TABLE OF CONTENTS
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(7) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS – (continued)
RSV is the single most common viral cause of lower respiratory infections in infants and young children. Initial vaccine candidates are in preclinical testing. In May 2008, we received a 2-year, $600,000 SBIR grant from the NIH to support work under this program. We recognized $42,000 in revenue through December 31, 2008.
In January 2008, we received a 2-year, $600,000 Phase I Small Business Innovation and Research grant from the NIH. This is intended to support work being conducted in a collaborative effort by us, the Vaccine and Infectious Disease Institute at Fred Hutchinson Cancer Research Center, and the University of Washington to develop vaccines for the prevention and treatment of HSV-2, the virus responsible for most cases of genital herpes. We recognized $143,000 in revenue through December 31, 2008.
In October 2008, we completed our collaboration agreement with the Cordis Corporation (Cordis). In January 2004, we received a $1.0 million advance payment. As of December 31, 2008, all activities and cost reimbursements associated with this agreement and with the previously announced decision in May 2006 to end the Phase II BIOBYPASS® trial have been completed.
We have entered into other research grants with the government, mainly the NIH, and recognized revenue under other corporate collaborations during 2008. Revenue recognized under these research grants totaled $1.0 million through December 31, 2008.
(8) COMMITMENTS
(a) LEASE AGREEMENTS
We have a non-cancelable operating lease for our Gaithersburg, MD facilities, which expires on November 1, 2009. The Company also had an operating lease for our Charlestown, MA facility, which expired in October 2006. The lease agreement for the Gaithersburg, MD facility includes a provision for a 3 percent annual increase in base rent. The lease contains renewal options for up to 14 years and requires the Company to pay all executory costs such as maintenance and insurance. As part of the lease, the landlord’s initial contribution of $1,300,000 in incentives is considered a reduction of rental expense that is recognized on a straight-line basis over the term of the lease. Rent expense under all operating leases was approximately $584,000, $584,000, and $611,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
Future minimum lease payments under our non-cancelable operating lease are as follows (in thousands):
 | | |
| 2009 | | $ | 677 | |
At December 31, 2008 and 2007, we had a deferred lease liability of $190,000 and $398,000, respectively.
In March 2009, we signed an amendment to our lease agreement for our Gaithersburg facilities extending the lease expiration date from November 1, 2009 to October 31, 2014. Under the terms of the agreement, we have additional contractual obligations of $139,000 in 2009, $841,000 in 2010, $866,000 in 2011, $892,000 in 2012, $847,000 in 2013, and $427,000 thereafter.
(b) LICENSE AGREEMENTS
In November 2001, we entered into an exclusive, worldwide license agreement with Baylor College of Medicine (Baylor) for the rights related to the MATH1 and HATH. Under the terms of the license agreement, we agreed to pay a non-refundable initial license fee of $50,000 at the time of execution of the license agreement and we also agreed to pay a minimum annual license maintenance fee, a percentage of product royalties, and milestone payments based on our achievement of certain clinical and regulatory related milestones for these rights. Our ability to meet the milestones is dependent on a number of factors including final approvals by regulatory agencies and the continued enforceability of patent claims.
TABLE OF CONTENTS
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(8) COMMITMENTS – (continued)
(c) RESEARCH AND DEVELOPMENT AND CLINICAL AGREEMENTS
We have agreed to provide grants for certain research projects under agreements with several universities and research organizations. Under the terms of these agreements, we have received rights to the resulting technology. Total grant amounts paid by us were approximately $154,000, $202,000, and $190,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
As discussed in Note 2, we have agreements with clinical sites for the treatment of patients under clinical protocols. Total costs under these agreements were $2,487,000, $2,235,000, and $1,713,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
Additionally, certain agreements disclosed above require us to pay royalties upon commercial sales of specified products. We generally base the royalties on a percentage of net sales or other product fees earned. Royalties will be due when sales are generated.
