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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549  

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to ______________

 

Commission file number: 001-38244

 

GENPREX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

90-0772347

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

3300 Bee Cave Road, #650-227, Austin, TX

78746

(Address of principal executive offices)

(Zip Code)

 

(512) 537-7997

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

GNPX

 

The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ☒    

 

As of August 5, 2022, the registrant had 48,020,304 shares of common stock, par value $0.001 per share, outstanding.

 


 

 

 

 

 
 

GENPREX, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

 

 

 

 

 

PART I

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

3

 

 

Condensed Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021

 

3

 

 

Condensed Statements of Operations for the Three and Six Months Ended June 30, 2022, and 2021 (unaudited)

 

4

    Condensed Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2022, and 2021 (unaudited)   5

 

 

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2022, and 2021 (unaudited)

 

6

 

 

Notes to Unaudited Condensed Financial Statements

 

7

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

18

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   24

ITEM 4.

 

CONTROLS AND PROCEDURES

 

24

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

25

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

25

ITEM 1A.

 

RISK FACTORS

 

25

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

25

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES   25
ITEM 4.   MINE SAFETY DISCLOSURES   25

ITEM 5.

 

OTHER INFORMATION

 

25

ITEM 6.

 

EXHIBITS

 

25

SIGNATURES

27

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Genprex, Inc.

 

Condensed Balance Sheets (unaudited)

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 

Assets

  (unaudited)     

Current assets:

        

Cash and cash equivalents

 $30,053,021  $38,628,876 

Prepaid expenses and other

 $847,802  $511,348 

Total current assets

 $30,900,823  $39,140,224 

Property and equipment, net

 $35,334  $48,608 

Other assets:

        

Security deposits

 $10,000  $8,691 

Supplies

 $2,952,917  $3,022,403 

Intellectual property, net

 $666,049  $642,360 

Total other assets

 $3,628,966  $3,673,454 

Total assets

 $34,565,123  $42,862,286 

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Accounts payable

 $683,323  $973,195 

Other current liabilities

 $1,470,515  $612,100 

Total current liabilities

 $2,153,838  $1,585,295 

Stockholders’ equity:

        

Preferred stock $0.001 par value: 10,000,000 shares authorized; no shares issued and outstanding

      

Common stock $0.001 par value: 200,000,000 shares authorized; 47,898,351 and 47,874,708 shares issued and outstanding at June 30, 2022, and December 31, 2021, respectively

 $47,898  $47,874 

Additional paid-in capital

 $121,273,050  $119,246,970 

Accumulated deficit

 $(88,909,663) $(78,017,853)

Total stockholders’ equity

 $32,411,285  $41,276,991 

Total liabilities and stockholders’ equity

 $34,565,123  $42,862,286 

 

See accompanying notes to the unaudited condensed financial statements.

 

3

 

 

 

Genprex, Inc.

 

Condensed Statements of Operations (unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenues

  $     $     $     $  

Cost and expenses:

                               

Depreciation

    6,543       2,848       13,274       9,090  

Research and development

    2,737,028       1,526,277       4,597,864       3,695,420  

General and administrative

    2,431,499       2,458,097       6,287,295       6,774,407  

Total costs and expenses

    5,175,070       3,987,222       10,898,433       10,478,917  

Operating loss

    (5,175,070 )     (3,987,222 )     (10,898,433 )     (10,478,917 )

Interest income

    5,744       1,104       6,623       3,086  

Net loss

    (5,169,326 )     (3,986,118 )     (10,891,810 )     (10,475,831 )

Net loss per share—basic and diluted

  $ (0.11 )   $ (0.08 )   $ (0.23 )   $ (0.23 )

Weighted average number of common shares— basic and diluted

    47,893,404       47,372,490       47,892,919       46,464,343  

 

See accompanying notes to the unaudited condensed financial statements.

 

4

 

 

 

Genprex, Inc.

 

Condensed Statements of Changes in Stockholders' Equity (unaudited)

 

   

Common Stock

   

Additional

   

Accumulated

         
   

Shares

   

Amount

   

Paid-In Capital

   

Deficit

   

Total

 

Balance at December 31, 2020

    43,117,681     $ 43,118     $ 89,295,601     $ (58,422,229 )   $ 30,916,490  

Issuance of stock for cash

    4,192,139       4,192       25,320,138             25,324,330  

Issuance of stock for services

    5,000       5       20,645             20,650  

Share based compensation

                651,088             651,088  

Net loss

                      (6,489,714 )     (6,489,714 )

Balance at March 31, 2021

    47,314,820     $ 47,315     $ 115,287,472     $ (64,911,942 )   $ 50,422,845  

Issuance of stock for cash

    203,037       203       109,830             110,033  

Issuance of stock for services

    5,000       5       21,095             21,100  

Share based compensation

                1,116,359             1,116,358  

Net loss

                      (3,986,118 )     (3,986,118 )

Balance at June 30, 2021

    47,522,857     $ 47,523     $ 116,534,756     $ (68,898,060 )   $ 47,684,218  
                                         

Balance at December 31, 2021

    47,874,708     $ 47,874     $ 119,246,970     $ (78,017,853 )   $ 41,276,991  

Issuance of stock for services

    5,000       5       17,495             17,500  

Share based compensation

                1,452,607             1,452,607  

Net loss

                      (5,722,484 )     (5,722,484 )

Balance at March 31, 2022

    47,879,708     $ 47,879     $ 120,717,072     $ (83,740,337 )   $ 37,024,614  

Issuance of stock for services

    18,643       19       17,953             17,972  

Share based compensation

                538,026             538,026  

Net loss

                      (5,169,326 )     (5,169,326 )

Balance at June 30, 2022

    47,898,351     $ 47,898     $ 121,273,050       (88,909,663 )   $ 32,411,285  

 

See accompanying notes to the unaudited condensed financial statements.

 

5

 

 

 

Genprex, Inc.

