NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2017 AND 2016
(Unaudited)
Basis of Presentation
The (a) condensed balance sheet as of December 31, 2016, which
has been derived from audited financial statements, and (b) unaudited interim condensed financial statements included herein have
been prepared by GenVec, Inc. (“GenVec”, “we”, “our”, “us”, or the “Company”)
without audit pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) 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, 2016 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 March 31, 2017 and December 31, 2016 and the results of its operations and cash flows for the three-month
periods ended March 31, 2017 and March 31, 2016. 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 AdenoVerse™ gene delivery platform to develop a pipeline
of cutting-edge therapeutics and vaccines. We are pioneers in the design, testing and manufacture of adenoviral-based product candidates
that can deliver on the promise of gene-based medicine. Our 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, to potential collaborators in the biopharmaceutical industry for the development and manufacture of therapeutics and
vaccines.
A key component of our strategy is to develop
and commercialize our product candidates through collaborations. We are working with prominent companies and organizations such
as Novartis, Merial (a unit of Boehringer Ingelheim), Washington University in St. Louis, and the U.S. government, as well as promising
young companies such as TheraBiologics, to support a portfolio of programs that addresses the prevention and treatment of a number
of significant human and animal health concerns. Our combination of internal and partnered development programs address therapeutic
areas such as hearing loss and balance disorders, oncology, bleeding disorders, as well as vaccines against infectious diseases,
including respiratory syncytial virus (“RSV”), herpes simplex virus (“HSV”), malaria, and in the area of
animal health, vaccines against foot-and-mouth disease (“FMD”).
Our AdenoVerse gene delivery 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 therapeutics, the goal is for the protein produced to have a meaningful effect
in treating the cause, manifestation, or progression of the disease. 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
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 our adenovector technology
may have the potential to restore hearing and balance function. We are currently working with Novartis on the development of novel
treatments for hearing loss and balance disorders that emerged from these research and development efforts. 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 vaccine candidates that
leverage our core adenovector technology, including our vaccine candidates for the prevention or treatment of RSV and HSV. We also
have a program to develop a vaccine for malaria, a program in which we are currently working in collaboration with the Laboratory
of Malaria Immunology and Vaccinology (“LMIV”) of the National Institute of Allergy and Infectious Diseases, National
Institutes of Health (“NIAID”).
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, or 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.
An 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. This
is intended to allow us to 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.
PLAN OF MERGER
On
January 24, 2017, the Company, Intrexon Corporation, a Virginia corporation (“Intrexon”), and Intrexon GV Holding,
Inc., a Delaware corporation and wholly owned subsidiary of Intrexon (“Merger Sub”), entered into an Agreement and
Plan of Merger (the “Merger Agreement”), pursuant to which, and on the terms and subject to the conditions set forth
in the Merger Agreement, Merger Sub will merge with and into GenVec (the “Merger”). GenVec will survive the Merger
as a wholly owned subsidiary of Intrexon. For more information on the Merger, the Merger Agreement and its terms and conditions,
see Note 11, “Subsequent Events,”
of the Notes to Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2016
.
Except where it is clear from the context,
the discussion in this Form 10-Q does not contemplate the consummation of the Merger or the integration of GenVec with Intrexon.
GOING CONCERN
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.
Management has determined the Company
has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about our ability to
continue as a going concern for the next twelve months. The report of our independent registered public accounting firm for the
year ended December 31, 2016 included an explanatory paragraph that expressed substantial doubt about our ability
to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome
of the uncertainty. If the merger with Intrexon is not consummated, our ability to continue as a going concern may depend on our
ability to raise additional capital, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate
revenue. There are no assurances that these future funding and operating efforts will be successful. If management is unsuccessful
in these efforts, our current capital is not expected to be sufficient to fund our operations for the next twelve months. Our
financial statements as of March 31, 2017 do not include any adjustments that might result from the outcome of this uncertainty.
Use of Estimates
The preparation of financial statements,
in conformity with U.S. GAAP, 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 estimates
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 is 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 collaborations and research
contract revenues, research and development activities, stock-based compensation, and warrant liabilities. 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.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying
financial statements for cash, cash equivalents, investments, and warrant liabilities, approximate fair value of these financial
instruments. The fair value for marketable securities and warrant liabilities is discussed in Notes 2 and 4, respectively.