In addition, in January 2008, we entered into a manufacturing development agreement with Cobra Biomanufacturing Plc to produce commercial quantities of TNFerade, our lead product candidate. The manufacturing development agreement covers technology transfer, scale-up, and validation of the manufacturing process for TNFerade through cGMP consistency lots. Under the terms of the agreement, we made an advance payment which was capitalized in accordance with EITF 07-3 and is being amortized to expense as related services are performed. We periodically evaluate whether we expect the goods to be delivered or services to be rendered. In the event we do not expect the goods to be received or services to be rendered the remaining capitalized amount will be expensed in the period the determination is made. All other costs incurred under this agreement are expensed as incurred. In 2008, we expensed $3.4 million in total under the terms of the contract. Amounts to be paid under the agreement could total up to $9.4 million in the aggregate based on estimated service activities over the 2-year term of the agreement. We have not authorized any additional services to be performed under this agreement. We are currently discussing with our contract manufacturer amending the service schedule to reduce both services and costs during the remaining period of the services schedule or terminating the agreement. We may not be able to amend the service schedule on terms that are favorable to us, and the contract manufacturer and we have different understandings of the amount of services that have been provided and the costs that have been incurred to date. If we or the manufacturer terminate this agreement, then under certain conditions we believe that we may be required to pay a termination fee that ranges from $0 to $2.3 million depending on the timing of and the reason for termination. In the event of termination, the contract manufacturer may also seek to have us pay additional amounts for services that it asserts have been provided prior to the date of termination. If we terminate the agreement, the remaining capitalized costs totaling $669,000 at December 31, 2008, will be charged to expense in the period of termination.
(9) STOCKHOLDERS’ EQUITY
(a) CAPITAL STOCK
In April 2005, we filed with the Securities and Exchange Commission a $35.0 million shelf registration statement on Form S-3, replacing our prior $25.0 million shelf registration statement.
| • | On September 26, 2005, we sold 7,600,000 shares of common stock to various investors at $2.00 per share under the shelf registration. Proceeds, net of offering costs, from this sale totaled $14.0 million. SG Cowen & Co., LLC (SG Cowen) was engaged as the sole placement agent for this transaction. At the time of this offering, Stelios Papadopoulos, Ph.D., was a Vice Chairman in the investment banking division of SG Cowen and was a member of our Board of Directors. |
| • | On December 21, 2006, we sold 9,610,000 shares of common stock to various investors at $2.05 per share under the shelf registration. Proceeds, net of offering costs, from this sale totaled $18.3 million. |
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(9) STOCKHOLDERS’ EQUITY – (continued)
In February 2007, we filed a $100.0 million shelf registration statement on Form S-3 with the Securities and Exchange Commission. The shelf registration was declared effective February 12, 2007 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock, warrants, or debt. On June 11, 2008, pursuant to this shelf registration statement, we completed a registered direct offering to various investors of 11,258,279 shares of common stock and warrants to purchase 2,251,653 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and a warrant to purchase 0.20 shares of common stock at a per unit price of $1.51. The warrants, which have a term of 5 years and an exercise price of $2.016 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been accounted for in permanent equity. Proceeds of this offering, net of offering costs, totaled $15.7 million.
On March 15, 2006, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd., under which Kingsbridge has 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 will expire on March 15, 2009. Due to the pricing formula, however, the actual amount of additional financing available to us under the CEFF may be substantially less than the committed amount. In particular, Kingsbridge is not obligated to purchase shares of common stock at a price lower than $1.25. In addition, the maximum number of shares we may issue under the CEFF is 12,375,050.
Under the CEFF, we may require Kingsbridge to purchase shares of common stock at prices between 88 percent and 92 percent of the volume weighted average price (VWAP) on each trading day during an 8-day pricing period. Settlement for sales under the CEFF takes place in two tranches after the fourth and eighth day of the pricing period. The value of the maximum number of shares the Company may issue in any pricing period is equal to the lesser of 1.75 percent of the Company’s market capitalization immediately prior to the commencement of the pricing period, or $5.0 million. The minimum VWAP for determining the purchase price at which our stock may be sold in any pricing period is the greater of $1.25, or 75 percent of the closing price of our common stock on the day prior to the commencement of the pricing period. As required under the CEFF, we filed a resale registration statement with respect to the resale of shares issued pursuant to the CEFF and underlying the warrant, which was declared effective May 5, 2006. We are required to use commercially reasonable efforts to maintain its effectiveness.
