Item 2
Management’s Discussion and Analysis of Financial Condition And Results of Operations
FORWARD LOOKING STATEMENTS
In addition to historical information, the information included in this Form 10-Q contains forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, including but not limited to the risk factors set forth under the heading “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2017, and should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as ‘‘believes,’’ ‘‘expects,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,” ‘‘intends,’’ ‘‘plans,’’ ‘‘pro forma,’’ ‘‘estimates,’’ or ‘‘anticipates’’ or other variations thereof or comparable terminology, or by discussions of strategy, plans, or intentions. Such forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and may be incapable of being realized. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
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whether we can raise additional capital as and when we need it;
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whether we are successful in developing our products;
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whether we are able to obtain regulatory approvals in the United States and other countries for sale of our products;
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whether we can compete successfully with others in our market; and
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whether we are adversely affected in our efforts to raise cash by the volatility and disruption of local and national economic, credit and capital markets and the economy in general.
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Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s analysis only. We assume no obligation to update forward-looking statements.
Overview
GeoVax is a clinical-stage biotechnology company developing human vaccines against infectious diseases and cancer using a novel patented Modified Vaccinia Ankara-Virus Like Particle (MVA-VLP) vaccine platform. In this platform, MVA, a large virus capable of carrying several vaccine antigens, expresses proteins that assemble into highly effective VLP immunogens in the person being vaccinated. The MVA-VLP derived vaccines elicit durable immune responses in the host similar to a live-attenuated virus, while providing the safety characteristics of a replication-defective vector.
Our current development programs are focused on preventive vaccines against Human Immunodeficiency Virus (HIV), Zika Virus, hemorrhagic fever viruses (Ebola, Sudan, Marburg, and Lassa), and malaria, as well as therapeutic vaccines for chronic Hepatitis B infections and cancers. Our most advanced vaccine program is focused on the clade B subtype of HIV prevalent in the larger commercial markets of the Americas, Western Europe, Japan and Australia; this program is currently undergoing human clinical trials.
Our corporate strategy is to advance and protect our vaccine platform and use its unique capabilities to design and develop an array of products. We aim to advance products through to human clinical testing, and to seek partnership or licensing arrangements for commercialization. We will also leverage third party resources through collaborations and partnerships for preclinical and clinical testing. Our collaborators and partners include the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH), the HIV Vaccines Trial Network (HVTN), Centers for Disease Control and Prevention (CDC), United States Army Research Institute of Infectious Disease (USAMRIID), U.S. Naval Research Laboratory (USNRL), Emory University, University of Pittsburgh, Georgia State University Research Foundation, Peking University, University of Texas Medical Branch (UTMB), the Institute of Human Virology (IHV) at the University of Maryland, the Scripps Research Institute (TSRI), Burnet Institute in Australia, American Gene Technologies, Inc. (AGT), ViaMune, Inc., Vaxeal Holding SA, and CaroGen Corporation.
We have not generated any revenues from the sale of any such products, and we do not expect to generate any such revenues for at least the next several years. Our product candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing. All product candidates that we advance to clinical testing will require regulatory approval prior to commercial use and will require significant costs for commercialization. We may not be successful in our research and development efforts, and we may never generate sufficient product revenue to be profitable.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates make adjustments as necessary. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our financial statements, refer to Item 7 in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no significant changes to our critical accounting policies from those disclosed in our 2017 Annual Report.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 3 to the Condensed Consolidated Financial Statements, included in this Quarterly Report.
Liquidity and Capital Resources
Our principal uses of cash are to finance our research and development activities. Since inception, we have funded these activities primarily from government grants and clinical trial assistance, and from sales of our equity securities. At March 31, 2018, we had cash and cash equivalents of $571,154 and total assets of $839,505, as compared to $312,727 and $490,235, respectively, at December 31, 2017. At March 31, 2018, we had a working capital deficit of $117,115, compared to a deficit of $363,218 at December 31, 2017. Our current liabilities at March 31, 2018 includes $838,108 of accrued management salaries and director fees, payment of which is continuing to be deferred as discussed further below.
Net cash used in operating activities was $381,573 and $332,098 for the three-month periods ended March 31, 2018 and 2017, respectively. The variances between periods are due to fluctuations in our net losses, offset by non-cash charges such as depreciation and stock-based compensation expense, and by net changes in our assets and liabilities. Our net losses generally fluctuate based on expenditures for our research activities, partially offset by government grant revenues. As of March 31, 2018, there is $265,396 in approved grant funds available for use. Additionally, in April 2018, NIAID awarded us a Fast Track Phase I/II Small Business Innovative Research (SBIR) grant to support our vaccine development efforts for Lassa virus. The initial Phase I grant award is $299,820 for the project period April 9, 2018 to March 31, 2019. See “Results of Operations – Grant and Collaboration Revenues” below for additional details concerning our government grants.
