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, 2015, 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 using our novel platform technology. Our current development programs are focused on HIV, hemorrhagic fever viruses (Ebola, Sudan, Marburg and Lassa), Zika virus, and cancer immunotherapy. We also recently began a program to develop a therapeutic vaccine for chronic Hepatitis B infections. Our HIV vaccine technology was developed in collaboration with researchers at Emory University, the NIH, and the CDC, and is exclusively licensed to us from Emory University. We also have nonexclusive licenses to certain patents owned by the NIH. Our hemorrhagic fever and Zika vaccines, and our cancer immunotherapy program, are being developed with technology we expect to license from the NIH.
Our most advanced HIV vaccine development efforts are focused on a preventive vaccine to address the clade B subtype of the HIV virus that is most prevalent in the developed world (primarily North America and Western Europe). All of the clinical trials for our preventive HIV vaccine (through Phase 2a) have been conducted by the HIV Vaccine Trials Network (HVTN) with funding from the NIH, and we expect additional clinical trials for this program to be funded by the NIH. We have also begun preclinical studies to develop an HIV vaccine candidate for the clade C subtype of HIV prevalent in the developing world (primarily sub-Saharan Africa and India); this work is currently being supported by NIH grants.
Our hemorrhagic fever vaccine development effort began in 2014 and we are currently conducting preclinical animal studies through a collaboration with the NIH. Our cancer immunotherapy program began in late 2015 and we are currently evaluating our vaccine construct in preclinical animal models in collaboration with ViaMune, Inc. Our Zika virus vaccine development effort began in early 2016 and we are currently testing our vaccine in preclinical animal models through collaborations with the University of Georgia, the CDC, and the NIH.
We have neither received regulatory approval for any of our vaccine candidates, nor do we have any commercialization capabilities; therefore, it is possible that we may never successfully derive significant product revenues from any of our existing or future development programs or product candidates.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management 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, management evaluates its estimates and adjusts the estimates as necessary. We base our estimates on historical experience and on various other assumptions that are believed 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.
Our significant accounting policies are summarized in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
We recognize revenue in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements,
as amended by Staff Accounting Bulletin No. 104,
Revenue Recognition,
(“SAB 104”). SAB 104 provides guidance in applying U.S. generally accepted accounting principles (“GAAP”) to revenue recognition issues, and specifically addresses revenue recognition for upfront, nonrefundable fees received in connection with research collaboration agreements. During 2016 and 2015, our revenue consisted of grant and contract funding received from the NIH. Revenue from these arrangements is approximately equal to the costs incurred and is recorded as income as the related costs are incurred.
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for the Company beginning in 2017 and allows for either full retrospective adoption or modified retrospective adoption. We are currently evaluating the impact of the adoption of ASU 2014-09 on our financial statements.
Stock-Based Compensation
We account for stock-based transactions in which the Company receives services from employees, directors or others in exchange for equity instruments based on the fair value of the award at the grant date. Compensation cost for awards of common stock is estimated based on the price of the underlying common stock on the date of issuance. Compensation cost for stock options or warrants is estimated at the grant date based on each instrument’s fair value as calculated by the Black-Scholes option pricing model. We recognize stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period for the award.
Liquidity and Capital Resources
We have funded our activities to date primarily from government grants and clinical trial assistance, and from sales of our equity securities. Due to our significant research and development expenditures, we have not been profitable and have generated operating losses since our inception in 2001. We will continue to require substantial funds to continue these activities. We believe that our existing cash resources and government funding commitments will be sufficient to fund our planned operations into the first quarter of 2017. We will require additional funds to continue our planned operations beyond that date. We are currently seeking sources of non-dilutive capital through additional government programs and clinical trial support, and we may also conduct additional offerings of our equity securities. However, such 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.
At September 30, 2016, we had cash and cash equivalents of $511,096 and working capital of $349,569, as compared to $1,060,348 and $1,109,985, respectively, at December 31, 2015. As of September 30, 2016, we had an accumulated deficit of $34.8 million and we expect for the foreseeable future our operations will result in a net loss on a quarterly and annual basis.
Net cash used in operating activities was $1,577,678 and $1,944,573 for the nine-month periods ended September 30, 2016 and 2015, respectively.
The NIH 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. We expect the NIH to fund the cost of another Phase 1 trial (HVTN 114) of our preventive HIV vaccine (GOVX-B11), which will investigate the effect of adding a “protein boost” component to our vaccine. The Investigational New Drug (IND) application for HVTN 114 was filed by the National Institute of Allergy and Infectious Diseases (NIAID), part of the NIH, on June 28, 2016, and we expect the trial to begin patient enrollment in January 2017. Concurrently, an ongoing preclinical study in non-human primates 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. Based on the results from these studies, we expect NIAID may then be ready to support a large phase 2b efficacy trial. In July 2016, NIAID awarded us a contract for the production of the DNA vaccine component of GOVX-B11, which is intended for use in advanced clinical trials.
