). 10.14+ Employee Stock Option Agreement under the Second Amended and Restated PDS Biotechnology Corporation 2014 Equity Incentive Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 9, 2020, and incorporated by reference herein). 10.15+ PDS Biotechnology Corporation 2009 Stock Option Plan, as amended (filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8 on June 4, 2019, and incorporated by reference herein). 10.16+ PDS Biotechnology Corporation 2018 Stock Option Plan (filed as Exhibit 99.2 to the Company’s Registration Statement on Form S-8 on June 4, 2019, and incorporated by reference herein). 10.17+ Form of PDS Biotechnology Corporation Option Agreement for 2009 Stock Option Plan, as amended (filed as Exhibit 99.3 to the Company’s Registration Statement on Form S-8 on June 4, 2019, and incorporated by reference herein). 10.18+ Form of PDS Biotechnology Corporation Option Agreement for 2018 Stock Incentive Plan (filed as Exhibit 99.4 to the Company’s Registration Statement on Form S-8 on June 4, 2019, and incorporated by reference herein). 10.19+ PDS Biotechnology Corporation 2019 Inducement Plan, as amended (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 9, 2020, and incorporated by reference herein). 10.20+ Form of Stock Option Grant Notice and Stock Option Agreement under the 2019 Inducement Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K on June 20, 2019, and incorporated by reference herein). 10.21+ Form of Indemnification Agreement for officers and directors (filed as Exhibit 10.9 to the Company’s Registration Statement on Form S-1 on August 14, 2015, and incorporated by reference herein). 10.22+ Offer Letter, dated February 1, 2019, by and between PDS Biotechnology Corporation and Lauren Wood, MD. (filed as Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q on August 1, 2019, and incorporated by reference herein). 10.23 Common Stock Purchase Agreement, dated July 29, 2019, by and among the Company and Aspire Capital Fund, LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on July 30, 2019, and incorporated by reference herein). 79 Index 10.24 Sublease Agreement, effective as of March 5, 2020, by and between PDS Biotechnology Corporation and COWI North America, Inc. (filed as Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed on March 27, 2020, and incorporated by reference herein). 10.25+ Executive Employment Agreement, dated January 1, 2021, by and between PDS Biotechnology Corporation and Seth L. Van Voorhees, Ph.D. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 9, 2020, and incorporated by reference herein). 23.1* Consent of KPMG LLP. 31.1* Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document + Indicates management contract or compensatory plan. * Filed Herewith. ** Confidential Treatment has been requested with respect to certain portions of this Exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. 80 Index SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. PDS Biotechnology Corporation March 18, 2021 By: /s/ Frank Bedu-Addo Frank Bedu-Addo, Ph.D. President and Chief Executive Officer March 18, 2021 By: /s/ Seth Van Voorhees Seth Van Voorhees Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons in the capacities indicated below and on the dates indicated: Signature Title Date /s/ Frank Bedu-Addo President and Chief Executive Officer and Director March 18, 2021 Frank Bedu-Addo (Principal Executive Officer) /s/ Seth Van Voorhees Chief Financial Officer March 18, 2021 Seth Van Voorhees (Principal Financial and Accounting Officer) /s/ De Lyle W. Bloomquist Director March 18, 2021 De Lyle W. Bloomquist, /s/ Gregory Freitag Director March 18, 2021 Gregory Freitag J.D., CPA /s/ Stephen Glover Director March 18, 2021 Stephen Glover /s/ Sir Richard Sykes Director March 18, 2021 Sir Richard Sykes /s/ Kamil Ali-Jackson Director March 18, 2021 Kamil Ali-Jackson /s/ Otis W. Brawley Director March 18, 2021 Otis W. Brawley /s/ Ilian Iliev Director March 18, 2021 Ilian Iliev 81 Index Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors PDS Biotechnology Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PDS Biotechnology Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the years then ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. We have served as the Company’s auditor since 2019. Short Hills, New Jersey March 18, 2021 82 Index PDS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 28,839,565 $ 12,161,739 Prepaid expenses and other 1,497,665 2,308,462 Total current assets 30,337,230 14,470,201 Property and equipment, net 5,443 21,051 Operating lease right-to-use asset 547,706 – Total assets $ 30,890,379 $ 14,491,252 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,415,224 $ 1,197,720 Accrued expenses 1,735,322 1,097,640 Restructuring reserve – 498,185 Operating lease obligation - short term 119,904 - Total current liabilities 3,270,450 2,793,545 Noncurrent liability: Operating lease obligation - long term 490,353 – Total liabilities $ 3,760,803 $ 2,793,545 STOCKHOLDERS’ EQUITY Common stock, $0.00033 par value, 75,000,000 shares authorized at December 31, 2020 and December 31, 2019, 22,261,619 shares and 5,281,237 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively 7,346 1,742 Additional paid-in capital 70,907,315 40,633,670 Accumulated deficit (43,785,085 ) (28,937,705 ) Total stockholders’ equity 27,129,576 11,697,707 Total liabilities and stockholders’ equity $ 30,890,379 $ 14,491,252 See accompanying notes to the consolidated financial statements. 83 Index PDS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss Year Ended December 31, 2020 2019 Operating expenses: Research and development expenses $ 7,924,450 $ 6,099,580 General and administrative expenses 6,962,328 10,981,765 Impairment expense IPRD – 2,974,000 Lease termination costs – 979,273 Depreciation 15,608 – Total operating expenses 14,902,386 21,034,618 Loss from operations (14,902,386 ) (21,034,618 ) Other income (expense): Gain on bargain purchase upon merger – 13,334,568 Interest income 55,006 353,490 Interest expense – (33,559 ) Loss before income taxes (14,847,380 ) (7,380,119 ) Income taxes (benefit) – (381,513 ) Net loss and comprehensive loss $ (14,847,380 ) $ (6,998,606 ) Per share information: Net loss per share, basic and diluted $ (0.89 ) $ (1.44 ) Weighted average common shares outstanding basic and diluted 16,745,044 4,868,079 See accompanying notes to the consolidated financial statements. 84 Index PDS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders’ Equity (Deficit) Common Stock Additional Accumulated Total Shares Issued Amount Paid-in Capital Deficit Equity (Deficit) Balance - December 31, 2018 3,417,187 $ 1,128 $ 19,871,759 $ (21,939,099 ) $ (2,066,212 ) Stock based compensation expense – – 3,139,053 – 3,139,053 Issuance of common stock, net of issuance costs 48,930 16 749,984 – 750,000 Issuance of warrant in consideration for settlement agreement – – 372,925 – 372,925 Issuance of common stock for antidilution 97,960 32 (32 ) – – Issuance of common stock for convertible debt 9,683 3 65,903 – 65,906 Issuance of common stock from 401K match 7,645 2 37,078 – 37,080 Issuance of common stock from equity transaction 100,654 33 603,891 – 603,924 Equity from merger transaction 1,599,178 528 15,793,109 – 15,793,637 Net loss – – – (6,998,606 ) (6,998,606 ) Balance - December 31, 2019 5,281,237 1,742 40,633,670 (28,937,705 ) 11,697,707 Stock based compensation expense – – 432,321 – 432,321 Issuances of common stock, net of issuance costs 16,900,000 5,581 29,750,921 – 29,756,502 Issuance of common stock for warrant exercise 65,240 22 70,437 – 70,459 Issuance of common stock from 401K match 15,142 1 19,966 – 19,967 Net loss – – – (14,847,380 ) (14,847,380 ) Balance - December 31, 2020 22,261,619 $ 7,346 $ 70,907,315 $ (43,785,085 ) $ 27,129,576 See accompanying notes to the financial statements. 