Members of our executive management team and our board of directors continue to defer portions of their salaries and fees in order to help conserve the Company’s cash resources. As of March 31, 2018, the accumulated deferrals totaled $838,108. We expect the ongoing deferrals of approximately $30,200 per month for the management salaries and approximately $28,000 per quarter for the board of director fees to continue until such time as a significant financing event (as determined by the board of directors) is consummated.
NIAID has funded the costs of conducting all of our human clinical trials (Phase 1 and Phase 2a) to date for our preventive HIV vaccines, with GeoVax incurring certain costs associated with manufacturing the clinical vaccine supplies and other study support. NIAID is also currently funding the cost of an ongoing Phase 1 trial (HVTN 114), which is investigating the effect of adding a “protein boost” component to our vaccine. Concurrently, a preclinical study in non-human primates (funded by a NIAID grant) is evaluating two additional proteins specifically chosen as boosting agents for GOVX-B11, and planning is underway for a Phase 1 trial to evaluate the safety and immunogenicity of these proteins in humans, which we expect to begin in the second half of 2018. Based on the results from these studies, we expect NIAID may then be ready to support a large phase 2b efficacy trial.
Net cash used in investing activities was $-0- and $4,350 for the three-month periods ended March 31, 2018 and 2017, respectively. Our investing activities have consisted predominantly of capital expenditures.
Net cash provided by financing activities was $640,000 and $49,167 for the three-month periods ended March 31, 2018 and 2017, respectively. During February 2018, we entered into a Senior Note Purchase Agreement with Georgia Research Alliance, Inc. pursuant to which we issued a five-year Senior Promissory Note (the “Note”) for $50,000. The Note bears an annual interest rate of 5%, payable monthly, with principal repayments beginning in the second year. During March 2018, we sold shares of our Series E convertible preferred stock for net proceeds of $590,000. During the three-month period ended March 31, 2017, warrants to purchase shares of our common stock were exercised for net proceeds of $49,167.
As of March 31, 2018, we had an accumulated deficit of $38.5 million. We expect for the foreseeable future we will continue to operate at a loss. The amount of the accumulated deficit will continue to increase, as it will be expensive to continue our research and development efforts. We will continue to require substantial funds to continue our activities and cannot predict the outcome of our efforts. We believe that our existing cash resources, combined with funding from existing NIH grants and clinical trial support will be sufficient to fund our planned operations into the third quarter of 2018. We will require additional funds to continue our planned operations beyond that date. We are currently seeking sources of capital through additional government grant programs and clinical trial support, and we may also conduct additional offerings of our equity securities. However, additional funding may not be available on favorable terms or at all and if we fail to obtain additional capital when needed, we may be required to delay, scale back, or eliminate some or all of our research and development programs as well as reduce our general and administrative expenses.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are likely or reasonably likely to have a material effect on our financial condition or results of operations.
Contractual Obligations
As of March 31, 2018, we had noncancelable lease obligations and other firm purchase obligations totaling approximately $117,000, as compared to approximately $235,000 at December 31, 2017. We have no committed lines of credit and no other committed funding or long-term debt, with the exception of the $50,000 note payable to GRA. We have employment agreements with our senior management team, each of which may be terminated with 30 days advance notice. There have been no other material changes to the table presented in our Annual Report on Form 10-K for the year ended December 31, 2017.
Results of Operations
Net Loss
We recorded a net loss of $621,813 for the three-month period ended March 31, 2018, as compared to $548,341 for the three-month period ended March 31, 2017. Our net losses typically fluctuate due to the timing of activities and related costs associated with our vaccine research and development activities and our general and administrative costs, as described below.
Grant
and Collaboration
Revenue
s
During the three-month period ended March 31, 2018, we recorded grant and collaboration revenues of $221,299, as compared to $295,735 during the comparable period of 2017. Grant revenues relate to grants and contracts from NIAID in support of our vaccine development activities. We record revenue associated with these grants as the related costs and expenses are incurred. The difference in our grant revenues from period to period is dependent upon our expenditures for activities supported by the grants, and fluctuates based on the timing of the expenditures.
Additional detail concerning our grant revenues and the remaining funds available for use as of March 31, 2018 is presented in the table below.
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Grant Revenues Recorded During
Three-Month Periods Ended March 31,
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Approved Funds
Available at
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Grant/Contract No.
