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| VXGN.OB > SEC Filings for VXGN.OB > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
In June 2007, we terminated by mutual consent our agreement with the
Chemo-Sero-Therapeutic Research Institute of Japan, or Kaketsuken, to co-develop
a next-generation, attenuated smallpox vaccine, LC16m8, for use in the United
States and elsewhere. Under the terms of the termination agreement, we
transferred to Kaketsuken or its designee all reports, data and materials and
all intellectual property rights that relate to conducting non-clinical and
clinical development of LC16m8 in the U.S. In return, Kaketsuken has released us
from all ongoing obligations.
In September 2007, we further reduced our workforce to decrease operating costs.
Restructuring costs included employee termination and benefit costs. The
estimated cash outflow of this RIF is $1.1 million. The cash outflow of this RIF
was $0.9 million during 2007 and $0.3 million during the six months ended
June 30, 2008. Beginning in October 2007, additional wage savings were $0.3
million per month. We do not expect these savings to be materially offset by any
anticipated increases in other expenses.
In April 2008, the Company restructured its workforce to reduce operating
expenses as a result of the termination of the proposed merger between VaxGen
and Raven by decreasing its workforce of twenty-two employees by approximately
75 percent. During the second quarter of 2008, the Company incurred and paid
restructuring costs of $1.0 million for one-time employee termination costs
associated with this action.
The following table summarizes the restructuring charges and expenditures
relating to the 2007 and 2008 restructurings (in thousands):
Consolidation
of Excess
Workforce Facilities and
Reduction Other Total
Restructuring Costs
Costs incurred $ 4,368 $ 1,006 $ 5,374
Amounts paid (4,068 ) (1,006 ) (5,074 )
Balance accrued as of December 31, 2007 300 - 300
Costs incurred 985 - 985
Amounts paid (1,285 ) - (1,285 )
Balance accrued as of June 30, 2008 $ - $ - $ -
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In October 2007, we amended our lease agreement, dated October 26, 1998, or
Lease Amendment. Per the Lease Amendment, we relinquished our occupancy of one
of our two buildings subject to the lease on March 1, 2008. The Lease Amendment
reduced our lease obligations by $12.2 million over the remaining lease term,
which runs through December 31, 2016. We paid a surrender fee to the landlord of
$0.1 million. Under the Lease Amendment, the amount of the $2.4 million letter
of credit we delivered in favor of the landlord was reduced by $1.0 million,
with further reductions over the remaining term of the lease upon our
achievement of financial benchmarks.
In November 2007, we entered into an Agreement and Plan of Merger, as amended in
December 2007 and February 2008, or Merger Agreement, with Raven
biotechnologies, inc., or Raven. Raven is a private, development stage
biopharmaceutical company focused on the discovery, development and
commercialization of monoclonal antibody-based products for the treatment of
cancer.
On March 28, 2008, we entered into a Termination of Merger Agreement,
Acknowledgment and Amendment to Loan Agreement and Secured Promissory Note (the
"Termination Agreement and Amendment"), terminating the Agreement and Plan of
Merger between Raven and two of our wholly-owned subsidiaries and amending the
terms of our bridge loan to Raven. The balance on the loan was $6.0 million as
of June 30, 2008 which was repaid in full by Raven in July 2008. Under the
Termination Agreement and Amendment, the parties mutually agreed to terminate
the Merger Agreement effective immediately. The Company recorded $2.3 million of
costs, primarily professional fees, related with the proposed merger during the
six months ended June 30, 2008.
As a result of the termination of proposed merger with Raven, the Company is
considering various alternate strategic transactions to return value to its
stockholders. If the Company is unable to identify and complete an alternate
strategic transaction, the Company will liquidate. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
On May 2, 2008, we completed the sale of all assets and rights related to its
recombinant protective antigen (rPA) anthrax vaccine product candidate and
related technology to Emergent BioSolutions, Inc., or Emergent. Under the terms
of the transaction, Emergent paid us $2 million upon execution of the definitive
agreement and may be obligated to pay up to an additional $8 million in
milestone payments, plus specified percentages of future net sales.
On July 31, 2008, the Company was notified by Emergent that conditions had been
satisfied that triggered a $1.0 million milestone payment from Emergent to
VaxGen in relation to this transaction. This payment will be recorded as other
income in the third quarter of 2008.
In July 2008, the Company repurchased $22.0 million principal amount of its
convertible senior subordinated notes at a purchase price of $18.0 million plus
$0.3 million in accrued interest. As a result of these transactions, the Company
will record in other income a gain on note redemptions of $3.5 million in the
third quarter of 2008.