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. Upfront non-refundable license 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 delivery to and acceptance by the customer 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 sheets 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 November 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of
Cash Flows (Topic 230): Restricted Cash”. This ASU clarifies the presentation requirements of restricted cash within the
statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in
the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents,
restricted cash, or restricted cash equivalents are presented in more than one line item within the statement of financial position,
an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement
of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for annual
and interim reporting periods for fiscal years beginning after December 15, 2017. The Company is currently evaluating the
impact this standard may have on our financial statements.
In August 2016, the FASB issued ASU
No. 2016-15, “Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments.” The objective
of ASU 2016-15 is to eliminate the diversity in practice related to the classification of certain cash receipts and payments in
the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. For public business entities,
ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted.
ASU 2015-16 provides that the amendments in the update should be applied retrospectively to all periods presented, unless deemed
impracticable, in which case, prospective application is permitted. The Company is currently evaluating the impact this standard
may have on our financial statements.
In February 2016, the FASB issued
ASU No. 2016-02, “Leases (Topic 842).” The new standard requires that all lessees recognize the assets and liabilities
that arise from leases on the balance sheet and disclose qualitative and quantitative information about their leasing arrangements.
The amendments in this ASU are effective for annual and interim periods for fiscal years beginning after December 15, 2018.
The adoption of this standard is expected to have a material impact on our financial position. The Company is currently evaluating
the impact this standard may have on our results of operations.
In January 2016, the FASB issued ASU
No. 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities,” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments.
Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value
option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related
to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale
debt securities. The amendments in this ASU are effective for fiscal years and interim periods beginning after December 15,
2017, and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting
period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes
for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.
The Company is currently evaluating the impact of adopting this standard.
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.
ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB issued ASU 2015-14, “Revenue
from Contracts with Customers (Topic 606) — Deferral of the Effective Date,” which deferred the effective date of ASU
2014-09 by one year to January 1, 2018. In March 2016, the FASB issued ASU No. 2016-8, “Revenue from Contracts
with Customers (Topic 606): Principal versus Agent Considerations.” The amendments in this ASU do not change the core principle
of ASU No. 2014-09 but the amendments clarify the implementation guidance on reporting revenue gross versus net. The effective
date for the amendments in this ASU is the same as the effective date of ASU No. 2014-09. In April 2016, the FASB issued ASU
No. 2016-10, “Revenue from Contracts with Customers (Identifying Performance Obligations and Licensing),” to clarify
the implementation guidance on identifying performance obligations and licensing. The standard allows for either “full retrospective”
adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning
the standard is applied only to the most current period presented in the financial statements. The Company is currently evaluating
the impact of adopting these standards. Nothing has come to the Company’s attention that would indicate the adoption of these
standards will have a material impact on the Company’s financial statements. However, the adoption of these standards will
have a material impact on the Company’s disclosures.
There are no other applicable new accounting
pronouncements issued but not effective until after March 31, 2017 that the Company believes could 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; and
|
|
·
|
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 and liabilities recorded at fair value on a recurring basis on the Condensed Balance Sheet at March 31, 2017:
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant
|
|
|
Significant
|
|
|
|
Total Carrying
|
|
|
Identical
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
Value on the
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Balance Sheet
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
1,749
|
|
|
$
|
-
|
|
|
$
|
1,749
|
|
|
$
|
-
|
|
Total assets at fair value
|
|
$
|
1,749
|
|
|
$
|
-
|
|
|
$
|
1,749
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
2,034
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,034
|
|
Total liabilities at fair value
|
|
$
|
2,034
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,034
|
|
The following table presents information about assets and liabilities
recorded at fair value on a recurring basis on the Condensed Balance Sheet at December 31, 2016:
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant
|
|
|
Significant
|
|
|
|
Total Carrying
|
|
|
Identical
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
Value on the
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Balance Sheet
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
$
|
3,498
|
|
|
$
|
-
|
|
|
$
|
3,498
|
|
|
$
|
-
|
|
Total assets at fair value
|
|
$
|
3,498
|
|
|
$
|
-
|
|
|
$
|
3,498
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
1,059
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,059
|
|
Total liabilities at fair value
|
|
$
|
1,059
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,059
|
|
We determine fair value for our investments
in 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 in 2017.
