##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-26483
 VaxGen, Inc.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-3236309
(I.R.S. Employer Identification No.)379 Oyster Point Boulevard, Suite 10
South San Francisco, California
    
    94080(Address of principal executive offices)
    
    (Zip Code)
 (650) 624-1000
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company þ
 o þ




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##### 



VaxGen, Inc.
 Form 10-Q
 For the Quarter Ended March 31, 2010
 Table of Contents
 PagePart
I Financial InformationItem 1 Financial Statements (Unaudited):Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations:Overview
    
    
    12Critical Accounting Policies and Estimates
    
    
    13Results of Operations
    
    
    13Financial Condition, Liquidity and Capital Resources
    
    
    14Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4T Controls and Procedures
    
    
    16Part II Other InformationItem 1 Legal Proceedings
    
    
    17Item 1A Risk Factors
    
    
    17Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3 Defaults Upon Senior Securities
    
    
    21Item 4 Removed and Reserved
    
    
    21Item 5 Other Information
    
    
    21Item 6 Exhibits
    
    
    21Signatures
    
    
    22Exhibit 31.1Exhibit 32.1
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 VaxGen, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(in thousands)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,261
    
    
    $
    29,348Investment securities
    
    
    1,999
    
    
    
    2,991Prepaid expenses and other current assets
    
    
    172
    
    
    
    681Assets held for sale
    
    
    354
    
    
    
    356Total current assets
    
    
    31,786
    
    
    
    33,376Restricted cash
    
    
    1,400
    
    
    
    1,400Other assets
    
    
    350
    
    
    
    366Total assets
    
    $
    33,536
    
    
    $
    35,142LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    36
    
    
    $
    100Accrued and other current liabilities
    
    
    751
    
    
    
    687Total current liabilities
    
    
    787
    
    
    
    787Deferred rent and other liabilities
    
    
    4,302
    
    
    
    4,377Total liabilities
    
    
    5,089
    
    
    
    5,164Commitments and Contingencies (Note 10)Stockholders equity:Common stock
    
    
    331
    
    
    
    331Additional paid-in capital
    
    
    303,148
    
    
    
    303,095Accumulated deficit
    
    
    (275,031
    )
    
    
    (273,449
    )Accumulated other comprehensive income (loss)
    
    
    (1
    )
    
    
    1Total stockholders equity
    
    
    28,447
    
    
    
    29,978Total liabilities and stockholders equity
    
    $
    33,536
    
    
    $
    35,142
   3




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##### Table of Contents



VaxGen, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(in thousands, except per share data)
 Three Months EndedMarch 31,2010
    
    
    2009Operating expenses:General and administrative
    
    $
    1,697
    
    
    $
    2,228Total operating expenses
    
    
    1,697
    
    
    
    2,228Loss from operations
    
    
    (1,697
    )
    
    
    (2,228
    )Other income (expense)Interest expense
    
    
    (3
    )
    
    
    (11
    )Interest income
    
    
    32
    
    
    
    104Realized gain on sale of available for sale investments
    
    
    
    
    
    
    357Other
    
    
    86
    
    
    
    32Total other income, net
    
    
    115
    
    
    
    482Net loss
    
    $
    (1,582
    )
    
    $
    (1,746
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.05
    )Weighted average shares used in computing basic and diluted net loss per share
    
    
    33,107
    
    
    
    33,107
   4




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##### Table of Contents



VaxGen, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)  (in thousands)
 Three Months EndedMarch 31,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (1,582
    )
    
    $
    (1,746
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation
    
    
    53
    
    
    
    62Gain on sale of Celltrion common stock
    
    
    
    
    
    
    (357
    )(Gain) Loss on sale of assets held for sale
    
    
    (1
    )
    
    
    7Changes in operating assets and liabilitiesPrepaid expenses and other current assets
    
    
    509
    
    
    
    232Accounts payable
    
    
    (64
    )
    
    
    111Accrued and other current liabilities
    
    
    64
    
    
    
    (149
    )Other
    
    
    (59
    )
    
    
    (75
    )Net cash used in operating activities
    
    
    (1,080
    )
    
    
    (1,915
    )Cash flows from investing activities:Proceeds from sale of assets held for sale
    
    
    3
    
    
    
    14Proceeds from sale and maturity of investment securities
    
    
    2,740
    
    
    
    2,398Purchase of investment securities
    
    
    (1,750
    )
    
    
    (3,051
    )Proceeds from sale of Celltrion common stock
    
    
    
    
    
    
    357Net cash provided by (used in) investing activities
    
    
    993
    
    
    
    (282
    )Net decrease in cash and cash equivalents
    
    
    (87
    )
    
    
    (2,197
    )Cash and cash equivalents, beginning of period
    
    
    29,348
    
    
    
    34,618Cash and cash equivalents, end of period
    
    $
    29,261
    
    
    $
    32,421
   5




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##### Table of Contents



VaxGen, Inc.
 
