Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on form 10-K filed with the SEC on March 30, 2020 (the "Annual Report").
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain forward-looking statements. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in “Risk Factors” as set forth in the Annual Report and in our other filings with the SEC. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.
Overview
We are a clinical stage gene therapy company developing potentially life-changing treatments for cancer and diabetes. Our cancer therapies are based upon our novel proprietary technology platform, including our lead drug candidate, GPX-001 (quaratusugene ozeplasmid), for non-small cell lung cancer ("NSCLC"). GPX-001 consists of a tumor suppressor gene inserted into a patient’s cells that has immunomodulatory effects and is therefore considered an “immunogene therapy.” The gene is one of a series of genes whose therapeutic use is covered by an exclusive worldwide license from The University of Texas MD Anderson Cancer Center ("MD Anderson"). We also are developing a pre-clinical gene therapy that is covered by an exclusive worldwide license from the University of Pittsburgh of the Commonwealth System of Higher Education that has the potential to cure type 1 and type 2 diabetes. This potential treatment works by transforming alpha cells in the pancreas into functional beta-like cells, which can produce insulin but are distinct enough from beta cells to evade the body’s immune system.
Oncology Platform Technologies
Our oncology platform technologies are designed to administer cancer fighting genes by encapsulating them into nanoscale hollow spheres called nanovesicles, which are then administered intravenously and taken up by tumor cells where they express proteins that are missing or found in low quantities. GPX-001 has a multimodal mechanism of action whereby it interrupts cell signaling pathways that cause replication and proliferation of cancer cells, re-establishes pathways for apoptosis, or programmed cell death, in cancer cells, and modulates the immune response against cancer cells. GPX-001 has also been shown to block mechanisms that create drug resistance.
With GPX-001, we are initially targeting NSCLC. According to the World Health Organization, in 2018 lung cancer was the leading cause of cancer deaths worldwide, causing more deaths than colorectal, breast, liver or stomach cancers. In 2018, there were more than 2 million new lung cancer cases and 1.7 million deaths from lung cancer worldwide. In the United States, according to the American Cancer Society, it is estimated that in 2020 there will be more than 228,000 new cases of lung cancer and more than 135,000 deaths from lung cancer. The American Society of Clinical Oncology reports that NSCLC represents 84 percent of all lung cancers and has a 24 percent five-year relative survival rate. However, according to the National Cancer Institute, 57 percent of lung cancer diagnoses are distant, or have metastasized, and the five-year relative survival rate for Stage IV (metastatic) NSCLC is approximately 5 percent. We believe that there is a significant unmet medical need for new treatments for NSCLC in the United States and globally, and we believe that GPX-001 may be suitable for a majority of NSCLC patients.
In January 2020, we received a United States Food and Drug Administration ("FDA") Fast Track Designation for use of GPX-001 in combination with epidermal growth factor receptor ("EGFR") inhibitor osimertinib (AstraZeneca’s Tagrisso®) for the treatment of NSCLC patients with EFGR mutations whose tumors progressed after treatment with osimertinib alone. According to the FLAURA study sponsored by AstraZeneca, the median length of time that patients are treated with osimertinib before their tumors progress is approximately 18 months. Osimertinib is now considered a new standard of care for NSCLC patients with an EGFR mutation. Given this and receipt of FDA Fast Track Designation for use of GPX-001 combined with osimertinib in patients whose tumors progress on osimertinib, we are prioritizing this drug combination and patient population and plan to initiate a Phase I/II clinical trial of GPX-001 combined with osimertinib in early 2021. We also are planning to initiate a Phase I/II clinical trial for use of GPX-001 with pembrolizumab (Merck’s Keytruda®) in 2021.
