NOTES TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
September
30
, 20
17
(unaudited)
1.
|
Description of Business
|
GeoVax Labs, Inc. (“GeoVax” or the “Company”), is a clinical-stage biotechnology company developing human vaccines using our novel vaccine platform. Our current development programs are focused
on preventive vaccines against Human Immunodeficiency Virus (HIV), Zika Virus, hemorrhagic fever viruses (Ebola, Sudan, Marburg, Lassa), and malaria, as well as therapeutic vaccines for chronic Hepatitis B infections and cancers. We believe our technology and vaccine development expertise are well-suited for a variety of human infectious diseases and we intend to pursue further expansion of our product pipeline.
Certain of o
ur vaccine development activities have been, and continue to be, financially supported by the U.S. government. This support has been both in the form of research grants and contracts awarded directly to us, as well as indirect support for the conduct of preclinical animal studies and human clinical trials.
We operate in a highly regulated and competitive environment. The manufacturing and marketing of pharmaceutical products require approval from, and are subject to, ongoing oversight by the Food and Drug Administration (FDA) in the United States, by the European Medicines Agency (EMA) in the European Union, and by comparable agencies in other countries. Obtaining approval for a new pharmaceutical product is never certain, may take many years and often involves expenditure of substantial resources. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with one or more potential strategic partners.
GeoVax is incorporated under the laws of the State of Delaware and our principal offices are located in Smyrna, Georgia (metropolitan Atlanta area).
2
.
|
Basis of Presentation
|
The accompanying
condensed consolidated financial statements at September 30, 2017 and for the three-month and nine-month periods ended September 30, 2017 and 2016 are unaudited, but include all adjustments, consisting of normal recurring entries, which we believe to be necessary for a fair presentation of the dates and periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. We expect our operating results to fluctuate for the foreseeable future; therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods.
Our
financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of the financial statements. We are devoting substantially all of our present efforts to research and development of our vaccine candidates. We have funded our activities to date from government grants and clinical trial assistance, and from sales of our equity securities. 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 continue our planned operations into the first quarter of 2018. Due to our history of operating losses and our continuing need for capital to conduct our research and development activities, there is substantial doubt concerning our ability to operate as a going concern beyond that date. We are currently exploring sources of capital through additional government grants and contracts. We also intend to seek additional funds through sales of our equity securities, exercise of currently outstanding stock purchase warrants, or other means. Management believes that we will be successful in securing the additional capital required to continue the Company’s planned operations, but that our plans do not fully alleviate the substantial doubt about the Company’s ability to operate as a going concern. Additional funding may not be available on favorable terms or at all. If we fail to obtain additional capital when needed, we will 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.
3
.
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Significant Accounting Policies and Recent Accounting Pronouncements
|
We
disclosed in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 those accounting policies that we consider significant in determining our results of operations and financial position. There have been no material changes to, or in the application of, the accounting policies previously identified and described in the Form 10-K.
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-09,
Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”), which amends Accounting Standards Codification Topic 718, Compensation – Stock Compensation. ASU 2016-09 is an attempt to simplify several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted ASU 2016-09 effective January 1, 2017; such adoption had no material impact on our financial statements.
In
May 2017, the FASB issued Accounting Standards Update 2017-09,
Scope of Modification
Accounting
(“ASU 2017-09”), which amends Accounting Standards Codification Topic 718, Compensation – Stock Compensation. ASU 2017-09 is an attempt to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for the Company beginning January 1, 2018. We are currently evaluating the impact of the adoption of ASU 2017-09 on our financial statements.
In
July 2017, the FASB issued Accounting Standards Update 2017-11,
(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
(“ASU 2017-11”), which amends Accounting Standards Codification Topic 260, Earnings Per Share, Topic 480, Distinguishing Liabilities from Equity, and Topic 815, Derivatives and Hedging. ASU 2017-11 changes the classification of certain equity-linked financial instruments (or embedded features) with down round features, and clarifies existing disclosure requirements for equity-classified instruments. ASU 2017-11 is effective for the Company beginning January 1, 2019. We are currently evaluating the impact of the adoption of ASU 2017-11 on our financial statements.
T
here have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2017, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which we expect to have a material impact on our financial statements.
4
.
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Basic and Diluted Loss Per Common Share
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Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and potential
ly dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents consist of convertible preferred stock, stock options and stock purchase warrants. Common share equivalents which potentially could dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, as the effect would be anti-dilutive, totaled approximately 277.5 million and 73.1 million shares at September 30, 2017 and 2016, respectively.
5
.