85 Index PDS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ (14,847,380 ) $ (6,998,606 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 432,321 3,139,053 Issuance of common stock from equity transaction – 603,924 Stock-based 401K company common match 19,967 37,080 Depreciation expense 15,608 98,414 Impairment charge - IPR&D – 2,974,000 Deferred income tax benefit – (381,513 ) Operating lease expense 160,684 – Loss on disposal of fixed assets related to lease termination – 310,951 Write off of remaining ROU asset and lease liability pursuant to a lease termination – (32,309 ) Bargain purchase gain – (13,334,568 ) Interest expense from beneficial conversion feature – 32,953 Increase in warrants liability – 81,700 Changes in operating assets and liabilities: Prepaid expenses and other assets 810,797 (1,138,548 ) Accounts payable 217,504 (1,977,667 ) Accrued expenses 637,682 83,753 Restructuring reserve (498,185 ) (1,572,086 ) Operating lease liabilities (98,133 ) – Net cash used in operating activities (13,149,135 ) (18,073,469 ) Cash flows from investing activities: Cash received in reverse merger transaction – 29,106,513 Proceeds from sale of equipment – 275,000 Net cash provided by investing activities – 29,381,513 Cash flows from financing activities: Proceeds from exercise of warrants 70,459 – Proceeds from issuances of common stock 29,756,502 750,000 Net cash provided by financing activities 29,826,961 750,000 Net increase in cash and cash equivalents 16,677,826 12,058,044 Cash and cash equivalents at beginning of period 12,161,739 103,695 Cash and cash equivalents at end of period $ 28,839,565 $ 12,161,739 Supplemental cash flow information: Conversion of convertible notes and accrued interest into common stock $ – $ 32,953 Consideration in connection with reverse merger transaction $ – $ 15,793,638 Conversion of warrants liability into additional common stock $ – 372,925 See accompanying notes to the consolidated financial statements. 86 Index PDS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 – Nature of Operations PDS Biotechnology Corporation, a Delaware corporation (the “Company,” or “PDS”), is a clinical stage immuno-oncology company with a growing pipeline of clinical-stage immunotherapies to treat cancer at various stages, including head and neck cancer, prostate cancer, breast cancer, cervical cancer, anal cancer, and other cancers. All of PDS’s products are based on the proprietary Versamune ® platform technology, which activates and directs the human immune system to unleash a powerful and targeted attack against cancer cells. The Versamune ® -based immunotherapies may be used as monotherapies or in combination with other agents. PDS is initially prioritizing the development of the Versamune ® -based products as combination therapies to be administered with other potentially synergistic agents such as FDA-approved therapeutic or immunotherapeutic agents and promising therapeutic agents still in clinical development. PDS has developed numerous patents and patent applications and owns substantial know-how and trade secrets related to its Versamune ® platform. As of December 31, 2020, PDS holds six (6) U.S. patents with granted claims directed to its platform technology and eight (8) pending patent applications. These issued patents will expire in 2028, 2029, 2031 and 2033. Should the more recently submitted patent applications currently in prosecution be issued, these will expire in 2033 through 2037 assuming no patent term extensions are granted. As of March 8, 2021, PDS holds thirty (30) issued foreign patents and thirty-four (34) pending or published foreign patent applications. Most of our international issued patents are issued in multiple countries including Europe, Japan and Australia, and all of which cover compositions of matter and methods of use related to its platform technology. These issued patents will expire in 2031-2034, or later if patent term extension applies. Licensed patents Licensed Patent Families 1 and 2 cover the Versamune ® -based product candidates, as they are directed to the currently utilized Versamune ® ingredient, (R)-DOTAP and its crystal forms, manufacturing methods, and pharmaceutical compositions using the compounds. PDS Biotechnology has an exclusive worldwide license from Merck & Cie to Licensed Patent Families 1 and 2, which are owned by Merck Patent GmbH, for use in the Company’s immunotherapy compositions and immunotherapies. Licensed Patent Families 3 and 4 are licensed from the US government, and are directed to mucin-1 (“MUC-1”) antigens to be used by the Company in future cationic lipid immunotherapy or vaccine products. Such immunotherapies can be used for treating a range of cancers, including colon, breast, ovarian and lung cancers. Reverse acquisition On March 15, 2019, the Company, then operating as Edge Therapeutics, Inc. (“Edge”), completed its reverse merger with privately held PDS Biotechnology Corporation (“Private PDS”), pursuant to and in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 23, 2018, as amended on January 24, 2019, by and among the Company, Echos Merger Sub, a wholly-owned subsidiary of the Company (“Merger Sub”), and Private PDS, whereby Private PDS merged with and into Merger Sub, with Private PDS surviving as the Company’s wholly-owned subsidiary (the “Merger”). In connection with and immediately following completion of the Merger, the Company effected a 1-for-20 reverse stock split (the “Reverse Stock Split”) and changed its corporate name from Edge Therapeutics, Inc. to PDS Biotechnology Corporation, and Private PDS changed its name to PDS Operating Corporation. For accounting purposes, the Merger is treated as a “reverse acquisition” under generally accepted accounting principles in the United States (“U.S. GAAP”) and Private PDS is considered the accounting acquirer. Accordingly, upon consummation of the Merger, the historical financial statements of Private PDS became the Company’s historical financial statements, and the historical financial statements of Private PDS are included in the comparative prior periods. See “Note 4 – Reverse Merger” for more information on the Merger. As part of the Merger, the Company acquired all of Edge’s assets relating to current and future research and development. 