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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

or

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

For the transition period from       to      
 
Commission file number:
   0-24469

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

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

65 West Watkins Mill Road, Gaithersburg, Maryland
 
20878
(Address of principal executive offices)
 
(Zip Code)

240-632-0740
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x      No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No  ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
(do not check if a smaller reporting company)
 

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

As of October 31, 2011, the Registrant had 12,958,009 shares of common stock, $.001 par value, outstanding.

 
 

 

GENVEC, INC.
FORM 10-Q
 
TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
   
Item 1.
 
Financial Statements (unaudited)
  3
   
Condensed Balance Sheets
  3
   
Condensed Statements of Operations
  4
   
Statements of Comprehensive Loss
  5
   
Condensed Statement of Stockholders’ Equity and Comprehensive Loss
  6
   
Condensed Statements of Cash Flows
  7
   
Notes to Condensed Financial Statements
  8
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  19
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
  26
Item 4.
 
Controls and Procedures
  26
         
PART II.
 
OTHER INFORMATION
   
Item 1.
 
Legal Proceedings
  27
Item 1A.
 
Risk Factors
  27
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
  27
Item 3.
 
Defaults Upon Senior Securities
  27
Item 4.
 
[Removed and Reserved]
  27
Item 5.
 
Other Information
  27
Item 6.
 
Exhibits
  27
         
SIGNATURES   28

 
2

 

PART I.   FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

GENVEC, INC.
CONDENSED BALANCE SHEETS
(in thousands, except per share data)
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 8,668     $ 35,002  
Short-term investments
    19,810       168  
Accounts receivable
    2,703       3,211  
Prepaid expenses and other
    352       242  
Total current assets
    31,533       38,623  
Property and equipment, net
    729       743  
Other assets
    88       66  
Total assets
  $ 32,350     $ 39,432  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,256     $ 1,134  
Accrued clinical trial expenses
    120       809  
Accrued other expenses
    1,716       2,910  
Unearned revenue
    597       2,081  
Total current liabilities
    3,689       6,934  
                 
Unearned revenue
    -       78  
Total liabilities
    3,689       7,012  
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value, 5,000 shares authorized; none issued and outstanding in 2011 and 2010
    -       -  
Common stock, $0.001 par value; 30,000 shares authorized; 12,918 and 12,908 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    13       13  
Additional paid-in capital
    277,806       276,576  
Accumulated other comprehensive income
    44       96  
Accumulated deficit
    (249,202 )     (244,265 )
Total stockholders’ equity
    28,661       32,420  
Total liabilities and stockholders’ equity
  $ 32,350     $ 39,432  

See accompanying notes to unaudited condensed financial statements.

 
3

 

GENVEC, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 4,332     $ 5,156     $ 14,355     $ 11,276  
                                 
Operating expenses:
                               
Research and development
    3,819       5,137       13,538       16,016  
General and administrative
    2,005       2,397       5,787       6,626  
Total operating expenses
    5,824       7,534       19,325       22,642  
                                 
Loss from operations
    (1,492 )     (2,378 )     (4,970 )     (11,366 )
                                 
Other income (expense):
                               
Interest income, net of change in fair value of warrants
    9       -       33       127  
Other income (expense)
    -       -       -       (31 )
Total other income, net
    9       -       33       96  
                                 
Net loss
  $ (1,483 )   $ (2,378 )   $ (4,937 )   $ (11,270 )
                                 
Net loss per share - basic and diluted
  $ (0.11 )   $ (0.18 )   $ (0.38 )   $ (0.90 )
                                 
Weighted average shares outstanding - basic and diluted
    12,918       12,903       12,917       12,591  

See accompanying notes to unaudited condensed financial statements.

 
4

 

GENVEC, INC.
STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net loss
  $ (1,483 )   $ (2,378 )   $ (4,937 )   $ (11,270 )
Unrealized holding loss on securities available for sale
    (35 )     (14 )     (52 )     (26 )
                                 
Comprehensive loss
  $ (1,518 )   $ (2,392 )   $ (4,989 )   $ (11,296 )

See accompanying notes to unaudited condensed financial statements.

 
5

 

GENVEC, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(in thousands)
(Unaudited)

                     
Accumulated
             
               
Additional
   
Other
             
   
Common Stock
   
Paid-in
   
Comprehensive
   
Accumulated
       
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Deficit
   
Total
 
Balance, December 31, 2010
    12,908     $ 13     $ 276,576     $ 96     $ (244,265 )   $ 32,420  
Comprehensive loss:
                                               
Net loss
    -       -       -       -       (4,937 )     (4,937 )
Unrealized change in investments, net
    -       -       -       (52 )     -       (52 )
Common stock issued under stock benefit plans
    10       -       37       -       -       37  
Stock-based compensation
    -       -       1,193       -       -       1,193  
Balance, September 30, 2011
    12,918     $ 13     $ 277,806     $ 44     $ (249,202 )   $ 28,661  

See accompanying notes to unaudited condensed financial statements.

 
6

 

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

   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (4,937 )   $ (11,270 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    175       181  
Non-cash charges for stock-based compensation
    1,193       1,446  
Change in fair value of warrant
    (3 )     (124 )
Change in accounts receivable
    508       (1,814 )
Change in accounts payable and accrued expenses
    (1,761 )     (298 )
Change in unearned revenue
    (1,562 )     1,966  
Change in other assets and liabilities, net
    (123 )     39  
Net cash used in operating activities
    (6,510 )     (9,874 )
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (161 )     (267 )
Proceeds from maturities of marketable securities
    23,413       -  
Purchases of investment securities
    (43,113 )     -  
Net cash used in investing activities
    (19,861 )     (267 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock and warrants, net of issuance costs
    37       35,153  
Net cash provided by financing activities
    37       35,153  
                 
Increase (decrease) in cash and cash equivalents
    (26,334 )     25,012  
Beginning balance of cash and cash equivalents
    35,002       10,887  
                 
Ending balance of cash and cash equivalents
  $ 8,668     $ 35,899  

See accompanying notes to unaudited condensed financial statements.