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 were no such impairments during the first quarter of 2017. During the first quarter of 2016,
we determined that our equity security holding had incurred an other-than-temporary impairment as a result of the entity in which
we held the equity being acquired by another company at a price lower than our carrying value. The stock of the entity is no longer
being publicly traded. As a result of this impairment, we realized a loss of $4,000.
All unrealized holding gains or losses
related to our investments in marketable securities are reflected in accumulated other comprehensive loss in stockholders’
equity. The changes in accumulated other comprehensive loss were net unrealized gains of $2,000 and $5,000 for the three
months ended March 31, 2017 and 2016, respectively.
|
(3)
|
Stock-Based Compensation Expense
|
The following table summarizes stock-based compensation expense
related to employee stock options for the three-month periods ended March 31, 2017 and March 31, 2016, which was allocated as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
97
|
|
|
$
|
136
|
|
Research and development
|
|
|
52
|
|
|
|
66
|
|
|
|
$
|
149
|
|
|
$
|
202
|
|
We use the Black-Scholes pricing model
to value stock options. No stock options were granted in 2017. The estimated fair value of employee stock options granted during
the three-month periods ended March 31, 2016 was calculated using the Black-Scholes model with the following weighted-average assumptions:
|
|
For the Three
|
|
|
|
Months Ended
|
|
|
|
March 31, 2016
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.51
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
101.66
|
%
|
Expected life (years)
|
|
|
6.46
|
|
Weighted-average fair value of options granted
|
|
$
|
0.46
|
|
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 are based on
the weighted average volatility for the most recent one-year period as well as the volatility over the expected life of 6.46 years.
The expected life of employee stock options represents the weighted average of 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 the estimates.
Forfeitures are estimated based on the demographics of current option holders and standard probabilities of employee turnover.
The weighted-average fair value of the
options granted for the three-month periods ended March 31, 2016 is $0.46. 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 three-month period ended March 31, 2017:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
of shares
|
|
|
price
|
|
|
life (years)
|
|
|
value
|
|
|
|
(in thousands, except exercise price and contractual term data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding, January 1, 2017
|
|
|
289
|
|
|
$
|
30.95
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2
|
)
|
|
|
261.00
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at March 31, 2017
|
|
|
287
|
|
|
$
|
29.50
|
|
|
|
6.70
|
|
|
$
|
55
|
|
Vested or expected to vest at March 31, 2017 (a)
|
|
|
275
|
|
|
$
|
30.27
|
|
|
|
6.62
|
|
|
$
|
50
|
|
Exercisable at March 31, 2017
|
|
|
204
|
|
|
$
|
35.81
|
|
|
|
5.95
|
|
|
$
|
8
|
|
(a) This represents the number of vested
options as of March 31, 2017, plus the number of unvested options as of March 31, 2017 that we expect to vest in the future based
on our estimated forfeiture rate.
Unrecognized stock-based compensation related
to stock options was approximately $0.8 million as of March 31, 2017. This amount is expected to be expensed over a weighted average
period of 1.9 years. There were no options exercised during the three-month periods ended March 31, 2017 or 2016.
The following table summarizes information
about our stock options outstanding and exercisable as of March 31, 2017:
|
|
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 - $7.00
|
|
|
70
|
|
|
|
8.97
|
|
|
$
|
5.28
|
|
|
|
17
|
|
|
$
|
5.60
|
|
$7.01 - $100.00
|
|
|
204
|
|
|
|
6.22
|
|
|
|
27.32
|
|
|
|
174
|
|
|
|
26.82
|
|
$100.01 - $200.00
|
|
|
5
|
|
|
|
1.02
|
|
|
|
171.39
|
|
|
|
5
|
|
|
|
171.39
|
|
$200.01 - $300.00
|
|
|
6
|
|
|
|
2.29
|
|
|
|
228.60
|
|
|
|
6
|
|
|
|
228.60
|
|
$300.01 - $410.00
|
|
|
2
|
|
|
|
0.05
|
|
|
|
410.00
|
|
|
|
2
|
|
|
|
410.00
|
|
|
|
|
287
|
|
|
|
6.70
|
|
|
$
|
29.50
|
|
|
|
204
|
|
|
$
|
35.81
|
|
On May 10, 2016, in a registered offering
pursuant to the 2014 shelf registration statement (as defined in Note 6 below), we sold 547,195 shares of our common stock (the
“Shares”), at a purchase price of $9.1375 per share. In a private placement concurrent with the sale of the Shares,
we sold to the investors who purchased the Shares warrants to purchase 410,396.8 shares of common stock (the “Warrants”).