 

Condensed Statements of Cash Flows (unaudited)

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net loss

  $ (10,891,810 )   $ (10,475,831 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation

  $ 13,274       9,090  

Share based compensation

  $ 2,026,104       1,809,196  

Changes in operating assets and liabilities:

               

Prepaid expenses and other

  $ (337,762 )     (371,043 )

Accounts payable

  $ (289,872 )     176,824  

Other current liabilities

  $ 858,415       419,671  

Net cash used in operating activities

  $ (8,621,651 )     (8,432,093 )

Cash flows from investing activities:

               

Additions to property and equipment

  $       (9,142 )

Additions to intellectual property

  $ (23,689 )     (18,048 )

Reductions (additions) to research and development supplies

  $ 69,485       (51,315 )

Net cash provided (used) by investing activities

  $ 45,796       (78,505 )

Cash flows from financing activities:

               

Proceeds from issuances of stock

  $       25,434,363  

Net cash provided by financing activities

  $       25,434,363  

Net (decrease) increase in cash and cash equivalents

  $ (8,575,855 )     16,923,765  

Cash and cash equivalents, beginning of period

  $ 38,628,876       27,319,684  

Cash and cash equivalents, end of period

  $ 30,053,021     $ 44,243,449  

 

See accompanying notes to the unaudited condensed financial statements.

 

6

 

 

GENPREX, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

 

Note 1 - Description of Business and Basis of Presentation

 

We are a clinical stage gene therapy company pioneering the development of gene-based therapies for large patient populations with unmet medical needs. Our oncology platform utilizes our non-viral ONCOPREX™ Nanoparticle Delivery System. Using this system, we encapsulate plasmids that express tumor suppressor genes within lipid nanoparticles and intravenously administer the encapsulated plasmids which are taken up by the tumor cells, after which the tumor suppressor genes express proteins that are missing or found in low quantities in the tumor cells. Our diabetes technology is designed to work 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

 

Our lead oncology drug candidate, REQORSA™ Immunogene Therapy, also sometimes referred to as GPX-001, initially is being developed in combination with top selling cancer drugs to treat Non-Small Cell Lung Cancer (“NSCLC”) and Small Cell Lung Cancer (“SCLC”). The active agent in REQORSA is a plasmid that expresses a tumor suppressor gene named TUSC2. REQORSA 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. REQORSA has been shown to be complementary with targeted drugs and immunotherapies.  We believe REQORSA’s unique attributes position REQORSA to provide treatment for patients with NSCLC, SCLC, and possibly other cancers, who are not benefitting from current therapies.    

 

We currently are enrolling and treating patients in two Phase 1/2 clinical trials in NSCLC, our Acclaim-1 and Acclaim-2 clinical trials. The Acclaim-1 clinical trial (“Acclaim-1") is using a combination of REQORSA with AstraZeneca PLC’s Tagrisso® in patients with late-stage NSCLC with activating epidermal growth factor receptor ("EGFR") mutations, whose disease progressed after treatment with Tagrisso. In August 2022, the Acclaim-1 Safety Review Committee approved escalating the dose in the second cohort of patients to 0.09 mg/kg from 0.06 mg/kg in the first cohort. We expect the Phase 1 portion of Acclaim-1 to be completed by year end 2022. The Acclaim-2 clinical trial (“Acclaim-2”) is using a combination of REQORSA with Merck & Co.’s Keytruda® in patients with late-stage NSCLC whose disease progressed after treatment with Keytruda. The first patient was dosed in Acclaim-2 in April 2022. We expect to complete the Phase 1 portion of Acclaim-2 by mid 2023. The Food and Drug Administration (“FDA”) has granted two Fast Track Designations, one for use of REQORSA in the patient population targeted in each of these trials. 

 

We expect to initiate a clinical trial in SCLC by year end 2022 by filing with the FDA a new or amended Investigational New Drug Application (“IND”).

 

The TUSC2 gene is one of a series of genes whose therapeutic use is covered by our exclusive worldwide licenses from The University of Texas MD Anderson Cancer Center ("MD Anderson").  We believe that our ONCOPREX Nanoparticle Delivery System allows for delivery of several cancer-fighting genes, alone or in combination with other cancer therapies, to combat multiple types of cancer and are in early stages of discovery programs to identify early-stage candidates.

 

Diabetes Gene Therapy

 

In diabetes, we are developing a gene therapy that is exclusively licensed from the University of Pittsburgh of the Commonwealth System of Higher Education (“University of Pittsburgh”) for the treatment of Type 1 and Type 2 diabetes. This potential treatment is designed to work 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 through the pancreatic duct. Our diabetes product candidate is currently being evaluated in preclinical studies at the University of Pittsburgh. In August 2022, we entered into a Sponsored Research Agreement with the University of Pittsburgh to support further pre-clinical studies of Type 2 diabetes in non-human primates.

 

Capital Requirements, Liquidity and Going Concern Considerations

 

Our unaudited condensed financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as shown in the accompanying unaudited condensed financial statements, we have sustained substantial losses from operations since inception and have no current source of revenue. In addition, we have used, rather than provided, cash in our operations. We expect to continue to incur significant expenditures to further clinical trials for the commercial development of our product candidates.

 

Management recognizes that we must obtain additional capital resources to successfully commercialize our product candidates. To date, we have received funding in the form of equity and debt, and we plan to seek additional funding in the future. However, no assurances can be given that we will be successful in raising additional capital. If we are not able to timely and successfully raise additional capital, the timing of our clinical trials, financial condition and results of operations may be materially and adversely affected. These condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities.

 

7

 
 

Note 2 - Summary of Significant Accounting Policies

 

The Company’s unaudited condensed financial statements have been prepared in accordance with GAAP. However, they do not include all the information and footnotes required by GAAP for complete financial statements. In our opinion, the unaudited condensed financial statements include all adjustments (consisting of normal recurring accruals) necessary to make the unaudited condensed financial statements not misleading. Operating results for the six months ended June 30, 2022 are not necessarily indicative of the final results that may be expected for the year ending December 31, 2022. For more complete financial information, these unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2021, included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2022. A summary of our significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed financial statements follows.

