During the nine months ended September 30, 2018, 1,000 shares of Series D Convertible Preferred Stock were converted into 66,666,666 shares of common stock. During the nine months ended September 30, 2017, 178 shares of Series C Convertible Preferred Stock were converted into 11,862,000 shares of common stock (Note 9).
NOTES TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
September
30
, 20
1
8
(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 our 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, 2018 and for the three-month and nine-month periods ended September 30, 2018 and 2017 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, 2017. 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 January 2019. 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 corporate collaborations. We also intend to secure additional funds through sales of our equity securities or by 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. 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, 2017 those accounting policies that we consider significant in determining our results of operations and financial position. Other than as described below, 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 May 2014, the Financial Accounting Standards Board (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. We adopted ASU 2014-09 effective January 1, 2018; 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 to a change to the terms or conditions of a share-based payment award. We adopted ASU 2017-09 effective January 1, 2018; such adoption had no material impact on our financial statements.
In June 2018, the FASB issued Accounting Standards Update 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
(ASU 2018-07), that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. We are currently evaluating the impact of the adoption of ASU 2018-07 on our financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2018, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which we expect to have a material impact on our financial statements.
4. Basic and Diluted Loss Per Common Share
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 potentially 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 276.0 million and 277.5 million shares at September 30, 2018 and 2017, respectively.
5. Property and Equipment
Property and equipment as shown on the accompanying Condensed Consolidated Balance Sheets is composed of the following as of September 30, 2018 and December 31, 2017:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Laboratory equipment
|
|
$
|
530,306
|
|
|
$
|
530,306
|
|
Leasehold improvements
|
|
|
115,605
|
|
|
|
115,605
|
|
Other furniture, fixtures & equipment
|
|
|
28,685
|
|
|
|
28,685
|
|
Total property and equipment
|
|
|
674,596
|
|
|
|
674,596
|
|
Accumulated depreciation and amortization
|
|
|
(658,326
|
)
|
|
|
(643,445
|
)
|
Property and equipment, net
|
|
$
|
16,270
|
|
|
$
|
31,151
|
|
6. Accrued Expenses
Accrued expenses as shown on the accompanying Condensed Consolidated Balance Sheets is composed of the following as of September 30, 2018 and December 31, 2017:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accrued management salaries
|
|
$
|
816,715
|
|
|
$
|
532,615
|
|
Accrued directors’ fees
|
|
|
265,420
|
|
|
|
182,620
|
|
Other accrued expenses
|
|
|
67,623
|
|
|
|
18,476
|
|
Total accrued expenses
|
|
$
|
1,149,758
|
|
|
$
|
733,711
|
|
7. Note Payable
On February 28, 2018, we entered into a Senior Note Purchase Agreement with Georgia Research Alliance, Inc. (GRA) pursuant to which we issued a five-year Senior Promissory Note (the “Note”) to GRA in exchange for $50,000. The Note bears an annual interest rate of 5%, payable monthly, with principal repayments beginning in the second year. Principal repayments are expected to be $-0- in 2018, $10,417 in 2019, $12,500 in 2020, 2021 and 2022, and $2,083 in 2023. In connection with the Note, we also issued to GRA a five-year warrant to purchase 178,571 shares of our common stock (see Note 9). Interest expense related to the Note for the three-month and nine-month periods ended September 30, 2018 was $625 and $1,458, respectively.
8. Commitments
We lease approximately 8,400 square feet of office and laboratory space pursuant to an operating lease which expires on December 31, 2019, with annual extension options through December 31, 2022. As of September 30, 2018, our future minimum lease payments total $200,402, $39,136 of which will be payable during 2018 and $161,266 in 2019. In the normal course of business, we may enter into various firm purchase commitments related to our research-related activities and, as of September 30, 2018, such unrecorded outstanding purchase commitments totaled approximately $209,000, all of which we expect to be reimbursable to us pursuant to our existing government grants.
9. Stockholders’ Equity
Series B Convertible Preferred Stock
As of September 30, 2018, 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, 2018, there were no conversions or other transactions involving our Series B Preferred Stock.
Series C Convertible Preferred Stock
As of September 30, 2018, there are 2,570 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 171,349,733 shares. During the nine months ended September 30, 2018, there were no conversions or other transactions involving our Series C Preferred Stock.
Series D Convertible Preferred Stock
As of September 30, 2018, there are no shares of our Series D Convertible Preferred Stock (“Series D Preferred Stock”) outstanding. During the nine months ended September 30, 2018, 1,000 shares our Series D Preferred Stock were converted into 66,666,666 shares of our common stock.
Series E Convertible Preferred Stock
In March 2018, we issued 600 shares of our Series E Convertible Preferred Stock, $1,000 stated value (“Series E Preferred Stock”), for net proceeds, after deduction of certain expenses, of $590,000. In September 2018, we issued an additional 600 shares of Series E Preferred Stock for net proceeds of $600,000.