87 Index Note 2 – Summary of Significant Accounting Policies (A) Use of estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses at the date of the consolidated financial statements and during the reporting periods, and to disclose contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates. The most significant estimates relate to the prior recognition and measurement of assets acquired and liabilities assumed in the business acquisition, assessment of indicators of impairment of intangible assets in the prior year, and the fair value of securities underlying stock-based compensation. (B) Significant risks and uncertainties: The Company’s operations are subject to a number of factors that may affect its operating results and financial condition. Such factors include, but are not limited to: the clinical and regulatory development of its products, the Company’s ability to preserve its cash resources, the Company’s ability to add product candidates to its pipeline, the Company’s intellectual property, competition from products manufactured and sold or being developed by other companies, the price of, and demand for, Company products if approved for sale, the Company’s ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products, and the Company’s ability to raise capital. The Company currently has no commercially approved products. As such, there can be no assurance that the Company’s future research and development programs will be successfully commercialized. Developing and commercializing a product requires significant time and capital and is subject to regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company operates in an environment of rapid change and is dependent upon the continued services of its employees and consultants and obtaining and protecting its intellectual property. (C) Business acquisition: The Company’s consolidated financial statements include the operations of an acquired business after the completion of the acquisition. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of IPR&D be recorded on the balance sheet. Transaction costs are expensed as incurred. The Company measures certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value in the initial recognition of net assets acquired in a business combination and when measuring impairment losses. We estimate fair value using an exit price approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of non-financial assets and, for liabilities, assuming that the risk of non-performance will be the same before and after the transfer. When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following techniques: • Income approach, which is based on the present value of a future stream of net cash flows. • Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities. • Cost approach, which is based on the cost to acquire or construct comparable assets, less an allowance for functional and/or economic obsolescence. Our fair value methodologies depend on the following types of inputs: • Quoted prices for identical assets or liabilities in active markets (Level 1 inputs). • Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs). • Unobservable inputs that reflect estimates and assumptions (Level 3 inputs). 88 Index (D) Cash equivalents and concentration of cash balance: The Company considers all highly liquid securities with a maturity weighted average of less than three months to be cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits. (E) Property and equipment: Property and equipment are recorded at cost. Depreciation is recorded for property and equipment using the straight-line method over the estimated useful life of five years. The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. (F) Research and development: Costs incurred in connection with research and development activities are expensed as incurred. These costs include licensing fees to use certain technology in the Company’s research and development projects as well as fees paid to consultants and entities that perform certain research and testing on behalf of the Company. (G) Patent costs: The Company expenses patent costs as incurred and classifies such costs as general and administrative expenses in the accompanying statements of operations and comprehensive loss. (H) Intangibles asset and impairment: As part of the reverse merger transaction on March 15, 2019, the Company acquired an in-process research and development (“IPR&D”) intangible asset valued at $2,974,000 using a discounted cash flow method. In determining the value of IPR&D, management considers, among other factors, the stage of completion of the project, the technological feasibility of the project, whether the project have an alternative future use, and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used is determined at the time of acquisition and includes a rate of return which accounts for the time value of money, as well as risk factors reflecting the economic risk that the projected cash flows may not be realized. The Company reviews all of its long-lived assets for impairment indicators throughout the year. The Company performs impairment testing for indefinite-lived intangible assets annually and for all other long-lived assets whenever impairment indicators are present. When necessary, the Company records charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets. See Note 7 for further discussion on prior year impairment. (I) Stock-based compensation: The Company accounts for its stock-based compensation in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees, directors and non-employees to be recognized as expense in the consolidated statements of operations and comprehensive loss based on their grant date fair values. In order to determine the fair value of stock options on the date of grant, the Company uses the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option term, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions that are based on factual data derived from public sources, the expected stock-price volatility and option term assumptions require a greater level of judgment. The Company expenses the fair value of its stock-based compensation awards to employees and directors on a straight-line basis over the requisite service period, which is generally the vesting period. The Company recognizes forfeitures as they occur. In lieu of higher cash compensation, the Company has granted non-employee options to consultants and expensed $1,027 and $18,425 during the years ended December 31, 2020 and 2019, respectively. 89 Index (J) Net loss per common share: Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common stock shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, because potentially dilutive securities would have an antidilutive effect as the Company incurred a net loss for the years ended December 31, 2020 and 2019. The potentially dilutive securities excluded from the determination of diluted loss per share as their effect is antidilutive, are as follows: Year Ended December 31, 2020 2019 Stock options to purchase Common Stock 1,650,898 1,421,797 Warrants to purchase Common Stock 197,518 258,825 Total 1,848,416 1,680,622 (K) Income taxes: The Company provides for deferred income taxes under the asset and liability method, which requires deferred tax assets and liabilities to be recognized for the future tax consequences attributable to net operating loss carryforwards and for differences between the financial statement carrying amounts and the respective tax bases of assets and liabilities. Deferred tax assets are reduced if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. (L) Fair value of financial instruments: FASB ASC 820, Fair Value Measurement Disclosures, specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows: • Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities. • Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies. • Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. (M) Subsequent events: Subsequent events have been evaluated through the date these financial statements were issued. See Note 16. 