 Notes to condensed Consolidated Financial Statements
(Unaudited)
 1. Organization
 Nature of Business Activities
   Basis of Presentation
    2. Summary of Significant Accounting Policies
  Recent Accounting Pronouncements
 Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task
Force.
  6




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##### Table of Contents



Improving Disclosures about Fair Value
Measurements Fair Value Measurements and Disclosures
 Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements,
 3. Net Loss per Share
   Three Months EndedMarch 31,2010
    
    
    2009Net loss
    
    $
    (1,582
    )
    
    $
    (1,746
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.05
    )Weighted average shares used in computing
basic and diluted net loss per share
    
    
    33,107
    
    
    
    33,107
  March 31,2010
    
    
    2009Options to purchase common stock
    
    
    1,147
    
    
    
    1,858Warrants to purchase common stock
    
    
    2,070
    
    
    
    2,238Total
    
    
    3,217
    
    
    
    4,096
 4. Comprehensive Loss
  Three Months EndedMarch 31,2010
    
    
    2009Net loss
    
    $
    (1,582
    )
    
    $
    (1,746
    )Change in unrealized gains on investment securities
    
    
    (2
    )
    
    
    (273
    )Comprehensive loss
    
    $
    (1,584
    )
    
    $
    (2,019
    )
  7




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##### Table of Contents



5. Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2010Certificates of deposit
    
    $
    2,000
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    1,999December 31, 2009Certificates of deposit
    
    $
    2,991
    
    
    $
    
    
    
    $
    
    
    
    $
    2,991
 6. Assets Held For Sale
   Fair Value Measurements UsingQuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantThree Months
    
    
    Identical
    
    
    Observable
    
    
    Unobservable
    
    
    TotalEnded
    
    
    Assets
    
    
    Inputs
    
    
    Inputs
    
    
    GainsDescription
    
    March 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    (Losses)Assets held for sale
    
    $
    354
    
    
    $
    
    
    
    $
    
    
    
    $
    354
    
    
    $
    
  7. Accrued and Other Current Liabilities
  March 31,
    
    
    December 31,2010
    
    
    2009Employee benefits and severance
    
    $
    82
    
    
    $
    82Legal and professional fees
    
    
    214
    
    
    
    163Deferred rent
    
    
    402
    
    
    
    423Other
    
    
    53
    
    
    
    19Total accrued and other current liabilities
    
    $
    751
    
    
    $
    687
  8




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##### Table of Contents



8. Income Taxes
     9. Stock-Based Compensation
  Three Months EndedMarch 31,2010
    
    
    2009General and administrative
    
    $
    53
    
    
    $
    62$
    53
    
    
    $
    62
 10. Commitments and Contingencies
 Leases
      9




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2010
    
    $
    1,8532011
    
    
    2,3672012
    
    
    2,4332013
    
    
    2,5052014
    
    
    2,5812015 and beyond
    
    
    5,396Total
    
    $
    17,135
 Litigation
  Contingencies
  11. Fair Value Measurements
 Fair Value Measurements and Disclosures
 
    
    Level 1 Inputs are quoted prices in active markets for
identical assets or liabilities.
    
    Level 2 Inputs are quoted prices for similar assets or
liabilities in an active market, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are
observable and market-corroborated inputs which are derived principally from or
corroborated by observable market data.
    
    Level 3 Inputs are derived from valuation techniques
in which one or more significant inputs or value drivers are unobservable.
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:Cash equivalents:Money market funds
    
    $
    998
    
    
    $
    
    
    
    $
    
    
    
    $
    998Investment securities:Certificates of deposit
    
    
    
    
    
    
    1,999
    
    
    
    
    
    
    
    1,999Restricted cash:Certificates of deposit
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    1,400Total financial assets
    
    $
    998
    
    
    $
    3,399
    
    
    $
    
    
    
    $
    4,397
  10




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##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:Cash equivalents:Money market funds
    
    $
    2,103
    
    
    $
    
    
    
    $
    
    
    
    $
    2,103Investment securities:Certificates of deposit
    
    
    
    
    
    
    2,991
    
    
    
    
    
    
    
    2,991Restricted cash:Certificates of deposit
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    1,400Total financial assets
    