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Property and Equipment
|
Property and equipment as shown on the accompanying Condensed Consolidated Balance Sheets is composed of th
e following as of September 30, 2017 and December 31, 2016:
|
|
September
30,
201
7
|
|
|
December 31,
201
6
|
|
Laboratory equipment
|
|
$
|
530,306
|
|
|
$
|
525,956
|
|
Leasehold improvements
|
|
|
115,605
|
|
|
|
115,605
|
|
Other furniture, fixtures & equipment
|
|
|
28,685
|
|
|
|
28,685
|
|
Total property and equipment
|
|
|
674,596
|
|
|
|
670,246
|
|
Accumulated depreciation and amortization
|
|
|
(636,112
|
)
|
|
|
(615,418
|
)
|
Property and equipment, net
|
|
$
|
38,484
|
|
|
$
|
54,828
|
|
Accrued
expenses as shown on the accompanying Condensed Consolidated Balance Sheets is composed of the following as of September 30, 2017 and December 31, 2016:
|
|
September
30,
201
7
|
|
|
December 31,
201
6
|
|
Accrued
management salaries
|
|
$
|
441,942
|
|
|
$
|
201,170
|
|
Accrued directors
’ fees
|
|
|
156,469
|
|
|
|
78,070
|
|
Other
accrued expenses
|
|
|
15,000
|
|
|
|
15,000
|
|
Total accrued expenses
|
|
$
|
613,411
|
|
|
$
|
294,240
|
|
Lease Agreement
We lease approximately 8
,400 square feet of office and laboratory space pursuant to an operating lease which expires on December 31, 2018, with an additional 12-month renewal option. As of September 30, 2017, our future minimum lease payments total $194,543, $37,998 of which will be payable during 2017 and $156,545 in 2018.
Other
Commitments
In the normal course of business, we may enter into various firm purchase commitments related to
production and testing of our vaccine products, conduct of our clinical trials, and other research-related activities. As of September 30, 2017, we had approximately $79,000 of unrecorded outstanding purchase commitments to our vendors and subcontractors, which we expect will be paid during 2017. We expect this entire amount to be reimbursable to us pursuant to currently outstanding government grants (See Note 10).
Series B Convertible Preferred Stock
As of
September 30, 2017, there are 100 shares of our Series B Convertible Preferred Stock (“Series B Preferred Stock”) outstanding. The Series B Preferred Stock may be converted at any time at the option of the holder into shares of our common stock at a conversion price of $0.35 per share, or 285,714 shares.
During the nine months ended September 30, 2017, there were no conversions or other transactions involving our Series B Preferred Stock.
Series C Convertible Preferred Stock
As of
September 30, 2017, there are 2,690 shares of our Series C Convertible Preferred Stock (“Series C Preferred Stock”) outstanding. The Series C Preferred Stock may be converted at any time at the option of the holder into shares of our common stock at a conversion price of $0.015 per share, or 179,349,733 shares.
In May 2017, in connection with the issuance of our Series D Convertible Preferred Stock discussed below, the conversion price of our Series C Preferred Stock was automatically reduced from $0.05 per share to $0.015 per share. During the nine months ended September 30, 2017, we issued an aggregate of 11,862,000 shares of our common stock related to conversion of 178 shares our Series C Preferred Stock.
Series D Convertible Preferred Stock
In
May 2017, we issued 1,000 shares of our Series D Convertible Preferred Stock, $1,000 stated value (“Series D Preferred Stock”), for gross proceeds of $1.0 million. Net proceeds, after deduction of certain expenses, were $980,000
.
Each share of
Series D Preferred Stock is entitled to a liquidation preference equal to the initial purchase price, has no voting rights, and is not entitled to a dividend. The Series D Preferred Stock is convertible at any time at the option of the holders into shares of our common stock, with an initial conversion price of $0.015 per share.
The Series D Preferred Shares contains price adjustment provisions, which may, under certain circumstances, reduce the conversion price on future dates according to a formula based on the then-current market price for our common stock.
We assessed the Series D
Preferred Stock under ASC Topic 480, “
Distinguishing Liabilities from Equity
” (“ASC 480”), ASC Topic 815, “
Derivatives and Hedging
” (“ASC 815”), and ASC Topic 470, “
Debt
” (“ASC 470”). The preferred stock contains an embedded feature allowing an optional conversion by the holder into common stock which meets the definition of a derivative. However, we determined that the preferred stock is an “equity host” (as described by ASC 815) for purposes of assessing the embedded derivative for potential bifurcation and that the optional conversion feature is clearly and closely associated to the preferred stock host; therefore, the embedded derivative does not require bifurcation and separate recognition under ASC 815. We determined there to be a beneficial conversion feature (“BCF”) requiring recognition at its intrinsic value. Since the conversion option of the preferred stock was immediately exercisable, the amount allocated to the BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock.