90 Index (N) New accounting standards adopted: In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). On January 1, 2020, the Company adopted ASU 2018-07 and there was no impact to its financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 modifies disclosure requirements related to fair value measurement. On January 1, 2020, the Company adopted ASU 2018-07 and there was no impact to its financial statements. Note 3 – Liquidity and Capital Resources As of December 31, 2020, the Company had $28.8 million of cash and cash equivalents. The Company’s primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when the Company pays these expenses, as reflected in the change to the Company’s outstanding accounts payable and accrued expenses. On July 29, 2019, we entered into a common stock purchase agreement, or the Aspire Purchase Agreement, with Aspire Capital pursuant to which, we have the right, in our sole discretion, to present Aspire Capital Fund, LLC, or Aspire Capital, with a purchase notice, directing Aspire Capital (as principal) to purchase up to 100,000 shares of our common stock per business day, in an aggregate amount of up to $20.0 million of our common stock, or the Purchased Shares, over the term of the Aspire Purchase Agreement. We may sell an aggregate of 1,034,979 shares of our common stock (which represented 19.99% of our outstanding shares of common stock on the date of the Aspire Purchase Agreement) without stockholder approval. We may sell additional shares of our common stock above the 19.99% limit provided that (i) we obtain stockholder approval or (ii) stockholder approval has not been obtained at any time the 1,034,979 share limitation is reached and at all times thereafter the average price paid for all shares issued under the Aspire Purchase Agreement, is equal to or greater than $5.76, which was the consolidated closing bid price of our common stock on July 26, 2019. The minimum price at which we can sell shares under the Aspire Purchase Agreement is $0.50. On July 29, 2019, we issued 100,654 shares of our common stock to Aspire Capital, as consideration for entering into the Aspire Purchase Agreement, which we refer to as the Commitment Shares. We recorded the fair value of the shares at July 29, 2019 of $603,924 as an expense in the third quarter of 2019. Concurrently with the Aspire Purchase Agreement, we entered into a registration rights agreement with Aspire Capital, or the Registration Rights Agreement. In accordance with the Registration Rights Agreement, on August 20, 2019 we filed a Registration Statement on Form S-1 (File No. 333-232988) to cover the resale of the Commitment Shares and any Purchased Shares issuable to Aspire Capital under the Aspire Purchase Agreement. There is market uncertainty regarding the utilization of financing associated from the Aspire Purchase Agreement. As of December 31, 2020, no Purchase Shares have been sold to Aspire Capital under the Aspire Purchase Agreement. In February 2020, we completed an underwritten public offering, in which we sold 10,000,000 shares of common stock at a public offering price of $1.30 per share. The shares sold included 769,230 shares issued upon the exercise by the underwriter of its option to purchase additional shares at the public offering price, minus underwriting discounts and commissions. We received gross proceeds of approximately $13 million and net proceeds of approximately $11.9 million after deducting underwriting discounts and commissions. In July 2020, we filed a shelf registration statement, or the 2020 Shelf Registration Statement, with the SEC, for the issuance of common stock, preferred stock, warrants, rights, debt securities and units, which we refer to collectively as the Shelf Securities, up to an aggregate amount of $100 million. The 2020 Shelf Registration Statement was declared effective on July 31, 2020. On August 13, 2020, the Company sold 6,900,000 shares of its common stock at a public offering price of $2.75 per share pursuant to the 2020 Shelf Registration Statement, which includes 900,000 shares issued upon the exercise by the underwriter of its option to purchase additional shares at the public offering price, minus underwriting discounts and commissions. We received gross proceeds of approximately $19.0 million and net proceeds of approximately $17.1 million, after deducting underwriting discounts and offering expenses. Approximately $81,000,000 of Shelf Securities remain available for future sale under the 2020 Shelf Registration Statement. Our operations have also been financed from cash of $29.1 million from the consummation of the Merger in March 2019. Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. 91 Index We evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year beyond the filing of this Annual Report on Form 10-K. Our budgeted cash requirements in 2021 and beyond include expenses related to continuing development and clinical studies. Based on our available cash resources and cash flow projections as of the date the consolidated financial statements were available for issuance, we believe there are sufficient funds to continue operations and research and development programs for at least 12 months from the date of this report. We plan to continue to fund our operations and capital funding needs through equity and/or debt financings. However, the Company cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its existing stockholders. We may also enter into government funding programs and consider selectively partnering for clinical development and commercialization. The sale of additional equity would result in additional dilution to our stockholders. Incurring debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market immunotherapies that we would otherwise prefer to develop and market ourselves. Any of these actions could harm our business, results of operations and prospects. Failure to obtain adequate financing also may adversely affect its ability to operate as a going concern. Note 4 – Reverse Merger On March 15, 2019, the Company (then operating as Edge), Merger Sub and Private PDS completed the Merger in accordance with the Agreement and Plan of Merger and Reorganization, dated as of November 23, 2018, as amended on January 24, 2019, pursuant to and in accordance with which Merger Sub merged with and into Private PDS, with Private PDS surviving as the Company’s wholly-owned subsidiary. Immediately following completion of the Merger, the Company effected the Reverse Stock Split at a ratio of one new share for every twenty shares of its common stock then-outstanding, and changed its corporate name from Edge Therapeutics, Inc. to PDS Biotechnology