Celltrion
For the six months ended June 30, 2006, our investment in Celltrion, Inc., or
Celltrion, a company developing and operating a mammalian cell culture
biomanufacturing facility in the Republic of Korea, was accounted for under the
equity method. At June 30, 2006, our ownership interest in Celltrion was 8%.
During June and December 2006, we received gross proceeds of $130.3 million from
the sale of substantially all of our Celltrion common stock. At December 31,
2007 and June 30, 2008, we held a nominal ownership interest in Celltrion.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Reference should be made to Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007, filed with the SEC in March 2008,
for a description of our critical accounting policies. There have been no
significant changes to our policies since we filed that report, other than those
mentioned below.
Assets Held for Sale
The Company considers an asset held for sale when all of the following criteria
per SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
("SFAS 144") are met:
a) Management commits to a plan to sell the asset;
b) The asset is available for immediate sale in its present condition;
c) An active marketing plan to sell the asset has been initiated at a reasonable price;
d) The sale of the asset is probable within one year; and,
e) It is unlikely that significant changes to the plan to sell the asset will be made.
Upon designation of a property as an asset held for sale and in accordance with
the provisions of SFAS 144, the Company records the carrying value of the
property at the lower of its carrying value or its estimated fair market value,
less estimated selling costs, and the Company ceases depreciation of the asset.
All losses and gains on assets sold and held for sale (including any related
impairment charges) are included in "loss from operations" in the Condensed
Consolidated Statement of Operations. All assets held for sale and the
liabilities related to these assets are separately disclosed in the Condensed
Consolidated Balance Sheet. The amount the Company will ultimately realize could
differ from the amount recorded in the financial statements.
Adoption of SFAS 157
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157,
Fair Value Measurement ("SFAS 157") with respect to its financial assets and
liabilities only. Effective January 1, 2008, the Company also adopted SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115 ("SFAS 159"), which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value. The
Company did not elect to adopt the fair value option under SFAS 159.
SFAS 157 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. SFAS 157 establishes a three-level
fair value hierarchy that prioritizes the inputs used to measure fair value.
This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. 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 - 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.
• 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.
Our adoption of SFAS 157 did not have a material impact on our consolidated
financial statements. The Company has segregated all financial assets and
liabilities that are measured at fair value on a recurring basis (at least
annually) into the most appropriate level within the fair value hierarchy based
on the inputs used to determine the fair value at the measurement date in the
table below.
Our cash equivalents and investments are classified within Level 1 or Level 2 of
the fair value hierarchy because they are valued using quoted market prices in
active markets, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency. The types of instruments valued based
on quoted market prices in active markets include most U.S. government and
agency securities, sovereign government obligations, and money market
securities. Such instruments are generally classified within Level 1 of the fair
value hierarchy.
The types of instruments valued based on other observable inputs include
investment-grade corporate bonds, mortgage-backed and asset-backed products,
state, municipal and provincial obligations. Such instruments are generally
classified within Level 2 of the fair value hierarchy.
We value certain embedded features issued in connection with the financing of
our Convertible Notes in 2005 as a derivative liability. We estimate the fair
value of our derivative liability each quarter using the Monte Carlo Simulation
methodology. This methodology allows flexibility in incorporating various
assumptions such as probabilities of certain triggering events. The valuations
are based on the information available as of the various valuation dates.
Factors affecting the amount of this liability include the market value of our
common stock, the estimated volatility of our common stock, our market
capitalization, the risk-free interest rate and other assumptions such as the
probability of a change in control event. Of these valuation parameters,
management's assessment of the probability of a change in control is the most
subjective and also has the greatest influence on fair value. Changes in value
are recorded as non-cash valuation adjustments within other income (expense) in
our consolidated statements of operations. The derivative is classified within
level 3 of the fair value hierarchy.
Based on the results of our fair value measurement of our derivative liability,
we recognized a valuation gain of $0.7 million and valuation loss of
$1.0 million for the three and six months ended June 30, 2008, respectively,
which was included in other income (expense), net in our condensed consolidated
statements of operations. The carrying value of our derivative liability was
$4.5 million as of June 30, 2008.
RESULTS OF OPERATIONS
Comparison of Fiscal Quarters and Six Months Ended June 30, 2008 and 2007
Revenues
Three Months Ended Percent Six Months Ended Percent
June 30, Change June 30, Change
2008 2007 2008/2007 2008 2007 2008/2007
(in thousands)
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Revenues for the six months ended June 30, 2008 were from service revenues
earned as part of a consulting services agreement with Celltrion to provide
technical assistance related to the design, engineering and start-up of
Celltrion's manufacturing facility. VaxGen recognized $15,000 and $0.2 million
from Celltrion during the three months ended June 30, 2008 and 2007,
respectively; and $0.3 million and $0.5 million from Celltrion during the six
months ended June 30, 2008 and 2007, respectively. Revenues for the six months
ended June 30, 2007 include $3.9 million from our Anthrax Contracts principally
reflecting the 2007 reimbursement of restructuring costs as a result of the
termination of the Anthrax Contracts in December 2006.
