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, 2015
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:

0-24469

 

	GenVec, Inc.
(Exact name of registrant as specified in its charter)

  

Delaware		23-2705690
(State or other jurisdiction of		(IRS Employer Identification
incorporation or organization)		Number)

  

910 Clopper Road, Suite 220N, Gaithersburg, Maryland	20878
(Address of principal executive offices)	(Zip Code)

 

240-632-0740

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller reporting company ☒
	(do not check if a smaller reporting company)

 

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 July 31, 2015, the Registrant had 17,269,962 shares of common stock, $.001 par value, outstanding.

 

 

GENVEC, INC.
FORM 10-Q

 

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION		3
Item 1.		Financial Statements		3
		Condensed Balance Sheets		3
		Condensed Statements of Operations and Comprehensive Loss		4
		Condensed Statements of Cash Flows		5
		Notes to Condensed Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.		Controls and Procedures		25
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		26
SIGNATURES				27

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENVEC, INC.

CONDENSED BALANCE SHEETS

(in thousands, except per share data)

		June 30,				December 31,
		2015				2014
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	6,699			$	7,968
Investments, at fair value			4,391				6,724
Accounts receivable, net			281				325
Prepaid expenses and other			455				219
Total current assets			11,826				15,236
Property and equipment, net			265				276
Restricted cash			97				97
Total assets		$	12,188			$	15,609
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	866			$	1,146
Accrued expenses and other			928				1,076
Total current liabilities			1,794				2,222
Other liabilities			93				89
Total liabilities			1,887				2,311
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; none issued and outstanding in 2015 and 2014			-				-
Common stock, $0.001 par value; 30,000 shares authorized; 17,270 shares issued and outstanding at June 30, 2015 and at December 31, 2014			17				17
Additional paid-in capital			292,008				291,609
Accumulated other comprehensive loss			(31	)			(33	)
Accumulated deficit			(281,693	)			(278,295	)
Total stockholders’ equity			10,301				13,298
Total liabilities and stockholders’ equity		$	12,188			$	15,609

 

See accompanying notes to unaudited condensed financial statements.

 

 

GENVEC, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

(in thousands, except per share data)
(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Revenues from strategic alliances and research contracts		$	127			$	129			$	532			$	2,260
Operating expenses:
General and administrative			1,327				1,325				2,620				3,722
Research and development			675				480				1,323				1,178
Total operating expenses			2,002				1,805				3,943				4,900
Operating loss			(1,875	)			(1,676	)			(3,411	)			(2,640	)
Other income:
Interest and other income, net			6				4				13				5
Net loss		$	(1,869	)		$	(1,672	)		$	(3,398	)		$	(2,635	)
Basic and diluted net loss per share		$	(0.11	)		$	(0.10	)		$	(0.21	)		$	(0.17	)
Shares used in computation of basic and diluted net loss per share			16,540				16,540				16,540				15,102
Comprehensive Loss:
Net loss		$	(1,869	)		$	(1,672	)		$	(3,398	)		$	(2,635	)
Unrealized holding gain/(loss) on securities available for sale			(6	)			(16	)			2				(4	)
Comprehensive loss		$	(1,875	)		$	(1,688	)		$	(3,396	)		$	(2,639	)

 

See accompanying notes to unaudited condensed financial statements.

 

 

GENVEC, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands) 

(Unaudited)

 

		Six Months Ended
		June 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(3,398	)		$	(2,635	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			47				130
Bad debt expense			24				-
Non-cash charges for stock-based compensation			406				225
Loss on disposal of long-lived assets			-				22
Changes in current assets and liabilities, net			(643	)			32
Changes in non-current liabilities, net			4				52
Net cash used in operating activities			(3,560	)			(2,174	)
Cash flows from investing activities:
Purchases of property and equipment			(36	)			(39	)
Purchases of investment securities			-				(9,432	)
Proceeds from maturities of investment securities			2,335				800
Net cash provided by/(used in) investing activities			2,299				(8,671	)
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs			(8	)			10,678
Net cash provided by/(used in) financing activities			(8	)			10,678
Change in cash and cash equivalents			(1,269	)			(167	)
Beginning balance of cash and cash equivalents			7,968				5,249
Ending balance of cash and cash equivalents		$	6,699			$	5,082

 

See accompanying notes to unaudited condensed financial statements.

 

 

GENVEC, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

  

(1)

General

 

Basis of Presentation

 

The condensed financial statements included herein have been prepared by GenVec, Inc. (GenVec, we, our, or the Company) without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. We believe the disclosures are adequate to make the information presented not misleading.  The condensed financial statements included herein should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC.

 

In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of June 30, 2015 and December 31, 2014, the results of its operations for the three-month and six-month periods ended June 30, 2015 and June 30, 2014, and cash flows for the six-month periods ended June 30, 2015 and June 30, 2014.  The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

 

Business

 

GenVec is a clinical-stage biopharmaceutical company with an entrepreneurial focus on leveraging its proprietary adenovector gene delivery platform to develop a pipeline of cutting-edge therapeutics and vaccines. The Company is a pioneer in the design, testing and manufacture of adenoviral-based product candidates that can deliver on the promise of gene-based medicine. GenVec’s lead product candidate, CGF166, is licensed to Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and is currently in a Phase 1/2 clinical study for the treatment of hearing loss and balance disorders. In addition to our internal and partnered pipeline, we also focus on opportunities to license our proprietary technology platform, including vectors and production cell lines, for the development and manufacture of therapeutics and vaccines to the biopharmaceutical industry.

 

A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, the U.S. government, and Merial Limited to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), Enterovirus D68 (EV-D68) and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).

 

Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach has the potential to reduce side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.