Corporation, and Private PDS, now the Company’s wholly-owned subsidiary, changed its name to PDS Operating Corporation. The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended. In connection with the Merger, each share of Private PDS’s common stock outstanding immediately prior to the Merger was converted into 0.3262 shares (on a post-Reverse Stock Split basis) of the Company’s common stock. As a result, the Company issued 3,573,760 shares of its common stock to the stockholders of Private PDS in exchange for all of the outstanding shares of common stock of Private PDS. For accounting purposes, Private PDS was considered to be the accounting acquirer in the Merger. As the accounting acquirer, Private PDS’s assets and liabilities continue to be recorded at their historical carrying amounts and the historical operations that will be reflected in the Company’s consolidated financial statements will be those of Private PDS. All references in the consolidated financial statements to the number of shares and per share amounts of the Company’s common stock have been retroactively restated to reflect completion of the Merger and the Reverse Stock Split. Purchase Price Pursuant to the Agreement and Plan of Merger and Reorganization, as amended, Edge issued to Private PDS’s stockholders a number of shares of Edge’s common stock representing approximately 70% of the outstanding shares of our common stock. The purchase price, which represents the consideration transferred to Edge’s stockholders in the Merger is calculated based on the number of shares of our common stock that Edge’s stockholders owned as of the closing of the Merger on March 15, 2019, which consists of the following: Number of our shares of common stock to be owned by Edge security holders (1) 1,600,166 Multiplied by the price per share of Edge’s common stock as of March 15, 2019 $ 9.87 Purchase price (in thousands) $ 15,794 (1) The amount includes 1,576,916 shares of Edge’s common stock outstanding as of March 15, 2019 plus 23,250 stock options of Edge that were in the money and vested immediately upon closing of the Merger. At closing, 753 of in-the-money options and 235 fractional shares paid out in cash to shareholders were not issued as common stock, resulting in 1,599,178 common shares issued. 92 Index Final Purchase Price Allocation The Company completed its analysis of the allocation of the purchase price as of December 31, 2019 . The purchase price was allocated to the net assets acquired of Edge based upon their preliminary estimated fair values as of March 15, 2019. The in-process research and development asset (“IPR&D”) that is recognized relates to Edge’s NEWTON 2 clinical trial for EG-1962 that has not reached technological feasibility. The Company was actively looking to license out EG-1962 and had preliminary discussions with third parties who were actively looking at the data of EG-1962 during the year. Accordingly, the IPR&D was capitalized as an indefinite-lived intangible asset and tested for impairment at least annually until it is determined that there is no future economic benefit from EG-1962. As a result of capitalizing the IPR&D, the Company recognized an indefinite life deferred tax liability. During the three months ended June 30, 2019, two adjustments were made to the preliminary allocation. The first was for $275,000 relating to an offer to purchase equipment that was given a value of $0 in the preliminary allocation. The second was for $65,551 relating to Edge’s bonus plan that was effective prior to the date of acquisition. During the three months ended December 31, 2020 two additional adjustments were made to the preliminary valuation. The first was for an increase of $1,751,000 relating to the IPR&D in which the Company finalized the valuation of the IPR&D and as a result recognized an additional deferred tax liability of $224,513. The second was for a write-off relating to a transition service arrangement that was effective prior to the date of the acquisition for $131,250. In accordance with ASC 805, Business Combinations any excess fair value of the acquired net assets over the purchase price has been recognized as a bargain purchase gain in the consolidated statement of operations and comprehensive loss. In the fourth quarter 2019, the Company has reassessed whether all the assets acquired, and the liabilities assumed have been identified and recognized in the purchase price allocation. The final allocation of the purchase price to the net assets of Edge, based on the fair values as of March 15, 2019, is as follows: Cash and cash equivalents $ 29,106,513 Prepaid expense and other assets 1,585,482 Right to use asset 1,384,810 Intangible assets-IPR&D 2,974,000 Total identifiable assets acquired 35,050,805 Accounts payable, accrued expenses, other liabilities (4,595,934 ) Lease liability (945,152 ) Deferred tax liability (381,513 ) Total liabilities assumed (5,922,599 ) Net identifiable assets acquired 29,128,206 Bargain purchase gain (13,334,568 ) Purchase price $ 15,793,638 The fair value of the IPR&D was determined using the discounted cash flow method based on probability- adjusted cash flow success scenarios to develop EG-1962 into a commercial product, estimating the revenue and costs. The rates utilized to discount the net cash flows to the present value are commensurate with the stage of development of the projects and uncertainties in the economic estimates used in the projections. Pro Forma Financial Information The following pro forma consolidated results of net loss for the year ended December 31, 2019: Pro forma operating expenses $ (31,152,190 ) Pro forma net loss (31,134,293 ) Pro forma basic and diluted net loss per share $ (6.40 ) The December 31, 2019 pro forma net loss excludes the bargain purchase gain that resulted from the Merger. 93 Index Note 5 – Fair Value of Financial Instruments There were no transfers between Levels 1, 2, or 3 during the years ended December 31, 2020 or 2019. Fair Value Measurements at Reporting Date Using Total Quoted Prices in Active Markets (Level 1) Quoted Prices in Inactive Markets (Level 2) Significant Unobservable Inputs (Level 3) As of December 31, 2020: Cash and cash equivalents $ 28,839,565 $ 28,839,565 $ – $ – As of December 31, 2019: Cash and cash equivalents $ 12,161,739 $ 12,161,739 $ – $ – Note 6 – Property and Equipment Property and equipment is summarized as follows: December 31, 2020 2019 Furniture and equipment $ 14,964 $ 14,964 Computer and Telephone equipment 13,545 13,545 Lab equipment 86,911 86,911 Total furniture and equipment 115,420 115,420 Less accumulated depreciation (109,977 ) (94,369 ) Property and equipment, net $ 5,443 $ 21,051 Depreciation expense for the years ended December 31, 2020 and 2019 was $15,608 and $98,414, respectively. Note 7 – Impairment Charge In the prior year, the Company determined that the intangible asset related to Edge’s NEWTON 2 clinical trial for EG-1962 was impaired due to significantly reduced activity in the data room and a lack of new interest from third parties to purchase or license the product. Further the Company does not have the internal resources to pursue EG 1962 as an internal development project and has stated publicly that it had