 
7

 

GENVEC, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

Basis of Presentation

The condensed financial statements included herein have been prepared by GenVec, Inc. (GenVec, we, our, or the Company) without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. We believe the disclosures are adequate to make the information presented not misleading.  The condensed financial statements included herein should be read in conjunction with the financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K filed with the SEC.

On April 19, 2011, the Company effected a reverse stock split of its outstanding common stock at a ratio of one-for-ten, whereby each ten shares of common stock were combined into one share of common stock (the Reverse Stock Split). The Reverse Stock Split was authorized by our stockholders at a special meeting of stockholders held on April 5, 2011. The Reverse Stock Split was effective with respect to stockholders of record at the close of business on April 18, 2011, and trading of our common stock on the NASDAQ Capital Market began on a split-adjusted basis beginning on April 19, 2011. As a result of the reverse stock split, each ten shares of common stock were combined into one share of common stock and the total number of shares of common stock outstanding was reduced from approximately 129.1 million shares to approximately 12.9 million shares. Stockholders became entitled to receive cash in lieu of fractional shares produced by the Reverse Stock Split.
 
All numbers in this Quarterly Report have been revised to reflect the Reverse Stock Split, the principal effects of which were to:
 
 
·
reduce the number of shares of common stock issued and outstanding by a factor of 10;
 
 
·
increase the per share exercise price by a factor of 10, and decrease the number of shares issuable upon exercise by a factor of 10, for all outstanding options, warrants and other convertible or exercisable equity instruments entitling the holders to purchase shares of the Company’s common stock; and
 
 
·
proportionately reduce the number of shares authorized and reserved for issuance under the Company’s existing equity compensation plans.
 
In the opinion of management, the accompanying condensed, unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 30, 2011 and December 31, 2010 and the results of its operations and cash flows for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010.  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 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, Merial, 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. 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 type 2 (HSV-2), dengue fever, and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).  Our technology is also being explored for vaccines against swine diseases.

 
8

 

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 yield product candidates that utilize our technology platform and we believe represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests 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 treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

In partnership with our collaborators we have multiple vaccines in development. These programs are funded by our collaborators and utilize our core adenovector technology. GenVec has grant-supported preclinical programs to develop vaccine candidates for the prevention of RSV and HSV-2. In addition, we have programs with the U.S. Naval Medical Research Center to develop vaccines against dengue fever and malaria.  We also have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to support the development of vaccines against influenza and the human immunodeficiency virus (HIV). In the field of animal health, we are working with Merial to commercialize vaccines for the prevention of a major animal health problem, FMD, and our technology is also being explored for vaccines against swine diseases. Development efforts for this program are also supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.

Use of Estimates

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

Revenue Recognition

Revenue is recognized when all four of the following criteria are met: (1) a contract is executed, (2) the contract price is fixed and determinable, (3) delivery of the service or products have occurred, and (4) collectability of the contract amounts is considered probable.

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

 
9

 

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.

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board  (FASB) issued Accounting Standards Update  (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” (ASU 2009-13) amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codification  (ASC) Topic 605. This consensus provides accounting principles and application guidance on how the arrangement should be separated, and the consideration allocated. This guidance changes how to determine the fair value of undelivered products and services for separate revenue recognition. Allocation of consideration under this pronouncement is based on management’s estimate of the selling price for undelivered items where there is no other means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted. The Company adopted this standard effective January 1, 2011. The adoption of this standard did not have an impact on the presentation of our financial statements.

In April 2010, FASB issued ASU No. 2010-17, “Revenue Recognition — Milestone Method,” (ASU 2010-17) which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in ASU 2010-17 provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17  is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We have historically followed the milestone method. The Company adopted this standard effective January 1, 2011. The adoption of this standard did not have an impact on the presentation of our financial statements.

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04).  ASU 2011-04 amends certain fair value principles to improve comparability between GAAP and International Financial Reporting Standards regarding fair value measurements and disclosures. In addition, ASU 2011-04 requires entities to disclose, among others: (1) quantitative information about the significant unobservable inputs used for Level 3 measurements; (2) qualitative information regarding the sensitivity of Level 3 measurements to changes in related unobservable inputs and (3) the amounts of any transfers between Levels 1 and 2 of the fair value hierarchy and the reasons for those transfers. ASU 2011-04 will become effective during interim and annual periods beginning after December 15, 2011. We are currently assessing what impact adoption of ASU 2011-04 may have on our financial statements.

In June 2011, FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders’ equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item must be reclassified to net income. ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Other than the presentational changes that will be required by ASU 2011-05, the adoption of ASU 2011-05 is not expected to have any impact on our financial statements.
 
 
10

 

Other new pronouncements issued but not effective until after September 30, 2011 are not expected to have a significant effect on our financial position or results of operations.