 

Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders through the delivery of the atonal gene using GenVec’s adenovector technology has the potential to restore hearing and balance function. We are working with Novartis on the development of novel treatments for hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

  

 

We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program have been supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).

 

In February 2015, GenVec announced the initiation of the development of a vaccine against EV-D68, a strain of enterovirus responsible for causing potentially serious respiratory illness in people across 49 states and the District of Columbia in 2014. We believe that GenVec’s EV-D68 vaccine program will leverage the success we had with a similar type of virus, FMD, to develop a safe, effective molecular vaccine.

 

Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants or government or agency-sponsored studies that could reduce our development costs.

 

In March 2015, GenVec announced a collaboration with TheraBiologics, Inc. to develop cancer therapeutics leveraging both GenVec’s proprietary gene delivery platform and TheraBiologics’ proprietary neural stem cell technology. In exchange for an economic participation in the products being developed under the collaboration, we will contribute technology, know-how, vector construction, and technical and regulatory support to the program. TheraBiologics will be responsible for all other development costs.

 

In April 2015, GenVec announced a new research collaboration agreement with the Laboratory of Malaria Immunology and Vaccinology (LMIV) under which GenVec will build new vaccine candidates based on our proprietary adenovectors isolated from gorillas and designed to deliver novel antigens discovered at the LMIV.

 

In June 2015, GenVec announced a new multi-faceted collaboration agreement with the School of Medicine at Washington University at St. Louis (WUSTL) under which GenVec and WUSTL will create modified versions of GenVec’s gorilla adenovectors that incorporate specialized targeting antibodies on the surface of the vectors. These antibodies are produced only by camels, alpacas and other camelids and are smaller and more stable in intracellular environments than their mouse or human counterparts. The ultimate goal of this collaboration is to create highly targeted therapeutics and vaccines.

 

A key element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. We believe our approach will help us diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

 

As a result of the uncertainties involved in our business, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. However, we believe our current cash and investments and committed and expected revenues from our collaborators and strategic alliances are expected to be sufficient to continue our current research, development and collaborative activities into 2017.

 

 

Use of Estimates

  

The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Critical accounting policies involved in applying our accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates are also those which are reasonably likely to change from period to period, and would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate to accounting policies for strategic alliances and research contract revenues, research and development activities, and stock-based compensation. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates.

  

Revenue Recognition

 

Revenue is recognized when all four of the following criteria are met (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the services or products has occurred and (iv) collectability of the contract amounts is considered probable.

 

Our collaborative research and development agreements provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront non-refundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement, (ii) substantive effort is involved in achieving the milestone and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.

 

Research and development revenue from cost-reimbursement and cost-plus fixed-fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors, such as indirect rate estimates, are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.

 

Research and development revenue from fixed-price best efforts arrangements is recognized as earned based on the performance requirements of the contract. Revenue under these arrangements is recognized when customer acceptance has been received. During the period of performance, recoverable contract costs are accumulated on the balance sheet in other current assets, but no revenue or profit is recorded prior to customer acceptance of the contractually stated deliverables. Recoverable contract costs that are accumulated on the balance sheet include all direct costs associated with the arrangement and an allocation of indirect costs. Payments received in advance of customer acceptance are recorded as deferred revenue. Once customer acceptance has been received, revenue and recoverable contract costs are recognized. Over the course of the arrangement, we routinely evaluate whether revenue and profitability should be recognized in the current period. Any known or probable losses on projects are charged to operations in the period in which such losses are determined.

 

  

Recent Accounting Pronouncements

  

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The guidance provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The update is effective for reporting periods beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. Entities have the option of applying either a full retrospective approach to all periods presented or a prospective approach to all arrangements entered into or materially modified after the effective date. The adoption of this standard will not have any impact on the Company’s financial position, results of operations and disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  To simplify the presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.  The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016.  Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued.  The adoption of this standard will not have any impact on the Company’s financial position, results of operations and disclosures.

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20):  Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. Extraordinary items are transactions or events that are both unusual in nature and infrequent in occurrence, and, currently, are required to be presented separately in an entity’s income statement, net of income tax, after income from continuing operations. The changes eliminate the concept of extraordinary items and, therefore, the presentation of such items will no longer be required.  Notwithstanding this change, an entity will still be required to present and disclose transactions or events that are both unusual in nature and infrequent in occurrence in the notes to the financial statements.  The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  The adoption of this standard will not have any impact on the Company’s financial position, results of operations and disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Topic 205), which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new standard, disclosures are required when conditions or events give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The new standard is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this standard will not have any impact on the Company’s financial position and results of operations and, at this time, the Company does not expect any impact on its disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for us on January 1, 2018; however the standard’s effective date may be delayed. We are currently evaluating the potential impact that Topic 606 may have on our financial position and results of operations.

 

 

There are no other new accounting pronouncements issued but not effective until after June 30, 2015 that are expected to have a significant effect on our financial position or results of operations.

 

(2)	Fair Value Measurements

  

For assets and liabilities measured at fair value we utilize FASB Accounting Standards Codification (ASC) Section 820 “Fair Value Measurements and Disclosures” (ASC 820) which defines fair value and establishes a framework for fair value measurements. This standard establishes a three-level hierarchy for disclosure of fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs used to measure fair value are as follows:

 

•	Level 1 – Quoted prices in active markets for identical assets or liabilities;

  

•

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and other inputs that are observable (e.g., interest rates, yield curves, volatilities and default rates, among others) or that can be corroborated by observable market data;

 

•	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

 

The following table presents information about assets recorded at fair value on a recurring basis on the Condensed Balance Sheet as of June 30, 2015:

 