As part of the arrangement, we issued a warrant to Kingsbridge to purchase 520,000 shares of our common stock at an exercise price equal to $2.67. The warrant became exercisable on September 15, 2006 and will remain exercisable until September 15, 2011. We have classified the warrant as a current liability for deferred financing costs, which is recorded at its fair value as determined under a Black-Scholes pricing model. Assuming a 2.75 year remaining life for the warrant, a 1.55 percent risk-free interest rate, and an 94.59 percent expected volatility and no dividend yield, the fair value of warrant liability as of December 31, 2008 was $35,000, a decrease of $221,000 compared to the prior year. Changes in fair value are recorded against operations in the reporting period in which they occur; increases and decreases in fair value are recorded to interest expense.
The fair value of the warrant issued to Kingsbridge on the date of grant of $800,000 or $1.54 per share, was initially recorded as a deferred financing cost to additional paid-in capital, with the opposing entry being accrued to other expenses in the balance sheet. Such deferred financing costs are allocated to Kingsbridge shares on an as drawn basis. Through December 31, 2008, the current liability has been marked-to-market using the Black-Scholes option-pricing model. Changes in fair value are recorded against operations in the reporting period in which they occur; increases or decreases in fair value are recorded as interest expense. During 2008 and 2007, the decrease in the fair value of the warrant of $221,000 and $445,000, respectively, resulted in a decrease in interest expense. Stock drawn under the CEFF is initially recorded outside of permanent equity, until such time as Kingsbridge sells the shares to outside third parties, due to the existence of a cash payment feature in the agreement that compensates Kingsbridge based on any reduction in the fair value
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(9) STOCKHOLDERS’ EQUITY – (continued)
of shares held by Kingsbridge during a period in which GenVec fails to maintain the effectiveness of the abovementioned registration statement, or electively imposes a trading blackout (i.e., a registration payment arrangement). The amount of compensation is payable in cash in both circumstances, or, at the sole discretion of GenVec, in shares of the Company’s common stock in the event of a trading blackout. The Company follows the provisions of FASB Staff Position No. EITF 00-19-2,“Accounting for Registration Payment Arrangements,” which requires that contingent obligations to make future payments under a registration payment arrangement be recognized and measured separately in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. The Company believes the likelihood of such a cash payment is not probable and therefore does not need to recognize a liability for such obligations.
In June 2007, we initiated our first draw against the CEFF. On June 26, 2007, subsequent to the first 4 days of the pricing period, the Company sold 769,773 common shares for gross proceeds of $1.8 million. On July 2, 2007, subsequent to the last 4 days of the pricing period, we sold under the CEFF, 832,441 common shares for gross proceeds of $1.8 million. On April 18, 2008, subsequent to the first 4 days of the pricing period, we sold 777,057 shares of common stock for gross proceeds of $1.47 million. The pricing period ended on April 25, 2008, at which time we sold an additional 905,559 shares of common stock for gross proceeds of $1.47 million. As of December 31, 2008, we have sold 3,284,830 shares of common stock to Kingsbridge. Kingsbridge holds no shares of common stock purchased pursuant to the CEFF; therefore, all shares sold are recorded in permanent equity.