 

Capital Stock

 

The Company has the authority to issue up to 210,000,000 shares of stock consisting of 200,000,000 shares of common stock at a par value of $0.001 per share and 10,000,000 shares of preferred stock at a par value of $0.001 per share.

 

Use of Estimates

 

The preparation of our unaudited condensed financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

We consider all highly liquid short-term investments with an initial maturity of three months or less to be cash equivalents. Any amounts of cash in financial institutions which exceed FDIC insured limits expose us to cash concentration risk. We have cash equivalents in a money market account and had $29,757,127 and $38,392,886 in excess of FDIC insured limits of $250,000 at June 30, 2022 and December 31, 2021, respectively.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments.

 

Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, defines fair value, provides a consistent framework for measuring fair value under GAAP and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

 

Level 1: Quoted prices for identical instruments in active markets.

 

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3: Instruments with primarily unobservable value drivers.

 

8

 

Property and Equipment

 

Furniture and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Routine maintenance and repairs are charged to expense as incurred and major renovations or improvements are capitalized.

 

Research and Development Costs

 

Research and development expenditures consist of costs incurred to conduct research, develop engineering materials for further study, and develop clinical strategies for future programs. These costs include payments to collaborative research partners, manufacturing partners and consultants, and clinical strategy partners, wages and associated employee benefits, facilities, and overhead costs. These expenditures relate to our preclinical and Phase 1/2 clinical trials and are expensed as incurred. Materials produced to be used in clinical research are capitalized and included in research and development supplies and are expensed as they are used for testing or clinical activities, or have spoiled.

 

Research and development supplies purchased and capitalized for future use were $2,952,917 and $3,022,403 at June 30, 2022 and December 31, 2021, respectively.

 

Intellectual Property

 

Intellectual property consists of legal and related costs associated with patents and other proprietary technology and rights developed, acquired, licensed by, or maintained by us that we believe contribute to a probable economic benefit toward such patents and activities. These costs incurred in connection with obtaining and maintaining intellectual property protection, such as patent applications and patent maintenance, are capitalized. Intellectual property is stated at cost, to be amortized on a straight-line basis over the estimated useful lives of the assets.

 

Accounting for Stock-Based Compensation

 

We use the fair value-based method of accounting for stock-based compensation for options granted to employees, independent consultants and contractors. We measure options granted at fair value determined as of the grant date and recognize the expense over the periods in which the related services are rendered based on the terms and conditions of the award. Generally, where the award only has a service condition, the requisite service period is the same as the vesting period.

 

Long-Lived Assets

 

We review long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. We recognize an impairment loss if the carrying value of the asset exceeds the expected future cash flows. During the six months ended June 30, 2022, and the year ended December 31, 2021, there were no deemed impairments of our long-lived assets.

 

Recent Accounting Developments

 

Accounting pronouncements issued but not effective until after June 30, 2022, are not expected to have a significant effect on our financial condition, results of operations, or cash flows.

 

 

9

 

Note 3 - Intellectual Property

 

On February 11, 2020, we entered into an exclusive license agreement with the University of Pittsburgh for patented gene therapy technologies relating to the potential treatment of type 1 and type 2 diabetes. 

 

On May 4, 2020, we entered into an exclusive worldwide license agreement with The Board of Regents of the University of Texas System on behalf of MD Anderson relating to a portfolio of 16 patent applications and related technology for the treatment of cancer using the Company’s lead drug candidate, REQORSA, and immunotherapies. 

 

We own or have exclusive license agreements on 18 issued patents and 18 pending patent applications worldwide for technologies developed in-house or by researchers at the National Cancer Institute, MD Anderson, the University of Texas Southwestern Medical Center, and the University of Pittsburgh. These patents comprise various therapeutic, diagnostic, technical and processing claims. These license rights will be amortized on a straight-line basis over the estimated period of useful lives of the underlying patents or the license agreements.

 

Note 4 - Equity

 

Registered Direct Offerings

 

On February 10, 2021, the Company completed a registered direct offering in which the Company sold to investors an aggregate of 4,000,000 shares of the Company's common stock at $6.25 per share. The Company received net proceeds of approximately $23.2 million after commissions and expenses.

 

Stock Issuances

 

During the six months ended June 30, 2022, we issued (i) 10,000 shares of common stock for services provided to us valued at $28,650 to the Chairman of our Scientific Advisory Board, and (ii) 13,643 shares of common stock upon the exercise of warrants on a cashless basis.

 

During the year ended December 31, 2021, we issued (i) 670,889 shares of common stock upon the exercise of options for cash proceeds of $677,912, and (ii) 86,138 shares of common stock for services provided to us valued at $156,045 to the Chairman of our Scientific Advisory Board and a consultant.

 

Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, none of which are outstanding at June 30, 2022.

 

Common Stock

 

The Company is authorized to issue 200,000,000 shares of common stock with a par value of $0.001 per share, all of which are voting common stock. There were 47,898,351 shares of the Company's common stock outstanding at June 30, 2022.

 

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Common Stock Purchase Warrants

 

Common stock purchase warrant activity for the period and year ended June 30, 2022, and December 31, 2021, respectively, is as follows:

 

  

Number of

  

Weighted Average

 
  

Warrants

  

Exercise Price

 

Outstanding at January 1, 2021

  2,154,747  $4.37 

Issued

  50,000   5.29 

Outstanding at December 31, 2021

  2,204,747  $4.39 

Cancelled or expired

  112,993   4.47 

Exercised

  13,643   0.50 

Outstanding at June 30, 2022

  2,078,111  $4.41 

Vested or expected to vest at June 30, 2022

      

Exercisable at June 30, 2022

  1,844,776  $4.66 

 

The Company did not issue warrants or record any share-based compensation associated with vesting of warrants during the six-month period ended June 30, 2022

 

In the year ended  December 31, 2021, the Company issued (i) a warrant to purchase up to 25,000 shares of common stock to a service provider at an exercise price of $7.22 per share, the fair market value of a share of common stock on the date of issuance and (ii) a warrant to purchase up to 25,000 shares of common stock to a service provider at an exercise price of $3.36 per share, the fair market value of a share of common stock on the date of issuance. During the year ended  December 31, 2021, we recorded share-based compensation of $200,282 associated with the vesting of warrants. 