						Quoted Prices in
						Active Markets for				Significant
		Total Carrying				Identical				Other Observable
		Value on the				Assets/Liabilities				Inputs
(In thousands)		Balance Sheet				(Level 1)				(Level 2)
Assets:
Cash and cash equivalents		$	6,699			$	6,699			$	-
Investments, at fair value:
Corporate notes and bonds			4,348				-				4,348
Equity securities			43				43				-
Subtotal, Investments, at fair value			4,391				43				4,348
Total assets at fair value		$	11,090			$	6,742			$	4,348

 

 

The following table presents information about assets recorded at fair value on a recurring basis on the Condensed Balance Sheet as of December 31, 2014:

 

						Quoted Prices in
						Active Markets for				Significant
		Total Carrying				Identical				Other Observable
		Value on the				Assets/Liabilities				Inputs
(In thousands)		Balance Sheet				(Level 1)				(Level 2)
Assets:
Cash and cash equivalents		$	7,968			$	7,968			$	-
Investments, at fair value:
Corporate notes and bonds			6,475				-				6,475
U.S. government and agency securities			200				-				200
Equity securities			49				49				-
Subtotal, Investments, at fair value			6,724				49				6,675
Total assets at fair value		$	14,692			$	8,017			$	6,675

 

We determine fair value for marketable securities with Level 1 inputs through quoted market prices and have classified them as available-for-sale.  Our Level 2 investments consist of corporate notes and bonds maturing at various times into 2016.

  

We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee, including its future earnings potential, (ii) the investee’s credit rating and (iii) the current and expected market and industry conditions in which the investee operates. If a decline in the fair value of an investment is deemed by management to be other-than-temporary, we write down the cost basis of the investment to fair value, and the amount of the write down is included in net earnings. Such a determination is dependent on the facts and circumstances relating to each investment. We have determined there have been no such impairments in 2015 or 2014; however as of June 30, 2015, the Company has an accumulated unrealized loss of $31,000; $30,000 of which is related to our equity security holding, which has been in a loss position for over twelve months.

 

All unrealized holding gains or losses related to our investments in marketable securities are reflected in accumulated other comprehensive loss in stockholders’ equity. The change in accumulated other comprehensive loss was a net unrealized gain of $2,000 and a net unrealized loss of $4,000 for the six months ended June 30, 2015 and 2014, respectively.

 

  

(3)	Stock-Based Compensation Expense

 

The following table summarizes stock-based compensation expense related to employee stock options for the three-month and six-month periods ended June 30, 2015 and June 30, 2014, which was allocated as follows:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(in thousands)								(in thousands)
General and administrative		$	127			$	72				240				128
Research and development			85				55			$	166			$	97
		$	212			$	127			$	406			$	225

  

We use the Black-Scholes pricing model to value stock options.  The estimated fair value of employee stock options granted during the six-month periods ended June 30, 2015 and 2014 was calculated using the Black-Scholes model with the following weighted-average assumptions:

 

		For the Six				For the Six
		Months Ended				Months Ended
		June 30, 2015				June 30, 2014
Range of risk-free interest rate			1.42 - 1.49	%			1.87 - 1.99	%
Expected dividend yield			0.00	%			0.00	%
Expected volatility			103.64	%			97.91	%
Expected life (years)			6.23				6.05
Weighted-average fair value of options granted		$	2.41			$	3.06

 

 

The risk-free interest rate assumptions are based upon various U.S. Treasury rates as of the date of the grants.  The dividend yield is based on the assumption that we do not expect to declare a dividend over the life of the options.

 

The volatility assumptions for the 2015 and 2014 periods are based on the weighted average volatility for the most recent one-year period as well as the volatility over the expected life of 6.23 years and 6.05 years, respectively.  The expected life of employee stock options represents the weighted average combining the actual life of options that have already been exercised or cancelled with the expected life of all outstanding options.  The expected life of outstanding options is calculated assuming the options will be exercised at the midpoint between the applicable vesting date and the full contractual term.

 

The Company estimates forfeiture rates at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Forfeitures are estimated based on the demographics of current option holders and standard probabilities of employee turnover.  We do not record tax-related effects on stock-based compensation given our historical and anticipated operating experience and offsetting changes in our valuation allowance which fully reserves against potential deferred tax assets.

 

  

Stock Options

 

The following table summarizes the stock option activity for the six months ended June 30, 2015:  

 

						Weighted				Weighted
						average				average				Aggregate
		Number				exercise				contractual				intrinsic
(in thousands,		of shares				price				life (years)				value
except exercise price and contractual term data)
Stock options outstanding, January 1, 2015			1,679			$	4.74
Granted			465				2.97
Expired			(14	)			18.37
Stock options outstanding at June 30, 2015			2,130			$	4.27				7.36			$	196
Vested or expected to vest at June 30, 2015			1,955			$	4.38				7.20			$	187
Exercisable at June 30, 2015			1,264			$	5.28				6.27			$	117

  

Unrecognized stock-based compensation related to stock options was approximately $1.7 million as of June 30, 2015. This amount is expected to be expensed over a weighted average period of 3.0 years.  There were no options exercised during the six-month periods ended June 30, 2015 or 2014.