(2)
Fair Value Measurements

We apply the provisions of the FASB ASC Section 820 (formerly SFAS No. 157) “Fair Value Measurements and Disclosures” (ASC 820). ASC 820 establishes a three-level hierarchy for 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; or other inputs that are observable or 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.  This includes 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 at September 30, 2011 on the Condensed Balance Sheet:

         
Quoted Prices in
             
         
Active Markets for
   
Significant
   
Significant
 
   
Total Carrying
   
Identical
   
Other Observable
   
Unobservable
 
   
Value on the
   
Assets/Liabilities
   
Inputs
   
Inputs
 
(In thousands)
 
Balance Sheet
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Cash & cash equivalents
  $ 8,668     $ 8,668     $ -     $ -  
Marketable securities
    19,810       19,810       -       -  
Total assets at fair value
  $ 28,478     $ 28,478     $ -     $ -  
  
 
11

 

The following table presents information about assets and liabilities recorded at fair value on a recurring basis at December 31, 2010 on the Condensed Balance Sheet:

         
Quoted Prices in
             
         
Active Markets for
   
Significant
   
Significant
 
   
Total Carrying
   
Identical
   
Other Observable
   
Unobservable
 
   
Value on the
   
Assets/Liabilities
   
Inputs
   
Inputs
 
(In thousands)
 
Balance Sheet
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Cash & cash equivalents
  $ 35,002     $ 35,002     $ -     $ -  
Marketable securities
    168       168       -       -  
Total assets at fair value
  $ 35,170     $ 35,170     $ -     $ -  
                                 
Liabilities:
                               
Warrant liability
  $ 3     $ -     $ 3     $ -  
Total liabilities at fair value
  $ 3     $ -     $ 3     $ -  
 
We determine fair value for marketable securities with Level 1 inputs through quoted market prices and have classified them as available-for-sale.  Our marketable securities consist of corporate and agency bonds with maturities of less than six months and an equity investment in a publicly traded company.
 
The warrant liability has been valued using the Black-Scholes pricing model, the inputs of which are described more fully in Note 5. The warrant liability, related to the Kingsbridge warrants described in Note 5, has been classified within Level 2.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the nine months ended September 30, 2011.

All unrealized holding gains or losses related to our investments in marketable securities are reflected in accumulated other comprehensive loss in stockholders’ equity. Included in comprehensive loss was a net unrealized loss of $52,000 and $26,000 for the nine months ended September 30, 2011 and 2010, respectively.

(3)
Stock Benefit Plans

Our stockholders approved the 2011 Omnibus Incentive Plan (2011 Plan) in June 2011.  At September 30, 2011 there are 858,015 shares available for future issuance and 15,350 outstanding options under the 2011 Plan.  Options outstanding under the 2011 Plan at September 30, 2011 expire through 2021.

Stock options granted under the 2011 Plan generally have a contractual term of ten years. The Compensation Committee administers the 2011 Plan, approves the individuals to whom options, restricted stock, or other awards will be granted, and determines the terms of the awards, including the number of shares granted and exercise price of each option.

The 2011 Plan replaces the 2002 Stock Incentive Plan (2002 Plan), which was approved in June 2002 as the replacement for the 1993 Stock Incentive Plan (1993 Plan).  There are 1,000,621 outstanding options and 41,750 outstanding restricted stock awards under the 2002 Plan at September 30, 2011.  Options outstanding under the 2002 Plan at September 30, 2011 expire through 2021.  Restricted stock awards generally vest over a three-year term, with 50% vesting two years after issuance and 50% vesting three years after issuance.  In October 2011, 20,875 restricted stock units vested, the remainder will vest in October 2012. There are 7,250 outstanding options under the 1993 Plan at September 30, 2011 that will expire 2012.

 
12

 
 
In August 2003, GenVec and Diacrin consummated a business combination under which we acquired Diacrin through an exchange of stock. Under the terms of the agreement, we agreed to assume each option, vested or unvested, granted by Diacrin under its 1997 Stock Option Plan (1997 Plan). As of September 30, 2011, awards outstanding under the 1997 Plan were 3,058 shares. Option holders will receive newly issued shares of our common stock upon exercise of their options. The plan is administered by the Compensation Committee and includes statutory and non-statutory stock options that are exercisable as to 25 percent of the underlying shares per year with a contractual term of ten years. Outstanding options under the 1997 Plan at September 30, 2011 expire through 2012.

Stock-Based Compensation Expense

We measure the cost of all share-based payment awards made to our employees and directors including awards of employee stock options, restricted stock awards and employee stock purchases based on the fair value method of measurement and recognize compensation expense on a straight-line basis over the service period of each award.

The following table summarizes stock-based compensation expense related to employee stock options for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010, which was allocated as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(in thousands)
   
(in thousands)
 
                         
Research and development
  $ 301     $ 337     $ 835     $ 1,041  
General and administrative
    131       140       358       405  
    $ 432     $ 477     $ 1,193     $ 1,446  

The weighted-average estimated fair value of employee stock options granted during the nine months ended September 30, 2011 and 2010 were $4.06 and $15.53, respectively.  The weighted-average estimated fair value of employee stock options granted during the nine months ended September 30, 2011 and 2010 was calculated using the Black-Scholes model with the following weighted-average assumptions:

   
For the Nine
   
For the Nine
 
   
Months Ended
   
Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
             
Risk-free interest rate
    2.09 %     2.40 %
Expected dividend yield
    0.00 %     0.00 %
Expected volatility
    97.62 %     90.08 %
Expected life (years)
    5.66       5.85  

The volatility assumption for 2011 and 2010 is based on the weighted average volatility for the most recent one-year period as well as the volatility over the expected life of 5.66 years and 5.85 years, respectively.

 
13

 
 
The risk-free interest rate assumption is based upon various U.S. Treasury rates as of the date of the grants ranging from 0.25% to 2.30% for the nine months ended September 30, 2011 and 1.39% to 2.65% for the nine months ended September 30, 2010.
 
The dividend yield is based on the assumption that we do not expect to declare a dividend over the life of the options.