The Shares and the Warrants were sold pursuant to a securities purchase agreement for aggregate gross proceeds of $5.0 million.
Subject to certain ownership limitations, the Warrants became exercisable on November 10, 2016 at an exercise price equal to $8.30
per share of common stock, subject to adjustments as provided under the terms of the Warrants. The Warrants are exercisable until
November 10, 2022.
In connection with the offering of the
Shares and Warrants, we issued to the placement agent and its designees unregistered warrants to purchase an aggregate of 38,303.7
shares of our common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same
terms as the Warrants, except that the Placement Agent Warrants will expire on May 4, 2021 and have an exercise price equal to
$11.422 per share of common stock.
A summary of the allocation of the proceeds
of the offering is shown below:
(in thousands)
|
|
|
|
|
|
|
|
Allocated to warrant liabilities
|
|
$
|
2,511
|
|
Allocated to common stock and additonal paid-in capital
|
|
|
2,489
|
|
Total allocated gross proceeds
|
|
$
|
5,000
|
|
The closing costs of $699,861 included
the 38,303.7 Placement Agent Warrants valued at $202,862, and $496,999 for placement agent and other fees. Based upon the estimated
fair value of the Shares and Warrants in units, the Company allocated $250,279 to financing expense and $449,582 as stock issuance
costs.
The table below sets forth the Warrants
and Placement Agent Warrants as of March 31, 2017:
Offering Date
|
|
Outstanding Warrants
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
Status
|
|
|
|
|
|
|
|
|
|
|
|
May 2016
|
|
|
410,396.8
|
|
|
$
|
8.30
|
|
|
11/10/2022
|
|
Exercisable
|
May 2016
|
|
|
38,303.7
|
|
|
|
11.4220
|
|
|
5/4/2021
|
|
Exercisable
|
|
|
|
448,700.5
|
|
|
|
|
|
|
|
|
|
The Warrants contain a provision for liquidated
damages in the event that there is a failure to deliver shares of common stock within three days of receiving a notice to exercise.
As a result of this liquidated damages provision, the Warrants require liability classification in accordance with ASC 480 and
are recorded at fair value.
The fair value of the Warrants has been determined under
a Black-Scholes pricing model; assuming a weighted average 5.49 year remaining life for the warrants, 1.97% risk-free interest
rate, a 104.24% expected volatility and no dividend yield, the weighted average fair value of warrant liability as of March 31,
2017 is $4.54. Changes in fair value are recorded against operations in the reporting period in which they occur; increases or
decreases in fair value are recorded to other income/(expense) as a change in fair value of warrant liabilities.
(5) 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 three-month periods ended March 31, 2017 and 2016 all common
stock equivalent shares associated with our stock option plans 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.
(6) Stockholders’
Equity
On December 1, 2016, the Company effected
a 1 for 10 reverse stock split of the Company’s outstanding stock. All share and per share amounts in the unaudited condensed
financial statements and accompanying notes have been retroactively restated to reflect the split.
On January 23, 2014, we filed a $75.0
million shelf registration statement on Form S-3 (the “2014 shelf registration statement”), with the SEC which was
declared effective February 11, 2014 and allowed us to obtain financing through the issuance of any combination of common
stock, preferred stock or warrants. Due to its expiration, the 2014 shelf registration statement is no longer available for use
for primary offerings by the Company.