  

The following table summarizes information about our stock options outstanding and exercisable as of June 30, 2015:  

  

				Outstanding												Exercisable
								Weighted
								average				Weighted								Weighted
								remaining				average								average
Range of exercise				Number				contractual				exercise				Number				exercise
prices				of shares				life (in years)				price				of shares				price
				(number of shares in thousands)
$0.00 - $10.00					1,936				7.84			$	2.77				1,070			$	2.76
$10.01 - $20.00					110				1.92				15.50				110				15.50
$20.01 - $30.00					82				3.50				23.57				82				23.57
$30.01 - $41.00					2				1.80				41.00				2				41.00
					2,130				7.36			$	4.27				1,264			$	5.28

  

  

Restricted Stock Awards

  

In September 2013, the Company issued 730,000 restricted shares of common stock under the Company’s 2011 Omnibus Incentive Plan. The following table summarizes the status of the Company’s unvested restricted stock awards as of June 30, 2015:

  

						Weighted
						Average				Aggregate
		Number				Grant Date				Intrinsic
(in thousands, except per share data)		of Shares				Fair Value				Value
Non-vested restricted stock awards at January 1, 2014			730			$	0.27
Granted			-				-
Vested			-				-
Forfeited			-				-
Non-vested restricted stock awards at December 31, 2014			730				-
Granted			-				-
Vested			-				-
Forfeited			-				-
Non-vested restricted stock awards at June 30, 2015			730			$	0.27			$	194
Expected to vest at June 30, 2015			704			$	0.27			$	187

  

Restricted stock awarded in 2013 vests 100% two years after the date of grant. The fair value of the grant is charged to operations over the vesting period. Unrecognized stock-based compensation expense related to restricted stock awards was approximately $52,000 as of June 30, 2015. This amount is expected to be expensed over a weighted average period of 0.2 years.

 

(4)          Net Loss per Share

  

Basic earnings per share is computed based upon the net loss available to common stock stockholders divided by the weighted average number of common stock shares outstanding during the period. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share only when the effect of the inclusion would be dilutive. For the six months ended June 30, 2015 and 2014 all common stock equivalent shares associated with our stock option plans, unvested restricted shares, and stock equivalent shares associated with our warrants were excluded from the denominator in the diluted loss per share calculation as their inclusion would have been antidilutive.

  

(5)          Stockholders’ Equity

  

In January 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. The 2014 shelf registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities in a public primary offering with a value exceeding more than one-third of our public float in any 12-month period so long as our public float remains below $75.0 million. As of July 31, 2015, pursuant to the Equity Distribution Agreement and the Registered Direct Offering described below we have sold approximately $11.6 million of securities in the aggregate.

  

On February 11, 2014, we entered into an Equity Distribution Agreement (the EDA) with Roth Capital Partners, LLC (Roth Capital Partners), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth Capital Partners (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth Capital Partners, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to use the net proceeds from the sale of shares in the ATM Offering, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of July 31, 2015, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.

  

 

On March 18, 2014, we sold 2,870,000 shares of our common stock in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of $3.15 per share, resulting in gross proceeds of approximately $9.0 million. We intend to use the net proceeds, $8.4 million, from the sale of shares in the Registered Direct Offering for operating costs, working capital and general corporate purposes.

  

As of June 30, 2015, pursuant to the Equity Distribution Agreement and the Registered Direct Offering we have sold 3,591,677 shares of our common stock since the 2014 shelf registration statement became effective on February 11, 2014 for gross proceeds of $11.6 million; all of these sales were completed prior to March 31, 2014.  These sales have resulted in proceeds, net of issuance costs of approximately $10.7 million.

  

Warrants to purchase common stock were granted to organizations and institutions in conjunction with certain licensing and funding activities. On February 1, 2015, 420,000 warrants with an exercise price of $27.50 issued in February 2010 expired. As a result of the expiration of the warrants on February 1, 2015, we have no outstanding warrants.  There were no warrants exercised during the six months ended June 30, 2015.

  

(6)          Collaborative Agreements

  

In January 2010, we signed a research collaboration and license agreement (the Agreement) with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under the terms of the Agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. In addition, the Agreement allows us to receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. During the three months ended June 30, 2015 and 2014, we recognized $2,000 and $0.1 million, respectively, for work performed under the Agreement. For both the six-month periods ended June 30, 2015 and 2014, we recognized $0.1 million for work performed under the Agreement.

  

Under the Agreement, we are eligible to receive milestones payments of up to $206.6 million; including up to $0.6 million for the achievement of preclinical development activities, up to $26.0 million for the achievement of clinical milestones (including the non-rejection of an IND with respect to a covered product, the first patient visit in Phase I, Phase IIb and Phase III clinical trials), up to $45.0 million for the receipt of regulatory approvals and up to $135.0 million for sales-based milestones. During each of the years ended December 31, 2010 and 2011, we recognized $0.3 million of milestone payments as a result of the successful completion of preclinical development activities. In 2012 and 2013, there were no milestone payments received. In February 2014, we achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection by the FDA of the IND filed by Novartis for CGF166. In October 2014, we achieved the fourth milestone in the collaboration with Novartis. The $3.0 million milestone was triggered when the first patient was dosed in a Phase 1/2 clinical trial sponsored by Novartis utilizing GenVec technology for the treatment of severe-to-profound bilateral hearing loss.

 

As of June 30, 2015, milestones available under the Agreement include $21.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. We are also entitled to royalties on future sales. There have been no milestones achieved during 2015.

  

In August 2010, we signed an agreement for the supply of services relating to development materials with Novartis, related to our collaboration in hearing loss and balance disorders. Under this agreement, valued at $14.9 million, we agreed to manufacture clinical trial material for up to two lead candidates. For both the three-month periods ended June 30, 2015 and 2014 we recognized $0.1 million for services performed under this agreement. For both the six-month periods ended June 30, 2015 and 2014 we recognized $0.1 million for services performed under this agreement.

 

 

In March 2015, we announced a collaboration with TheraBiologics, Inc. to develop cancer therapeutics leveraging both GenVec’s proprietary gene delivery platform and TheraBiologics’ proprietary neural stem cell technology. In exchange for an economic participation in the products being developed under the collaboration, we will contribute technology, know-how, vector construction, and technical and regulatory support to the program. TheraBiologics will be responsible for all other development costs.