The expected life of employee stock options represents the weighted average combination of 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 of the vesting date (four years) and the full contractual term (ten years). Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Forfeitures are estimated based on our historical forfeiture rates and standard probabilities of employee turnover based on the demographics of current option holders.  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 nine months ended September 30, 2011:

         
Weighted
   
Weighted
       
         
average
   
average
   
Aggregate
 
   
Number
   
exercise
   
contractual
   
intrinsic
 
(in thousands,
 
of shares
   
price
   
life (years)
   
value
 
except exercise price and contractual term data)
                 
                         
Stock options outstanding, December 31, 2010
    822     $ 18.00              
Granted
    257       6.12              
Exercised
    (1 )     4.10              
Forfeited
    (26 )     14.52              
Expired
    (26 )     31.27              
Stock options outstanding at September 30, 2011
    1,026     $ 14.80       6.80     $ -  
Vested or expected to vest at September 30, 2011
    963     $ 15.17       6.66     $ -  
Exercisable at September 30, 2011
    661     $ 17.56       5.76     $ -  

Unrecognized stock-based compensation related to stock options was approximately $2.4 million as of September 30, 2011. This amount is expected to be expensed over a weighted average period of 2.5 years.  We realized proceeds of $3,000 from options exercised during the nine months ended September 30, 2011 and proceeds of $106,000 during the nine months ended September 30, 2010.

 
14

 
 
The following table summarizes information about our stock options outstanding at September 30, 2011:

   
Outstanding
   
Exercisable
 
                               
         
Weighted
                   
         
average
   
Weighted
         
Weighted
 
         
remaining
   
average
         
average
 
Range of exercise
 
Number
   
contractual
   
exercise
   
Number
   
exercise
 
prices
 
of shares
   
life (in years)
   
price
   
of shares
   
price
 
   
(number of shares in thousands)
 
                               
$0.00 - $10.00
    422       8.54     $ 5.10       161     $ 4.90  
$10.01 - $30.00
    533       6.06       19.96       429       19.66  
$30.01 - $40.00
    62       1.93       32.46       62       32.46  
$40.01 - $50.00
    9       2.91       40.97       9       40.97  
      1,026       6.80     $ 14.80       661     $ 17.56  
 
In October 2009, the Company issued 50,000 restricted shares of common stock under the 2002 Plan.  The following table summarizes the status of the Company’s non-vested restricted stock as of September 30, 2011:
 
         
Weighted
       
         
Average
   
Aggregate
 
   
Number
   
Grant Date
   
Intrinsic
 
(in thousands, except per share data)
 
of Shares
   
Fair Value
   
Value
 
                       
Non-vested restricted stock at December 31, 2010
    43     $ 7.90        
Granted
    -       -        
Exercised
    -       -        
Cancelled
    (1 )     7.90        
                         
Non-vested restricted stock at September 30, 2011
    42     $ 7.90     $ 330  
                         
Expected to vest at September 30, 2011
    36     $ 7.90     $ 284  

Restricted stock awards granted are scheduled to vest 50 percent two years after the date of grant and 50 percent three years after the date of grant.  The cost of the grant is charged to operations over the vesting period.  At September 30, 2011, the weighted average remaining term of non-vested restricted stock was 1.0 year.  In October 2011, 50 percent of the outstanding awards vested.

Forfeitures are estimated based on our historical forfeiture rates and standard probabilities of employee turnover based on the demographics of current option holders.

Unrecognized stock-based compensation related to restricted stock awards was approximately $0.2 million as of September 30, 2011. This amount is expected to be expensed over a period of 1.0 year.

 
15

 

(4)
Net Loss per Share

Basic earnings per share is computed based upon the net loss available to common stock stockholders divided by the weighted average number of common stock shares outstanding during the period. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share only when the effect of the inclusion would be dilutive. For the nine months ended September 30, 2011 and 2010 approximately 703,000 and 585,000 common stock equivalent shares associated with our stock option plans and unvested restricted shares and approximately 1.4 million and 1.4 million common stock equivalent shares associated with our warrants, respectively, were excluded from the denominator in the diluted loss per share calculation as their inclusion would have been antidilutive due to our net loss incurred during the periods presented.

(5)
Stockholders’ Equity

On March 15, 2006, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge), under which Kingsbridge committed to purchase up to $30.0 million of our common stock within a 3-year period, subject to certain conditions and limitations.  The CEFF expired on March 15, 2009.  Prior to the expiration of the CEFF on March 15, 2009, we sold 328,483 shares of common stock to Kingsbridge in the aggregate for gross proceeds of $6.5 million.  As part of the arrangement, we issued a warrant to Kingsbridge to purchase 52,000 shares of our common stock at an exercise price equal to $26.70 per share.  The warrant became exercisable on September 15, 2006 and expired on September 15, 2011.  Prior to its expiration, we had classified the warrant as a current liability with a fair value determined under a Black-Scholes pricing model.  Changes in fair value were recorded against operations in the reporting period in which they occurred; increases and decreases in fair value were recorded to interest expense.  During the nine months ending September 30, 2011, we recorded income of $3,000 due to the change in fair value of the warrant.

The table below sets forth the outstanding warrants to purchase shares of common stock as of September 30, 2011:

Offering Date
 
Outstanding Warrants
   
Exercise Price
 
Expiration Date
 
Status
                   
June 2008
    220,383     $ 20.16  
6/11/2013
 
Exercisable
May 2009
    711,539     $ 8.58  
5/29/2014
 
Exercisable
February 2010
    420,000     $ 27.50  
2/1/2015
 
Exercisable
      1,351,922                

During the nine months ended September 30, 2011, no warrants were exercised.
 
On September 7, 2011, the Company’s prior Stockholder Rights Agreement expired. In August 2011, the Company’s Board of Directors adopted a new Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent, to be effective on September 7, 2011 upon expiration of the prior Stockholder Rights Agreement. The new 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 September 30, 2011.
 