In addition to clinical trial support, our operations have been partially funded by NIH research grants for our HIV program. As of September 30, 2016, there was $680,419 of unused grant funds available for use during the remainder of 2016 and the first half of 2017. We are pursuing additional grants from the federal government for our vaccine development programs but cannot be assured of success.
Net cash used in investing activities was $-0- and $15,850 for the nine-month periods ended September 30, 2016 and 2015, respectively.
Net cash provided by financing activities was $1,028,426 and $2,679,809 for the nine month periods ended September 30, 2016 and 2015, respectively. The cash provided by financing activities for the nine-month period ended September 30, 2016 is related to exercises of stock purchase warrants. The cash provided by financing activities for the nine-month period ended September 30, 2015 is related to the sale of shares of our Series C convertible preferred stock
in February 2015.
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 September 30, 2016, we had noncancellable lease obligations and other firm purchase obligations totaling approximately $495,000, as compared to approximately $149,000 at December 31, 2015. Approximately $305,000 of the purchase commitments at September 30, 2016 relate to subcontracts associated with our government grants, which we expect will be fully reimbursed to us pursuant to those grants. We have no committed lines of credit and no other committed funding or long-term debt. 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, 2015.
Results of Operations
Net Loss
We recorded a net loss of $464,200 for the three-month period ended September 30, 2016, as compared to $619,899 for the three-month period ended September 30, 2015. For the nine-month period ended September 30, 2016, we recorded a net loss of $2,336,314, as compared to a net loss of $1,996,556 for nine-month period ended September 30, 2015. Our net losses will 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 in more detail below.
Grant Revenue
During the three-month and nine-month periods ended September 30, 2016, we recorded grant revenue of $440,106 and $653,986, respectively, as compared to $93,130 and $268,028, respectively, during the comparable periods of 2015. Grant revenues for these periods relate to grants and contracts from the NIH in support of our HIV 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 directly related to our expenditures for activities supported by the grants, and can fluctuate significantly based on the timing of the related expenditures. Increases in grant revenues of $346,976 and $385,958, respectively, for the three-month and nine-month periods were offset by increases in research and development expenses and in general and administrative expenses during those periods.
In September 2007, the NIH awarded us a grant entitled “GM-CSF-Adjuvanted Clade C DNA/MVA and MVA/MVA Vaccines”. The aggregate award (including subsequent amendments) totaled approximately $20.4 million. No revenues were recorded for this grant during the three-month and nine-month periods ended September 30, 2016, as compared to $-0- and $75,464, respectively, during the comparable periods of 2015. There are no unrecognized grant funds remaining and available for use pursuant to this grant as of September 30, 2016.
In July 2013, the NIH awarded us a Small Business Innovative Research (SBIR) grant entitled “Enhancing Protective Antibody Responses for a GM-CSF Adjuvanted HIV Vaccine.” The initial grant award was $276,690 for the first year of a two year project period beginning August 1, 2013. In July 2014, the NIH awarded us $289,641 for the second year of the project period. No revenues were recorded for this grant during the three-month and nine-month periods ended September 30, 2016, as compared to $54,067 and $153,501, respectively during the comparable periods of 2015. All funding pursuant to this grant has been utilized as of September 30, 2016.
In June 2015, the NIH awarded us a Small Business Innovative Research (SBIR) grant entitled “Directed Lineage Immunizations for Eliciting Broadly Neutralizing Antibody.” The initial grant award of $299,585 was for the first year of a two year project period beginning July 1, 2015. In June 2016, the NIH awarded us $294,038 for the second year of the project period, beginning July 1, 2016. We recorded grant revenues of $79,805 and $180,274 for the three-month and nine-month periods ended September 30, 2016, respectively, related to this grant. No revenues related to this grant were recorded during the three-month or nine-month periods ended September 30, 2015. There is approximately $214,233 in approved grant funds available as of September 30, 2016, which we expect to utilize during the remaining project period ending June 30, 2017.
In April 2016, the NIH awarded us an SBIR grant entitled “Enhancing Protective Antibody Responses for a DNA/MVA HIV Vaccine.” The initial grant award of $740,456 is for the first year of a two year project period beginning April 15, 2016, with a total budget of $1,398,615. We recorded grant revenues of $344,528 and $457,939 for the three-month and nine-month periods ended September 30, 2016, respectively, related to this grant. There is approximately $282,517 in approved grant funds available as of September 30, 2016, which we expect to utilize during the remaining first year budget period ending April 15, 2017.
In August 2016, the NIH awarded us a
Staged Vaccine Development
contract for the production of our preventive HIV vaccine for use in future clinical trials. The award includes a base contract of $199,442 for the initial twelve-month period beginning August 1, 2016 to support process development, as well as $7.6 million in additional development options that can be exercised by the NIH. We recorded revenues of $15,773 for the three-month and nine-month periods ended September 30, 2016 related to this contract, and there is approximately $183,669 in approved funds available as of September 30, 2016, which we expect to utilize during the remaining budget period ending July 31, 2017. Prior to the end of the initial twelve-month base period, we expect that NIH will exercise the first development option under the contract, which would provide approximately $1.5 million in additional funding for the period August 1, 2017 to January 31, 2018.