  

In April 2015, we announced a new Research Collaboration Agreement with the Laboratory of Malaria Immunology and Vaccinology (LMIV) under which we will build new vaccine candidates based on our proprietary adenovectors isolated from gorillas and designed to deliver novel antigens discovered at the LMIV.

  

In June 2015, GenVec announced a new multi-faceted collaboration agreement with the School of Medicine at Washington University at St. Louis (WUSTL) under which GenVec and WUSTL will create modified versions of GenVec’s gorilla adenovectors that incorporate specialized targeting antibodies on the surface of the vectors. These antibodies are produced only by camels, alpacas and other camelids and are smaller and more stable in intracellular environments than their mouse or human counterparts. The ultimate goal of this collaboration is to create highly targeted therapeutics and vaccines.

 

(7)          Litigation

 

On February 3, 2012, a putative class action lawsuit captioned Satish Shah v. GenVec, Inc., et al. Civil Action. No. 8:12 CV-00341-DKC was commenced in the United States District Court for the District of Maryland against the Company, Paul H. Fischer, Douglas J. Swirsky and Mark O. Thornton. Following appointment of a Lead Plaintiff group in April 2012, Lead Plaintiffs filed a pleading titled Amended Class Action Complaint for Violations of the Federal Securities Laws on July 6, 2012 (the Amended Class Action Complaint). In the Amended Class Action Complaint, Lead Plaintiffs asserted claims, purportedly on behalf of a class of persons who had purchased or acquired Company common stock between March 12, 2009 and March 30, 2010 (the Class Period), that the Company and the individual defendants had violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Lead Plaintiffs alleged generally that the Company and the individual defendants had made materially false or misleading statements or omissions concerning the prospects for the Company’s leading product candidate at the time, TNFerade, and the outcome of the then-ongoing clinical trial for TNFerade. Lead Plaintiffs alleged that these misrepresentations resulted in the Company’s common stock trading at artificially inflated prices throughout the Class Period. Lead Plaintiffs sought unspecified damages. On September 4, 2012, the Company and the individual defendants moved to dismiss the Amended Class Action Complaint in its entirety for failure to state a claim upon which relief can be granted. On September 20, 2013, the Court granted this motion and dismissed the case in its entirety and with prejudice. Lead Plaintiffs did not file an appeal.

  

On March 12, 2012, a putative shareholder derivative action was commenced in the United States District Court for the District of Maryland against certain current and former members of our Board of Directors and the Company as a nominal defendant. The case was styled Garnitschnig v. Horovitz, et al. and generally arose out of the matters alleged to underlie the securities action. The plaintiff, who purported to bring the action derivatively on behalf of the Company, originally alleged that the individual defendants violated their fiduciary duties, wasted corporate assets and were unjustly enriched by the receipt of compensation while serving as our directors. On November 1, 2013, the plaintiff in the Garnitschnig action filed an Amended Verified Shareholder Derivative and Class Action Complaint (the Amended Complaint) that supersedes the previous Complaint and asserted claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets and alleged violations of the duty of candor. The plaintiff, who now purported to bring the Amended Complaint both derivatively and as a shareholder class action, alleged that certain current and former members of the Board of Directors exceeded their authority under the Company’s 2011 Omnibus Incentive Plan (the 2011 Plan) by exceeding certain limits applicable to both stock options and restricted stock. The Amended Complaint further alleged that the Company’s Proxy Statement was materially false and misleading for failing to disclose the alleged violations of the 2011 Plan.

  

 

On October 17, 2014, a second putative class and derivative action was filed in the United States District Court for the District of Maryland styled Galitsis v. Swirsky, et. al., Case No. 14-cv-3265. The Galitsis Complaint contains the same allegations and asserts almost all the same claims as those in the Garnitschnig Amended Complaint Shortly after the Galitsis action was filed, counsel for the plaintiff (who was also counsel for the plaintiff in the Garnitschnig action) voluntarily dismissed the Garnitschnig action.

 

The Company and the individual defendants vigorously deny all liability with respect to the claims alleged in the Galitsis action. However, the Company considered it desirable that the action be settled to avoid the substantial burden, expense, risk, inconvenience and distraction of continued litigation and to fully and finally resolve the settled claims. On or about November 3, 2014, the parties to the Galitsis action reached an agreement in principle set forth in a Settlement Term Sheet to settle the Galitsis action. Subsequently, on January 23, 2015, the parties executed and filed with the Court a Stipulation of Settlement embodying terms previously set forth in the Settlement Term Sheet. On May 7, 2015, the court entered orders approving the settlement and awarding the plaintiff’s attorneys in the Galitsis action $325,000 in attorneys’ fees and expenses. The court order approving the settlement resolves all of the claims that were or could have been brought in the Galitsis action, including all claims related to awards made pursuant to the 2011 Plan.

  

(8)          Restructuring

  

On January 10, 2014, we relocated our corporate offices from 65 W. Watkins Mill Road in Gaithersburg, MD to 910 Clopper Road, Suite 220N in Gaithersburg, MD. As a result of our relocation, the Company incurred $0.7 million of expense in the first quarter of 2014. This amount comprises $0.6 million for accrued rent expense and $57,000 of accelerated depreciation and amortization for long-lived assets that are not currently expected to be utilized after our relocation. Additionally, the Company incurred $39,000 of accelerated depreciation for long-lived assets that have been taken out of service in the third quarter of 2014. Accrued rent expense for the Company’s lease obligation for the former corporate offices, which ran through October 31, 2014 was paid monthly over the remaining lease term. At June 30, 2015, we have no remaining liability related to our former corporate offices. 

  

At June 30, 2015 and December 31, 2014, liabilities of approximately $0 and $128,000, respectively, remain in accrued expenses for the unpaid portion of the severance costs related to the departure of Cynthia Collins, our former President and Chief Executive Officer.