In 2019, preclinical data was presented by MD Anderson collaborators for the combination of TUSC2, the active agent in GPX-001, with pembrolizumab (Merck’s Keytruda®), showing that TUSC2 combined with the checkpoint blockade mechanism of action of pembrolizumab was more effective than pembrolizumab alone in increasing the survival of mice with human immune cells (humanized mice) that had metastatic lung cancer. Also presented in 2019 by MD Anderson collaborators was pre-clinical data for the combination of TUSC2, pembrolizumab and chemotherapy for the treatment of some of the most resistant metastatic lung cancers. This study found that the addition of TUSC2 increases the effectiveness of pembrolizumab and chemotherapy, and thus may improve on first-line standard of care for lung cancer. In May 2020, we entered into a worldwide, exclusive license agreement with The Board of Regents of the University of Texas System on behalf of MD Anderson for the use of TUSC2 in combination with immunotherapies, including pembrolizumab.
We believe that our platform technologies could allow delivery of a number of cancer fighting genes, alone or in combination with other cancer therapies, to combat multiple types of cancer. We believe that GPX-001’s combination of pan-kinase inhibition, direct induction of apoptosis, anti-cancer immune modulation and complementary action with targeted drugs and immunotherapies is unique, and positions GPX-001 to provide treatment for patients with NSCLC and possibly other cancers, who are not benefitting from currently offered therapies.
Diabetes Gene Therapy
Diabetes is a chronic, metabolic disease characterized by elevated levels of blood glucose (or blood sugar), which leads over time to serious damage to the heart, blood vessels, eyes, kidneys and nerves. The most common is type 2 diabetes, usually in adults, which occurs when the body becomes resistant to insulin or does not make enough insulin. In the past three decades the prevalence of type 2 diabetes has risen dramatically. Type 1 diabetes, once known as juvenile diabetes or insulin-dependent diabetes, is a chronic condition in which the pancreas produces little or no insulin by itself. According to the International Diabetes Federation, in 2019 approximately 463 million people worldwide had diabetes and 4.2 million deaths were attributed to diabetes. Both the number of cases and the prevalence of diabetes have been steadily increasing over the past few decades.
Our diabetes gene therapy, GPX-002, was developed by lead researcher Dr. George Gittes at the Rangos Research Center at UPMC Children’s Hospital of Pittsburgh. The therapy utilizes an infusion process in which an endoscope and an adeno-associated virus vector are used to deliver Pdx1 and MafA genes to the pancreas. The proteins these genes express have been shown to transform alpha cells in the pancreas into functional beta-like cells, which can produce insulin but are distinct enough from beta cells to evade the body’s immune system.
The diabetes gene therapy has been tested in vivo in mice and nonhuman primates. In studies of diabetic mice, the gene therapy approach restored normal blood glucose levels for an extended period of time, typically around four months. According to Dr. Gittes, the duration of restored blood glucose levels in mice could translate to decades in humans. If successful, this gene therapy could eliminate the need for insulin replacement therapy for diabetic patients.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Although we are an emerging growth company, we have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. We have implemented all new accounting pronouncements that are in effect and may affect our condensed financial statements, and we do not believe that there are any other new accounting pronouncements that have been issued that would have a material impact on our financial position or results of operations.
Notwithstanding the foregoing, subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain exemptions, including, without limitation, the exemption from the requirements (i) to provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our IPO; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our financial statements appearing in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP”). The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed financial statements, and the reported amounts of expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Research and Development Costs
We record accrued expenses for costs invoiced from research and development activities conducted on our behalf by third-party service providers, which include the conduct of preclinical studies and clinical trials and use of contract research and manufacturing activities. We record the costs of research and development activities based upon the amount of services provided, and we include these costs in accrued liabilities in the balance sheets and within research and development expense in the statements of operations. These costs are a significant component of our research and development expenses. Purchased materials to be used in future research are capitalized and included in research and development supplies.
We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed, the number of patients enrolled and the rate of patient enrollment may vary from our estimates and could result in our reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from contract research organizations ("CROs") and other third-party service providers. To date, there have been no material differences from our accrued expenses to actual expenses.
Income Taxes
Deferred tax assets or liabilities are recorded for temporary differences between financial statement and tax basis of assets and liabilities, using applicable rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized. We have provided a full valuation allowance on our deferred tax assets, which primarily consist of cumulative net operating losses from April 1, 2009 (inception) to June 30, 2020. Due to our history of operating losses since inception and losses expected to be incurred in the foreseeable future, a full valuation allowance was considered necessary.