In September 2001, our Board of Directors declared a dividend which was issued on September 28, 2001 of one preferred stock purchase right (a Right) for each share of common stock outstanding. The Rights initially trade with, and are inseparable from the common stock. The Rights will become exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the outstanding common stock of GenVec (an Acquiring Person), or announces the intention to commence a tender or exchange offer the consummation of which would result in that person or group becoming an Acquiring Person. Each Right allows its holder, other than the Acquiring Person, to purchase from the Company one one-hundredth of a share of Series A junior participating preferred stock (the Preferred Share), at a purchase price of $50.00, subject to adjustment. This portion of a Preferred Share gives the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. The Rights expire on September 7, 2011, unless redeemed earlier by the Company at a price of $0.01 per Right at any time before the Rights become exercisable.
In addition to the common stock reflected on our balance sheets, the following items are reflected in the capital accounts as of December 31, 2008 and 2007:
| • | 4,400,000 shares of $0.001 par value preferred stock have been authorized; none are issued or outstanding. |
| • | 600,000 shares of $0.001 par value Series A junior participating preferred stock have been authorized in connection with the preferred stock purchase rights referred to above; none are issued or outstanding. |
(b) STOCK OPTION GRANTS
Stock Option Plans
In June 2002, at our Annual Meeting, GenVec stockholders approved the 2002 Incentive Stock Plan (2002 Plan) as the replacement for the 1993 Stock Incentive Plan (1993 Plan) and 2000 Director Plan (2000 Plan). As originally approved by stockholders, under the 2002 Plan, we may grant statutory and non-statutory stock options and restricted stock awards for the purchase of newly issued common stock up to an aggregate of 1,000,000 shares, plus any shares remaining or that are subject to awards that expire or terminate under the 1993 Plan and 2000 Plan. Grants awarded under the 2002 Plan may be subject to adjustment in the event of stock splits and other similar events.
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(9) STOCKHOLDERS’ EQUITY – (continued)
Our stockholders have subsequently approved amendments to the 2002 Plan to increase the number of common shares available to be issued under the 2002 Plan. In June 2007, at our Annual Meeting, the stockholders of the Company approved an amendment to the 2002 Plan in which the total shares available under the 2002 Plan were increased from 8,680,000 to 11,580,000.
Generally under the 2002 Plan, 12.5 percent of the option shares of each award are exercisable 6 months after the date of grant; thereafter, the remaining option shares are exercisable in equal monthly installments over the next 3.5 years. Stock options granted under this plan generally have a contractual term of 10 years. The Compensation Committee administers this plan, approves the individuals to whom options will be granted, and determines the number of shares and exercise price of each option. Outstanding options under the 2002 Plan at December 31, 2008 expire through 2018.
In June 2006, at our Annual Meeting, the stockholders approved an amendment to the 2002 Plan in which the maximum number of shares with respect to which stock options and/or restricted shares may be granted to any one participant may not exceed 1,000,000 shares per calendar year and no more than 500,000 shares may be issued as shares of restricted stock per calendar year.
Options granted under the 1993 Plan include statutory and non-statutory awards, and options granted under the 2000 Plan, which were made to non-employee directors, generally permit 25 percent of the option shares of each award to be exercised on the anniversary of the grant date and typically have a contractual term of 10 years. The Compensation Committee administered options granted under the 1993 Plan and 2000 Plan, approved the individuals to whom options were granted, and determined the number of shares and exercise price of each option. Outstanding options under the 1993 Plan and 2000 Plan at December 31, 2008 expire through 2012.
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). Additional grants under this plan subsequent to the merger were prohibited. Each option under the 1997 Plan assumed by us continued to have, and be subject to, the same terms and conditions set forth in the Diacrin option plan under which the option was granted except as adjusted to reflect, among other things, the merger exchange ratio and any future changes to our capitalization. As of December 31, 2008, awards outstanding under the 1997 Plan were 85,634 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 December 31, 2008 expire through 2012.