 

 

 

GENVEC, INC.

 

FORM 10-Q

 

FORWARD-LOOKING STATEMENTS

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Forward-looking statements also may be included in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements and are based on management’s estimates, assumptions and projections that are subject to risks and uncertainties. These statements can generally be identified by the use of forward-looking words like “believe,” “expect,” “intend,” “may,” “will,” “should,” “anticipate,” or similar terminology.

 

Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date we make them, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to:

 

	●	decisions we make with respect to the future and strategic direction of our Company;

	●	our product candidates being in the early stages of development;

	●	our ability to find collaborators and, if we find collaborators, to mutually agree on terms for our collaborations;

	●	our reliance on collaborators;

	●	the timing, amount and availability of revenues from our government-funded vaccine programs;

	●	uncertainties with, and unexpected results and related analyses relating to, preclinical development and clinical trials of our product candidates;

	●	the timing and content of future Food and Drug Administration (FDA) regulatory actions related to us, our product candidates, or our collaborators;

	●	our financial condition, the sufficiency of our existing cash, cash equivalents, marketable securities and cash generated from operations, and our ability to lower our operating costs; and

	●	the scope and validity of patent protection for our technology and product candidates and our ability to commercialize technology and products without infringing the patent rights of others.

Further information on the factors and risks that could affect our business, financial condition and results of operations is set forth under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014 and is contained in our other filings with the SEC. The filings are available on our website at www.genvec.com or at the SEC’s website, www.sec.gov.

 

Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this report, and we assume no duty to update our forward-looking statements.

 

 

ITEM 2.

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

 

OVERVIEW

 

GenVec, Inc. (GenVec, we, our, or the Company) is a clinical-stage biopharmaceutical company with an entrepreneurial focus on leveraging its proprietary adenovector gene delivery platform to develop a pipeline of cutting-edge therapeutics and vaccines. The Company is a pioneer in the design, testing and manufacture of adenoviral-based product candidates that can deliver on the promise of gene-based medicine. GenVec’s lead product candidate, CGF166, is licensed to Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and is currently in a Phase 1/2 clinical study for the treatment of hearing loss and balance disorders. In addition to our internal and partnered pipeline, we also focus on opportunities to license our proprietary technology platform, including vectors and production cell lines, for the development and manufacture of therapeutics and vaccines to the biopharmaceutical industry.

 

A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, the U.S. government, and Merial Limited to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), Enterovirus D68 (EV-D68) and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).

 

Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach has the potential to reduce side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.

 

Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders indicate that the delivery of the atonal gene using GenVec’s adenovector technology has the potential to restore hearing and balance function. We are working with Novartis on the development of novel treatments for hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

 

We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program have been supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).

 

In February 2015, GenVec announced the initiation of the development of a vaccine against EV-D68, a strain of enterovirus responsible for causing potentially serious respiratory illness in people across 49 states and the District of Columbia in 2014. We believe that GenVec’s EV-D68 vaccine program will leverage the success we had with a similar type of virus, FMD, to develop a safe, effective molecular vaccine.

 

Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants or government or agency-sponsored studies that could reduce our development costs.

 

 

In March 2015, GenVec announced a collaboration with TheraBiologics, Inc. to develop cancer therapeutics leveraging both GenVec’s proprietary gene delivery platform and TheraBiologics’ proprietary neural stem cell technology. In exchange for an economic participation in the products being developed under the collaboration, we will contribute technology, know-how, vector construction, and technical and regulatory support to the program. TheraBiologics will be responsible for all other development costs.

 

In April 2015, GenVec announced a new research collaboration agreement with the Laboratory of Malaria Immunology and Vaccinology (LMIV) under which GenVec will build new vaccine candidates based on our proprietary adenovectors isolated from gorillas and designed to deliver novel antigens discovered at the LMIV.

 

In June 2015, GenVec announced a new multi-faceted collaboration agreement with the School of Medicine at Washington University at St. Louis (WUSTL) under which GenVec and WUSTL will create modified versions of GenVec’s gorilla adenovectors that incorporate specialized targeting antibodies on the surface of the vectors. These antibodies are produced only by camels, alpacas and other camelids and are smaller and more stable in intracellular environments than their mouse or human counterparts. The ultimate goal of this collaboration is to create highly targeted therapeutics and vaccines.

 

A key element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. We believe our approach will help us diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

 

As a result of the uncertainties involved in our business, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. However, we believe our current cash and investments and committed and expected revenues from our collaborators and strategic alliances are expected to be sufficient to continue our current research, development and collaborative activities into 2017.

 

As a biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties.  Material risks and uncertainties relating to our business and our industry are described in Item 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014. The description of our business in this Quarterly Report on Form 10-Q should be read in conjunction with those material risks and uncertainties.

 

FINANCIAL OVERVIEW FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Results of Operations

 

GenVec’s net loss was $1.9 million or $0.11 per share on revenues of $0.1 million for the three months ended June 30, 2015. This compares to a net loss of $1.7 million or $0.10 per share on revenues of $0.1 million in the same period in the prior year. GenVec’s net loss was $3.4 million or $0.21 per share on revenues of $0.5 million for the six months ended June 30, 2015. This compares to a net loss of $2.6 million or $0.17 per share on revenues of $2.3 million in the same period in the prior year. Included in our net loss for the first six months of 2015 was stock-based compensation expense of $406,000 as compared to $225,000 for the same period in the prior year. GenVec ended the second quarter of 2015 with $11.1 million in cash, cash equivalents and liquid investments.

 

 

Revenue

 

Revenues for the three-month and six-month periods ended June 30, 2015 were $0.1 million and $0.5 million, respectively, which represent decreases of 1% and 76% as compared to $0.1 million and $2.3 million in the comparable prior year periods.