(6)
Collaborative Agreement

In January 2010, we signed a research collaboration and license agreement (the Agreement) with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under 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 million non-refundable upfront license fee and Novartis purchased $2.0 million of our common stock. The common stock was recorded at fair value of $3.3 million on the date of issuance.  The upfront non-refundable fee will be recognized ratably over the term of the two-year research and collaboration term of the Agreement. Revenue to be recognized from the non-refundable upfront license fee will be $3.7 million by the end of the Agreement due to the pricing agreement associated with the sale of our common stock.  In addition, we will receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. If certain clinical, regulatory, and sales milestones are met, we were eligible to receive up to $206.6 million in milestone payments in addition to royalties on future sales, if any.  During the three months ended September 30, 2011 and 2010 we recognized $466,000 and $466,000 of the upfront payment and $610,000 and $386,000 for research performed under this Agreement, respectively. During the nine months ended September 30, 2011 and 2010 we recognized $1,398,000 and $1,321,000 of the upfront payment and $1,389,000 and $973,000 for research performed under this Agreement, respectively.
 
 
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In September 2010, we achieved the first milestone in our collaboration with Novartis.  The $300,000 milestone was triggered by the successful completion of certain preclinical development activities.  If certain additional clinical, regulatory, and sales milestones are met, we are eligible to receive up to $206.3 million in additional milestone payments.

In August 2010, we signed an additional agreement for the supply of services relating to development materials with Novartis, related to our collaboration in hearing loss and balance disorders.  Under this new agreement, GenVec could receive approximately $13 million over four years to manufacture clinical trial material for up to two lead candidates.  During the three and nine month periods ended September 30, 2011 we recognized $1.3 million and $5.1 million, respectively, for services performed under this agreement. During the three month and nine month periods ended September 30, 2010, we recognized $2.0 million for services performed under this agreement.
 
In December 2010, we entered into a collaboration with Merial to develop and commercialize our proprietary vaccine technology for use against foot-and-mouth disease (FMD). Merial is the leading FMD vaccine producer in the world, with leading positions in all key markets. Under the agreement, Merial will be responsible for all costs related to the development and commercialization of FMD vaccines developed through the collaboration. We will receive development milestones and royalties on sales. There was $0 and $58,000 of revenue recognized under this contract during the three month and nine month periods ended September 30, 2011.

In April 2011, we expanded our collaboration with Merial and entered into a separate collaboration agreement.  Under this new agreement and program, Merial has the right to evaluate GenVec technology for applications in other areas of animal health.  Merial has elected to start the program using our technology to target swine diseases.  There was $150,000 of revenue recognized under this contract during the nine months ended September 30, 2011.
 
(7)
Reclassifications

We have made certain reclassifications to prior year amounts to conform to the 2011 presentation.
 
 
17

 
 
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,” “estimate,” 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:

our product candidates being in the early stages of development;

our ability to find collaborators and the terms of our agreements that we may enter into with them;

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

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

the timing and content of future FDA regulatory actions related to us, our product candidates, or our collaborators;

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

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

Further information on the factors and risks that could affect our business, financial condition, and results of operations is set forth under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2010 and is contained in our other filings with the SEC. The filings are available on our website at www.genvec.com or at the SEC’s website, www.sec.gov.

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

 
18

 
 
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 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, Merial, 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. 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 type 2 (HSV-2), dengue fever, and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD). Our technology is also being explored for vaccines against swine diseases.
 
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 yield product candidates that utilize our technology platform and we believe represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests 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 treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

In partnership with our collaborators we have multiple vaccines in development. These programs are funded by third-parties and utilize our core adenovector technology. GenVec has grant-supported preclinical programs to develop vaccine candidates for the prevention of RSV and HSV-2. In addition, we have programs with the U.S. Naval Medical Research Center to develop vaccines against dengue fever and malaria.  We also have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to support the development of vaccines against influenza and the human immunodeficiency virus (HIV). In the field of animal health, we are working with Merial 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 and in collaboration with the U.S. Department of Agriculture.

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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The description of our business in this Form 10-Q should be read in conjunction with the information described in Item 1A of the 10-K.

FINANCIAL OVERVIEW FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

Results of Operations

GenVec’s net loss was $1.5 million (or $0.11 per share) on revenues of $4.3 million for the three months ended September 30, 2011.  This compares to a net loss of $2.4 million (or $0.18 per share) on revenues of $5.2 million in the same period in the prior year. GenVec’s net loss was $4.9 million (or $0.38 per share) on revenues of $14.4 million for the nine months ended September 30, 2011.  This compares to a net loss of $11.3 million (or $0.90 per share) on revenues of $11.3 million for the nine months ended September 30, 2010. Included in our net loss for the first nine months of 2011 was stock-based compensation expense of $1.2 million as compared to $1.4 million for the same period in the prior year. GenVec ended the third quarter of 2011 with $28.5 million in cash, cash equivalents, and short-term investments.  All per share information presented gives effect to the Reverse Stock Split, described below.

 
19

 
 
Revenue

Revenues for the three-month and nine-month periods ended September 30, 2011 were $4.3 million and $14.4 million, respectively, which represent a  decrease of 16 percent and an increase of 27 percent, respectively, as compared to $5.2 million and $11.3 million, respectively, in the comparable prior year periods.

Revenues for the three-month and nine-month periods ended September 30, 2011 were primarily derived from the collaboration with Novartis Institutes for Biomedical Research Inc. (Novartis) to discover and develop novel treatments for hearing loss and balance disorders. Revenue has also been derived from the Company’s funded research and development programs with the U.S. Department of Homeland Security (DHS), Merial, the National Institute of Allergy and Infectious Diseases (NIAID), and the National Institutes of Health (NIH), all of which use GenVec’s proprietary adenovector technology for the development of either vaccine candidates against foot-and-mouth disease for livestock or vaccines against malaria, HIV, RSV, and HSV-2.