Impairment of Long-Lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable or at a minimum annually during the fourth quarter of the year. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying value to determine if an impairment of such asset is necessary. The effect of any impairment would be to expense the difference between the fair value of such asset and its carrying value.
Components of our Results of Operations and Financial Condition
Operating expenses
We classify our operating expenses into three categories: research and development, general and administrative and depreciation.
Research and development. Research and development expenses consist primarily of:
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costs incurred to conduct research, such as the discovery and development of our current and potential product candidates;
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costs related to production and storage of clinical supplies, including fees paid to contract manufacturers, manufacturing consultants, and cold-storage facilities;
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fees paid to clinical consultants, clinical trial sites and vendors, including CROs in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as patient screening fees, laboratory work, and statistical compilation and analysis;
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costs related to compliance with drug development regulatory requirements; and
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costs related to staffing and personnel associated with research and development activities, including wages, taxes, benefits, leases, overheads, supplies, and share-based compensation.
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We recognize all research and development costs as they are incurred. Clinical trial costs, contract manufacturing and other development costs incurred by third parties are expensed as the contracted work is performed.
We expect our research and development expenses to increase in the future as we advance our current and potential product candidates into and through clinical trials, as we expand our clinical programs to a greater number of sites, as we pursue regulatory approval of our current and potential product candidates in the United States and Europe, and as we expand our research programs to include new therapies and new therapy combinations. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our current and potential product candidates may be affected by a variety of factors including the quality of our current and potential product candidates, early clinical data, investment in our clinical program, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our current and potential product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our current and potential product candidates.
General and administrative. General and administrative expense consists of personnel related costs, which include salaries, as well as the costs of professional services, such as accounting and legal, travel, facilities, information technology and other administrative expenses. We expect our general and administrative expense to increase in future periods due to the anticipated growth of our business and related infrastructure as well as accounting, insurance, investor relations, and other costs associated with being a public company.
Depreciation. Depreciation expense consists of depreciation from our fixed assets consisting of our property, equipment, and furniture. We depreciate our assets over their estimated useful life. We estimate furniture and computer and office equipment to have a 5-year life.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
The following summarizes our results of operations for the three and six months ended June 30, 2020 and 2019.
Research and Development Expense
Research and development ("R&D") expense was $2,155,637 and $3,633,514 for the three and six months ended June 30, 2020 as compared to $502,040 and $1,010,082 for the three and six months ended June 30, 2019. The increases of $1,653,597 and $2,623,432, or 329% and 260%, respectively, were due primarily to greater utilization of our employees on R&D activities and further advancements in our preclinical research and clinical and manufacturing programs. These R&D activities will continue throughout 2020 and include costs related to the launch of planned and potential clinical trials for our initial product candidate, GPX-001, the development of manufacturing strategies and manufacturing processes, data analysis, and our preclinical research at MD Anderson.
General and Administrative Expense
General and administrative ("G&A") expense for the three months ended June 30, 2020 was $2,216,691 as compared to $3,198,728 for the three months ended June 30, 2019. The decrease of $982,037, or 31%, is primarily due to greater focus and utilization of R&D activities, as opposed to G&A activities, during the period. Additionally, as the result of travel restrictions and social distancing guidelines as a result of the COVID-19 pandemic, we realized cost savings in the three months ended June 30, 2020 due to reduced office and travel expenses.
G&A expense for the six months ended June 30, 2020 was $6,309,687 as compared to $4,858,524 for the six months ended June 30, 2019. The increase of $1,451,163, or 30%, is primarily due to an increase in financing costs and legal fees associated with our fundraising activities in early 2020 as well as greater than normal share-based compensation expense associated with the accelerated vesting of options for a former employee pursuit to his separation agreement.