 

Revenues for the three-month and six-month periods ended June 30, 2015 were derived from our collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders and from our funded research and development programs with the Department of Homeland Security (DHS), and National Institutes of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH), both of which use GenVec’s proprietary adenovector technology for the development of either vaccine candidates against foot-and-mouth disease (FMD) for livestock or vaccines against malaria.

 

In January 2010, we signed a research collaboration and license agreement (the Agreement) with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under the terms of the Agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. In addition, the Agreement allows us to receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. During the three months ended June 30, 2015 and 2014, we recognized $2,000 and $0.1 million, respectively, for work performed under the Agreement. For both the six-month periods ended June 30, 2015 and 2014, we recognized $0.1 million for work performed under the Agreement.

 

Additionally, since the inception of the Agreement, we have been eligible to receive up to $206.6 million in milestone payments if certain clinical, regulatory and sales milestones are met. To date, we received a total of $5.6 million in milestone payments under the collaboration. In September 2010, we announced that we had achieved the first milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities. In December 2011, we announced that we had achieved the second milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities. In February 2014, we announced that we had achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection of the Investigational New Drug application filed by Novartis for CGF166 with the U.S. Food and Drug Administration (FDA). In October 2014, we announced that we had achieved the fourth milestone in the collaboration with Novartis. The $3.0 million milestone was triggered by the first patient treated with CGF166 in a Phase 1/2 clinical trial sponsored by Novartis utilizing GenVec technology for the treatment of severe-to-profound bilateral hearing loss. As of July 31, 2015, milestones available under the Agreement include $21.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. We are also entitled to royalties on future sales.

 

In August 2010, the Company and Novartis entered into a development agreement related to the supply of clinical trial material in connection with activities under the Agreement. For both the three-month periods ended June 30, 2015 and 2014 we recognized $0.1 million for services performed under this development agreement. For both the six-month periods ended June 30, 2015 and 2014 we recognized $0.1 million for services performed under this development agreement.

 

 

Revenues recognized under our various funded research projects for the three-month and six-month periods ended June 30, 2015 and 2014 are as follows: 

		Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)			2015				2014				2015				2014
Hearing loss and balance disorders		$	63			$	119			$	217			$	2,195
Animal Health			-				10				180				33
Malaria			64				-				85				32
Other			-				-				50				-
Total		$	127			$	129			$	532			$	2,260

 

The decrease in revenue in the three-month period ended June 30, 2015 as compared to the comparable prior year period was due mainly to reduced work scope under our hearing loss and balance disorders and animal health programs partially offset by increased work efforts under our malaria program. The decrease in revenue for the six-month period ended June 30, 2015 as compared to the comparable prior year period was primarily a result of a decrease in revenue of $2.0 million associated with our hearing loss and balance disorders program with Novartis. The decrease in revenue under the Novartis collaboration is mainly a result of the achievement of the third milestone under the terms of our collaboration with Novartis described above with no comparable achievement in the current period. This decrease was partially offset by an increase in revenue of $0.1 million associated with our animal health program as a result of increased work scope. Our work under the contract with the DHS related to our animal health program was completed in February 2015.

 

Expenses

 

Operating expenses were $2.0 million and $3.9 million for the three-month and six-month periods ended June 30, 2015, respectively, which represents an increase of 11% and a decrease of 20% as compared to $1.8 million and $4.9 million in the comparable prior year periods.

 

General and administrative expenses of $1.3 million for the three-month period ended June 30, 2015 were in line with the three-month period ended June 30, 2014. For the six-month period ended June 30, 2015, general and administrative expenses of $2.6 million decreased 30% as compared to $3.7 million in the comparable period in 2014. The decrease in the six-month period ended June 30, 2015 was primarily attributable to lower facility costs related to the relocation of our corporate offices and professional costs, partially offsetting these decreases were increased personnel costs.

 

Research and development expenses for the three-month and six-month periods ended June 30, 2015 increased 41% and 12%, respectively, from $0.5 million and $1.2 million in 2014 to $0.7 million and $1.3 million in 2015. The increases in both the three-month and six-month periods ended June 30, 2015 were primarily due to increased personnel costs and to a lesser extent in the three-month period ended June 30, 2015, professional costs as compared to the comparable prior year periods.

  

Liquidity and Capital Resources

 

We have experienced significant losses since our inception. As of June 30, 2015 we have an accumulated deficit of  $281.7 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

 

 

As of June 30, 2015, cash, cash equivalents and liquid investments totaled $11.1 million as compared to $14.7 million on December 31, 2014.

 

For the six months ended June 30, 2015, we used $3.6 million of cash for operating activities. This consisted of a net loss for the period of $3.4 million, which included approximately $24,000 of bad debt expense, $47,000 of non-cash depreciation and amortization, $0.4 million of non-cash stock-based compensation, $0.6 million used by the net change in current assets and liabilities and $4,000 provided by the net change in non-current liabilities.  Net cash was used primarily for our internally funded research and development programs and general and administrative activities.

 

For the six months ended June 30, 2014, we used $2.2 million of cash for operating activities. This consisted of a net loss for the period of $2.6 million, which included approximately $0.1 million of non-cash depreciation and amortization, $0.2 million of non-cash stock-based compensation, $32,000 provided by the net change in current assets and liabilities and $52,000 provided by the net change in non-current liabilities. Net cash was used primarily for our internally funded research and development programs and general and administrative activities.

 

Net cash provided by investing activities during the six months ended June 30, 2015 was $2.3 million. This consisted of proceeds from the sale and maturity of investments of $2.3 million partially offset by $36,000 of cash used for the purchase of furniture and equipment.

