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GNVC > SEC Filings for GNVC > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for GENVEC INC


13-Aug-2013

Quarterly Report


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 biopharmaceutical company with differentiated, proprietary technologies that we believe could be used to create superior therapeutics and vaccines. GenVec has been working with leading companies and organizations such as Novartis AG, Merial Limited, and the U.S. Government to support a portfolio of product programs that address the prevention and treatment of a number of significant human and animal health concerns.

On May 24, 2013, the Company's Board of Directors approved a Plan of Complete Liquidation and Dissolution of the Company (Plan of Dissolution), subject to stockholder approval. The Board of Directors concluded, after extensive and careful consideration of our strategic alternatives and the terms and conditions of the Plan of Dissolution, that the liquidation and dissolution of the Company, pursuant to the Plan of Dissolution, is in the best interests of the Company and our stockholders.

Since announcing the approval of the Plan of Dissolution by the Board of Directors, the Company received several proposals for transactions with the Company, including transactions to purchase all or portions of the Company's assets or to engage in mergers with private companies that are looking to use the company principally as a means to become publicly traded. As part of the Board of Directors' efforts to seek to maximize the value for stockholders and to provide stockholders with appropriate information for their consideration, the Board of Directors considered these proposals. Given that it was considering these proposals, the Board of Directors also authorized Cannacord Genuity to solicit additional proposals for the acquisition of our assets, and on June 24, 2013, the Company announced publicly that it had received and was considering proposals. The Board of Directors viewed the ability of the counterparties to complete the proposed transactions, in a timely manner, if at all, as extremely risky, the prospects for preserving value as very uncertain and the likelihood of receiving significant consideration in an asset sale as unlikely. Accordingly, at a meeting on August 7, 2013, the Board of Directors unanimously concluded that proceeding with seeking stockholder approval for the liquidation and dissolution of the Company, and receiving that approval, was in the best interests of the Company and its stockholders.

If the Company's stockholders approve the Plan of Dissolution, our Board of Directors will have the discretion to, at such times as the Board of Directors deems appropriate or advisable, file a certificate of dissolution with the Delaware Secretary of State, complete the liquidation of the Company's assets, satisfy the Company's remaining obligations and make distributions to the Company's stockholders of any available liquidation proceeds. Following stockholder approval of the Plan of Dissolution and the filing of the certificate of dissolution, the Company would seek to delist its common stock from NASDAQ. The Company may, however, abandon the Plan of Dissolution if the Board of Directors determines that, in light of new proposals presented or changes in circumstances, liquidation and dissolution pursuant to the Plan of Dissolution are no longer advisable and in the best interests of the Company and its stockholders.

Taking into account the approval of the Plan of Dissolution by the Board of Directors and the proposals received, and in anticipation of potentially winding down all of our business, we are currently working to terminate or further curtail a significant portion of our operations. In furtherance of these efforts, we announced on June 28, 2013, that we terminated the employment of 30 of our then-remaining 41 employees.

As of the date of this report, and in light of the Plan of Dissolution discussed above, the termination of the substantial number of our employees, and our efforts to terminate or further curtail a significant portion of our operations, much of our development programs are not being supported by us at the levels at which they were previously supported, or at all, and we are actively seeking to terminate ongoing contractual obligations. On July 29, 2013, for example, we entered into a modification with the U.S. Naval Medical Logistics Command to terminate contractual obligations under our agreement related to dengue fever and malaria vaccine development efforts at the U.S. Naval Medical Research Center.

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 reduces 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 that causes production of an antigen, which then stimulates the desired immune reaction by the body.

Our research and development activities have been focused on identifying product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders has indicated that the delivery of the atonal gene using GenVec's adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and 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.

There is no certainty that the Plan of Dissolution will provide our stockholders with meaningful returns, or that we will be able to execute on any of the proposals that we have received. We anticipate that there will be significant costs associated with the winding down of our operations, which will reduce the portion of our cash and investments available for distribution to our stockholders. The interim condensed financial statements are prepared on a going concern basis and do not include adjustments, if any, that would be required if our stockholders approved the Plan of Dissolution.

On June 25, 2013, we received a notice from The NASDAQ Stock Market LLC stating that the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with the minimum bid price requirement for continued listing set forth in Marketplace Rule 5550(a)(2). The notification letter states that we will be afforded 180 calendar days, or until December 23, 2013, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days. NASDAQ may, in its discretion, require our common stock to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that the Company has demonstrated an ability to maintain long-term compliance.

If we do not regain compliance by December 23, 2013, but meet the continued listing requirement for market value of publicly held shares and all other applicable standards for initial listing on the NASDAQ Capital Market (with the exception of the minimum bid price requirement), the Company may be eligible for an additional 180-day compliance period. Unless NASDAQ determines that it does not appear possible for the Company to cure the deficiency, we will be granted the additional 180-day compliance period if we notify NASDAQ of our intent to come into compliance with the minimum bid price requirement. If the Company is not eligible for the additional 180-day compliance period, NASDAQ will provide written notice that our securities will be delisted. At that time, we may appeal the delisting determination to an independent Hearings Panel authorized by the NASDAQ Board of Directors.