Stock Option Valuation and Expense Information under SFAS No. 123(R)
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, (SFAS No. 123(R)), which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock options and employee stock purchases based on estimated fair values. We adopted SFAS No. 123(R) using the modified prospective application method which requires us to record compensation cost related to unvested option awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining service period of those awards with no change in historical reported earnings. Awards granted after December 31, 2005 are valued at fair value in accordance with SFAS No. 123(R) and compensation expense is recognized 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 under SFAS No. 123(R) for the years ended December 31, 2008, 2007, and 2006, which was allocated as follows:
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(9) STOCKHOLDERS’ EQUITY – (continued)
| | | | | | |
| | December 31,
2008 | | December 31,
2007 | | December 31,
2006 |
| | | (In Thousands) | | (In Thousands) | | (In Thousands) |
| Research and development | | $ | 1,581 | | | $ | 1,274 | | | $ | 681 | |
| General and administrative | | | 545 | | | | 524 | | | | 273 | |
| | | $ | 2,126 | | | $ | 1,798 | | | $ | 954 | |
We use the Black-Scholes pricing model to value stock options. The Black-Scholes model requires the use of a number of complex assumptions including expected volatility of the Company’s stock price and the expected life of option grants. The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2008, 2007, and 2006 was calculated using the Black-Scholes model with the following weighted-average assumptions:
| | | | | | |
| | December 31,
2008 | | December 31,
2007 | | December 31,
2006 |
| Risk-free interest rate | | | 3.01 | % | | | 4.64 | % | | | 4.60 | % |
| Expected dividend yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
| Expected volatility | | | 84.00 | % | | | 80.36 | % | | | 86.53 | % |
| Expected life (years) | | | 5.67 | | | | 5.59 | | | | 5.64 | |
| Weighted-average fair value of options granted | | $ | 1.23 | | | $ | 1.87 | | | $ | 1.17 | |
The volatility assumption for 2008 and 2007 is based on the weighted average volatility for the most recent 1-year period as well as the volatility over the expected life of 5.67 and 5.59 years, respectively. For 2006, the volatility assumption is based on the 5-year, long-term volatility of our stock price in relationship to its average stock price during the same period.
The risk-free interest rate assumption is based upon various U.S. Treasury rates as of the date of the grants, ranging from 1.34 percent to 3.68 percent, 3.28 percent to 5.13 percent, and 4.28 percent to 5.22 percent, respectively, for the years ended December 31, 2008, 2007, and 2006.
The dividend yield is based on the assumption that we are not expected to declare a dividend over the life of the options.
The expected life of employee stock options represents the weighted average combining the actual life of the 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 and the full contractual term.
SFAS No. 123(R) requires forfeitures to be 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 the demographics of current option holders and standard probabilities of employee turnover. Stock-based compensation expense recognized in the statements of operation for the year ended December 31, 2008 has been revised for actual forfeitures. 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.
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(9) STOCKHOLDERS’ EQUITY – (continued)
Stock Options
The activity of the plans from December 31, 2005 to December 31, 2008 is as follows:
| | | | | | | | |
| (In Thousands, Except per Share Data) | | Number
of Shares
Under
Option | | Weighted
Average
Exercise
Price | | Weighted
Average
Contractual
Life (Years) | | Aggregate
Intrinsic
Value |
| Outstanding at December 31, 2005 | | | 4,841 | | | $ | 3.01 | | | | | | | | | |
| Granted | | | 2,041 | | | | 1.59 | | | | | | | | | |
| Exercised | | | (44 | ) | | | 1.27 | | | | | | | | | |
| Cancelled | | | (1,330 | ) | | | 2.90 | | | | | | | | | |
| Outstanding at December 31, 2006 | | | 5,508 | | | | 2.52 | | | | | | | | | |
| Granted | | | 1,522 | | | | 2.69 | | | | | | | | | |
| Exercised | | | (296 | ) | | | 2.18 | | | | | | | | | |
| Cancelled | | | (1,147 | ) | | | 2.88 | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 5,587 | | | | 2.51 | | | | | | | | | |
| Granted | | | 2,091 | | | | 1.73 | | | | | | | | | |
| Exercised | | | — | | | | — | | | | | | | | | |
| Cancelled | | | (618 | ) | | | 2.52 | | | | | | | | | |
| Stock options outstanding at December 31, 2008 | | | 7,060 | | | $ | 2.28 | | | | 6.8 | | | $ | 250 | |
| Vested or expected to vest at December 31, 2008 | | | 4,482 | | | $ | 2.50 | | | | 5.8 | | | $ | 23 | |
| Exercisable at December 31, 2008 | | | 4,319 | | | $ | 2.52 | | | | 5.7 | | | $ | — | |
Unrecognized stock-based compensation expense related to stock options was approximately $3.1 million as of December 31, 2008. This amount is expected to be expensed over a weighted average period of 2.5 years. There were no stock options exercised during 2008. We realized proceeds of $0, $647,000 and $55,000 from options exercised during the years ended December 31, 2008, 2007, and 2006, respectively.
