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 focused on developing life-changing treatments for cancer and diabetes. Our lead cancer drug candidate, REQORSA™ Immunogene therapy drug (formerly referred to as GPX-001), is being developed to treat non-small cell lung cancer (”NSCLC”). REQORSA consists of a tumor suppressor gene called TUSC2, which has both tumor killing (via apoptosis) and immunomodulatory effects. We utilize our novel proprietary Oncoprex® Nanoparticle Delivery System™ to deliver TUSC2 to cancer cells. The TUSC2 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 are planning to initiate our Acclaim-1 and Acclaim-2 clinical trials in the first half of 2021. Acclaim-1 is a Phase 1/2 clinical trial using a combination of REQORSA with AstraZeneca PLC’s Tagrisso® in patients with late stage NSCLC with mutated epidermal growth factor receptors (“EGFRs”) whose disease progressed after treatment with Tagrisso. In January 2020, we received Food and Drug Administration (“FDA”) Fast Track Designation for the Acclaim-1 patient population. Acclaim-2 is a Phase 1/2 clinical trial using a combination of REQORSA with Merck & Co.’s Keytruda® in NSCLC patients who are low expressors (1% to 49%) of the protein programmed death-ligand 1 (“PD-L1”).
In diabetes, we are developing a gene therapy that is exclusively licensed from the University of Pittsburgh of the Commonwealth System of Higher Education and, according to researchers, 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. Our diabetes product is currently being evaluated in pre-clinical studies.
Oncology Platform Technologies
Utilizing our Oncoprex Nanoparticle Delivery System, we are developing cancer treatments that are designed to administer cancer fighting genes. We encapsulate the genes into the Oncoprex nanoscale hollow spheres, administer them intravenously, where they are then taken up by tumor cells and express proteins that are missing or found in low quantities in the tumor cells. With our lead drug candidate, REQORSA, there is a multimodal mechanism of action whereby REQORSA, which encapsulates the TUSC2 gene, 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. REQORSA has also been shown to block mechanisms that create drug resistance.
Epidemiology: Non-Small Cell Lung Cancer
We are initially targeting NSCLC with REQORSA. 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 the same year, 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 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. With limited benefit from current therapies, we believe there is a significant unmet medical need for new treatments for NSCLC in the United States and globally, and we believe REQORSA may be suitable for a majority of NSCLC patients.
Acclaim-1
In January 2020, we received Fast Track Designation from the FDA for use of REQORSA in combination with AstraZeneca’s EGFR inhibitor Tagrisso for the treatment of NSCLC patients with EFGR mutations whose tumors progressed after treatment with Tagrisso. According to the FLAURA study sponsored by AstraZeneca, the median length of time that patients are treated with Tagrisso before their tumors progress is approximately 18 months. Tagrisso is now considered a new standard of care for NSCLC patients with an EGFR mutation. Given the poor prognosis for these patients and our FDA Fast Track Designation, we are prioritizing this drug combination and patient population and plan to initiate the Phase 1/2 clinical trial in the first half of 2021. The Acclaim-1 trial is a Phase 1/2 clinical trial in Stage 4 NSCLC patients who are EGFR mutant and whose disease has progressed after treatment with Tagrisso. The trial consists of a combination of REQORSA and Tagrisso, and we plan to conduct the trial in approximately 10 U.S. sites with about 100 patients (9-18 patients in the Phase 1 component and 82 patients in the Phase 2 component). An interim analysis will be performed after 53 events (i.e., death or progression of disease).
Acclaim-2
In 2019, preclinical data was presented by MD Anderson collaborators relating to the combination of TUSC2, the active agent in REQORSA, with Keytruda showing that TUSC2 combined with the checkpoint blockade mechanism of action of Keytruda was more effective than Keytruda alone in increasing the survival of mice with human immune cells (humanized mice) that had metastatic lung cancer. MD Anderson also presented preclinical data in 2019 for the combination of TUSC2, Keytruda and chemotherapy for the treatment of some of the most resistant metastatic lung cancers. This study found that the addition of TUSC2 demonstrates synergy with Keytruda 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 Keytruda. We plan to initiate the Acclaim-2 trial in the first half of 2021, which is a Phase 1/2 clinical trial combining REQORSA with Keytruda in patients whose disease has progressed on Keytruda in NSCLC patients who are low expressors (1% to 49%) of PD-L1.
We believe that our Oncoprex Nanoparticle Delivery System 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 REQORSA’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 REQORSA to provide treatment for patients with NSCLC and possibly other cancers, who are not benefitting from current 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, which usually occurs in adults, and which arises 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, also 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, about 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, also referred to as GPX-002, was developed by lead researcher Dr. George Gittes, at the Rangos Research Center at UPMC Children’s Hospital of Pittsburgh. 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. The therapy utilizes a procedure in which an adeno-associated virus vector delivers Pdx1 and MafA genes to the pancreas.
The diabetes gene therapy has been tested in vivo in mice and nonhuman primates. In studies in non-obese 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 of 2002, as amended, 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 initial public offering; (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 in any of our clinical trials 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 September 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 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, if at all.
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 Nine Months Ended September 30, 2020 and 2019
The following summarizes our results of operations for the three and nine months ended September 30, 2020 and 2019.