Increase in Authorized Shares of Common Stock
At a special meeting of our stockholders held on August 4, 2017, our stockholders approved an amendment to our certificate of incorporation to increase our authorized shares of common stock from 300,000,000 to 600,000,000 shares. The amendment to our certificate of incorporation was filed with the Delaware Secretary of State on August 4, 2017.
Common Stock Transactions
As discussed above, d
uring the nine months ended September 30, 2017, we issued 11,862,000 shares of our common stock pursuant to the conversion of 178 shares of our Series C Preferred Stock. During the nine months ended September 30, 2017, we also issued 3,816,667 shares of our common stock related to the exercise of stock purchase warrants, resulting in net proceeds to us of $154,167.
Stock Options
The following table presents a summary of
our stock option transactions during the nine months ended September 30, 2017:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Ou
tstanding at December 31, 2016
|
|
|
3,499,475
|
|
|
$
|
1.21
|
|
Granted
|
|
|
--
|
|
|
|
--
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
Forfeited or expired
|
|
|
(115,200
|
)
|
|
|
17.75
|
|
Outstanding at
September 30, 2017
|
|
|
3,384,275
|
|
|
$
|
0.64
|
|
Exercisable at
September 30, 2017
|
|
|
1,140,494
|
|
|
$
|
1.76
|
|
Stock Purchase Warrants
The following table presents a summary of stock purchase warrant transactions during t
he nine months ended September 30, 2017:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Ou
tstanding at December 31, 2016
|
|
|
32,751,578
|
|
|
$
|
0.07
|
|
Granted
|
|
|
--
|
|
|
|
--
|
|
Exercised
|
|
|
(3,816,667
|
)
|
|
|
0.04
|
|
Forfeited or expired
|
|
|
(1,112,001
|
)
|
|
|
0.57
|
|
Outstanding at
September 30, 2017
|
|
|
27,822,910
|
|
|
$
|
0.02
|
|
Exercisable at
September 30, 2017
|
|
|
27,822,910
|
|
|
$
|
0.02
|
|
Stock-Based Compensation Expense
Stock-based compensation expense related to
our stock option plans was $14,433 and $43,535 for the three-month and nine-month periods ended September 30, 2017, respectively, as compared to $13,686 and $41,058 for the three-month and nine-month periods ended September 30, 2016, respectively. Additionally, during the three-month and nine-month periods ended September 30, 2016, we recorded $15,030 and $484,829, respectively, of stock-based compensation expense related to modifications to stock purchase warrants.
Stock-based compensation expense for stock options is recognized on a straight-line basis over the requisite service period for the award and is allocated to research and development expense or general and administrative expense based upon the related employee classification. As of
September 30, 2017, there was $88,449 of unrecognized compensation expense related to stock options, which we expect to recognize over a weighted average period of 1.9 years.
Because of our historically significant net operating losses, we have not paid
income taxes since inception. We maintain deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets are comprised primarily of net operating loss carryforwards and also include amounts relating to nonqualified stock options and research and development credits. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of our future profitability and our ability to utilize the deferred tax assets. Utilization of operating losses and credits will be subject to substantial annual limitations due to ownership change provisions of Section 382 of the Internal Revenue Code. The annual limitation will result in the expiration of net operating losses and credits before utilization.
10
.
|
Grants and Collaboration Revenue
|
Government Grants and Contracts
We receive payments from government entities under our grants and contrac
ts with the National Institute of Allergy and Infectious Diseases in support of certain of our vaccine research and development efforts. We record revenue associated with government grants and contracts as the reimbursable costs are incurred. During the three-month and nine-month periods ended September 30, 2017, we recorded $247,994 and $800,866, respectively, of revenues associated with these grants and contracts, as compared to $440,106 and $653,986, respectively, for the comparable periods of 2016. As of September 30, 2017, there is an aggregate of $744,769 in approved grant and contract funds available for use.
Collaboration Revenue
In March 2017, we entered into a clinical trial collaboration agreement with American Gene Technologies International, Inc. (“AGT”) whereby AGT intends to conduct a phase 1 human clinical trial investigating our combined technologies as a func
tional cure for HIV infection. In connection with the agreement, during the second quarter of 2017 AGT paid to us a non-refundable fee of $95,000, which we recorded as collaboration revenue during the nine-month period ended September 30, 2017.
During
October 2017, we issued 8,000,000 shares of our common stock pursuant to the conversion of 120 shares of our Series C Preferred Stock. During October and November 2017 we issued 5,000,000 shares of our common stock pursuant to the exercise of stock purchase warrants for net proceeds of $75,000.
Item 2
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|