Research and Development
During the three-month and nine-month periods ended September 30, 2016, we recorded $683,939 and $1,519,519, respectively, of research and development expense as compared to $378,521 and $1,166,803, respectively, during the three-month and nine-month periods ended September 30, 2015. Research and development expense for the three-month and nine-month periods of 2016 includes stock-based compensation expense of $5,894 and $17,681, respectively, while the comparable periods of 2015 include stock-based compensation expense of $5,340 and $15,972, 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 the NIH, the timing of costs associated with clinical trials being funding directly by us, and other factors.
We cannot predict the level of support we may receive from the HVTN, NIH, or other federal agencies (or divisions thereof) for our future clinical trials. We expect that our research and development costs will increase in the future as we expand our vaccine development programs and advance into later stages of development.
Our vaccine candidates still require significant, time-consuming and costly research and development, testing and regulatory clearances. Completion of clinical development will take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product candidate. The NIH has funded the costs of conducting all of our human clinical trials to date for our preventive HIV vaccine and we expect the NIH will provide support for additional trials (see discussion under “Liquidity and Capital Resources” above). We intend to seek government and/or third party support for future clinical human trials and for production of our vaccine product for use in clinical trials, but there can be no assurance that we will be successful.
The duration and the cost of future clinical trials may vary significantly over the life of the project as a result of differences arising during development of the human clinical trial protocols, including, among others:
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the number of patients that ultimately participate in the clinical trial;
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the duration of patient follow-up that seems appropriate in view of the results;
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the number of clinical sites included in the clinical trials; and
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the length of time required to enroll suitable patient subjects.
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Due to the uncertainty regarding the timing and regulatory approval of clinical trials and pre-clinical studies, our future expenditures are likely to be highly volatile in future periods depending on the outcomes of the trials and studies. From time to time, we will make determinations as to how much funding to direct to these programs in response to their scientific, clinical and regulatory success, anticipated market opportunity and the availability of capital to fund our programs.
In developing our product candidates, we are subject to a number of risks that are inherent in the development of products based on innovative technologies. For example, it is possible that our vaccines may be ineffective or toxic, or will otherwise fail to receive the necessary regulatory clearances, causing us to delay, extend or terminate our product development efforts. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could cause our research and development expenditures to increase which, in turn, could have a material adverse effect on our results of operations and cash flows. Because of the uncertainties of clinical trials, estimating the completion dates or cost to complete our research and development programs is highly speculative and subjective. As a result of these factors, we are unable to accurately estimate the nature, timing and future costs necessary to complete the development of our product candidates. In addition, we are unable to reasonably estimate the period when material net cash inflows could commence from the sale, licensing or commercialization of such product candidates, if ever.
General and Administrative Expense
During the three-month and nine-month periods ended September 30, 2016, we incurred general and administrative costs of $220,707 and $1,472,030, respectively, as compared to $335,932 and $1,102,262, respectively, during the comparable periods in 2015. General and administrative costs include officers’ salaries, legal and accounting costs, patent costs, and other general corporate expenses. General and administrative expense for the three-month and nine-month periods of 2016 include stock-based compensation expense of $22,822 and $508,206, respectively; while the comparable periods of 2015 include stock-based compensation expense of $11,586 and $34,544, respectively (see discussion under “Stock-Based Compensation Expense” below). Excluding stock-based compensation expense, general and administrative expenses were $197,885 and $963,824 during the three-month and nine-month periods ended September 30, 2016, respectively, as compared to $324,346 and $1,067,718, respectively during the comparable periods of 2015. We expect that our general and administrative costs may increase in the future in support of expanded research and development activities and other general corporate activities.
Stock-Based Compensation Expense
For the three-month and nine-month periods ended September 30, 2016 and 2015, the components of stock-based compensation expense were as follows:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2016
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2015
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2016
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2015
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Stock option expense
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$
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13,686
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$
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16,926
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$
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41,058
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$
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50,516
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Warrant modification expense
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15,030
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-
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484,829
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-
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Total stock-based compensation expense
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$
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28,716
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$
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16,926
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$
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525,887
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$
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50,516
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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 and nine-month periods ended September 30, 2016 and 2015
, stock-based compensation expense was allocated as follows:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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Expense Allocated to:
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2016
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2015
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2016
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2015
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General and administrative expense
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$
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22,822
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$
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11,586
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$
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508,206
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$
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34,544
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Research and development expense
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5,894
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5,340
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17,681
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15,972
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Total stock-based compensation expense
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$
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28,716
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$
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16,926
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$
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525,887
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$
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50,516
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Other Income
Interest income for the three-month and nine-month periods ended September 30, 2016 was $340 and $1,249, respectively, as compared to $1,424 and $4,481, respectively, for comparable periods of 2015. The variances between periods are primarily attributable to cash available for investment and interest rate fluctuations.