 

On January 29, 2018, the Company entered into an agreement with a consultant whereby the Company agreed to grant warrants to purchase up to 6,000 shares of the Company's common stock at an exercise price of $5.00 per share in consideration of services valued at $30,000 provided to the Company. At June 30, 2022, the Company has not issued these warrants.

 

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2018 Equity Incentive Plan

 

The Company’s board of directors and stockholders have approved and adopted the Company’s 2018 Equity Incentive Plan (“2018 Plan”), which became effective on the completion of the IPO on April 3, 2018. The 2018 Plan provides for the grant of incentive stock options that are intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (“ISOs”), nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and performance-based cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to the Company’s non-employee directors and consultants.

 

A total of 4,160,000 shares of common stock were initially available under the 2018 Plan, plus a number of shares of common stock (not to exceed 2,628,749 shares) subject to outstanding awards under our 2009 Equity Incentive Plan (the “2009 Plan”) as of the IPO that expire, are forfeited or otherwise terminate or that are used to cover the exercise price or applicable tax withholdings. No further grants will be made under the 2009 Plan.

 

In addition, the number of shares of common stock reserved for issuance under the 2018 Plan automatically increase on January 1 of each year, since  January 1, 2019, by 5% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our Board or a committee appointed to administer the 2018 Plan.

 

On  January 1, 2021, and 2022, the number of shares of common stock reserved for issuance under the 2018 Plan was increased by an aggregate of 2,155,884 and 2,393,735 shares, respectively. As of June 30, 2022, a total of 145,816 shares of common stock remains available for issuance under the 2018 Plan.

 

2018 Employee Stock Purchase Plan

 

The Company’s board of directors and stockholders approved and adopted the Company’s 2018 Employee Stock Purchase Plan (“ESPP”), which became effective on April 3, 2018. The ESPP has not yet been utilized as a benefit available to our employees. The ESPP authorizes the issuance of 208,500 shares of the Company’s common stock pursuant to purchase rights that may be granted to our eligible employees. The number of shares of common stock reserved for issuance under the ESPP is automatically increased on January 1 of each calendar year, beginning on January 1, 2019, by 2% of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the administrator of the ESPP. The administrator of the ESPP determined not to increase the number of shares reserved for issuance under the ESPP on  January 1, 2022.

 

Stock Options

 

As of June 30, 2022, the Company had outstanding stock options to purchase 11,448,967 shares of common stock that have been granted to various executives, employees, directors, and independent contractors. These options vest immediately or over periods ranging from 12 to 48 months, are exercisable for a period of up to ten years, and enable the holders to purchase shares of our common stock at exercise prices ranging from $0.015 to $9.80 per share. The per-share fair values of these options range from $0.015 to $7.93, based on Black-Scholes-Merton pricing models with the following assumptions:

 

Expected term (in years):

  10 

Risk-free rate:

  

0.07% – 2.79%

 

Volatility:

  

75.98% – 88.38%

 

Dividend yield:

  

0%

 

 

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During the six-month period ended  June 30, 2022, the Company (i) granted stock options to purchase an aggregate of 2,892,166 shares of the Company's common stock with exercise prices ranging from $1.36 to $3.50 per share to executives and employees, and (ii) cancelled options to purchase 17,500 shares of common stock at an exercise price of $2.00 per share in connection with the termination of employment of an employee. 

 

In the year ended  December 31, 2021, the Company (i) granted stock options to purchase an aggregate of 2,519,628 shares of the Company's common stock with exercise prices ranging from $2.72 to $7.22 per share to executives, employees, board members, and consultants, (ii) cancelled options to purchase 118,507 shares of common stock with exercise prices ranging from $1.45 to $7.22 per share in connection with the termination of employment of employees, and (iii) issued 670,889 shares of the Company's common stock upon the exercise of options held by consultants, a former board member, and a former executive, with exercise prices ranging from $0.015 to $2.15 per share.

 

The weighted average remaining contractual term for the outstanding options at  June 30, 2022 and  December 31, 2021 is 7.48 and 7.24 years, respectively.
 

Stock option activity for the six months ended June 30, 2022, and year ended  December 31, 2021 is as follows:

 

  

Number of

  

Weighted Average

 
  

Shares

  

Exercise Price

 

Outstanding at January 1, 2021

  6,844,069  $2.81 

Options granted

  2,519,628   4.26 

Options exercised

  (670,889)  1.01 

Options expired

  (118,507)  3.00 

Outstanding at December 31, 2021

  8,574,301  $3.35 

Options granted

  2,892,166   2.18 

Options expired or cancelled

  (17,500)  2.00 

Outstanding at June 30, 2022

  11,448,967  $3.06 

Vested or expected to vest at June 30, 2022

  235,465   3.32 

Exercisable at June 30, 2022

  6,166,620  $3.20 

 

Share-Based Compensation

 

For the six months ended June 30, 2022, the Company's total share-based compensation was approximately $2.1 million, nearly all of which represents the vesting of options issued to executives, employees, and service providers. As of  June 30, 2022, the Company’s total compensation cost related to non-vested time-based stock option awards and warrants granted to executives, employees, board members, and service providers and not yet recognized was approximately $10.6 million. The Company expects to record this stock-based compensation expense over the next three years using a graded vesting method. As of June 30, 2022, the weighted average term over which these expenses are expected to be recognized is 2.29 years. 

 

As of June 30, 2022, there are no performance-based stock option awards outstanding and one performance-based warrant outstanding issued to a service provider. The Company’s total compensation cost related to the non-vested performance-based warrant not yet recognized was approximately $300,000. The entirety of this warrant may be recognized and recorded upon the achievement of certain milestones.