    $
    2,103
    
    
    $
    4,391
    
    
    $
    
    
    
    $
    6,494
  In loss position for lessthan twelve monthsFair Value
    
    
    Unrealized LossCertificates of deposit
    
    $
    1,999
    
    
    $
    (1
    )
 12. Subsequent Events
      11




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Special Note Regarding Forward - Looking Statements
   
 OVERVIEW
   Recent Developments
      12




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  
 RESULTS OF OPERATIONS
 Comparison of Fiscal Quarters Ended March 31, 2010 and 2009
 General and administrative expenses
 Three Months Ended
    
    
    PercentMarch 31,
    
    
    Change2010
    
    
    2009
    
    
    2010/2009(in thousands)General and administrative expenses
    
    $
    1,697
    
    
    $
    2,228
    
    
    
    -24
    %
   Other income (expense)
 Three Months EndedMarch 31,2010
    
    
    2009(in thousands)Interest expense
    
    $
    (3
    )
    
    $
    (11
    )Interest income
    
    
    32
    
    
    
    104Realized gain on sale of available for sale investments
    
    
    
    
    
    
    357Other
    
    
    86
    
    
    
    32Total other income (expense), net
    
    $
    115
    
    
    $
    482
  
    
    Decreased interest income due to lower interest rates and lower overall cash,
cash equivalents and investment balances; and
    
    A $0.4 million realized gain on the sale of our remaining Celltrion investment in
2009.
   13




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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 2010
    
    
    2009(in thousands)As of March 31:Cash, cash equivalents and investment securities
    
    $
    31,260
    
    
    $
    36,723Working capital
    
    
    30,999
    
    
    
    37,302Three Months ended March 31:Cash provided by (used in)Operating activities
    
    $
    (1,080
    )
    
    $
    (1,915
    )Investing activities
    
    
    993
    
    
    
    (282
    )Financing activities
    
    
    
    
    
    
    
    
    
    Prepaid and other current assets, which decreased by $0.5 million in 2010 vs.
$0.2 million in 2009. The 2010 decrease was primarily due to the receipt of a $0.4
million tax refund during the three months ended March 31, 2010;
    
    Accounts payable, which decreased by $64,000 in 2010 and increased by $111,000 in
2009 primarily due to the timing of payments; and
    
    Accrued and other liabilities, which increased by $64,000 in 2010 and decreased
by $149,000 in 2009. The 2010 increase was primarily due to increased accrued legal and
audit fees resulting. The 2009 decrease was primarily due to decreased accrued bonus at
March 31, 2009 resulting from the payment of the bonus.
   
    
    Cash, cash equivalents and investments decreased by $5.5 million primarily due to
operating losses;
    
    Prepaid and other current assets decreased by $0.4 primarily due to reduced
prepaid tax; and
    
    Assets held for sale decreased by $0.7 million primarily due to impairment
charges in 2009.
   14




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##### Table of Contents



Contractual Obligations
  Remainderof current
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    year (2010)
    
    
    Years
    
    
    Years
    
    
    5 yearsOperating Lease Obligations
    
    $
    17,135
    
    
    $
    1,853
    
    
    $
    4,800
    
    
    $
    5,086
    
    
    $
    5,396
  Off-Balance Sheet Arrangements
 S-K.
 Recent Accounting Pronouncements
 Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task
Force.
 , Improving Disclosures about Fair Value
Measurements Fair Value Measurements and Disclosures
 Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements,
  15




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  Inherent limitations on effectiveness of controls.
   16




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 Jensen v. Panek et al. Ming v.
VaxGen, Inc. et al. Hawes v. VaxGen, Inc. et al.
  
 ITEM 1A.
    
    RISK FACTORS
  Failure to complete our proposed merger with diaDexus could adversely affect our stock
price and our future business and operations; provisions of a merger agreement may restrict
our ability to operate our business.*
      17




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##### Table of Contents



The costs associated with the proposed merger are difficult to estimate, may be higher than
expected and may harm the financial results of the combined company. *
  We do not currently have capabilities to develop products or offer any services; the continuation
of our business as a going concern is wholly dependent on our ability to identify and successfully
complete a strategic transaction, and/or the sale of the Companys assets which we may be unable to
accomplish.
   We may use some or all of our remaining resources, including available cash, while we seek to
identify a strategic transaction; we may fail to identify an appropriate transaction; our
stockholders may vote against a proposed transaction; and even if a strategic transaction is
completed, it may be unsuccessful in creating value for stockholders.
    18