In January 2010, we signed a research collaboration and license agreement (the Agreement) with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the Agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. At the time of entering into the Agreement, we received a $5 million non-refundable upfront license fee and Novartis purchased $2.0 million of our common stock. The common stock was recorded at fair value of $3.3 million on the date of issuance.  The upfront non-refundable fee will be recognized ratably over the term of the two-year research and collaboration term of the Agreement.  We will recognize revenue of $3.7 million from the non-refundable upfront license fee over the term of the Agreement, which reflects a discount of $1.3 million as a result of the difference between the issuance price and the fair value of the common stock issued to Novartis.  In addition, we will receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. If certain clinical, regulatory, and sales milestones are met, we were eligible, at the inception of the Agreement, to receive up to $206.6 million in milestone payments in addition to royalties on future sales, if any.  In September 2010, we achieved the first milestone and received payment of $300,000, which was triggered by the successful completion of certain preclinical development activities.  During the three-month and nine-month periods ended September 30, 2011 we recognized $466,000 and $1,398,000, respectively, of the upfront payment and $610,000 and $1,389,000 for research performed under this Agreement. During the three and nine month periods ended September 30, 2010 we recognized $466,000 and $1,321,000, respectively of the upfront payment and $386,000 and $973,000, respectively, for research performed under the Agreement.

In August 2010, we signed an additional 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, GenVec could receive approximately $13 million over four years to manufacture clinical trial material for up to two lead candidates.  During the three-month and nine-month periods ended September 30, 2011 we recognized $1.3 million and $5.1 million, respectively, for services performed under this agreement. During the three-month and nine-month periods ended September 30, 2010 we recognized $2.0 million for services performed under this agreement.

In February 2010, we signed a new contract with the DHS to continue the development of adenovector-based vaccines against foot-and-mouth disease (FMD). Under this new contract, GenVec is eligible to receive up to $3.8 million in program funding the first year and up to an additional $0.7 million if DHS exercises its renewal option under the contract. Under this contract, we will use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. In June 2010 the DHS exercised its renewal option for 2011 funding under this agreement for an additional $0.7 million. During the three and nine month periods ended September 30, 2011 we recognized $441,000 and $1.5 million, respectively, for services performed under this agreement.   There was $292,000 and $327,000 of revenue recognized respectively, under this contract during the three and nine month periods ended September 30, 2010.
 
 
20

 

In December 2010, we entered into a collaboration with Merial to develop and commercialize our proprietary vaccine technology for use against FMD. Merial is the leading FMD vaccine producer in the world, with leading positions in all key markets. Under the agreement, Merial will be responsible for all costs related to the development and commercialization of FMD vaccines developed through the collaboration. We will receive development milestones and royalties on sales. There was $58,000 of revenue recognized under this contract during the nine month period ended September 30, 2011.

In April 2011, we expanded our collaboration with Merial and entered into a separate collaboration agreement.  Under this new agreement and program, Merial has the right to evaluate GenVec technology for applications in other areas of animal health.  Merial has elected to start the program using our technology to target swine diseases.  There was $150,000 of revenue recognized under this contract during the nine months ended September 30, 2011.

Revenues recognized under our various funded research projects for the three-month and nine-month periods ended September 30, 2011 and 2010 are as follows: (in thousands)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
Program
 
2011
   
2010
   
2011
   
2010
 
                         
Hearing loss and balance disorders
  $ 2,407     $ 3,183     $ 7,876     $ 4,636  
Animal Health
    936       591       2,844       1,655  
HIV
    446       855       1,942       3,340  
Malaria
    119       38       360       373  
Other
    424       489       1,333       1,272  
                                 
Total
  $ 4,332     $ 5,156     $ 14,355     $ 11,276  
 
The decrease for the three-month period ended September 30, 2011 as compared to the comparable period in 2010 is primarily due to a $0.8 million decrease in revenue from our collaboration with Novartis related to the timing of manufacturing activities and efforts in 2011; and a $0.4 million decrease in revenue due to decreased work scope in our HIV program. Partially offsetting these decreases are increased revenue associated with our animal health program of $0.3 million due to increased work scope with DHS.

The increase for the nine-month period ended September 30, 2011 is primarily due to higher revenue under the Novartis agreements of $3.2 million.  The variance is due to increased work scope related to the timing of manufacturing activities and efforts in 2011 as compared to the 2010 period.  In addition, revenue associated with our animal health program has increased $1.2 million due to increased work scope with DHS and licensing revenue and work performed under the Merial agreements.  Partially offsetting these increases is decreased revenue associated with our HIV program of $1.4 million as compared to the comparable prior year period due to decreased work scope.
 
 
21

 

Expenses

Operating expenses were $5.8 million and $19.3 million for the three and nine month periods ended September 30, 2011, respectively, which represent decreases of 23 percent and 15 percent as compared to $7.5 million and $22.6 million in the comparable prior year periods.

Research and development expenses for the three and nine month periods ended September 30, 2011 decreased 26 percent and 15 percent to $3.8 million and $13.5 million, respectively, as compared to $5.1 million and $16.0 million for the comparable prior year periods. The decreases in expenses in both the three and nine month periods are primarily due to lower clinical costs as a result of the termination of our TNFerade clinical trial (PACT trial).  In both periods we experienced lower personnel and outside costs than in the comparable prior year periods. In the three-month period ended September 30, 2011, we also experiences lower manufacturing costs related to our hearing program as compared to the comparable period in 2010. In the nine month period ended September 30, 2011, these decreases are partially offset by increased manufacturing costs for our foot and mouth disease and hearing loss programs as compared to the comparable period in 2010. Additionally, stock-based compensation expense allocated to research and development decreased $36,000 and $206,000 for the three and nine month periods as compared to the comparable prior year periods.