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 could 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. Sales of shares pursuant to the EDA, if any, could 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 us and Roth Capital Partners, by any other method permitted by law, including but not limited
to in negotiated transactions. Sales under the EDA were made pursuant to the 2014 shelf registration statement. As of March 31,
2014, we had sold 72,168 shares pursuant to the EDA for gross proceeds of approximately $2.6 million. We have not sold any shares
under the EDA since that date, and we would not be able to do so until a new registration statement is filed pursuant
to which sales under the EDA may be made.
On March 18, 2014, we sold 287,000
shares of our common stock, par value $0.001, in a registered direct offering pursuant to the 2014 shelf registration statement
(the “2014 RDO”), at a price of $31.50 per share, resulting in gross proceeds of approximately $9.0 million.
On May 10, 2016, in a registered offering
pursuant to the 2014 shelf registration statement, we sold the Shares, as defined in Note 4 above, at a purchase price of
$9.1375 per share (together with the 2014 RDO, the “Registered Direct Offerings”). In a private placement concurrent
with the sale of the Shares, we sold the Warrants to the investors who purchased the Shares. The Shares and Warrants, as defined
in Note 4 above, were sold pursuant to a securities purchase agreement for aggregate gross proceeds of $5.0 million. Subject
to certain ownership limitations, the Warrants became exercisable on November 10, 2016 at an exercise price equal to $8.30
per share of common stock, subject to adjustments as provided under the terms of the Warrants. The Warrants are exercisable until
November 10, 2022.
In connection with the offering of the
Shares and Warrants, we issued to the placement agent and its designees unregistered warrants to purchase the Placement Agent Warrants,
as defined in Note 4 above. The Placement Agent Warrants have substantially the same terms as the Warrants, except that the Placement
Agent Warrants will expire on May 4, 2021 and have an exercise price equal to $11.422 per share of common stock.
The net proceeds from the sale of the Shares
and the Warrants are $4.5 million after deducting certain fees due to the placement agent and our estimated transaction expenses.
As of March 31, 2017, pursuant to the EDA
and the Registered Direct Offerings, we have sold 906,363 shares of our common stock since the 2014 shelf registration statement
became effective on February 11, 2014, for gross proceeds of $16.6 million. These sales resulted in proceeds, net of
issuance costs of approximately $15.1 million. The 2014 shelf registration statement expired on February 11, 2017.
On February 24, 2016, we received
notification from NASDAQ that the minimum bid price of our common stock had remained below $1.00 per share for 30 consecutive business
days, and we therefore were not in compliance with the minimum bid price requirement for continued listing set forth in Marketplace
Rule 5550(a)(2). The notification letter stated that we would be afforded 180 calendar days, or until August 22, 2016, to
regain compliance with the minimum bid price requirement. On August 23, 2016, we received notification from NASDAQ that we
had been afforded a second 180 calendar day grace period, or until February 21, 2017, to regain compliance. To regain compliance,
the closing bid price of our common stock must have met or exceeded $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 we demonstrated an
ability to maintain long-term compliance.
On December 15, 2016, we received
a notice from NASDAQ stating that the Company regained compliance with the $1.00 minimum bid price requirement for continued listing
set forth in Marketplace Rule 5450(a)(1) because the closing bid price of the Company’s common stock met or exceeded $1.00
per share for at least 10 consecutive business days. The notice further stated that the NASDAQ matter relating to the Company’s
non-compliance with the minimum bid price requirement, which the Company initially disclosed under Item 3.01 of its Current Report
on Form 8-K filed with the Securities and Exchange Commission on February 26, 2016, is now closed.
Effective September 7, 2011, we
entered into a stockholder rights agreement (the “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 Stockholder Rights Agreement, the
Company’s board of directors declared a dividend of one preferred stock purchase right (a “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 the Company’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 the Company’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 Stockholder Rights Agreement. There was no Series B
Junior Participating Preferred Stock issued or outstanding as of March 31, 2017.
In connection with the execution of the
Merger Agreement with Intrexon, we amended the Stockholder Rights Agreement to provide that none of Intrexon, Merger Sub or any
of their respective associates or affiliates shall become an Acquiring Person under the Stockholder Rights Agreement and to otherwise
exempt the Merger from triggering provisions or rights under the Stockholder Rights Agreement.
(7) Collaborative
Agreements
In January 2010, we entered into a research
collaboration and license 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. We received a $5.0 million upfront payment and Novartis purchased $2.0 million of our common stock.