Interest Income. Interest income was $4,811 and $8,646 for the three months ended June 30, 2020 and 2019, respectively, a decrease of $3,835, or 44%. Interest income was $14,817 and $20,569 for the six months ended June 30, 2020 and 2019, respectively, a decrease of $5,752, or 28%. The decreases associated with interest income for the three and six months ended June 30, 2020 were due to changes in the cash balances associated with money market instruments.
Interest Expense. There was no interest expense for the three and six months ended June 30, 2020 and 2019 because we satisfied all debt obligations and repaid all short-term loans prior to 2019. As of June 30, 2020, we had no outstanding debt.
Depreciation Expense. Depreciation expense was $5,776 and $3,118 for the three months ended June 30, 2020 and 2019, respectively, an increase of $2,658, or 85%. Depreciation expense was $11,129 and $6,049 for the six months ended June 30, 2020 and 2019, respectively, an increase of $5,080, or 84%. Depreciation is generated from our fixed assets, which currently consists of computer equipment, research and development equipment, and office furniture. The increase in depreciation expense during the periods was driven by increased purchase of equipment for use by employees and manufacturing partners for research activities.
Liquidity and Capital Resources
From inception through June 30, 2020, we have never generated revenue from product sales and have incurred net losses in each year. As of June 30, 2020, we had an accumulated deficit of approximately $50 million. We have funded our operations primarily through the sale and issuance of capital stock. During 2019, we sold 3,167,986 shares of common stock and warrants to purchase 3,167,986 shares of common stock for total gross proceeds of $1,267,194 through a registered direct offering. During the six months ended June 30, 2020, we sold an aggregate of 13,581,000 shares of common stock for total gross proceeds of $25,731,640 through our registered direct offerings and issued 5,774,388 shares of common stock and together with the proceeds from warrant and option exercises, we received total gross proceeds of $2,569,227.
As of June 30, 2020, we had $22,127,179 in cash.
We do not expect to generate revenue from product sales unless and until we successfully complete development of, obtain regulatory approval for and begin to commercialize one or more of our current and potential product candidates, or other product candidates to which we may acquire rights, which we expect will take a number of years and which is subject to significant uncertainty. Accordingly, we anticipate that we will need to raise additional capital to fund our future operations, which include conducting two Phase I/II clinical trials utilizing GPX-001 in combination with osimertinib and pembrolizumab, respectively, in 2021. Until such time as we can generate substantial revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings and debt financings and we may seek to raise additional capital through strategic collaborations. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our development programs or commercialization efforts or grant to others rights to develop or market product candidates that we would otherwise prefer to develop and market ourselves. Failure to receive additional funding could cause us to cease operations, in part or in full. Furthermore, even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations.
The following table sets forth the primary sources and uses of cash during the six months ended June 30, 2020 and 2019:
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Six Months Ended June 30,
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2020
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2019
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Net cash used in operating activities
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$
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(8,027,875
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$
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(3,207,588
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Net cash used in investing activities
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(148,304
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(896,788
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Net cash provided by financing activities
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28,300,866
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—
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Net increase (decrease) in cash
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$
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20,124,687
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$
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(4,104,376
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Cash used in operating activities
Net cash used in operating activities was $8,027,875 and $3,207,588 for the six months ended June 30, 2020 and 2019, respectively. The $4,820,287, or 150%, increase in net cash used in operating activities during the three months ended June 30, 2020 was due to an increase in financing costs and legal fees associated with our fundraising activities during the first three months of 2020 and increases to our headcount and additional service providers.
Cash used in investing activities
Net cash used in investing activities was $148,304 and $896,788 for the six months ended June 30, 2020 and 2019, respectively. This decrease of $748,484, or 83%, used in investment activities was primarily due to a major investment in manufacturing materials during the six months ended June 30, 2019 as compared to the use of such materials in testing and research during the six months ended June 30, 2020. Investments in property and equipment and intellectual property increased slightly for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Cash provided by financing activities
Net cash provided by financing activities was $28,300,866 and $0 during the six months ended June 30, 2020 and 2019, respectively. The $28,300,866 increase in net cash provided by financing activities was due us selling common stock during the first six months of 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.