intended to find a partner to fund and run the EG 1962 program. The drop off in interest from third parties and the lack of any new inbound interest has made this an extremely low probability of success. As a result for the year ended December 31, 2019, the Company recorded an impairment charge - IPR&D of $2,974,000 for the estimated value of the IPR&D asset of $2,974,000 in its consolidated statement of operations and comprehensive loss. Note 8 – Leases The Company adopted Accounting Standards Codification (ASC) Topic 842 on the date of the Merger and recognized an operating right-of-use (ROU) asset of $1.4 million and operating lease liabilities of $1.4 million at upon acquiring the lease in the reverse merger. The Company leased office space in Berkeley Heights, New Jersey that was expected to expire on November 15, 2021 under an operating lease. In addition to the monthly base amount in the lease agreement, the Company is required to pay its proportionate share of real estate taxes and operating expenses during the lease term which are expensed as incurred. The discount rate implicit within the lease is not determinable, therefore Company estimated an incremental borrowing rate based on the information available on the date of the Merger. On July 8, 2019, the Company entered into a lease termination agreement for its office space located at 300 Connell Drive, Suite 4000, Berkeley Heights, NJ 07922 effective August 31, 2019 (the “Lease Termination Agreement”). Pursuant to the Lease Termination Agreement, the Company was required to pay 50 percent of the remaining lease payments of $665,802 over three installments on September 1, 2019, December 1, 2019, and March 1, 2020, which was recorded as lease termination costs in the third quarter of 2019. On August 31, 2019, the right-of-use asset of $1.2 million and operating lease liability of $1.2 million was written off. Leasehold improvements amounting to approximately $0.3 million were also written off and are included in lease termination costs. The Company entered into a temporary month-to-month lease as of September 1, 2019 for office space located at 830 Morris Turnpike, Short Hills, NJ 07078 until the Company entered into a new lease for permanent office space. This lease was terminated on May 31, 2020. 94 Index Effective March 5, 2020, the Company entered into a sublease for approximately 11,200 square feet of office space located at 25B Vreeland Road, Florham Park, NJ. The sublease commenced on May 1, 2020 and will continue for a term of forty (40) months with an option to renew through October 31, 2027. Upon inception of the lease, the Company recognized approximately $0.7 million of a ROU asset and operating lease liabilities. The discount rate used to measure the operating lease liability as of May 1, 2020 was 9.15%. Throughout the period described above the Company has maintained, and continues to maintain, a month-to-month lease for its research facilities at the Princeton Innovation Center BioLabs located at 303A College Road E, Princeton NJ, 08540. Year Ended December 31, 2020 Cash paid for amounts included in measurement of lease liabilities: Operating cash outflows for operating lease $ 98,133 Right-of use asset obtained in exchange for new operating lease liability $ 668,764 Remaining lease term - operating lease liability 32.0 Discount rate - operating lease 9.15 % Reported as of December 31, 2020 Operating lease right-to-use asset $ 547,706 Current portion of operating lease liability $ 119,904 Operating leases, net of current portion 490,353 Total $ 610,257 For the year ended December 31, 2020 the Company’s operating lease expense was $160,685. Year ended December 31, 2021 $ 170,836 2022 295,346 2023 239,469 2024 - 2025 and after - Total future minimum lease payments 705,651 Less inputed interest (95,394 ) $ 610,257 Note 9 – Accrued Expenses and Restructuring Reserve Accrued expenses and other liabilities consist of the following: December 31, 2020 2019 Accrued research and development costs $ 204,780 $ 16,415 Accrued professional fees 219,822 256,062 Accrued compensation 1,310,720 603,229 Accrued rent - 221,934 Total $ 1,735,322 $ 1,097,640 95 Index Restructuring Reserve Restructuring reserve relates to the severance costs incurred by Edge Therapeutics in 2019 prior to the merger transaction and assumed by the Company as part of the purchase accounting, but not yet paid. Through September 2020, restructuring costs of $498,185 was paid. As of December 31, 2020, the balance of the restructuring reserve was $0. Note 10 – Convertible Promissory Note In November 2017, the Company received $30,000 from an investor in exchange for a convertible promissory note bearing interest at 7.50% per annum. The original terms of the promissory note was amended in December 2018 and states that in the event the Company consummates a sale of the Company prior to the conversion or repayment in full of this Note, the outstanding principal amount and all accrued but unpaid interest due shall automatically convert into the numbers of shares of the Company’s common stock equal to (a) the principal amount plus all accrued but unpaid interest thereon, divided by the lesser of (a) $1.11 and (b) the parent closing price multiplied by the exchange ratio (each, as defined in the merger agreement of $3.22). This event occurred on March 15, 2019, the date of the Merger, and as a result, the outstanding principal amount of $30,000 and accrued unpaid interest of $2,950 was converted into 9,683 shares of the Company’s common stock. At the date of the Merger the effective conversion price was less than the parent’s closing stock price of $3.22. As a result, for the year ended December 31, 2019, the Company recorded a beneficial conversion charge of $32,953 which was recorded to interest expense in the consolidated statement of operations and comprehensive loss and an increase to additional paid in capital for the same amount in its consolidated statement of changes in stockholder’s equity (deficit). Note 11 – Stock-Based Compensation The Company has three equity compensation plans: the 2009 Stock Option Plan, 2014 Equity Incentive Plan and the 2018 Stock Incentive Plan (the “Plans”). In 2014, the Company’s stockholders approved the 2014 Equity Incentive Plan pursuant to which the Company may grant up to 91,367 shares as ISOs, NQs and restricted stock units (“RSUs”), subject to increases as hereafter described (the “Plan Limit”). In addition, on January 1, 2015 and each January 1 thereafter and prior to the termination of the 2014 Equity Incentive Plan, pursuant to the terms of the 2014 Equity Incentive Plan, the Plan Limit was and shall be increased by the lesser of (x) 4% of the number of shares of Common Stock outstanding as of the immediately preceding December 31 and (y) such lesser number as the Board of Directors may determine in its discretion. On January 1, 2016, 2017, 2018 and 2019 the Plan Limit was increased to 152,366 shares, 210,203 shares, 271,941 shares and 323,529 shares, respectively. In March 2019, the Plan was amended and restated which removed the annual increase component and was limited to 826,292 shares. In 2018, the Company’s stockholders approved the 2018 Stock Incentive Plan pursuant to