We were eligible, from the inception of
the agreement, to receive up to an additional $206.6 million in milestone payments if certain clinical, regulatory, and sales milestones
were met, 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 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.
From September 2010 through October 2014,
we achieved four milestones resulting in aggregate payments from Novartis of $5.6 million. We have not achieved any milestones
since October 2014.
The achieved milestones are as follows:
Milestone Event
|
|
Date
|
|
Amount
|
|
(1) Successful completion of certain preclinical development activities
|
|
September 2010
|
|
$
|
300,000
|
|
(2) Successful completion of certain preclinical development activities
|
|
December 2011
|
|
|
300,000
|
|
(3) Non-rejection by the FDA of the IND filed by Novartis for CGF166
|
|
February 2014
|
|
|
2,000,000
|
|
(4) First patient treated in a Phase I clinical trial with CGF166
|
|
October 2014
|
|
|
3,000,000
|
|
As of April 30, 2017, milestones remaining
available under the agreement included $21.0 million of additional clinical milestones, $45.0 million in regulatory milestones,
and $135.0 million of sales-based milestones.
Additionally, if a product is commercialized
we are also entitled to tiered royalties on the annual net sales of licensed products, on a product-by-product and country-by-country
basis, at percentage rates that range based on annual net sales from the mid-single digits to the low double digits until the earlier
of (a) the expiration of the last valid claim with respect to applicable patent rights and (b) January 1 following a year in which
annual net sales of the product declined by a specified percentage of the highest level of prior annual net sales where the decline
is reasonably attributable in part to the marketing or sale of a competing product in the country. For the five years thereafter,
in the applicable country we are entitled to tiered royalties of below 1% on annual net sales. The collaboration and license agreement
is terminable for convenience upon notice by either party or for uncured material breach.
In addition, the agreement allows us to
receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. During each
of the three-month periods ended March 31, 2017 and 2016, we recognized $0.1 million for work performed under the agreement.
In January 2016, we were notified by Novartis
that enrollment was paused in the clinical study for CGF166. This pause was based on a review of data by the trial’s Data
Safety Monitoring Board (the “DSMB”) in accordance with criteria in the trial protocol. On April 28, 2016, we were
notified by Novartis, based on a review of safety and efficacy data from the nine patients currently enrolled in the study, that
the DSMB recommended that the trial continue, subject to approval by the FDA. On July 25, 2016, we announced we were notified by
Novartis, that the FDA had lifted the clinical hold on the trial. In February 2017, we were notified that the first patient in
the fourth cohort of the trial had been dosed.
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
product candidates. During each of the three-month periods ended March 31, 2017 and 2016, we recognized $30,000 for
services performed under this agreement.
In March 2015, we announced a collaboration
with TheraBiologics, Inc. to develop cancer therapeutics leveraging both our proprietary gene delivery platform and TheraBiologics’
proprietary neural stem cell technology. Depending on the manner of commercialization, we will be entitled to profit sharing and/or
royalty and milestone payments for the products being developed under the collaboration. We will contribute technology, know-how,
vector construction, and technical and regulatory support to the program, and TheraBiologics will be responsible for all other
development costs. We anticipate TheraBiologics will advance a second generation neural stem cell-based cancer treatment utilizing
our technology into the clinic by the first half of 2018.
In April 2015, we announced a Research
Collaboration Agreement with the 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, we announced a multi-faceted
collaboration agreement with the School of Medicine at Washington University at St. Louis (“WUSTL”) under which we
and WUSTL will create modified versions of our 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.
In December 2016, we entered into a
n
exclusive option agreement with Washington University in St. Louis to license intellectual property and technology related to gene
editing and pulmonary endothelial cell targeting. If the option is exercised, the license will allow broad utilization of technology.
The Company plans to initially focus on research utilizing the technology to develop treatments for hemophilia. Under the terms
of the agreement
we agreed to pay $0.3 million over the two year term of the agreement, this agreement may be terminated
by either party upon written notice.
In September 2016, we entered into a second
amendment to our previously disclosed license agreement with Merial. Under the terms of the amendment we will provide Merial
with certain biological materials and grant Merial the right to use the underlying GenVec technology to further develop and advance
FMD vaccine product candidates.