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##### Table of Contents



We may be unable to satisfactorily settle our lease obligation or sub-lease our manufacturing
facility.
  We may need to raise additional capital to support our operations and in order to continue as a
going concern if we successfully complete a strategic transaction.
   As a result of the reductions in our workforce that we announced throughout 2007 and 2008, we may
not be successful in retaining key employees and in attracting qualified new employees as required
in the future. If we are unable to retain our management or to attract additional qualified
personnel, our ability to rebuild our business will be seriously jeopardized.
  We have only a limited operating history and we expect to continue to generate operating losses.
  Natural disasters, including earthquakes, may damage our facilities.
  We may be subject to claims that our employees or we have wrongfully used or disclosed alleged
trade secrets of their former employers.
   19




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We are not currently listed on a national exchange and there can be no assurance we will ever be
listed.
  Our stockholders could experience substantial dilution as a result of the issuance of additional
shares of common or preferred stock.
  Shares of our common stock eligible for future sale may adversely affect the market for our common
stock.
  Our stock price is likely to be volatile.
   
    
    timing and consistency of filing Financial Statements;
    
    changes in financial estimates by securities analysts and our failure to meet or exceed such estimates;
    
    rumors about our business prospects or product development efforts;
    
    issuances of debt or equity securities;
    
    issuances of securities or the expectation of the issuance of securities as part of a merger or other strategic transaction;
    
    actual or expected sales by our stockholders of substantial amounts of our common stock, including shares issued upon
exercise of outstanding options and warrants;
    
    developments in or the outcome of litigation against us; and
    
    other events or factors, many of which are beyond our control.
  20




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##### Table of Contents



We have no history of paying dividends on our common stock.
  Our charter documents and Delaware law may discourage an acquisition of VaxGen.
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    (REMOVED AND RESERVED)
 
 ITEM 5.
    
    OTHER INFORMATION
  
 
 ITEM 6.
    
    EXHIBITS
 (a) Exhibits required by Item 601 of Regulation S-K:
  Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith3.1
    
    
    Amended and Restated Certificate of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.13.2
    
    
    Amendment to the Amended and Restated Certificate of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.33.3
    
    
    Amended and Restated Bylaws, dated as of May 18, 2007.
    
    8-K
    
    000-26483
    
    05-23-07
    
    
    3.1
  21




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##### Table of Contents



Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith3.4
    
    
    Amendment to the Amended and Restated Certificate of
Incorporation, dated as of August 10, 2005.
    
    10-Q
    
    0-26483
    
    05-31-07
    
    
    3.44.1
    
    
    Reference is made to Exhibits 3.1, 3.2, 3.4 and 3.54.2
    
    
    Certificate of Designations, Rights and Preferences of Series A 6%
Cumulative Convertible Preferred Stock.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.24.3
    
    
    Registrant Rights Agreement by and among Registrant and Certain
Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.24.4
    
    
    Form of Common Stock Purchase Warrant.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    4.14.5
    
    
    Specimen Stock Certificate for Common Stock of Registrant.
    
    S-1
    
    333-78065
    
    6-11-99
    
    
    4.131.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Section 1350 Certification
    
    
    
    
    
    
    
    
    
    
    
    X
 
 Signatures
  VaxGen, Inc.Dated: May 14, 2010
    By:
    /s/ James P. PanekJames P. PanekPresident
(Principal Executive,  Financial and Accounting
Officer)  22




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EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith3.1
    
    
    Amended and Restated Certificate of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.13.2
    
    
    Amendment to the Amended and Restated Certificate
of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.33.3
    
    
    Amended and Restated Bylaws, dated as of May 18,
2007.
    
    8-K
    
    000-26483
    
    05-23-07
    
    
    3.13.4
    
    
    Amendment to the Amended and Restated Certificate
of Incorporation, dated as of August 10, 2005.
    
    10-Q
    
    0-26483
    
    05-31-07
    
    
    3.44.1
    
    
    Reference is made to Exhibits 3.1, 3.2, 3.4 and 3.54.2
    
    
    Certificate of Designations, Rights and Preferences of Series A 6%
Cumulative Convertible Preferred Stock.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.24.3
    
    
    Registrant Rights Agreement by and among Registrant and Certain
Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.24.4
    
    
    Form of Common Stock Purchase Warrant.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    4.14.5
    
    
    Specimen Stock Certificate for Common Stock of Registrant.
    
    S-1
    
    333-78065
    
    6-11-99
    
    
    4.131.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Section 1350 Certification
    
    
    
    
    
    
    
    
    
    
    
    X
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