Research and Development Expense
Research and development ("R&D") expense for the three months ended September 30, 2020 was $1,350,016 as compared to 467,344 for the three months ended September 30, 2019. The increase of $882,672, or 189%, is due to increased activities in support of our upcoming Acclaim-1 and Acclaim-2 clinical trials including the hiring of new employees to develop and execute on clinical strategy and additional manufacturing activities.
R&D expense for the nine months ended September 30, 2020 was $4,983,530 as compared to $1,477,427 for the nine months ended September 30, 2019. The increase of $3,506,103, or 237%, is due to the hiring of new employees and consultants to develop strategy for and execute on the launch of our Acclaim-1 and Acclaim-2 clinical trials, major advancements in our manufacturing programs providing drug product for our Acclaim-1 and Acclaim-2 clinical trials, and research of novel therapeutic approaches for the treatment of cancer using REQORSA and immunotherapies. These R&D activities will continue throughout 2020 and thereafter and will continue to include costs related to the launch and conduct of the Acclaim-1 and Acclaim-2 clinical trials, the development and execution on related manufacturing strategies and processes required to support these, and potentially other, clinical programs, and additional preclinical research.
General and Administrative Expense
General and administrative ("G&A") expense for the three months ended September 30, 2020 was $1,421,863 as compared to $1,909,982 for the three months ended September 30, 2019. The decrease of $488,119, or 26%, is primarily due to reclassification of expenses associated with R&D personnel to more accurately reflect expenses associated with their job function. Additionally, as a result of travel restrictions and social distancing guidelines put in place as a result of the COVID-19 pandemic, we realized cost savings during the three months ended September 30, 2020 due to reduced office and travel expenses.
G&A expense for the nine months ended September 30, 2020 was $7,731,550 as compared to $6,768,506 for the nine months ended September 30, 2019. The increase of $963,044, or 14%, 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 executive pursuant to his separation agreement.
Interest Income. Interest income was $2,650 and $5,051 for the three months ended September 30, 2020 and 2019, respectively, a decrease of $2,401, or 48%. Interest income was $17,467 and $25,620 for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $8,153, or 32%. The decreases associated with interest income for the three and nine months ended September 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 nine months ended September 30, 2020 and 2019 because we satisfied all debt obligations and repaid all short-term loans prior to 2019. As of September 30, 2020, we had no outstanding debt.
Depreciation Expense. Depreciation expense was $5,714 and $3,437 for the three months ended September 30, 2020 and 2019, respectively, an increase of $2,277, or 66%. Depreciation expense was $16,843 and $9,486 for the nine months ended September 30, 2020 and 2019, respectively, an increase of $7,357, or 78%. The increase in depreciation expense during the three and nine months ended September 30, 2020, was driven by increased purchase of equipment for use by employees and manufacturing partners for research activities.
Liquidity and Capital Resources
From inception through September 30, 2020, we have never generated revenue from product sales and have incurred net losses in each year. As of September 30, 2020, we had an accumulated deficit of approximately $53 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 pursuant to a registered direct offering. During the nine months ended September 30, 2020, we sold an aggregate of 13,581,000 shares of common stock for total gross proceeds of $25,731,640 pursuant to registered direct offerings and issued 6,603,881 shares of common stock with gross proceeds of $3,362,758 from warrant and option exercises.
As of September 30, 2020, we had $21,058,386 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 our Acclaim-1 and Acclaim-2 clinical trials planned to be launched 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 curtail or cease our operations. 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.
Based on our current cash, we estimate that we will be able to fund our expenditure requirements for our current operations and planned clinical trial activities into mid 2022. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently plan due to incorrect assumptions or due to a decision to expand our activities beyond those currently planned.
The following table sets forth the primary sources and uses of cash during the nine months ended September 30, 2020 and 2019:
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Nine Months Ended September 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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(10,043,034
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$
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(5,197,353
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Net cash provided by (used in) investing activities
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4,415
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(855,132
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Net cash provided by financing activities
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29,094,513
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—
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Net increase (decrease) in cash
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$
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19,055,894
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$
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(6,052,485
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Cash used in operating activities
Net cash used in operating activities was $10,043,034 and $5,197,353 for the nine months ended September 30, 2020 and 2019, respectively. The $4,845,681, or 93%, increase in net cash used in operating activities during the nine months ended September 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 significant increases to our headcount and service providers in preparation for the launch of our Acclaim-1 and Acclaim-2 clinical trials planned for 2021.
Cash provided by (used in) investing activities
Net cash provided by investing activities was $4,415 for the nine months ended September 30, 2020 and net cash used by investing activities was $855,132 for the nine months ended September 30, 2019. This difference of $859,547, was primarily due to a major investment in manufacturing materials during the nine months ended September 30, 2019 that are currently being used to manufacture REQORSA for our planned clinical trials. Investments in property and equipment and intellectual property increased slightly for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
Cash provided by financing activities
Net cash provided by financing activities was $29,094,513 and $0 during the nine months ended September 30, 2020 and 2019, respectively. The $29,094,513 increase in net cash provided by financing activities was due to our selling common stock in capital raising activities during the first nine months of 2020.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.