 

13

 
 
 

Note 5 - Related Party Transactions

 

Introgen Research Institute

 

Introgen Research Institute (“IRI”) is a Texas-based technology company formed by Rodney Varner, our President, Chief Executive Officer and Chairman of the Board of which Mr. Varner is the sole officer. IRI is owned by trusts of which Mr. Varner's descendants are the sole beneficiaries. In April 2009, prior to Mr. Varner becoming an officer and director of our Company in August 2012, we entered into an Assignment and Collaboration Agreement with IRI, providing us with the exclusive right to commercialize a portfolio of intellectual property. This agreement was amended in 2011 to include additional sublicensing of additional intellectual property made available to IRI from MD Anderson.

 

 

Note 6 - Commitments and Contingencies

 

Leases

 

On April 16, 2018, the Company executed a space utilization agreement with the Board of Regents of the University of Texas System to establish and lease offices at the Dell Medical School in Austin, Texas. On March 23, 2021, the Company was informed by Dell Medical School that the University of Texas desired to use the space and not renew the space utilization agreement. The lease terminated on April 30, 2021, and our employees all currently work virtually while we evaluate future space needs post the COVID-19 pandemic. 

 

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Commitments

 

MD Anderson Cancer Center

 

The Company entered into a clinical study agreement with MD Anderson, to administer the Company’s Phase 1/2 clinical trial, combining REQORSA and Tarceva in Stage 4 lung cancer patients. The trial was expected to run through the end of 2018 with a projected total cost of approximately $2 million. Payments are due and payable when invoiced throughout the clinical trial period. The agreement may be terminated at any time. In 2020, the Company received Fast Track Designation ("FTD") from the FDA for its Acclaim-1 trial which combines REQORSA plus Tagrisso in patients with stage III or IV NSCLC with EGFR mutations that progressed after treatment with Tagrisso. Given the FTD and with Tagrisso now considered a new standard of care in the U.S. for NSCLC with an EGFR mutation, the Company is no longer enrolling patients in its ONC-002 study and, in June 2021, initiated its Acclaim-1 trial.

 

In July 2018, the Company entered into a two-year sponsored research agreement with MD Anderson to sponsor preclinical studies focused on the combination of REQORSA with an immunotherapy with a projected total cost of approximately $2 million. This agreement was extended beyond the original expiration date. Payments are due and payable when invoiced throughout the period. The agreement may be terminated at any time. This agreement expired in May 2022.

 

In 2011, the Company agreed to assume certain contractual and other obligations of IRI in consideration for the sublicense rights, expertise, and assistance associated with certain technologies and intellectual property originally licensed to another party under a 1994 License Agreement with MD Anderson (“Original MD Anderson License Agreement”). These technologies and intellectual property were later sublicensed to IRI (the “IRI Sublicense”). The Company also agreed to pay royalties of 1% on sales of certain licensed products for a period of 21 years following the termination of the later of the Original MD Anderson License Agreement and the IRI Sublicense. The Company assumed patent prosecution costs and an annual minimum royalty of $20,000 payable to the National Institutes of Health.

 

On March 3, 2021, the Company entered into an amendment (the “MD License Amendment”) to the Patent and Technology License Agreement dated May 4, 2020, with MD Anderson. The MD License Amendment grants the Company a worldwide, exclusive, sublicensable license to an additional portfolio of six patents and one patent application and related technology for methods for treating cancer by administration of a TUSC2 therapy in conjunction with EGFR inhibitors or other anti-cancer therapies in patients predicted to be responsive to TUSC2 therapy. Pursuant to the MD License Amendment, the Company agreed to (i) pay annual maintenance fees ranging from the mid five figures to the low six figures, (ii) total milestone payments of $6,150,000, (iii) a one-time fee in the mid five figures and (iv) certain patent related expenses.

 

15

 

National Institutes of Health

 

Our $191,393 payment obligation to the National Institutes of Health (“NIH”) represented a current obligation, of which $15,393 of 2016 patent prosecution costs were paid in the fourth quarter of 2016 and $176,000 was included in accounts payable at December 31, 2016 (consisting of accrued annual royalties of $140,000 and patent costs of $36,000). During the first quarter of 2017, we modified the terms of our accrued royalty obligation to NIH. Under the modified agreement, NIH agreed to extinguish $120,000 of the accrued royalties payable to it in consideration of payment by us of (i) accrued patent costs of $36,000, (ii) a royalty payment of $20,000, and (iii) a contingent payment of $240,000, increasing by $20,000 per year starting in 2018, to be paid upon our receipt of FDA approval. The payments for the patent costs of $36,000 and royalties of $20,000 were paid during the second quarter of 2017.

 

As a result of our modified agreement with the NIH, we have recognized the exchange of the $120,000 fixed obligation for the $240,000 contingent obligation as a $120,000 reduction to intellectual property expense (classified within general and administrative expense) during the first quarter of 2017. The $240,000 contingent obligation, which increases annually by $20,000 and was $340,000 as of June 30, 2022, will be recognized when we obtain regulatory approval (the event that triggers the payment obligation).

 

University of Pittsburgh

 

Pursuant to the Exclusive License Agreement dated February 11, 2020 by and between the Company and the University of Pittsburgh, the Company agreed to pay (i) an initial licensing fee of $25,000, (ii) annual maintenance fees of $25,000 for the first three years and $40,000 for each subsequent year following the first anniversary of the agreement, (iii) royalties ranging from 1.5% to 3% of net sales of licensed technologies, (iv) an annual minimal royalty payment of $250,000 per year beginning in the year of the first commercial sale of licensed technology, (v) a share of non-royalty sublicense income of 20%, and (vi) an aggregate of $3,975,000 in milestone payments. Unless earlier terminated pursuant to its terms, the agreement expires upon the later of (i) 20 years after the first commercial sale of the licensed technology thereunder and (ii) expiration of the last valid claim under the patent rights.

 

Contingencies

 

From time to time, we may become subject to threatened and/or asserted claims arising in the ordinary course of our business. Management is not aware of any matters, either individually or in the aggregate, that are reasonably likely to have a material impact on our financial condition, results of operations or liquidity.