We intend to continue actively monitoring the bid price for our common stock between now and December 23, 2013, and will consider available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement. There is no assurance, however, that the Company will pursue efforts to continue to be listed, that the Company will be eligible for an additional compliance period or that our common stock will not be delisted, particularly given the Board of Directors' approval of the Plan of Dissolution.

Material risks and uncertainties relating to our business and our industry are described in Item 1A of Part II this Report on Form 10-Q and in Item 1A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The description of our business in this Form 10-Q should be read in conjunction with the information described in Item 1A of Part II of the Form 10-K for the fiscal year ended December 31, 2012.

FINANCIAL OVERVIEW FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

Results of Operations

GenVec's net loss was $3.1 million (or $0.24 per share) on revenues of $0.7 million for the three months ended June 30, 2013. This compares to a net loss of $3.7 million (or $0.28 per share) on revenues of $2.5 million in the same period in the prior year. GenVec's net loss was $6.2 million (or $0.48 per share) on revenues of $2.0 million for the six months ended June 30, 2013. This compares to a net loss of $6.9 million (or $0.53 per share) on revenues of $5.7 million in the same period in the prior year. Included in our net loss for the first six months of 2013 was stock-based compensation expense of $626,000, as compared to $638,000 for the same period in the prior year. GenVec ended the second quarter of 2013 with $9.3 million in cash, cash equivalents, and investments.

Revenue

Revenues for the three-month and six-month periods ended June 30, 2013 were $0.7 million and $2.0 million, which represent decreases of 71% and 66%, respectively, as compared to $2.5 million and $5.7 million in the comparable prior year period.

Revenues for the three-month and six-month periods ended June 30, 2013 were derived from the collaboration with Novartis Institutes for Biomedical Research Inc. (Novartis) to discover and develop novel treatments for hearing loss and balance disorders and from the Company's funded research and development programs with the DHS, NIAID, and NIH, all of which use GenVec's proprietary adenovector technology for the development of either vaccine candidates against FMD for livestock or vaccines against malaria, HIV, RSV, and HSV.

We entered into a research collaboration and license agreement (the Agreement) with Novartis in January 2010, which accounted for $118,000 and $198,000 of revenue for the three-month periods ended June 30, 2013 and 2012, respectively. For the six-month periods ended June 30, 2013 and 2012, we recognized $252,000 and $429,000, respectively under the same agreement.

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, which accounted for $0.1 million and $1.0 million in revenue for the three-month periods ended June 30, 2013 and 2012, respectively. During the six-month periods ended June 30, 2012 and June 30, 2012, we recognized $0.3 million and $2.2 million, respectively, for services performed under this agreement.

In September 2012, we signed an agreement worth approximately $3.5 million with the U.S. Naval Medical Logistics Command to support malaria vaccine development efforts at the U.S. Naval Medical Research Center (NMRC). Under the terms of the agreement, GenVec was responsible for producing clinical supplies of its malaria vaccine, which utilizes its novel, proprietary technology. NMRC used this clinical material as part of its efforts to assess the safety and efficacy of these next-generation vectored vaccines using the clinical challenge model developed by NMRC and the Walter Reed Army Institute of Research (WRAIR) malaria vaccine programs, which now are unified as the U.S. Military Malaria Vaccine Program (USMMVP). Under the agreement, GenVec retains the right to commercialize this novel technology. No revenue was recognized under this contract during the three and six-month periods ended June 30, 2013 or 2012. On July 29, 2013, we entered into a modification to terminate contractual obligations under the agreement.

The decrease in revenue for the three-month and six-month periods ended June 30, 2013 is primarily due to a decrease of $1.0 million and $2.0 million, respectively associated with our hearing program. The decrease in revenue associated with our hearing program was a result of a reduced work scope as we near completion of our development work under the two Novartis agreements. Additionally, there were reductions in revenue with respect to our FMD program of $0.3 million during the three-months ended June 30, 2013 and a $0.8 million during the six-months ended June 30, 2013 compared to the comparable prior year periods due mainly to the successful completion of field safety studies in 2012.

Revenues recognized under our various funded research projects for the three-month and six-month periods ended June 30, 2013 and 2012 are as follows:

                                       Three Months Ended          Six Months Ended
                                            June 30,                   June 30,
                                       2013           2012         2013         2012

Hearing loss and balance disorders   $    267       $  1,233     $     705     $ 2,730
Animal Health                             198            451           563       1,371
HIV                                        97            249           155         329
Malaria                                    50             89           144         211
Other                                     136            518           388       1,063

Total                                $    748       $  2,540     $   1,955     $ 5,704

Expenses

Operating expenses were $3.9 million and $8.1 million for the three-month and six-months ended June 30, 2013, which represent decreases of 38% and 35%, respectively, as compared to $6.2 million and $12.6 million in the comparable prior year periods.