The following table summarizes information about our stock options outstanding at December 31, 2008:
| | | | | | | | | | |
| | Outstanding | | Exercisable |
| Range of Exercise Prices | | Number
of Shares | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
of Shares | | Weighted
Average
Exercise
Price |
| | | (Number of Shares in Thousands) |
| $0.00 – $1.00 | | | 10 | | | | 10.0 | | | $ | 0.41 | | | | — | | | $ | — | |
| $1.01 – $3.00 | | | 5,544 | | | | 7.8 | | | | 1.90 | | | | 2,872 | | | | 1.93 | |
| $3.01 – $4.00 | | | 1,051 | | | | 3.7 | | | | 3.30 | | | | 1,035 | | | | 3.30 | |
| $4.01 – $5.00 | | | 381 | | | | 2.7 | | | | 4.28 | | | | 338 | | | | 4.30 | |
| $5.01 – $10.00 | | | 74 | | | | 2.0 | | | | 6.07 | | | | 74 | | | | 6.07 | |
| | | | 7,060 | | | | 6.8 years | | | $ | 2.28 | | | | 4,319 | | | $ | 2.52 | |
As of December 31, 2008 options covering 4,319,236 shares were exercisable at $1.06 to $9.63 per share (average $2.52 per share) and options covering 4,973,593 shares remain available to be granted.
(c) EMPLOYEE STOCK PURCHASE PLAN
In December 2000, we adopted the 2000 Employee Stock Purchase Plan (Purchase Plan). Under the Purchase Plan, employees may purchase our common stock through payroll deductions at a purchase price equal to 85 percent of the fair market value of our common stock on either the first business day or last business day of
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(9) STOCKHOLDERS’ EQUITY – (continued)
the applicable 6-month offering period, whichever is lower. Substantially all employees are eligible to participate. Participants may purchase common stock through payroll deductions of up to 15 percent of the participant’s compensation. The maximum number of shares a participant may purchase during a 6-month offering period is 6,250 shares. In June 2006, the Board of Directors approved a resolution effectively fixing the number of shares available for issuance under the Purchase Plan. The Purchase Plan will terminate on October 18, 2010, unless terminated earlier by the Board of Directors.
Employees purchased 97,423 shares, 37,027 shares, and 120,146 shares during the 12 months ended December 31, 2008, 2007, and 2006, respectively, at a weighted average purchase price of $1.24, $2.00, and $1.19. We realized proceeds of $120,000, $74,000, and $143,000 from shares acquired under the Purchase Plan during the years ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008, 1,880,795 shares were available for issuance under the Purchase Plan.
In January 2009, we issued 181,491 shares related to the purchase period for the 6 months ending December 31, 2008. This purchase reduced the shares available for issuance to 1,699,304 under the plan. The purchase price of these shares was $0.37 and we realized proceeds of $67,000.
(d) WARRANTS
Warrants to purchase common stock were granted to organizations and institutions in conjunction with certain licensing and funding activities. The warrants vested typically vest 6 months after issuance. Outstanding and vested warrants are summarized below (in thousands, except per share amounts):
| | | | | | | | | | | | |
| | 2008 | | 2007 | | 2006 |
| Exercise Price | | Outstanding | | Vested | | Outstanding | | Vested | | Outstanding | | Vested |
| $2.016 | | | 2,252 | | | | 2,252 | | | | — | | | | — | | | | — | | | | — | |
| $2.67 | | | 520 | | | | 520 | | | | 520 | | | | 520 | | | | 520 | | | | 520 | |
| $3.60 | | | — | | | | — | | | | — | | | | — | | | | 66 | | | | 66 | |
| | | | 2,772 | | | | 2,772 | | | | 520 | | | | 520 | | | | 586 | | | | 586 | |
(10) INCOME TAXES
For the years ended December 31, 2008, 2007, and 2006 there is no provision for income taxes included in the statements of operations. We have incurred operating losses, but have not recorded an income tax benefit for 2008, 2007, and 2006, as we have recorded a valuation allowance against our net operating losses and other net deferred tax assets due to uncertainties related to the ability to realize these tax assets. A reconciliation of tax credits computed at the statutory federal tax rate (34%) on operating loss before income taxes to the actual income tax expense is as follows (in thousands):
| | | | | | |
| | 2008 | | 2007 | | 2006 |
| Tax provision computed at the statutory rate | | $ | (8,861 | ) | | $ | (6,361 | ) | | $ | (6,553 | ) |
| State income taxes, net of federal income tax provision | | | (1,419 | ) | | | (864 | ) | | | (404 | ) |
| Book expenses not deductible for tax purposes | | | 449 | | | | 7 | | | | 6 | |
| Research and experimentation tax credit | | | (1,432 | ) | | | (1,021 | ) | | | (1,119 | ) |
| Nondeductible compensation expense | | | 638 | | | | 486 | | | | 322 | |
| Change in state statutory rate and other | | | (2,129 | ) | | | — | | | | — | |
| Change in valuation allowance for deferred tax assets | | | 12,754 | | | | 7,753 | | | | 7,748 | |
| Income tax expense | | $ | — | | | $ | — | | | $ | — | |
Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulated net losses to date, we have provided a full valuation allowance against our deferred tax assets.
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GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(10) INCOME TAXES – (continued)
Deferred income taxes reflect the net effects of net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):
| | | | | | |
| | 2008 | | 2007 | | 2006 |
| Net operating loss carryforwards | | $ | 101,061 | | | $ | 89,838 | | | $ | 83,394 | |
| Capital loss carryforwards | | | — | | | | 328 | | | | 328 | |
| Research and experimentation tax credit | | | 13,997 | | | | 12,565 | | | | 11,544 | |
Property and equipment, principally due to differences in
depreciation | | | (213 | ) | | | (275 | ) | | | (501 | ) |
| Deferred compensation expense | | | 1,217 | | | | 979 | | | | 793 | |
| Other | | | 202 | | | | 115 | | | | 178 | |
| Total deferred tax assets | | | 116,264 | | | | 103,550 | | | | 95,736 | |
| Valuation allowance | | | (116,264 | ) | | | (103,550 | ) | | | (95,736 | ) |
| Net deferred tax assets | | $ | — | | | $ | — | | | $ | — | |
The difference reflected in the change in the valuation allowance as it appears in the analysis of deferred tax assets in comparison to the reconciliation of income tax expense is the result of the tax impact of other comprehensive income.
At December 31, 2008, we have net operating loss carryforwards of approximately $256.2 million for federal income tax purposes of which $59.4 million expire at various dates through 2013, and $196.8 million expire at various dates through 2028. We have research and experimentation tax credit carryforwards of $14.0 million at December 31, 2008, of which $1.7 million expire through 2013 and $12.3 million expire through 2028. Capital loss carryforwards of $0.8 million expired in 2008.
Our NOL and tax credit carryforwards may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryforwards are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2008 and in prior years, we may have experienced such ownership changes. Diacrin might have also experienced ownership changes in prior years and/or as a result of its merger with us.
The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryforwards that can be utilized. When we complete the necessary studies, the amount of NOL carryforwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryforwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenues, and expenses for the periods presented.
As discussed in Note 2, we adopted the provisions of FIN 48 on January 1, 2007. At January 1, 2007 and December 31, 2007 and December 31, 2008, we had no gross unrecognized tax benefits. We do not expect any significant changes in unrecognized tax benefits over the next 12 months. In addition, we did not recognize any interest or penalties related to uncertain tax positions at December 31, 2008 and 2007.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2005 through 2008 tax years generally remain subject to examination by federal and most state tax authorities. In addition, we would remain open to examination for earlier years if we were to utilize net operating losses or tax credit carryforwards that originated prior to 2005.
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TABLE OF CONTENTS
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(11) OTHER COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is included in the Statements of Stockholders’ Equity. Our change in accumulated other comprehensive loss is due exclusively to changes in our unrealized gain or loss on securities for the 3 years ended December 31, 2008 as follows:
| | |
| | Accumulated
Other
Comprehensive
Income (Loss) |
| Balance, December 31, 2005 | | $ | (45 | ) |
| Net current period change | | | (1,169 | ) |
| Reclassification adjustments for gains (losses) reclassified into income | | | 1,227 | |
| Balance, December 31, 2006 | | | 13 | |
| Net current period change | | | (1,678 | ) |
| Reclassification adjustments for gains (losses) reclassified into income | | | 1,520 | |
| Balance, December 31, 2007 | | | (145 | ) |
| Net current period change | | | (590 | ) |
| Reclassification adjustments for gains (losses) reclassified into income | | | 695 | |
| Balance, December 31, 2008 | | $ | (40 | ) |
Other comprehensive loss does not reflect the effect of income taxes because we did not have an income tax expense during the 3 years ended December 31, 2008.
(12) QUARTERLY RESULTS (UNAUDITED)
Our unaudited quarterly information is as follows (in thousands, except per share data):
| | | | | | | | |
| 2008 | | Q1 | | Q2 | | Q3 | | Q4 |
| Revenue | | $ | 3,729 | | | $ | 3,863 | | | $ | 4,205 | | | $ | 3,324 | |
| Operating Loss | | $ | (6,404 | ) | | $ | (6,782 | ) | | $ | (7,041 | ) | | $ | (6,447 | ) |
| Net Loss | | $ | (6,260 | ) | | $ | (6,550 | ) | | $ | (6,839 | ) | | $ | (6,414 | ) |
| Basic and Diluted Loss Per Share | | $ | (0.08 | ) | | $ | (0.08 | ) | | $ | (0.08 | ) | | $ | (0.07 | ) |
| | | | | | | | |
| 2007 | | Q1 | | Q2 | | Q3 | | Q4 |
| Revenue | | $ | 2,903 | | | $ | 3,709 | | | $ | 3,777 | | | $ | 3,658 | |
| Operating Loss | | $ | (6,219 | ) | | $ | (4,817 | ) | | $ | (4,750 | ) | | $ | (5,551 | ) |
| Net Loss | | $ | (6,001 | ) | | $ | (4,219 | ) | | $ | (4,053 | ) | | $ | (4,435 | ) |
| Basic and Diluted Loss Per Share | | $ | (0.08 | ) | | $ | (0.06 | ) | | $ | (0.05 | ) | | $ | (0.06 | ) |
The loss per share was calculated for each 3-month period on a stand-alone basis. As a result, the sum of the loss per share for the 4 quarters may not equal the loss per share for the respective 12-month period.
(13) SUBSEQUENT EVENT
On January 29, 2009, we announced a corporate restructuring plan to help us lower our operating costs and our projected use of cash, including the elimination of 22 positions. The plan reduced our workforce to 98 full-time positions. Approximately $270,000 of termination expenses are expected to be incurred in the first quarter of 2009 as a result of this corporate restructuring plan.
On March 11, 2009, we signed an amendment to our lease agreement for our Gaithersburg facilities. The lease will expire on October 31, 2014.
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