 

16

 
 

Note 7 - Significant Events

 

The COVID-19 pandemic continues to have a major impact in the U.S. and around the world. The availability of vaccines holds promise for the future, though new variants of the virus and potential waning immunity from vaccines may result in continued impact from this pandemic in the future, which could adversely impact our operations. Through March 31, 2021, the Company had not experienced any material impact on its financial results or operations as a result of the COVID-19 pandemic. Beginning in June 2021, the Company experienced delays in engaging clinical sites as a result of a backlog of clinical trial protocols requiring review created by an accumulation of clinical trial protocols. The Company also has experienced disruptions in our supply chain regarding our manufacturing and testing operations. The Company continues to closely monitor the impact of the COVID-19 pandemic on its business and workforce.

 

 

Note 8 - Subsequent Events

 

Share Issuance

 

On July 1, 2022, the Company issued 5,000 shares of its common stock to the Chairman of our Scientific Advisory Board in consideration for services.

 

Warrant Issuances

 

On July 1, 2022, the Company issued a warrant to purchase up to 50,000 shares of its common stock at an exercise price of $1.38 per share to a consultant for services. On August 10, 2022, the Company issued a warrant to purchase up to 50,000 shares of its common stock at an exercise price of $1.49 per share to a consultant for services.

 

Option Exercise

 

On July 28, 2022, we issued 116,953 shares of common stock for $1,755 in cash to our Chief Financial Officer upon the exercise of options.

 

Option Issuance

 

On August 10, 2022, the Company issued stock options to purchase up to 9,000 shares of its common stock at an exercise price of $1.49 per share pursuant to its 2018 Plan to new employees for services. 

 

17

 
 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations together with our interim condensed financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. Any statements in this Quarterly Report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. 

 

Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout this Quarterly Report. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include but are not limited to:

 

 

Market conditions;

  

 

Our capital position;

  

 

Our ability to compete effectively and with larger better financed pharmaceutical companies;

  

 

Our uncertainty of developing marketable products;

  

 

Our ability to develop and commercialize our products;

  

 

Our ability to obtain regulatory approvals;

  

 

Our ability and third parties’ ability to maintain and protect intellectual property rights;

  

 

Our ability to raise additional future financing and possible lack of financial and other resources;

  

 

The ultimate impact of the current coronavirus pandemic, or any other health epidemic, on our business, our clinical trials, our research programs, healthcare systems or the global economy as a whole;

  

 

The success of our clinical trials through all phases of clinical development;

  

 

Any delays in regulatory review and approval of our current and future product candidates;

  

 

Our dependence on third-party manufacturers to supply or manufacture our products;

  

 

Our ability to control product development costs;

  

 

Our ability to attract and retain key employees;

 

18

 

 

Our ability to enter into new strategic collaborations, licensing or other arrangements;

 

 

Changes in government regulation affecting product candidates that could increase our development costs;

 

 

Our involvement in patent and other intellectual property litigation that could be expensive and divert management’s attention;

 

 

The possibility that there may be no market acceptance for our products; and

 

 

Changes in third-party reimbursement policies which could adversely affect potential future sales of any of our products that are approved for marketing.

 

The foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements, which speak only as of the date of this Quarterly Report or the date of the document incorporated by reference into this Quarterly Report.  Except as required by law, we assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements contained in this Quarterly Report. All forward-looking statements are expressly qualified in their entirety by the cautionary statements contained in this section.

 

Overview

 

We are a clinical stage gene therapy company pioneering the development of gene-based therapies for large patient populations with unmet medical needs.  Our oncology platform utilizes our non-viral ONCOPREX™ Nanoparticle Delivery System.  Using this system, we encapsulate plasmids that express tumor suppressor genes within lipid nanoparticles and intravenously administer the encapsulated plasmids which are taken up by the tumor cells, after which the tumor suppressor genes express proteins that are missing or found in low quantities in the tumor cells.  Our diabetes technology is designed to work 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

 

Our lead oncology drug candidate, REQORSA™ Immunogene Therapy, also sometimes referred to as GPX-001, initially is being developed in combination with top selling cancer drugs to treat Non-Small Cell Lung Cancer (“NSCLC”) and Small Cell Lung Cancer (“SCLC”). The active agent in REQORSA is a plasmid that expresses a tumor suppressor gene named TUSC2. REQORSA 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. REQORSA has been shown to be complementary with targeted drugs and immunotherapies.  We believe REQORSA’s unique attributes position REQORSA to provide treatment for patients with NSCLC, SCLC, and possibly other cancers, who are not benefitting from current therapies.    

 

We currently are enrolling and treating patients in two Phase 1/2 clinical trials in NSCLC, our Acclaim-1 and Acclaim-2 clinical trials. The Acclaim-1 clinical trial (“Acclaim-1") is using a combination of REQORSA with AstraZeneca PLC’s Tagrisso® in patients with late-stage NSCLC with activating epidermal growth factor receptor ("EGFR") mutations, whose disease progressed after treatment with Tagrisso. In August 2022, the Acclaim-1 Safety Review Committee approved escalating the dose in the second cohort of patients to 0.09 mg/kg from 0.06 mg/kg in the first cohort. We expect the Phase 1 portion of Acclaim-1 to be completed by year end 2022. The Acclaim-2 clinical trial (“Acclaim-2”) is using a combination of REQORSA with Merck & Co.’s Keytruda® in patients with late-stage NSCLC whose disease progressed after treatment with Keytruda. The first patient was dosed in Acclaim-2 in April 2022. We expect to complete the Phase 1 portion of Acclaim-2 by mid 2023. The Food and Drug Administration (“FDA”) has granted two Fast Track Designations, one for use of REQORSA in the patient population targeted in each of these trials. 

 

We expect to initiate a clinical trial in SCLC by year end 2022 by filing with the FDA a new or amended Investigational New Drug Application (“IND”).