Research and development expenses for the three-month and six-months ended June 30, 2013 decreased 62% and 53%, respectively, from $3.6 million and $7.9 million in 2012 to $1.4 million and $3.7 million in 2013. During both the three and six-months ended June 30, 2013 we experienced lower personnel costs resulting from our position eliminations, reduced manufacturing costs associated with our FMD program, reduced material costs for our hearing program and lower general supply costs, and equipment purchases for our hearing program as compared to the comparable periods in 2012.

General and administrative expense for the three-month and six-months ended June 30, 2013 decreased 5% and 6%, respectively, with expense of approximately $2.6 million and $4.7 million in 2012 as compared to $2.5 million and $4.4 million in 2013. During both the three and six-months ended June 30, 2013 we experienced lower personnel costs resulting from our position eliminations. Partially offsetting the reduced personnel costs are higher professional costs during each period as compared to the comparable prior year periods. Recruiting costs were also lower in the six-months ended June 30, 2013 than in the comparable prior year period, when we conducted a Chief Executive Officer search. In addition, included in general and administrative expense during the three and six-months ended June 30, 2013, are charges of $304,000 and $479,000 of severance costs related to the respective February 7, 2013 and June 28, 2013 position eliminations. Additionally we have evaluated our long-lived assets and determined that approximately $229,000 of these assets have been impaired.

Liquidity and Capital Resources

We have experienced significant losses since our inception. As of June 30, 2013 we have an accumulated deficit of $271.9 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, 2013, cash, cash equivalents, and investments totaled $9.3 million as compared to $15.3 million as of December 31, 2012.

For the six months ended June 30, 2013, we used $5.6 million of cash for operating activities. This consisted of a net loss for the period of $6.2 million, $0.1 million of non-cash depreciation and amortization, $0.6 million of non-cash stock option expenses, $0.2 million of impaired long lived assets, $0.3 million used for the net change in current assets and liabilities; and $0.1 million used for the net change in non-current assets. Net cash used in operating activities was used primarily for our internally funded research and development programs and general and administrative activities.

For the six months ended June 30, 2012, we used $5.2 million of cash for operating activities. This consisted of a net loss for the period of $6.9 million, $0.1 million of non-cash depreciation and amortization, $0.6 million of non-cash stock option expenses, $0.9 million provided by the net change in current assets and liabilities, and $43,000 used for the net change in non-current assets. Net cash used in operating activities was used primarily for the advancement of 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, 2013 was $7.3 million. This consisted of $0.4 million of cash used for the purchase of laboratory equipment and $2.0 million of cash used to purchase investment securities during the period offset by proceeds from the sale and maturities of investments of $9.6 million.

Net cash provided by investing activities during the six months ended June 30, 2012 was $5.2 million. This consisted of $0.2 million of cash used for the purchase of laboratory equipment and $21.4 million of cash used to purchase investment securities during the period offset by proceeds from the sale and maturities of investments of $26.9 million.

There were no financing activities during the six months ended June 30, 2013 or 2012.

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 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. As a result of a number of these offerings, as of July 31, 2013, we have approximately 1.1 million warrants outstanding. Please see Note 5 "Stockholders' Equity" of the Notes to Financial Statements included in this Quarterly Report on Form 10-Q.

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, 2013.

As discussed above, on June 25, 2013 we received a notice from NASDAQ stating that the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with the minimum bid price requirement for continued listing. We intend to continue actively monitoring the bid price for our common stock between now and December 23, 2013, and will consider available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement. There is no assurance, however, that the Company will pursue efforts to continue to be listed, the Company will be eligible for an additional compliance period, or that our common stock will not be delisted, particularly given the Board of Directors' approval of the Plan of Dissolution, subject to stockholder approval.

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, and whether the Plan of Dissolution is approved by our stockholders. Based on our current business plan, we currently estimate we will use between $6 million and $7 million of cash during the next four quarters, ending June 30, 2014. Our estimate includes approximately $0.9 million in contractual obligations as well as $0 for capital expenditures. Based on this estimate we expect to have sufficient resources to fund our operations through at least the next twelve months.

However, our cash needs may differ significantly, particularly in the event of a liquidation and dissolution of the Company. If the Company's stockholders approve the Plan of Dissolution, our Board of Directors will have the discretion to, at such times as the Board of Directors deems appropriate or advisable, file a certificate of dissolution with the Delaware Secretary of State, complete the liquidation of the Company's assets, satisfy the Company's remaining obligations and make distributions to the Company's stockholders of any available liquidation proceeds, and seek to delist our common stock from NASDAQ. We anticipate that there would be significant costs associated with the liquidation and dissolution process. In this event, we are also likely to use a significant portion of our cash and investments to satisfy our obligations to our creditors. Satisfying these obligations will reduce the portion of our assets available for distribution to our shareholders.

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 disclosed in Note 7, Commitments, of the Notes to Financial Statements included in Annual Report on Form 10-K for the year ended December 31, 2012.

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, 2012. 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, 2012. There have been no material changes in our significant accounting policies or critical accounting estimates since the end of 2012, however Note 1, General, of the Notes to Financial Statements included in this Quarterly Report on Form 10-Q discusses the revenue recognition for fixed-price contracts.

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 our Financial Statements.

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