 

Net cash used in investing activities during the six months ended June 30, 2014 was $8.7 million. This consisted of $39,000 of cash used for the purchase of laboratory equipment and $9.4 million of cash used to purchase investment securities during the period offset by proceeds from the sale and maturity of investments of $0.8 million.

 

Net cash used in financing activities during the six months ended June 30, 2015 was $8,000, which represent the issuance costs of common stock issued under the terms of our ATM, described below, in 2014. 

 

Net cash provided by financing activities during the six months ended June 30, 2014 was $10.7 million, which was derived from the issuance of common stock, net of issuance costs. 

 

Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs.

 

Since our initial public offering, we have raised capital by offering shares of our common stock and warrants to purchase shares of our common stock in a variety of offerings. On May 29, 2014, 711,539 warrants with an exercise price of $8.58 issued in May 2009 expired. On February 1, 2015, 420,000 warrants with an exercise price of $27.50 issued in February 2010 expired. As a result, as of July 31, 2015, we have no warrants outstanding.

 

On September 7, 2011, we entered into a Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Stockholder Rights Agreement was not adopted in response to any specific effort to acquire control of the Company. In connection with the adoption of the new Stockholder Rights Agreement, the Company’s Board of Directors declared a dividend of one preferred stock purchase right, or Right, for each outstanding share of common stock to stockholders of record as of the close of business on September 7, 2011. Initially, the Rights will be represented by GenVec’s common stock certificates or book entry notations, will not be traded separately from the common stock and will not be exercisable. In the event that any person acquires beneficial ownership of 20% or more of the outstanding shares of GenVec’s common stock, or upon the occurrence of certain other events, each holder of a Right, other than the acquirer, would be entitled to receive, upon payment of the purchase price, which is initially set at $32 per Right, a number of shares of GenVec common stock having a value equal to two times such purchase price. The Company’s Board of Directors is entitled to redeem the Rights at $0.001 per right at any time before a person or group has acquired 20% or more of the Company’s common stock. The Rights will expire on September 7, 2021, subject to the Company’s right to extend such date, unless earlier redeemed or exchanged by the Company or terminated. The Rights will at no time have any voting rights. The Company has authorized 30,000 shares of Series B Junior Participating Preferred Stock in connection with the adoption of the new Stockholder Rights Agreement. There was no Series B Junior Participating Preferred Stock issued or outstanding as of June 30, 2015.

 

 

On January 23, 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. As of July 31, 2015, we have sold approximately $11.6 million of common stock under the 2014 shelf registration statement. The 2014 shelf registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities in a public primary offering using Form S-3 with a value exceeding more than one-third of our public float in any 12-month period so long as our public float remains below $75.0 million. Our last sales under the Form S-3 were in March 2014, in the amount of $9.0 million.

 

On February 11, 2014, we entered into an Equity Distribution Agreement (the EDA) with Roth Capital Partners, LLC (Roth Capital Partners), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth Capital Partners (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth Capital Partners, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to use the net proceeds from the sale of shares in the ATM Offering, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of July 31, 2015, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.

 

On March 18, 2014, we sold 2,870,000 shares of our common stock, par value $0.001, in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of $3.15 per share, resulting in gross proceeds of approximately $9.0 million.

 

As of June 30, 2015, pursuant to the Equity Distribution Agreement and the Registered Direct Offering we have sold 3,591,677 shares of our common stock since the 2014 shelf registration statement became effective on February 11, 2014 for gross proceeds of $11.6 million; all of these sales were completed prior to March 31, 2014.  These sales have resulted in proceeds, net of issuance costs of approximately $10.7 million.

 

Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. We currently estimate we will use between $5 million and $7 million of cash during the four quarters ending June 30, 2016. Our estimate includes approximately $0.3 million in contractual obligations. Based on this estimate we have sufficient resources to fund our operations into 2017.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

We have no off-balance sheet financing arrangements other than in connection with our operating leases, which are described in Note 7, Commitments and Contingencies, of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Significant Accounting Policies and Estimates

 

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes in our significant accounting policies or critical accounting estimates since the end of 2014.

 

 

Recently Issued Accounting Pronouncements

 

For a discussion of recently issued accounting pronouncements, refer to the section titled “Recent Accounting Pronouncements” within Note 1 General in the Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

Not applicable.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

As of June 30, 2015, under the supervision and with the participation of our president, chief executive officer and corporate secretary (our principal executive officer) and our sr. director, accounting & finance, corporate controller and treasurer (our principal financial officer), we have reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our president, chief executive officer and corporate secretary and our sr. director, accounting & finance, corporate controller and treasurer have concluded that, as of June 30, 2015, these disclosure controls and procedures are effective at the reasonable assurance level in alerting them in a timely manner to material information required to be included in our periodic SEC reports.

 

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

For a discussion of our material pending legal proceedings, refer to Note 7 “Litigation” in the Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q.

 

ITEM 1A.

RISK FACTORS

 

Investing in our securities involves a high degree of risk. You should carefully consider the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, as well as other information contained in that report, in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, and in the other reports we file with the SEC.  

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None

 

ITEM 5.

OTHER INFORMATION

 

None

 

 

ITEM 6.

EXHIBITS

31.1		Rule 13a-14(a) Certification by Principal Executive Officer. (filed herewith)
31.2		Rule 13a-14(a) Certification by Principal Financial Officer. (filed herewith)
32.1		Rule 13a-14(b) Certification by Principal Executive Officer pursuant to 18 United States Code Section 1350. (filed herewith)
32.2		Rule 13a-14(b) Certification by Principal Financial Officer pursuant to 18 United States Code Section 1350. (filed herewith)
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

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.

 

		GENVEC, INC.
		(Registrant)
Date:   August 7, 2015	By:	/s/ Douglas J. Swirsky
		Douglas J. Swirsky
		President, Chief Executive Officer, Corporate Secretary and Director