 

The TUSC2 gene is one of a series of genes whose therapeutic use is covered by our exclusive worldwide licenses from The University of Texas MD Anderson Cancer Center ("MD Anderson").  We believe that our ONCOPREX Nanoparticle Delivery System allows for delivery of several cancer-fighting genes, alone or in combination with other cancer therapies, to combat multiple types of cancer and are in early stages of discovery programs to identify early-stage candidates.

 

Diabetes Gene Therapy

 

In diabetes, we are developing a gene therapy that is exclusively licensed from the University of Pittsburgh of the Commonwealth System of Higher Education (“University of Pittsburgh”) for the treatment of Type 1 and Type 2 diabetes. This potential treatment is designed to work 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 through the pancreatic duct. Our diabetes product candidate is currently being evaluated in preclinical studies at the University of Pittsburgh. In August 2022, we entered into a Sponsored Research Agreement with the University of Pittsburgh to support further pre-clinical studies of Type 2 diabetes in non-human primates.

 

19

 

JOBS Act

 

On April 5, 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 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 initial public offering; (iii) the date on which we have issued more than $1.0 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 contract research, manufacturing, and testing 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 condensed balance sheets and within research and development expense in the condensed 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. 

 

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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, 2022. 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:

 

 

costs incurred to conduct research, such as the discovery and development of our current and potential product candidates;

 

costs related to the production and storage of supplies for engineering purposes and storage and usage of clinical supplies, including waste created in the process of producing clinical materials, spoilage, and testing of clinical materials;

 

costs related to the use of contract manufacturers, manufacturing consultants, testing organizations, cold-storage facilities, and logistics service providers;

 

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; 

 

costs related to compliance with drug development regulatory requirements; and

 

costs related to staffing and personnel associated with research and development activities, including wages, taxes, benefits, leases, overheads, supplies, and share-based compensation.

 

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 future 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, and limited contracted partners. We may never succeed in achieving regulatory approval for any of our current or future 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 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 five-year life.

 

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Results of Operations

 

Comparison of the Three and Six Months Ended June 30, 2022, and 2021

 

The following summarizes our results of operations for the three and six months ended June 30, 2022, and 2021.

 

Research and Development Expense

 

Research and Development ("R&D") expense for the three months ended June 30, 2022, was $2,737,028, compared to $1,526,277 for the three months ended June 30, 2021. This increase of $1,210,751, or 79%, is primarily due to increases in pre-clinical research and manufacturing activities and clinical operations expenses associated with the advancements of our Acclaim-1 and Acclaim-2 clinical trials. 

 

R&D expense for the six months ended June 30, 2022, was $4,597,864, compared to $3,695,420 for the six months ended June 30, 2021. This increase of 902,444, or 24%, is primarily due to increases in manufacturing activities and clinical operations expenses associated with the commencement and advancements of our Acclaim-1 and Acclaim-2 clinical trials. 

 

General and Administrative Expense

 

General and administrative ("G&A") expense for the three months ended June 30, 2022, was $2,431,499, compared to $2,458,097 for the three months ended June 30, 2021, or a decrease of $26,598, or 1%. The larger G&A expense in the three months ended June 30, 2021, was primarily due to equity-based compensation charges during this period. The decrease in G&A expenses for the six months ended June 30, 2022, is offset by increases in consulting services and increases in personnel expenses related to insurance premiums and contributions to a newly implemented 401(k) plan. 

 

G&A expense for the six months ended June 30, 2022, was $6,287,295 compared to $6,774,407 for the six months ended June 30, 2021, or a decrease of $487,112, or 7%. The smaller G&A expense in the six months ended June 30, 2022, was primarily due to a one-time finance fee of $1,750,000 in connection with a registered direct offering during the period ended June 30, 2021. The decrease in G&A expenses in the first half of 2022 is offset by increases in equity-based compensation due to the vesting of stock options by employees and consultants and increases in personnel expenses, including insurance premiums and contributions to a newly implemented 401(k) plan, during the six months ended June 30, 2022.

 

Interest Income. Interest income was $5,744 and $1,104 for the three months ended June 30, 2022, and 2021, respectively, representing an increase of $4,640, or 420%. The increase associated with interest income for the three months ended June 30, 2022 were due to cashback incentives associated with credit cards and changes in interest rates associated with the cash balances held in money market instruments.

 

Depreciation Expense. Depreciation expense was $6,543 and $2,848 for the three months ended June 30, 2022, and 2021, respectively, representing an increase of $3,695, or 130%. The changes in associated depreciation expense for the three months ended June 30, 2022 were due to the timing of purchases of computer equipment for new employees.

 

Net Loss.  We had a net loss of $5,169,326 and $3,986,118 for the three months ended June 30, 2022, and 2021, respectively, representing an increase of $1,183,208, or 30%. The increase in net loss is due to our headcount growing from 13 to 22 employees since June 30, 2021 as well as R&D expenses associated with the commencement of our Acclaim-1 and Acclaim-2 clinical trials. 

 

Liquidity and Capital Resources

 

From inception through June 30, 2022, we have never generated revenue from product sales and have incurred net losses in each year. As of June 30, 2022, we had an accumulated deficit of $88,909,663. We have funded our operations primarily through the sale and issuance of capital stock. For the year ended December 31, 2021, we sold an aggregate of 4,000,000 shares of common stock for total net proceeds of $23,192,500 pursuant to a registered direct offering and issued 670,889 shares of common stock upon the exercise of options for gross proceeds of $677,912. We did not sell any shares of common stock during the six months ended June 30, 2022. 

 

22

 

 

As of June 30, 2022, we had $30,053,021 in cash and cash equivalents.