General and administrative expense for the three and nine month periods ended September 30, 2011 decreased 16 percent and 13 percent, respectively, to $2.0 million and $5.8 million as compared to $2.4 million and $6.6 million for the comparable prior year periods.  The decrease in expense during both the three and nine month periods ended September 30, 2011 is due to lower personnel costs as compared to the comparable periods in 2010.   In addition during the nine month period ended September 30, 2011 we incurred lower professional costs as compared to the same period in 2010.  Stock-based compensation expense allocated to general and administrative expenses, which is included in the personnel costs, decreased $9,000 and $47,000, respectively for the three and nine month periods ended September 30, 2011 as compared to the comparable periods in 2010.

Other Income (Expense)

Total other income increased by $9,000 for the three-month period ended September 30, 2011 due to higher interest income on our investments due mainly to higher yields earned in 2011 as compared to the comparable prior year period.

Total other income, net was $96,000 for the nine months ended September 30, 2010. This was composed of a $122,000 decrease in fair value of warrants partially offset by $31,000 of expense for the remaining costs associated with the shelf registration statement in 2010. Total other income, net was $33,000 for the nine months ended September 30, 2011 and represents interest income on our investments.
 
Liquidity and Capital Resources

We have experienced significant losses since our inception. As of September 30, 2011 we have an accumulated deficit of $249.2 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. Notwithstanding our efforts to pursue collaborative arrangements, 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 September 30, 2011, cash, cash equivalents and short-term investments totaled $28.5 million as compared to $35.2 million at December 31, 2010.

 
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For the nine months ended September 30, 2011, we used $6.5 million of cash for operating activities principally to fund our operating loss of $4.9 million. This  net loss included approximately $175,000 of non-cash depreciation and amortization and $1.2 million of non-cash stock compensation expense.  In addition, there was a net decrease in unearned revenue of $1.6 million, due mainly to the Novartis agreement, and a decrease in accounts payable and accrued expenses of $1.8 million.  Net cash was used primarily for the advancement of our internally funded research programs, the termination activities associated with our PACT trial, and general and administrative activities.

Net cash used in investing activities during the nine months ended September 30, 2011 was $19.9 million. This consisted of $19.7 million of cash used to purchase investment securities, net during the period and $161,000 of cash used for the purchase of laboratory and office equipment.

Net cash provided by financing activities during the nine months ended September 30, 2011 was $37,000, from the issuance of common stock under our Employee Stock Purchase Plan. 

On June 11, 2008, we completed a registered direct offering to various investors of 1,125,827 shares of common stock and warrants to purchase 225,165 shares of common stock. Proceeds of this offering, net of offering costs, totaled $15.7 million. No warrants were exercised in 2011; however, individual investors in 2010 exercised a portion of these warrants and purchased 4,782 shares of common stock for gross proceeds to the Company of $96,000.

On May 29, 2009, we completed a registered direct offering to an institutional investor for the sale of 961,538 shares of common stock and warrants to purchase 961,538 shares of common stock. Proceeds of this offering, net of offering costs, totaled $5.5 million. No warrants were exercised in 2011; however, the institutional investor exercised a portion of these warrants in 2010 and purchased 250,000 shares of common stock for gross proceeds to the Company of $2.1 million.

On August 31, 2009, we completed a registered direct offering to an institutional investor of 800,000 shares of common stock and warrants to purchase 400,000 shares of common stock. Proceeds of this offering, net of offering costs, totaled $5.5 million. The institutional investor exercised all of these warrants in 2010 for gross proceeds to the Company of $3.3 million.

On February 1, 2010, we completed a registered direct offering to various investors of 1,400,000 shares of common stock and warrants to purchase 420,000 shares of common stock. Proceeds of this offering, net of offering costs, totaled $26.1 million. There were no warrants that were issued in connection with this transaction that were exercised as of September 30, 2011.

On February 11, 2010, we filed with the Securities and Exchange Commission a $150 million shelf registration statement on Form S-3, which we later amended on May 13, 2010 (the 2010 shelf registration statement). The 2010 shelf registration statement was declared effective May 20, 2010 and allows us to issue any combination of common stock, preferred stock, or warrants to purchase common stock or preferred stock.

On May 12, 2010, we received a notice from the Nasdaq Stock Market (NASDAQ) stating that the minimum bid price of our common stock was below $1.00 per share for 30 consecutive business days and that we were therefore not in compliance with the minimum bid price requirement for continued listing set forth in Marketplace Rule 5450. The notification letter stated that we would be afforded until November 8, 2010 to regain compliance. In order to obtain additional time to seek to regain compliance, we transferred our common stock to the NASDAQ Capital Market effective November 8, 2010. On November 9, 2010, NASDAQ notified us that we would have an additional 180 days, or until May 9, 2011, to regain compliance with the minimum bid price requirements. To regain compliance, the closing bid price of our common stock was required to meet or exceed $1.00 per share for at least ten consecutive business days prior to May 9, 2011.
 
As a result of the reverse stock split, described below, the bid price of our common stock increased, and on May 4, 2011, NASDAQ notified us that we regained compliance with the minimum bid price requirement.

 
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On April 19, 2011, the Company effected a reverse stock split of its outstanding common stock at a ratio of one-for-ten, whereby each ten shares of common stock were combined into one share of common stock (the “Reverse Stock Split”). The Reverse Stock Split was authorized by our stockholders at a special meeting of stockholders held on April 5, 2011. The Reverse Stock Split was effective with respect to stockholders of record at the close of business on April 18, 2011, and trading of our common stock on the NASDAQ Capital Market began on a split-adjusted basis on April 19, 2011. As a result of the reverse stock split, each ten shares of common stock were combined into one share of common stock and the total number of shares of common stock outstanding was reduced from approximately 129.1 million shares to approximately 12.9 million shares. Stockholders received cash in lieu of fractional shares produced by the Reverse Stock Split.
 