which the Company may grant up to 558,071 shares as Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv) Preferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based Awards. Pursuant to the terms of the Plans, ISOs have a term of ten years from the date of grant or such shorter term as may be provided in the option agreement. Unless specified otherwise in an individual option agreement, ISOs generally vest over a four year term and NQs generally vest over a one to five year terms. Unless terminated by the Board, the Plans shall continue to remain effective for a term of ten years or until such time as no further awards may be granted and all awards granted under the Plans are no longer outstanding. As of December 31, 2020, there were 190,799 shares available for grant under the 2018 Stock Incentive Plan. On June 17, 2019, the Board adopted the 2019 Inducement Plan (the “Inducement Plan”). The Inducement Plan provides for the grant of non-qualified stock options. The Inducement Plan was recommended for approval by the Compensation Committee of the Board and subsequently approved and adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. On December 9, 2020, the Company amended the Inducement Plan solely to increase the total number of shares of Common Stock reserved for issuance under the Inducement Plan from 200,000 shares to 500,000 shares. The 2019 Inducement Plan will be administered by the Compensation Committee of the Board. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, non-qualified stock options under the 2019 Inducement Plan may only be made to an employee who has not previously been an employee or member of the Board (or any parent or subsidiary of the Company), or following a bona fide period of non-employment by the Company (or a parent or subsidiary of the Company), if he or she is granted such non-qualified stock options in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary. As of December 31, 2020 , there were 421,500 shares available for grant under the 2019 Inducement Plan. 96 Index The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Research and development $ 229,977 $ 550,605 General and administrative 202,344 2,588,448 Total $ 432,321 $ 3,139,053 The following table summarizes the stock option activity for the Company’ stock option plans for the year ended December 31, 2020: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value Balance at January 1, 2020 1,421,797 $ 15.95 6.99 Granted 331,407 $ 1.46 Exercised – $ – Forfeited (84,583 ) $ 41.19 Expired (17,724 ) $ 4.69 Options outstanding at December 31, 2020 1,650,897 $ 11.87 7.03 $ 226,731 Vested and expected to vest at December 31, 2020 1,650,897 $ 11.87 7.03 $ 226,731 Exercisable at December 31, 2020 1,090,493 $ 16.29 5.47 $ – As of December 31, 2020 there was approximately $1,317,615 of unamortized stock compensation expense, which is expected to be recognized over a remaining average vesting period of 2.91 years. The weighted-average grant date fair value of the stock options granted in 2020 was $1.14 per share. The fair value of options granted during the year ended December 31, 2020 was estimated using the Black-Scholes option valuation model utilizing the following assumptions: Year Ended December 31, 2020 2019 Weighted Average Volatility 97.50 % 88.70 % Risk-Free Interest Rate 0.39 % 2.31 % Expected Term in Years 6.04 5.54 Dividend Rate - - Fair Value of Option on Grant Date $ 1.14 $ 5.67 Expected volatility . The expected volatility assumption is based on volatilities of a peer group of similar companies in the biotechnology industry whose share prices are publicly available. Risk-free interest rate . The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the stock option grants. Expected term. The expected term represents the period options are expected to be outstanding. The expected term of the options is based on using the simplified method, which is the midpoint between the requisite service period and the contractual term of the option, since the Company has a limited history of being a public company from March 15, 2019 (the date of the Merger) to develop reasonable expectations about future exercise patterns and employment duration for the stock options grants. Expected dividend rate . The expected dividend yield assumption is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. 97 Index Note 12 - Stockholders’ Equity (Deficit) Preferred Stock The Company currently has 5,000,000 shares of preferred stock authorized. Voting Shares of preferred stock may be issued in one or more series, from time to time, with each such series to consist of such number of shares and to have such voting powers relative to other classes or series of preferred stock, if any, or common stock, full or limited or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the Company’s Board of Directors. Common Stock The Company currently has 75,000,000 shares of common authorized. Voting Each holder of a share of common stock is entitled to one vote for each share of common stock. Dividends Dividends may be declared and paid as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding preferred stock. Preemptive Rights. The holders of common stock shall have no preemptive rights to subscribe for any shares of any class of stock of the Company whether now or hereafter authorized. Liquidation Rights Upon the dissolution or liquidation of the Company, whether voluntary or involuntary, holders of the common stock will be entitled to receive all assets of the Company available for distribution to its stockholders, subject to any preferential rights of any then outstanding preferred stock. 2019 Issuance of Common Stock In January 2019, Private PDS’s Board of Directors approved an amendment to the terms of the 2018 financing. The amendment increased the warrant coverage (which is the amount of warrants each investor is entitled to, based on how much they paid for the common stock) from 20% to 45% in connection with the 2018 bridge financing term sheet. As a result of the amendment, in 2019 investors who purchased shares of common stock in 2018 received an additional $32,500 in warrant coverage. In February 2019, Private PDS issued 48,930 shares of common stock resulting in proceeds of $750,000 and the investors collectively received a warrant coverage of $337,500. The exercise price of the warrants to purchase shares of Private PDS’s common stock is $9.87, which is the stock price as of the date of the Merger. Accordingly, during the year ended December 31, 2019, Private PDS issued 37,487 warrants to purchase shares of Private PDS’s common stock. These warrants were determined to be equity instruments under ASC 480, Distinguishing Liabilities from Equity and ASC 815-40, Derivatives and Hedging. Warrant Liability Classified to Additional Paid in Capital On March 13, 2019, in connection with the settlement agreement entered into with one of its vendors, Private PDS granted a warrant to purchase 45,288 shares of its common stock at an exercise price of $9.87 which is the stock price as of the date of the Merger. At March 13, 2019, the estimated fair value of the warrant was $372,925. As a result, at March 13, 2019, Private PDS marked the warrant liability to the estimated fair value by $81,700 from $291,225 at December 31, 2018 to $372,925 and recorded an increase to general and administrative expenses in its statement of operations in 2019 for the $81,700. Since Private PDS issued a fixed number of warrants and a fixed exercise price to the vendor the warrant liability of $372,925 was classified to additional paid in capital. 