On March 28, 2017 and April 6, 2017, putative
stockholder class actions were filed in the United States District Court for the District of Delaware styled, respectively,
Parshall
v. GenVec, Inc., et. al.
, Case No. 1:17-cv-00338 (D.Del.) and
Mussman v. GenVec, Inc., et al.
, Case No. 1:99-mc-09999
(D.Del.). Additionally, on April 10, 2017 and April 25, 2017, actions were filed in the United States District Court for
the District of Maryland styled, respectively
Hoose v. GenVec, Inc. et al.
, Case No. 8:17-cv-00987, and
Pillai
v. GenVec, Inc. et al.
, Case No. 8:17-cv-01143 (together with the
Parshall
and
Mussman
actions, the “Stockholder
Actions”). The Stockholder Actions assert claims against GenVec and members of GenVec’s board of directors (the “Individual
Defendants”). The
Parshall
action also named, and the
Hoose
action purports to name, Intrexon and Merger Sub
as defendants. The complaints in the Stockholder Actions allege that GenVec and the Individual Defendants violated Section 14(a)
of the Exchange Act, and Rule 14a-9 promulgated thereunder, by failing to disclose in the draft proxy statement included in the
Registration Statement on Form S-4 filed by Intrexon on March 17, 2017 in connection with the Merger certain information regarding
alleged potential conflicts of interest, events leading up to the signing of the merger agreement with Intrexon and Merger Sub,
certain financial data regarding GenVec, and certain inputs regarding Roth Capital Partners’ fairness opinion. The complaints
in the Stockholder Actions also allege the Individual Defendants violated Section 20(a) of the Securities Exchange Act of 1934,
as amended, as control persons who had the ability to prevent the Registration Statement from being false and misleading. The
Parshall
and
Hoose
actions also allege that Intrexon and Merger Sub violated Section 20(a) of the Exchange Act.
The actions seek, among other things, an injunction preventing consummation of the merger with Merger Sub, an award of damages,
and an award of costs and expenses, including attorneys’ fees.
On April 19, 2017, the plaintiffs in the
Parshall
and
Mussman
actions voluntarily dismissed their claims. On April 25, 2017, the plaintiff in the
Hoose
action filed a pre-motion letter advising the court of his intention to file a motion for preliminary injunctive relief (the
“April 25 Letter”). On May 4, 2017, the
Hoose
and
Pillai
actions were consolidated for all purposes.
On May 2, 2017, the parties to the
Stockholder Actions entered into a Memorandum of Understanding (“MOU”) that calls for, among other things: (1)
certain additional disclosures to be included in the proxy statement mailed to GenVec stockholders; (2) the withdrawal of the
April 25 Letter in the
Hoose
action; and (3) dismissal of the
Hoose
and
Pillai
actions immediately
following the vote by GenVec stockholders on the Merger. On May 4, 2017, in accordance with the MOU, the plaintiffs in the
Hoose
and
Pilla
i actions advised the Court of the MOU, filed stipulations seeking to stay those actions and withdrew the
April 25 Letter. GenVec and the Individual Defendants believe the
Hoose
and
Pillai
actions are
without merit and, if those actions are not voluntarily dismissed pursuant to the MOU, intend to vigorously defend them. GenVec
and the Individual Defendants agreed to make the additional disclosures that are the subject of the MOU to avoid the expense
and inconvenience of further litigation.
On December 1, 2016, the Company effected
a 1 for 10 reverse stock split of the Company’s outstanding stock. All share and per share amounts in the unaudited condensed
financial statements and accompanying notes have been retroactively restated to reflect the split.
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 proposed merger with Intrexon Corporation;
|
•
|
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 U.S. 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;
|
•
|
the scope and validity of patent protection for our product candidates and our ability to commercialize technology and products without infringing the patent rights of others; and
|
•
|
our listing of our common stock on the NASDAQ Stock Market.
|
Further information on the factors and
risks that could affect our business, financial condition and results of operations is set forth under Part II, Item 1A
of this report, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016, and in our other filings with
the SEC. Our 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. The
forward-looking statements in this report are intended to be subject to protection afforded by the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.