News Column

GENVEC INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 12, 2014

OVERVIEW

GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. 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 AG, Merial Limited and the U.S. Government 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), 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 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 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 indicates 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.

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 are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).

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.

As a result of the uncertainties discussed above, among others, 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 and cash from our financings completed in the first quarter of 2014 are expected to be sufficient to continue our current research, development and collaborative activities into the foreseeable future.

16



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 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, 2013. 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, 2014 AND 2013

Results of Operations

GenVec's net loss was $1.7 million or $0.10 per share on revenues of $0.1 million for the three months ended June 30, 2014. This compares to a net loss of $3.1 million or $0.24 per share on revenues of $0.7 million in the same period in the prior year. GenVec's net loss was $2.6 million or $0.17 per share on revenues of $2.3 million for the six months ended June 30, 2014. This compares to a net loss of $6.2 million or $0.48 per share on revenues of $2.0 million in the same period in the prior year. Included in our net loss for the first six months of 2014 was stock-based compensation expense of $225,000 as compared to $626,000 for the same period in the prior year. GenVec ended the second quarter of 2014 with $14.6 million in cash, cash equivalents and liquid investments.

Revenue

Revenues for the three-month and six-month periods ended June 30, 2014 were $0.1 million and $2.3 million, which represent a decrease of 83% and an increase of 16% as compared to $0.7 million and $2.0 million in the comparable prior year periods.

Revenues for the three-month and six-month periods ended June 30, 2014 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, 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.

We entered into a research collaboration and license agreement (the Agreement) with Novartis in January 2010, for which we recognized $0.1 million of revenue during each of the three-month periods ended June 30, 2014 and 2013. For the six-month period ended June 30, 2014 and 2013, we recognized $0.1 million and $0.3 million, respectively.

Under the terms of the Agreement, we were initially eligible to receive up to an additional $206.6 million in milestone payments if certain clinical, regulatory and sales milestones were met. 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 (IND) filed by Novartis with the U.S. Food and Drug Administration (FDA). As of June 30, 2014, milestones available under the Agreement include $24.0 million of additional clinical milestones, $45.0 million in regulatory milestones and $135.0 million of sales-based milestones. Additionally, we are also entitled to royalties on future sales.

17



In August 2010, we signed an agreement for the supply of services relating to development materials in connection with our collaboration with Novartis 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. During the three months ended June 30, 2014 and 2013 we recognized $37,000 and $0.1 million, respectively, for services performed under this agreement. During the six months ended June 30, 2014 and 2013 we recognized $0.1 million and $0.3 million, respectively, for services performed under this agreement.

Revenues for the three-month and six-month periods ended June 30, 2014 were $0.1 million and $2.3 million, which represent a decrease of 83% and an increase of 16% as compared to $0.7 million and $2.0 million in the comparable prior year periods. The decrease in revenue for the three-month period ended June 30, 2014 is primarily due to a decrease of $0.2 million associated with our FMD program, $0.1 million associated with our hearing loss and balance disorders program and $0.3 million due to reduced work scope and grant work performed for our NIH programs and malaria programs. The increase in revenue for the six-month period ended June 30, 2014 is primarily due to an increase of $1.5 million associated with our hearing loss and balance disorders program as a result of the achievement of the third milestone under our Agreement with Novartis. The $2.0 million milestone was triggered by the non-rejection of the IND submitted by Novartis to the FDA in the three-month period ended March 31, 2014. There were no milestones achieved in the six months ended June 30, 2013. Partially offsetting the increase in the six month period ended June 30, 2014 was a decrease in revenue associated with our hearing loss and balance disorders program of $0.5 million as compared to the same period in 2013. Additionally, for the six-month period ended June 30, 2014 there were reductions in revenue of $0.5 million with respect to our FMD program and $0.7 million due to reduced work scope and grant work performed for our NIH programs and malaria programs.

Revenues recognized under our various funded research projects for the three-month and six-month periods ended June 30, 2014 and 2013 are as follows:

Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2014 2013 2014 2013 Hearing loss and balance disorders $ 119$ 267$ 2,195$ 705 Animal Health 10 198 33 563 HIV - 97 - 155 Malaria - 50 32 144 Other - 136 - 388 Total $ 129$ 748$ 2,260$ 1,955 Expenses



Operating expenses were $1.8 million and $4.9 million for the three-month and six-month periods ended June 30, 2014, which represent decreases of 53% and 40% as compared to $3.9 million and $8.1 million in the comparable prior year periods.

Research and development expenses for the three-month and six-month periods ended June 30, 2014 decreased 65% and 68%, respectively, from $1.4 million and $3.7 million in 2013 to $0.5 million and $1.2 million in 2014. The decreases in the three and six-month periods ended June 30, 2014 were primarily due to lower personnel costs resulting from our reductions in personnel in February 2013 and June 2013 and a decreased allocation of facility costs to research and development as compared to the same periods in 2013. Additionally, in the six-month period ended June 30, 2014 we incurred reduced material costs for our funded programs and lower general supply costs as compared to the comparable period in 2013. Partially offsetting these lower costs in both periods were expenses related to our NMRC contract that were capitalized during the six-months ended June 30, 2013 prior to their recognition in July 2013. There were no such transactions in 2014.

18



General and administrative expense for the three-month and six-month periods ended June 30, 2014 decreased 47% and 16% with expense of approximately $1.3 million and $3.7 million in 2014 as compared to $2.5 million and $4.4 million in 2013. The decreases were primarily due to lower personnel costs resulting from our reductions in force in February 2013 and June 2013 and lower professional fees. Additionally, in 2013 we incurred expense related to the impairment of our manufacturing facility and the write-off of shelf registration expenses. Partially offsetting these decreases were the one-time facility costs associated with the relocation of our corporate office and research and development laboratories that occurred in January 2014 and an increased allocation of facility costs to general and administrative for the three-month and six-month periods ended June 30, 2014 as compared to the same periods in 2013.

Liquidity and Capital Resources

We have experienced significant losses since our inception. As of June 30, 2014 we have an accumulated deficit of $278.4 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, 2014, cash, cash equivalents and liquid investments totaled $14.6 million as compared to $6.1 million on December 31, 2013.

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.

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, which included approximately $0.1 million of non-cash depreciation and amortization, $0.6 million of non-cash stock-based compensation, $0.3 million used for the net change in current assets and liabilities and $56,000 used for the net change in non-current liabilities. Net cash was used primarily for the advancement of our hearing program, research and development programs, and general and administrative activities.

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 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 maturity of investments of $9.6 million.

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. There were no financing activities for the six months ended June 30, 2013.

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 our facility needs.

19



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 those offerings, as of June 30, 2014, we have approximately 0.4 million warrants outstanding and exercisable.

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, 2014.

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. 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.

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 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 June 30, 2014, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million, all of which were completed prior to March 31, 2014.

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, 2014, pursuant to the Equity Distribution Agreement and the Registered Direct Offering we have sold approximately $11.6 million of securities since February 11, 2014, all of which were completed prior to March 31, 2014.

20



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 $5.0 million and $7.0 million of cash to continue our current activities during the four quarters ending June 30, 2015. Our estimate includes approximately $0.7 million in contractual obligations. Based on this estimate we have sufficient resources to fund our operations into the foreseeable future.

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 of our Form 10-K for the year ended December 31, 2013.

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, 2013. 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, 2013. There have been no material changes in our significant accounting policies or critical accounting estimates since the end of 2013.

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.


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters