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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 March 31, 2005

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, MD 20878
 
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 o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
As of April 25, 2005, the Registrant had 55,635,968 shares of common stock, $.001 par value, outstanding.
 
 
 
 

 



GENVEC, INC.
FORM 10-Q
 
TABLE OF CONTENTS
 

PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
 
Condensed Balance Sheets
 
Condensed Statements of Operations
 
Condensed Statements of Cash Flows
 
Notes to Condensed Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
   
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits
 
 
SIGNATURES

 
 
 
 

 
2

GENVEC, INC.

FORM 10-Q

FORWARD LOOKING STATEMENTS


This report includes statements that reflect projections or expectations of our future financial condition, results of operations and business. These statements are “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, 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 terminology such as "believes," "expects," "intends," "may," "will," "should," or "anticipates" or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date thereof, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to the early stage of product candidates under development; risks relating to our ability to secure and maintain relationships with collaborators; uncertainties with, and unexpected results and related analyses relating to clinical trials of our product candidates; the timing and content of future U.S. Food and Drug Administration regulatory actions with respect to us or our collaborators; dependence on the efforts of third parties; dependence on intellectual property; risks that we may lack the financial resources and access to capital to fund our operations; and risks relating to the commercialization, if any, of our product candidates (such as marketing, regulatory, patent, product liability, supply, competition and other risks). Further information on the factors and risks that could affect our business, financial conditions and results of operations, are contained in our filings with the U.S. Securities and Exchange Commission (SEC), which are available at www.sec.gov. We will not update any forward-looking statements to reflect new, changing or unanticipated events or circumstances that occur after the date, on which the statement is made, except as may be required by applicable law or regulation.

 
 
 
 

 
3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
GENVEC, INC.
CONDENSED BALANCE SHEETS
(in thousands, except per share data)
 
 
    
March 31, 
    
December 31,
  
     
2005
    
2004
  
 
    
(unaudited) 
        
ASSETS
              
Current assets:
              
  Cash and cash equivalents
  
$
5,102
  
$
5,366
  
  Short-term investments
    
20,591
    
25,397
  
  Accounts receivable
    
1,621
    
1,544
  
  Prepaid expenses and other
    
1,541
    
1,821
  
  Bond sinking fund
    
415
    
276
  
    Total current assets
    
29,270
    
34,404
  
Property and equipment, net
    
5,079
    
5,418
  
Long-term investments
    
2,277
    
2,302
  
Other assets
    
62
    
65
  
Intangible assets
    
1,856
    
1,882
  
    Total assets
  
$
38,544
  
$
44,071
  
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current liabilities:
              
  Current portion of long-term debt
  
$
1,099
  
$
1,227
  
  Accounts payable
    
998
    
1,622
  
  Accrued clinical trial expenses
    
1,065
    
1,364
  
  Accrued other expenses
    
1,892
    
2,128
  
  Unearned revenue
    
1,602
    
2,042
  
    Total current liabilities
    
6,656
    
8,383
  
Long-term debt, less current portion
    
3,159
    
3,264
  
Other liabilities
    
1,620
    
1,943
  
    Total liabilities
    
11,435
    
13,590
  
 
Stockholders' equity:
              
  Common stock, $.001 par value; 100,000 shares authorized; 55,636 and
    55,588 shares issued and outstanding at March 31, 2005 and December 31, 2004
    
56
    
56
  
  Additional paid-in capital
    
166,656
    
166,656
  
  Deferred stock compensation
    
(341
)
  
(382
)
  Accumulated other comprehensive loss
    
(210
)
  
(255
)
  Accumulated deficit
    
(139,052
)
  
(135,594
)
    Total stockholders' equity
    
27,109
    
30,481
  
    Total liabilities and stockholders' equity
  
$
38,544
  
$
44,071
  
 
See notes to condensed financial statements.
 
 
 
 

 
4

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


 
  
Three Months Ended 
  
 
  
March 31, 
  
   
 2005
  
 2004
  
 
Revenue from strategic alliances and research contracts
  
$
4,549
  
$
2,741
  
 
Operating expenses:
              
  Research and development
    
5,906
    
6,321
  
  General and administrative
    
2,198
    
2,096
  
     Total operating expenses
    
8,104
    
8,417
  
 
Loss from operations
    
(3,555
)
  
(5,676
)
 
Other income (expense):
              
  Interest income
    
185
    
114
  
  Interest expense
   
(88
)
  
(88
)
     Total other income (expense), net
    
97
    
26
  
 
Net loss
  
$
(3,458
)
$
(5,650
)
 
Other comprehensive income (loss), net of tax:
  Unrealized holding gain (loss) on securities available
    for sale
 
$
(24
)
$
73
  
  Change in fair value of derivatives used for cash flow hedge
    
69
    
(19
)
 
    Other comprehensive income
   
45
    
54
  
 
Comprehensive loss
  
$
(3,413
)
$
(5,596
)
Basic and diluted net loss per share
  
$
(0.06
)
$
(0.11
)
Shares used in computing basic and diluted net loss per share
   
55,636
    
51,408
  


See notes to condensed financial statements.
 
 
 
 

 
5

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


 
  
Three Months Ended 
 
  
March 31, 
     
2005
    
2004
  
Cash flows from operating activities:
              
Net loss
  
$
(3,458
)
$
(5,650
)
Adjustments to reconcile net loss to net cash used in operating activities:
             
  Depreciation and amortization
    
406
    
816
  
  Stock option compensation
   
41
    
57
  
  Change in accounts receivable
   
(77
)
  
(682
)
  Change in accounts payable and accrued expenses
    
(1,159
)
  
(1,809
)
  Change in unearned revenue
    
(647
)
  
1,409
  
  Change in other assets and liabilities, net
    
392
    
126
  
    Net cash used in operating activities
    
(4,502
)
  
(5,733
)
               
Cash flows from investing activities:
              
  Purchases of property and equipment
    
(67
)
  
(69
)
  Purchases of investment securities
    
(4,083
)
  
(2,592
)
  Proceeds from sale and maturity of investment securities
    
8,760
    
7,967
  
    Net cash provided by investing activities
    
4,610
    
5,306
  
               
Cash flows from financing activities:
              
  Proceeds from issuance of common stock, net of issuance costs
    
--
    
258
  
  Principal payments of long-term debt
    
(372
)
  
(418
)
    Net cash used in financing activities
    
(372
)
  
(160
)
               
Decrease in cash and cash equivalents
    
(264
)
  
(587
)
Beginning balance of cash and cash equivalents
   
5,366
    
5,217
  
Ending balance of cash and cash equivalents
 
$
5,102
  
$
4,630
  
               
Supplemental disclosures of non-cash activities:
              
    Cash interest payments
  
$
72
  
$
89
  


See notes to condensed financial statements.

 
 
 
 

 
6
GENVEC, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)

(1)  
General

The condensed financial statements included herein have been prepared by GenVec, Inc. (“GenVec” or the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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; however, the Company believes that 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 the Company’s 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 2005 and December 31, 2004 and the results of its operations and cash flows for the three-month periods ended March 31, 2005 and March 31, 2004. 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.

(2)  
Investments

The amortized cost, gross unrealized holding gains (losses) and fair value of available-for-sale securities by major security type at March 31, 2005 and December 31, 2004, are as follows (in thousands):
   
March 31, 2005
  
 
    
Amortized
Cost 
    
Gross unrealized holding
gains
(losses)
 
  
Fair
Value
  
  Government and agency notes
  
$
6,017
  
$
4
  
$
6,021
  
  Corporate bonds
    
16,891
    
(44
)
  
16,847
  
   
$
22,908
  
$
(40
)
$
22,868
  
 
 
 December 31, 2004
  
     
Amortized
Cost 
  
  Gross unrealized 
holding
gains
(losses)
    
Fair
Value
  
   Government and agency notes   $ 6,522   $ 24   $ 6,546  
   Corporate Bonds   21,200   (47 ) 21,153  
    $ 27,722    $ (23 ) $ 27,699  
 
Maturities of securities classified as available-for-sale had fair value as follows (in thousands):
 
 
    
March 31,
2005 
 
 
December 31,
2004
  
 
              
  Due within one year
  
$
20,591
  
$
25,397
  
  Due after one year through four years
    
2,277
    
2,302
  
 
  
$
22,868
  
$
27,699
  
 
 
 
 

 
7
 
(3)  
Stock Option Plans

The Company accounts for stock-based compensation awards to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and complies with the disclosure provisions of SFAS Nos. 123 and 148, Accounting for Stock-Based Compensation.

Option grants to employees have been issued only at fair market value prices as of the date of grant during the periods presented herein, and the Company’s policy does not recognize compensation costs for options of this type. The pro forma costs of these options granted in the first three months of 2005 have been calculated using the Black-Scholes option pricing model and assuming a 75% expected volatility, a 3.5% risk-free interest rate, a 4-year life for the option and no dividend yield. The pro forma amounts may not be representative of the effects on pro forma net earnings for future years. The weighted-average grant date fair market value of options issued was $2.08 and $1.84 per share in the three months ended March 31, 2005 and 2004, respectively.
 
The following table illustrates the effect on net loss per share as if the fair value based method had been applied to all outstanding and unvested stock-based awards in each period:
 
 
  
Three Months
Ended March 31, 
 
  
(In thousands, except per share amounts) 
     
2005
    
2004
  
Net loss, as reported
  
$
(3,458
)
$
(5,650
)
Total stock-based employee compensation expense determined under
  fair value based method for all awards
    
(248
)
  
(162
)
Pro forma net loss
  
$
(3,706
)
$
(5,812
)
Basic and diluted loss per share:
  As reported
  
$
(0.06
)
$
(0.11
)
  Pro forma
  
$
(0.07
)
$
(0.11
)
               


 
 
 
 

 
8
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
                   RESULTS OF OPERATIONS
 
STRATEGIC AND CLINICAL OVERVIEW

GenVec is a clinical-stage biopharmaceutical company developing innovative gene-based therapeutics to treat cancer, heart disease and vision loss. We have four product candidates in clinical development, including two in randomized, controlled Phase II trials, as follows:

 
·
TNFerade™: Our lead product candidate for the treatment of cancer, currently under clinical study in a randomized, controlled Phase II trial for the treatment of locally advanced pancreatic cancer;

 
·
BIOBYPASS®: We initiated a randomized, placebo-controlled Phase II trial with our collaborator, Cordis Corporation, in the fourth quarter of 2004 to study the clinical benefit of BIOBYPASS delivered by the NOGASTAR® mapping and MYOSTAR™ injection catheter system to treat severe coronary artery disease;

 
·
PEDF: We have completed a dose-escalation Phase I clinical trial in patients with severe, wet age-related macular degeneration (AMD), a leading cause of blindness in individuals over the age of 50. In February 2005, we expanded the Phase I clinical testing of PEDF in AMD patients with less severe disease; and

 
·
Cell Transplantation Therapy for congestive heart failure

In February 2005, we received a letter from the U.S. Food and Drug Administration (FDA), which allowed us to proceed with the randomized, controlled portion of the Phase II clinical trial of TNFerade in patients with locally advanced pancreatic cancer. In October 2004, the FDA placed the TNFerade clinical program on hold due to blood clots seen in patients with esophageal cancer in a separate Phase II trial. In response, GenVec submitted data to the FDA and requested and received permission to move forward with the pancreatic study. The Company has not yet asked the FDA to move forward in other types of cancer and the other studies affected (esophageal and rectal cancer) remain on clinical hold. We will continue our efforts to identify other promising TNFerade indications suitable for further commercial development.

We have initiated a randomized, controlled study in heart disease (BIOBYPASS) to confirm our Phase II clinical results and position this product candidate for a pivotal Phase III trial. The NOVA (NOGA Delivery of VEGF in Angina) study is being conducted in collaboration with Cordis Corporation. With respect to our PEDF program, we expanded our Phase I clinical testing in AMD patients with less severe disease. We are currently seeking development partners possessing clinical, regulatory, marketing and sales experience to help support our product registration and commercialization efforts for TNFerade and PEDF.

Each of our product candidates (excluding Cell Transplantation Therapy) uses a common, patent-protected technology platform to deliver genes that produce medically beneficial proteins at the site of disease. We also are using this flexible technology platform in collaboration with FUSO Pharmaceutical Industries of Japan to develop a targeted cancer therapy and with the U.S. Government and PATH’s Malaria Vaccine Initiative (MVI) for the development of preventative vaccine candidates.

Our Cell Transplantation Therapy program, which has completed three Phase I studies, demonstrated safety and feasibility of myoblast cell transplantation for the treatment of patients with damaged heart muscle. We have a Development and License Agreement with Terumo Corporation who is funding all development in Japan. We are currently pursuing a collaborative partner to further advance the development of this program outside of Japan.

To help realize the full commercial potential of TNFerade, we are seeking a development partner possessing clinical, regulatory and marketing experience in oncology to lead the registration and commercialization efforts in Europe and Asia and to help fund clinical development in North America. We are also pursuing collaborative partners to further advance the development of PEDF and our Cell Transplantation Therapy program. Collaborative licensing and/or funded research arrangements under such partnerships would help offset additional operating expenses associated with these programs.

 
 
 
 

 
9
Product Candidates

Our product candidates address significant markets for which no products are currently available or where we believe that the current standard of care can be significantly improved. Our lead product candidates and clinical activities are described below.

TNFerade™, in development for the treatment of locally advanced pancreatic cancer, is intended to be a novel therapy with a unique mechanism of action for use by multi-disciplinary oncology teams. TNFerade produces Tumor Necrosis Factor-Alpha (TNF-alpha) - a potent anti-tumor agent, shown to be effective in treating solid tumors, and approved for one indication in Europe. TNF-alpha’s use is limited, however, because its high toxicity when delivered systemically. To address this toxicity problem, GenVec utilizes targeted delivery and production of the TNF-alpha protein directly at the site of the tumor.

We anticipate that, if approved, TNFerade will primarily be used as a front-line therapy for solid tumors. Front-line therapy for solid tumors is typically directed at eradicating the local cancer through various combinations of surgery, radiation and chemotherapy. TNFerade is intended to be used in combination with these other therapies, as well as existing and new drugs for metastic cancer.

For TNFerade, we have completed the dose-escalation portion of Phase II trials for pancreatic and esophageal cancer. Our clinical data indicate that TNFerade has activity in many solid tumor types, including pancreatic, esophageal, rectal and breast cancers, melanoma and sarcomas. Data from our Phase II study in pancreatic cancer has demonstrated improved local tumor response, a slowing of tumor progression, and an increase in patient survival rates at a dose of 4x1011 pu. We have established the maximum tolerated dose at 4x1011 pu for current and future clinical trials. The current Phase II pancreatic trial includes a randomized component that will be amended to incorporate the Phase III trial design to confirm our initial clinical results.

BIOBYPASS®, which has completed a randomized, controlled Phase II study in 71 patients with severe heart disease who have no treatment options, is being developed for the treatment of coronary artery disease. As a result of blocked arteries in the heart, patients with severe coronary artery disease typically experience severe, often immobilizing, pain from minimal physical activity such as walking. BIOBYPASS is intended to restore blood flow to areas of the heart with insufficient blood flow through the formation of new blood vessels, a process known as angiogenesis. BIOBYPASS produces vascular endothelial growth factor (VEGF121) to stimulate the growth of new blood vessels in heart tissue and restore blood flow to areas of the heart with poor blood flow. Our approach of directly injecting BIOBYPASS into the heart wall enables the sustained, controlled production of the VEGF121 protein in the area of the heart with poor blood flow.

In November 2002, we presented results from the 71-patient, randomized, controlled study. Patients treated with BIOBYPASS showed a greater ability to exercise, less chest pain, less medication for angina pain and an improved quality of life when compared to patients receiving current standard of care. There were no drug-related serious adverse events or dose limiting toxicities. Also in 2002, we completed a clinical study designed to demonstrate the feasibility of using an endocardial injection catheter to deliver BIOBYPASS directly to the heart muscle.

We are collaborating with Cordis Corporation (a Johnson & Johnson Company) to conduct an endocardial injection catheter study. We anticipate that a commercialized version of BIOBYPASS would be delivered by such a non-surgical injection catheter approach. GenVec and Cordis will collaborate on regulatory matters and share in the clinical trial costs. GenVec will supply BIOBYPASS and Cordis will provide the NOGASTAR® mapping and MYOSTAR injection catheter system and training to the interventional cardiologists conducting the trial. GenVec will retain commercial rights to BIOBYPASS and Cordis will retain commercial rights to their injection catheter system. We initiated this randomized, placebo-controlled trial in patients with severe coronary artery disease in the fourth quarter of 2004. This multi-center study, enrolling up to 129 patients, will be conducted in Europe and Israel.

PEDF is designed for the treatment of wet age-related macular degeneration, which leads to rapid loss of vision. PEDF uses our proprietary technology to produce the pigment epithelium-derived factor (PEDF) protein, a natural inhibitor of angiogenesis, in the eye.

During the second quarter of 2004, we completed a Phase I clinical trial of PEDF in patients with severe wet age-related macular degeneration. We reported encouraging findings from this study at the American Academy of Ophthalmology meeting in October 2004. Data reported on 28 patients demonstrated that PEDF was well tolerated with no dose limiting toxicities. Additionally, investigators observed feasible delivery of PEDF to the eye and improvement in the appearance of the retina and stabilization of vision loss in some patients after administration of PEDF. In February 2005, we expanded the Phase I clinical testing of PEDF in AMD patients with less severe disease.
 
 
 
 

 
10
Cell Transplantation Therapy for the treatment of patients with damaged heart muscle has completed three Phase I safety studies that have demonstrated the safety and feasibility of myoblast cell transplantation when administered in conjunction with coronary artery bypass surgery (CABG) or a left ventricle assist device (LVAD). These positive results were reported at a meeting of the American Heart Association in November 2004. In collaboration with the Arizona Heart Institute, we have initiated a Phase I trial for “no option” patients receiving myoblast cell transplantation therapy alone (i.e., without CABG or LVAD). We also have a Development and License Agreement with Terumo Corporation. Under the terms of our agreement, Terumo will fund all development in Japan and pay development milestones to GenVec.

To date, our clinical studies have involved only a limited number of patients. Before we can obtain FDA approval and commercialize a product candidate, we will have to conduct additional clinical trials. Favorable results in early studies may not be repeated later. Our product development costs will increase if we experience delays in testing or if we need to perform more or larger clinical trials than we currently plan.

Other Programs

In addition to our internal product development programs, we are working to further develop and expand our technology platform by developing second-generation adenovectors and new applications, such as vaccines, in collaboration with our partners. Our current programs include:

 
·
A three-year, $4.5 million contract extension announced in December 2002 with FUSO Pharmaceutical Industries of Japan to develop a targeted cancer therapy product candidate designed to treat not only the primary tumor, but also cancer that has spread, or metastasized, to distant sites in the body. Under the terms of our agreement with FUSO, we have retained worldwide rights, excluding Japan, to develop and commercialize product candidates arising from the collaboration.

 
·
A multi-year, $40 million funded research and development contract with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health (NIH) using our proprietary adenovector technology for the development of clinical grade vaccine candidates against HIV and SARS. In April 2005, we announced positive results of the NIH initiated Phase I studies using the vaccine candidates developed under this collaboration.

 
·
Other funded preventative vaccine development programs include the United States Naval Medical Research Center (vaccine for malaria and dengue virus); the Malaria Vaccine Initiative (malaria vaccine) and the United States Department of Agriculture (vaccine for foot and mouth disease).
 
FINANCIAL OVERVIEW FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

Results of Operations

GenVec’s net loss was $3.5 million or ($0.06) per share on revenues of $4.5 million for the quarter ended March 31, 2005. This compares to a net loss of $5.6 million or ($0.11) per share on revenues of $2.7 million in the same period in the prior year. GenVec ended the first quarter of 2005 with $28.0 million in cash and investments.

Revenue

Revenues for the three months ended March 31, 2005 were $4.5 million, an increase of 66 percent when compared to revenues of $2.7 million in the comparable prior period.

Revenues for the current period were primarily derived from the Company’s funded research and development programs with the National Institutes of Health (NIH), PATH’s Malaria Vaccine Initiative (MVI) and the United States Naval Medical Research Center (NMRC), all of which use GenVec’s proprietary adenovector technology for the development of clinical grade vaccine candidates against HIV, SARS, malaria, and dengue virus, and our collaboration with Fuso Pharmaceuticals Industries for the development of a targeted cancer therapy. On January 12, 2005, the Company announced a one-year, $10 million extension of its HIV vaccine development contract with NIH, now totaling up to $40 million and extending through 2008. The additional funding will support continued joint efforts of NIH and GenVec to develop HIV vaccine candidates, including utilization of GenVec’s proprietary and advanced scaleable production process for manufacturing clinical grade HIV vaccine for future NIH trials.

The Company also generated revenue from an expanded collaboration with Fuso Pharmaceutical Industries for the development of a targeted cancer therapy and an ongoing collaboration with Terumo Corporation for the development of a cell transplantation therapy in Japan.
 
 
 
 

 
11
Expenses
 
Operating expenses were $8.1 million for the three months ended March 31, 2005, a decrease of 4 percent compared to $8.4 million in the comparable prior year period. Research and development expenses for the current quarter decreased 7% to $5.9 million as compared to $6.3 million for the comparable prior year period. The reduction is primarily due to lower outside costs related to the manufacture of clinical supplies for the Company’s ongoing TNFerade development program. This decrease was partially offset by increased levels of vaccine development activities under the Company’s funded contracts. General and administrative expenses for the three months ended March 31, 2005 increased 5% to $2.2 million as compared to $2.1 million for the comparable prior year period. General and administrative expenses were primarily higher in 2005 due to additional auditing fees associated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, partially offset by lower license fee payments.
 
Net other income for the three-month period ended March 31, 2005 was $97,000, compared to $26,000 in the comparable period last year. Interest income for the three-month period ended March 31, 2005 was $185,000 compared to $114,000 in the comparable prior year period. The increase in interest income was primarily attributable to higher investment balances resulting from our equity financing completed on April 16, 2004, which generated net proceeds of approximately $11.7 million.

Liquidity and Capital Resources

At March 31, 2005, cash and investments totaled $28.0 million compared to $33.1 million at December 31, 2004. This $5.1 million decrease resulted primarily from the use of cash for general operating activities totaling $4.5 million and repayment of $371,000 of outstanding debt obligations.

Net cash used in operating activities for the three months ended March 31, 2005 was approximately $4.5 million primarily resulting from continued clinical development of the Company’s product portfolio. Net cash used in operating activities for the three months ended March 31, 2005 also reflects the impact of the timing of payments for certain budgeted expenditures in the first quarter of 2005 such as annual premiums for directors and officers liability insurance and 2004 performance-based employee bonuses.
 
In April 2005, we filed a shelf registration statement with the Securities and Exchange Commission. This shelf registration statement replaces our prior registration statement. When declared effective, the registration statement will cover the offer and sale of up to $35 million of our common stock, preferred stock and warrants. Although we have no immediate plans to offer and sell these securities, we believe that the shelf registration statement will provide greater flexibility in accessing capital markets when market conditions are conducive to an offering.
 
Without additional financing, we believe that our cash reserves and anticipated cash flow from our current collaborations will be sufficient to support our operations through 2006. We anticipate that expenditures for research and development, including clinical trials, product development and preclinical studies, expansion of manufacturing capabilities, and general and administrative activities will increase significantly in future periods. In the future, our liquidity and capital resources will depend upon, among other things, the level of our research, development, clinical, regulatory, manufacturing and marketing expenses and funding from collaborations.


 
 
 
 

 
12
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.

As of March 31, 2005, we have an outstanding bond payable totaling $3.1 million. This bond bears interest at a variable rate based on LIBOR. We have addressed our exposure to changes in interest rates through the use of derivative financial instruments. During 2000, we entered into an interest rate swap agreement that effectively fixed the interest rate over the life of the bond at 6.7% plus a remarketing fee. The remaining debt has a fixed rate and is not subject to interest rate exposure.

ITEM 4.    CONTROLS AND PROCEDURES

As of March 31, 2005, under the supervision and with the participation of the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer, Treasurer and Corporate Secretary (its principal executive officer and principal financial officer, respectively), management has reviewed and evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer, Treasurer and Corporate Secretary have concluded that these disclosure controls and procedures are effective as of March 31, 2005.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 
 
 
 

 
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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS

 
31.1      
Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2  
Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1     
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 
32.2  
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350,  As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
  *  This exhibit is not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and is not and should not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Through its website at www.genvec.com, the Company makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.

 
 
 
 

 
14
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: May 10, 2005
By:
/s/ Paul H. Fischer
   
Paul H. Fischer, Ph.D.
   
President and Chief Executive Officer
   
(Principal Executive Officer)
     
Date: May 10, 2005
By:
/s/ Jeffrey W. Church
   
Jeffrey W. Church
   
Chief Financial Officer, Treasurer and Corporate Secretary
   
(Principal Financial and Accounting Officer)
 

 

 
 
 
 

 
15
Exhibit 31.1
 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Paul H. Fischer, President and Chief Executive Officer of GenVec, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of GenVec, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(15(f)) for the registrant and have:

 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
designed such internal control over financial reporting,  or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation  of financial statements for external  purposes in  accordance with generally accepted accounting principles;
 
 
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 

Date:  May 10, 2005
/s/ Paul H. Fischer
 
Paul H. Fischer, Ph.D.
 
President and Chief Executive Officer

 
 
 
 

 
16
Exhibit 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Jeffrey W. Church, Chief Financial Officer, Treasurer and Corporate Secretary of GenVec, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of GenVec, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(15(f)) for the registrant and have:

 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
designed such internal control over financial reporting,  or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation  of financial statements for external  purposes in  accordance with generally accepted accounting principles;

 
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:  May 10, 2005
/s/ Jeffrey W. Church
 
Jeffrey W. Church
 
Chief Financial Officer, Treasurer
 and Corporate Secretary

 
 
 
 

 
17

Exhibit 32.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GenVec, Inc. (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul H. Fischer, as President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
 
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by the Report.
 
This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 

 
Date: May 10, 2005
/s/ Paul H. Fischer
 
Paul H. Fischer, Ph.D.
 
President and Chief Executive Officer
 

 
 

 

 
 
 
 

 
18

Exhibit 32.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GenVec, Inc. (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey W. Church, as Chief Financial Officer, Treasurer and Corporate Secretary of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by the Report.
 
This certificate is being made for the exclusive purpose of compliance by the Chief Financial Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 

 
Date: May 10, 2005
/s/ Jeffrey W. Church
 
Jeffrey W. Church
 
Chief Financial Officer, Treasurer
 and Corporate Secretary
 

 
19