All numbers in this Quarterly Report have been revised to reflect the Reverse Stock Split, the principal effects of which were to:  
 
 
·
reduce the number of shares of common stock issued and outstanding by a factor of 10;

 
·
increase the per share exercise price by a factor of 10, and decrease the number of shares issuable upon exercise by a factor of 10, for all outstanding options, warrants and other convertible or exercisable equity instruments entitling the holders to purchase shares of the Company’s common stock; and
 
 
·
proportionately reduce the number of shares authorized and reserved for issuance under the Company’s existing equity compensation plans.

On September 7, 2011, the Company’s prior Stockholder Rights Agreement expired. In August 2011, the Company’s Board of Directors adopted a new Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent, to be effective on September 7, 2011 upon expiration of the prior Stockholder Rights Agreement. The new 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 September 30, 2011.
 
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 our success in establishing collaborative arrangements with third parties. We currently estimate we will use approximately $6.0 million to $8.0 million of cash in the 12 months ending September 30, 2012. Our estimate includes approximately $1.1 million in contractual obligations as well as $0.3 million for capital expenditures. Based on this estimate we believe we have sufficient resources to fund our operations for at least 36 months from the balance sheet date.

Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. 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. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, we may need to relinquish rights to certain of our existing or future technologies, product candidates, or products we would otherwise seek to develop or commercialize on our own, or to license the rights to our technologies, product candidates, or products on terms that are not favorable to us. We also will continue to look for government sponsored research collaborations and grants to help offset future anticipated losses from operations, as we expect to continue to rely on government funding for a significant portion of our revenues for the next few years and, to a lesser extent, interest income. If we are unable to advance the development of our product candidates through collaborations, or if our current operating capital is not sufficient to fund our operations, we may need to access the capital markets for financing or enter into strategic alliances or licensing arrangements. If we determine to pursue and are successful in raising additional funds through the issuance of equity securities, investors will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock.

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 the contractual commitments table in our Form 10-K for the year ended December 31, 2010.

 
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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, 2010. 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, 2010. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of 2010.

Recently Issued Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” (ASU 2009-13) amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codification Topic 605. This consensus provides accounting principles and application guidance on how the arrangement should be separated, and the consideration allocated. This guidance changes how to determine the fair value of undelivered products and services for separate revenue recognition. Allocation of consideration under this pronouncement is based on management’s estimate of the selling price for undelivered items where there is no other means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted. The Company adopted this standard effective January 1, 2011. The adoption of this standard did not have an impact on the presentation of our financial statements.

In April 2010, FASB issued ASU No. 2010-17, “Revenue Recognition — Milestone Method,” (ASU 2010-17) which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in ASU 2010-17 provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17 is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We have historically followed the milestone method. The Company adopted this standard effective January 1, 2011. The adoption of this standard did not have an impact on the presentation of our financial statements.
 
In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04).  ASU 2011-04 amends certain fair value principles to improve comparability between GAAP and International Financial Reporting Standards regarding fair value measurements and disclosures. In addition, ASU 2011-04 requires entities to disclose, among others: (1) quantitative information about the significant unobservable inputs used for Level 3 measurements; (2) qualitative information regarding the sensitivity of Level 3 measurements to changes in related unobservable inputs and (3) the amounts of any transfers between Levels 1 and 2 of the fair value hierarchy and the reasons for those transfers. ASU 2011-04 will become effective during interim and annual periods beginning after December 15, 2011. We are currently assessing what impact adoption of ASU 2011-04 may have on our financial statements.
 
In June 2011FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders’ equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item must be reclassified to net income. ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Other than the presentational changes that will be required by ASU 2011-05, the adoption of ASU 2011-05 is not expected to have any impact on our financial statements.

Other new pronouncements issued but not effective until after September 30, 2011 are not expected to have a significant effect on our financial position or results of operations.
 
 
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ITEM 3. 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. Our cash flow and earnings are subject to fluctuations due to changes in interest rates in our investment portfolio.  We maintain a portfolio of various issuers, types, and maturities.  These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive loss included in stockholders’ equity.

ITEM 4. 
CONTROLS AND PROCEDURES

As of September 30, 2011, under the supervision and with the participation of our President and Chief Executive Officer and our Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary (our principal executive officer and principal financial officer, respectively), we have reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, the President and Chief Executive Officer and the Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary have concluded that, as of September 30, 2011, these disclosure controls and procedures are effective at the reasonable assurance level in alerting them in a timely manner to material information required to be included in our periodic SEC reports.

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION
 
ITEM 1.          LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

ITEM 1A.       RISK FACTORS

None

ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.          (REMOVED AND RESERVED)


ITEM 5.          OTHER INFORMATION

None

ITEM 6.          EXHIBITS
 
 
3.1
Certificate of Designation of Series B Junior Participating Preferred Stock (Incorporated by reference from the Company’s Current Report on Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on August 12, 2011).

 
3.2
Certificate of Elimination of Series A Junior Participating Preferred Stock.

 
4.1
Rights Agreement, dated as of August 11, 2011, by and between GenVec, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (Incorporated by reference from the Company’s Current Report on Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on August 12, 2011).
 
 
31.1
Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
32.2
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS 
XBRL Instance Document.

 
101.SCH 
XBRL Taxonomy Extension Schema Document.

 
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase Document.

 
101.DEF 
XBRL Taxonomy Extension Definition Linkbase Document.

 
101.LAB 
XBRL Taxonomy Extension Label Linkbase Document.

 
101.PRE 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
27

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

   
GENVEC, INC.
   
(Registrant)
     
Date:   November 9, 2011
By:
/s/ Paul H. Fischer, Ph.D.
   
Paul H. Fischer, Ph.D.
   
President and Chief Executive Officer
 
Date:   November 9, 2011
By:
/s/ Douglas J. Swirsky
   
Douglas J. Swirsky
   
Senior Vice President, Chief Financial Officer,
   
Treasurer, and Corporate Secretary

 
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