 

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 or potential product candidates, which we expect will take several 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 our Acclaim-2 clinical trials, launching a SCLC clinical trial and continuing the development of our gene therapy for diabetes. Our Acclaim 1 and Acclaim 2 trials are both open for enrollment. The first patient in Acclaim-1 was dosed in February 2022 and in August 2022 the Safety Review Committee approved escalating the dose in the second cohort of patients. The first patient in Acclaim-2 was dosed in April 2022. We expect the Phase 1 portion of the Acclaim-1 trial to be completed by year end 2022 and we expect the Phase 1 portion of the Acclaim-2 trial to be completed in the middle of of 2023. We expect to initiate a clinical trial in SCLC by the end of 2022. 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 rights to others 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 and cash equivalents, we estimate that we will be able to fund our expenditure requirements for our current operations and planned clinical trial activities into 2024. 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 economic factors, such as inflation, incorrect assumptions, or due to a decision to expand our activities, or innovate existing activities beyond those currently planned. We also have been experiencing delays in engaging clinical sites for our Acclaim-1 and Acclaim-2 trials because of a backlog of clinical trial protocols at the sites requiring review created by an accumulation of protocols while clinical trials have been widely disrupted during the COVID-19 pandemic and workforce shortages impacting the U.S. economy in general. Although continued delays will enable us to fund our expenditure requirements for our current operations and planned clinical trial activities longer, we would not be advancing our clinical trials as anticipated and utilizing our available capital resources to support our operations only.

 

The following table sets forth the primary sources and uses of cash and cash equivalents during the six months ended June 30, 2022, and 2021:

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

Net cash used in operating activities

  $ (8,621,651 )   $ (8,432,093 )

Net cash provided (used) by investing activities

    45,796       (78,505 )

Net cash provided by financing activities

          25,434,363  

Net (decrease) increase in cash and cash equivalents

  $ (8,575,855 )   $ 16,923,765  

 

Cash used in operating activities

 

Net cash used in operating activities was $8,621,651 and $8,432,093 for the six months ended June 30, 2022, and 2021, respectively, or an increase of $189,559, or 2%. The one-time finance fee of $1,750,000 in the six months ended June 30, 2021, was offset in the six months ended June 30, 2022, due to our personnel expenses growing as a result of the expansion of our headcount from 13 to 22 employees as well as increases in contract manufacturing and clinical strategy expenses as the Phase I portion of the Acclaim-1 and Acclaim-2 trials commenced. 

 

Cash provided (used) in investing activities

 

Net cash provided by investing activities was $45,796 for the six months ended June 30, 2022, and the net cash used by investing activities was $78,505 for the six months ended June 30, 2021. This decrease of $120,349, or 109%, was due to timing and use of materials for our clinical trials. 

 

Cash provided by financing activities

 

Net cash provided by financing activities was $0 and $25,434,363 during the six months ended June 30, 2022, and 2021, respectively. The decrease of $25,434,363, or 100%, in net cash provided by financing activities was due to significant sales of common stock in capital raising activities and option and warrant exercises during the six months ended June 30, 2021, compared to the six months ended June 30, 2022, in which we did not sell any common stock. 

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting due to the lack of segregation of duties. 

 

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to maintain effective segregation of duties on our assessment of our internal control over financial reporting and has concluded that the control deficiency represents a material weakness. 

 

In response to the material weakness described above, during the quarter ended June 30, 2022, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with GAAP. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

Remediation Plans

 

Management is actively engaged in remediation efforts to address the material weakness identified in the management’s evaluation of internal controls and procedures. The remediation efforts, which have been or are in the process of being implemented, are intended to address the identified material weakness, and include

 

 

new accounting software, processes, and workflows to further segregate duties among limited accounting staff;

 

 

specific review procedures, including the added involvement of our General Counsel to review certain accounting transactions following a given period in an effort to enhance accuracy of reporting;

 

 

specific review procedures, including the added involvement of our manufacturing staff to enhance controls associated with the tracking and reporting of inventory values in our supply chain; 

 

 

the formation of a formal Disclosure Committee that has oversight responsibility for the accuracy and timeliness of disclosures made by us through the establishment of controls and procedures and the monitoring of their integrity and effectiveness; and

 

 

additional hiring of staff and development of accounting processes and policies to further segregate accounting responsibilities. 

 

During the quarter ended June 30, 2022, we took actions to remediate the material weakness relating to our internal controls over financial reporting including the evaluation and improvement of procedures and processes associated with new accounting software and workflows to segregate duties among our accounting staff.

 

As Management continues to evaluate and work to improve its internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of the remediation measures described above. While remediation efforts are active, management requires additional time to demonstrate the operating effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control over Financial Reporting

 

Except as described above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting

 

Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.

 

Item 1A. Risk Factors

 

The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On April 1, 2022, we issued 5,000 shares of our common stock to a consultant in consideration for services. The foregoing issuance of securities was not registered under the Securities Act or the securities laws of any state, and the securities were offered and issued in reliance on the exemption from registration under the Securities Act afforded by Section 4(a)(2).

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Our Chairman, Chief Executive Officer and President, Rodney Varner, has been diagnosed with a cutaneous lymphoma and has been undergoing chemotherapy treatment. Mr. Varner has been continuing in his roles at the Company during this period and expects to continue to do so, although he has limited some business activities, including travel and taking certain time off. The Board has taken steps in order to ensure smooth continuity of business priorities and operations during this period, which include, but are not limited to, more integrated roles of Catherine Vaczy, the Company’s Executive Vice President, General Counsel and Chief Strategy Officer Ryan Confer, the Company’s Chief Financial Officer and the Board, in the event of periods of unavailability of Mr. Varner.

 

Item 6. Exhibits

 

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INDEX TO EXHIBITS

 

Exhibit

Number

 

Description of Exhibit

     

31.1*

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1*

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

10.1*+

 

Form of Indemnity Agreement by and between the Company and its directors and officers, dated as of May 17, 2022.

     
10.2*   Warrant Agreement with Bear Creek Capital, LLC, dated as of July 1, 2022.

 

 

101.INS*

 

Inline XBRL Instance Document.

 

 

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

     
104*   Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101).

 

*  Filed herewith.

+  Indicates management contract or compensatory plan.

 

26

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

GENPREX, INC.

 

 

 

Date: August 12, 2022

By:

/s/ J. Rodney Varner

 

 

J. Rodney Varner

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ Ryan M. Confer

 

 

Ryan M. Confer

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

27