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2018
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2017
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March 31, 2018
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SBIR Grant No. R44AI106422 (HIV)
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$
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187,511
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$
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194,126
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$
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196,857
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SBIR Grant No. R43AI134200 (Zika)
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28,788
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-
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68,539
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SBIR Grant No. R43AI120887 (HIV)
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-
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54,803
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Staged Vaccine Development Contract (HIV)
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46,806
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-
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Total
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$
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216,299
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$
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295,735
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$
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265,396
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During the three-month period ended March 31, 2018, we recorded $5,000 of revenue associated with a collaboration with the U.S. Naval Research Laboratory (USNRL) for development of high-quality antibodies useful for detection of Lassa virus.
In April 2018, NIAID awarded us a Fast Track Phase I/II Small Business Innovative Research (SBIR) grant to support our vaccine development efforts for Lassa virus. The initial Phase I grant award is $299,820 for the project period April 9, 2018 to March 31, 2019.
Research and Development
Expenses
Our research and development expenses were $486,994 and $551,795 for the three-month periods ended March 31, 2018 and 2017, respectively. Research and development expense for these periods includes stock-based compensation expense of $10,951 and $6,660, respectively (see discussion under “Stock-Based Compensation Expense” below).
Our research and development expenses can fluctuate considerably on a period-to-period basis, depending on our need for vaccine manufacturing by third parties, the timing of expenditures related to our grants from NIAID, the timing of costs associated with any clinical trials being funding directly by us, and other factors. The overall decrease in research and development expense from the 2017 period to 2018 is primarily attributable to lower expenditures related to the activities supported by our grants from NIAID. Our research and development costs do not include costs incurred by the HVTN in conducting clinical trials of our preventive HIV vaccines; those costs are funded directly to the HVTN by NIAID.
We do not disclose our research and development expenses by project, since our employees’ time is spread across multiple programs and our laboratory facility is used for multiple vaccine candidates. We track the direct cost of research and development expenses related to government grant revenue by the percentage of assigned employees’ time spent on each grant and other direct costs associated with each grant. Indirect costs associated with grants are not tracked separately but are applied based on a contracted overhead rate negotiated with the NIH. Therefore, the recorded revenues associated with government grants approximates the costs incurred.
We do not provide forward-looking estimates of costs and time to complete our research programs due to the many uncertainties associated with vaccine development. Due to these uncertainties, our future expenditures are likely to be highly volatile in future periods depending on the outcomes of the trials and studies. As we obtain data from pre-clinical studies and clinical trials, we may elect to discontinue or delay vaccine development programs to focus our resources on more promising vaccine candidates. Completion of preclinical studies and human clinical trials may take several years or more, but the length of time can vary substantially depending upon several factors. The duration and the cost of future clinical trials may vary significantly over the life of the project because of differences arising during development of the human clinical trial protocols, including the number of patients that ultimately participate in the clinical trial; the duration of patient follow-up that seems appropriate in view of the results; the number of clinical sites included in the clinical trials; and the length of time required to enroll suitable patient subjects.
General and Administrative Expense
s
Our general and administrative expenses were $357,228 and $292,667 for the three-month periods ended March 31, 2018 and 2017, respectively. General and administrative costs include officers’ salaries, legal and accounting costs, patent costs, and other general corporate expenses. General and administrative expense includes stock-based compensation expense of $41,598 and $7,920 for the 2018 and 2017 periods, respectively (see discussion under “Stock-Based Compensation Expense” below). Excluding stock-based compensation expense, general and administrative expenses were $315,630 and $284,747 for the three-month periods ended March 31, 2018 and 2017, respectively. The overall increase in general and administrative expense from 2017 to 2018 is attributable to costs associated with investment banking arrangements, investor relations activities, and travel. We expect that our general and administrative costs may increase in the future in support of expanded research and development activities and other general corporate activities.
Stock-Based Compensation Expense
For the three-month periods ended March 31, 2018 and 2017, the components of stock-based compensation expense were as follows:
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Three Months Ended March 31,
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2018
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2017
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Stock option expense
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$
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23,978
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$
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14,580
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Stock issued for services
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28,571
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-
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Total stock-based compensation expense
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$
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52,549
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$
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14,580
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In general, stock-based compensation expense is allocated to research and development expense or general and administrative expense according to the classification of cash compensation paid to the employee, consultant or director to whom the stock compensation was granted. For the three-month periods ended March 31, 2018 and 2017, stock-based compensation expense was allocated as follows:
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Three Months Ended March 31,
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2018
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2017
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General and administrative expense
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$
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41,598
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$
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7,920
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Research and development expense
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10,951
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6,660
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Total stock-based compensation expense
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$
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52,549
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$
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14,580
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Other Incom
e
(Expense)
Interest income for the three-month periods ended March 31, 2018 and 2017 was $1,318 and $386, respectively. The variances between periods are primarily attributable to cash available for investment and interest rate fluctuations. Interest expense for the three-month periods ended March 31, 2018 and 2017 was $208 and $-0-, respectively.