Revenues earned in one period are not indicative of revenues to be earned in
future periods. Following the HHS decision to terminate its contract with us, we
ceased actively developing our anthrax vaccine, scaled back our biodefense
activities and are actively pursuing strategic and other alternatives;
therefore, we are unable to predict revenues, if any, for the remainder of 2008.
Research and development expenses
Three Months Ended Percent Six Months Ended Percent
June 30, Change June 30, Change
2008 2007 2008/2007 2008 2007 2008/2007
(in thousands) (in thousands)
Research and
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Research expenses include the costs of internal personnel, outside contractors,
allocated overhead and laboratory supplies. The Company ceased operations during
the first quarter of 2008 and therefore no research and development expenses
were incurred during the second quarter of 2008. Research and development
expenses during the second quarter of 2007 included $1.5 million of labor and
related expenses, and $3.3 million of facilities and overhead costs.
The decrease in research and development expenses in the six months ended
June 30, 2008 over the comparable period in 2007 was primarily due to:
• Labor and related expenses, which decreased by $3.3 million primarily due
to no research and development expenses during the second quarter of 2008
and decreased headcount following multiple reductions in force during
2007; and
• Facilities and overhead costs, which decreased by $7.4 million due to reduced operations and consolidation of facilities during the first quarter of 2008 and no research and development expenses during the second quarter of 2008.
We expect to incur no research and development expenses during the remainder of
2008.
General and administrative expenses
Three Months Ended Percent Six Months Ended Percent
June 30, Change June 30, Change
2008 2007 2008/2007 2008 2007 2008/2007
(in thousands)
General and
administrative
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General and administrative expenses consist primarily of compensation costs,
occupancy costs including depreciation expense, fees for accounting, legal and
other professional services and other general corporate expenses.
The decrease in general and administrative expenses in the three months ended
June 30, 2008 over the comparable period of 2007 was primarily due to lower
consultant and outside labor costs which decreased $1.4 million in the three
months ending June 30, 2008 versus the comparable 2007 period resulting from
non-recurring costs incurred during the second quarter of 2007 to file multiple
SEC filings.
The decrease in general and administrative expenses in the six months ended
June 30, 2008 over the comparable period of 2007 was primarily due to:
• Labor and benefits, which decreased by $0.9 million primarily associated
with the 2007 and 2008 reductions in force; and
• Consultant and outside labor costs, which decreased by $1.9 million due to non-recurring costs incurred during the first six months of 2007 to file multiple SEC filings.
We expect quarterly general and administrative expenses to decrease during the remainder of 2008 due to our 2007 and 2008 reductions in force and the termination of our proposed merger agreement with Raven. Restructuring expenses
Three Months Ended Percent Six Months Ended Percent
June 30, Change June 30, Change
2008 2007 2008/2007 2008 2007 2008/2007
(in thousands)
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During the three months ended June 30, 2008 and June 30, 2007, we reduced our workforce to reduce operating costs. Restructuring costs included employee termination and benefit costs. Restructuring expenses for the six months ended June 30, 2007 also reflect a reduction in January 2007. The January 2007 restructuring costs include $2.7 million for employee termination benefits and $1.0 million for costs associated with consolidation of our facilities in California.
Impairment of assets held for sale
Three Months Ended Percent Six Months Ended Percent
June 30, Change June 30, Change
2008 2007 2008/2007 2008 2007 2008/2007
(in thousands)
Impairment of assets
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Based on the lack of success in finding a buyer for its facility and expectation
of need to dismantle to sell, the Company performed an impairment assessment of
the facility as of June 30, 2008. At June 30, 2008, the Company estimated that
the fair market values of these assets were less than the carrying values of
these assets by $8.5 million, which was recorded as an impairment of assets held
for sale in the statement of operations for the three and six months ended
June 30, 2008. The impairment includes all leasehold improvements relating to
the facility of approximately $6.5 million, as these items will have no future
economic benefit. The Company used the market approach to determine fair market
value of its assets held for sale.
Other income (expense)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(in thousands) (in thousands)
Interest expense $ (601 ) $ (612 ) $ (1,369 ) $ (1,223 )
Interest income 534 1,279 1,249 2,519
. . .
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