Each share of Series E 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 E Preferred Stock is convertible at any time at the option of the holders into shares of our common stock, with a current conversion price of $0.02544 per share. The Series E Preferred Shares contains price adjustment provisions, which may, under certain circumstances reduce the conversion price to match if we sell or grant options to purchase, including rights to reprice, our common stock or common stock equivalents at a price lower than the then conversion price of the Series E Preferred Stock, or if we announce plans to do so.
In connection with the Series E Preferred Stock issuance in September 2018, we also issued the purchasers Series G Warrants to purchase an aggregate of up to 47,169,812 shares of our common stock. The warrants have an exercise price of $0.02544 per share, are exercisable once they have been outstanding for six months and have a term equal to 3 years from the date of issuance. The warrants contain anti-dilution and price adjustment provisions, which may, under certain circumstances reduce the exercise price to match if we sell or grant options to purchase, including rights to reprice, our common stock or common stock equivalents at a price lower than the then exercise price of the warrants, or if we announce plans to do so. The number of shares subject to warrants will not increase due to such reductions in exercise price.
We assessed the Series E 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.
During the nine months ended September 30, 2018, there were no conversions or other transactions involving our Series E Preferred Stock except as described above.
Common Stock Transactions
As discussed above, during the nine months ended September 30, 2018, we issued 66,666,666 shares of our common stock pursuant to the conversion of 1,000 shares of our Series D Preferred Stock.
In February 2018, we issued 5,000,000 shares of our common stock in connection with our entering into a financial advisory and investment banking agreement (see “Stock-Based Compensation Expense” below).
Stock Options
The following table presents a summary of our stock option transactions during the nine months ended September 30, 2018:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2017
|
|
|
7,024,275
|
|
|
$
|
0.29
|
|
Granted
|
|
|
3,000,000
|
|
|
|
0.03
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
Forfeited or expired
|
|
|
(169,334
|
)
|
|
|
2.46
|
|
Outstanding at September 30, 2018
|
|
|
9,854,941
|
|
|
$
|
0.17
|
|
Exercisable at September 30, 2018
|
|
|
4,890,618
|
|
|
$
|
0.29
|
|
Stock Purchase Warrants
On February 28, 2018, in connection with issuance of the note payable discussed in Note 7, we issued a five-year warrant to purchase 178,571 shares of our common stock at a purchase price of $0.042 per share. On September 5, 2018, in connection with issuance of Series E Preferred Stock discussed above, we issued three-year warrants to purchase an aggregate of 47,169,812 shares of our common stock at a purchase price of $0.02544 per share. We had no other stock purchase warrants outstanding at September 30, 2018.
Stock-Based Compensation Expense
Stock-based compensation expense related to our stock option plans was $85,370 and $132,569 for the three-month and nine-month periods ended September 30, 2018, respectively, as compared to $14,433 and $43,535 for the three-month and nine-month periods ended September 30, 2017, respectively. 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, 2018, there was $145,230 of unrecognized compensation expense related to stock options, which we expect to recognize over a weighted average period of 1.9 years.
Additionally, during the three-month and nine-month periods ended September 30, 2018 we recorded stock-based compensation expense of $57,143 and $142,856, respectively, associated with common stock issued for financial advisory services. As of September 30, 2018, there was $57,143 of unrecognized stock-based compensation expense associated with this arrangement, which we expect to recognize during the remainder of 2018 and the first half of 2019.
10. Income Taxes
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.
11. Grants and Collaboration Revenue
We receive payments from government entities under our grants from the National Institute of Allergy and Infectious Diseases (NIAID) and from the U.S. Department of Defense in support of our vaccine research and development efforts. We record revenue associated with government grants as the reimbursable costs are incurred. During the three-month and nine-month periods ended September 30, 2018, we recorded $340,716 and $650,280, respectively, of revenues associated with these grants, as compared to $247,994 and $800,866, respectively, for the comparable periods of 2017. As of September 30, 2018, there is an aggregate of $2,873,542 in approved grant and contract funds available for use.
During the three-month and nine-month periods ended September 30, 2018, we recorded $8,628 and $13,628, respectively, of revenues associated with research collaboration agreements with several third parties, as compared to $-0- and $95,000, respectively, for the comparable periods of 2017.
12. Subsequent Events
In October 2018, we issued 5,000,000 shares of our common stock related to an agreement for capital market and business advisory services. In connection with the issuance we will recognize stock-based compensation expense of $129,750 over the six-month term of the engagement.
In October 2018, we issued 7,500,000 shares of our common stock related to an amendment to a financial advisory and investment banking agreement. In connection with the amendment, we eliminated $56,250 of cash retainer fees accrued as of September 30, 2018. In connection with the common stock issuance, we will recognize stock-based compensation expense of $127,500 over the term of the agreement through June 30, 2019.
During October 2018, 90 shares our Series C Preferred Stock were converted into 6,000,000 shares of our common stock.
Item 2
Management’s Discussion and Analysis of Financial Condition And Results of Operations