98 Index At March 13, 2019, Private PDS estimated the fair value of the warrant using the Black-Scholes option pricing model utilizing the following assumptions. Private PDS determined the expected stock price volatility based on volatilities of a peer group of similar companies in the biotechnology industry whose share prices are publicly available. The expected term of the warrant was based on the contractual term. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of the grant over the term of the warrant grant. The expected dividend rate is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Volatility 83 % Risk-Free Interest Rate 2.63 % Expected Term in Years 10 Dividend Rate 0.00 % Fair Value of Warrant $ 8.23 Note 13 – Income Taxes A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate is as follows: December 31, 2020 2019 Federal statutory rate 21.0 % 21.0 % State taxes 6.7 % 21.1 % Extraordinary gain 0.0 % 38.0 % Permanent differences (4.5 )% (4.1 )% Research and development 2.3 % 4.1 % Valuation Allowance (27.1 )% (74.6 )% Other 1.6 % (0.3 )% Effective tax rate 0.0 % 5.2 % The tax effects of temporary differences that give rise to significant portions of the deferred tax assets were as follows: December 31, 2020 2019 Federal net operating losses $ 19,757,859 $ 16,620,765 State net operating losses 5,704,791 4,653,462 Stock options 1,687,123 2,153,487 Restricted stock/warrants - 143,841 Federal tax credit 1,089,138 740,040 State tax credits 752,791 657,376 Amortization 41,695 47,811 Accrued expense 352,642 363,617 Depreciation 721,024 719,263 Lease liabilities 171,543 - Other 18,098 18,098 Total gross deferred tax assets 30,296,704 26,117,760 Less valuation allowance (30,142,744 ) (26,117,760 ) Deferred tax assets, net $ 153,960 $ - Right of use asset $ (153,960 ) $ - Total gross deferred tax liabilities (153,960 ) - Deferred tax, net $ - $ - 99 Index In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more likely than not that some portion of the deferred income tax will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. At December 31, 2020 and 2019, the Company has recorded a full valuation allowance against its net deferred tax assets of approximately $30.1 and $26.1 million respectively. The change in the valuation allowance during the year ended 2020 was approximately $4.0 million. At December 31, 2020, the Company had federal net operating loss (“NOL”) carryforwards of approximately $94.1 million. At December 31, 2020, the Company had federal research and development credit carryforwards of approximately $1.1 million. The federal net operating loss carryforwards begin to expire in 2028, losses generated in 2018 or later will carry forward indefinitely. The federal credit carryforwards begin to expire in 2032. Section 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes, such as research and experimental tax credits, to an annual limitation in the event certain ownership changes, as defined. The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. Although the Company has not completed an analysis under Section 382 of the Code, it is likely that the utilization of the NOLs will be limited. At December 31, 2020, the Company had approximately $80.4 million of State of New Jersey NOLs which expire between 2029 and 2040. At December 31, 2020, the Company had approximately $1.0 million of the State of New Jersey research development credits carryforwards. The State of New Jersey has enacted legislation permitting certain corporations located in New Jersey to sell state tax loss carryforwards and state research and development credits, or net loss carryforwards. The Technology Business Tax Certificate Transfer Program enables qualified, unprofitable NJ-based technology or biotechnology companies with fewer than 225 US employees (including parent company and all subsidiaries) to sell a percentage of New Jersey NOLs and research and development (“R&D”) tax credits to unrelated profitable corporations. In 2020 the company applied to sell its New Jersey NOL and is currently awaiting a final decision regarding this program. Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2020, there were no uncertain positions. The Company’s U.S. federal and state net operating losses have occurred since its inception in 2009 and as such, tax years subject to potential tax examination could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. The Company did not have any unrecognized tax benefits and has not accrued any interest or penalties for the years ended December 31, 2020 and 2019. Note 14 – Commitments and Contingencies Employment Matters The Company has entered into employment agreements or offer letters with each of its executive officers. The employment agreements generally provide for, among other things, salary, bonus and severance payments. The employment agreements generally provide for between 12 months and 24 months of severance benefits to be paid to an executive (as well as certain potential bonus, COBRA and equity award benefits), subject to the effectiveness of a general release of claims, if the executive terminates his or her employment for good reason or if the Company terminates the executive’s employment without cause. Such severance payments may be provided for as long as 24 months in connection with a termination following a change of control. The continued provision of severance benefits is conditioned on each executive’s compliance with the terms of the Company’s confidentiality and invention and assignment agreement as well as his or her release of claims. Rent For the years ended December 31, 2020 and 2019, rent was $183,372 and $113,009, respectively, for month-to-month arrangements not impacted by the adoption of ASC 842. 100 Index Note 15 – Retirement Plan The Company has a 401(k) defined contribution plan for the benefit for all employees and permits voluntary contributions by employees subject to IRS-imposed limitations. The 401(k) employer contribution for the years ended December 31, 2020 and 2019 plan years were $19,967 and $37,080 respectively. Note 16– Subsequent Events On March 11, 2021, the Company announced that its COVID-19 vaccine consortium consisting of PDS Biotech, Farmacore Biotechnology and Blanver Farmoquímica, received a commitment from the Secretary for Research and Scientific Training of The Ministry of Science, Technology and Innovation of Brazil (“MCTI”), to fund up to approximately US$60 million to support the clinical development and commercialization of a Versamune®-based, second generation COVID-19 vaccine in Brazil. MCTI intends to start making the funds available to prepare to perform a combined Phase 1/2 clinical trial, upon authorization by the Brazilian regulatory agency, Agência Nacional de Vigilância Sanitária (Anvisa) to initiate the proposed Versamune®-based COVID-19 vaccine clinical program in Brazil. 101