##### 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 September 30, 2008
 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
    
    94-3236309(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)349 Oyster Point BoulevardSouth San Francisco, California
    
    94080(Address of Principal Executive Offices)
    
    (Zip Code)
 (650) 624-1000
  þ o
 Rule 12b-2
 Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
  o þ




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##### 



VaxGen, Inc.
 Form 10-Q
 For the Quarter Ended September 30, 2008
 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
    
    
    14Overview
    
    
    14Critical Accounting Policies and Estimates
    
    
    16Results of Operations
    
    
    18Financial Condition, Liquidity and Capital Resources
    
    
    20Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4T Controls and Procedures
    
    
    23Part II Other InformationItem 1 Legal Proceedings
    
    
    24Item 1A Risk Factors
    
    
    24Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3 Defaults Upon Senior Securities
    
    
    29Item 4 Submission of Matters to a Vote of Security Holders
    
    
    29Item 5 Other Information
    
    
    29Item 6 Exhibits
    
    
    29Signatures
    
    
    31Exhibit 10.4Exhibit 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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    44,154
    
    
    $
    64,726Investment securities
    
    
    2,240
    
    
    
    6,889Accounts receivable
    
    
    
    
    
    
    199Prepaid expenses and other current assets
    
    
    725
    
    
    
    1,167Assets held for sale
    
    
    1,131
    
    
    
    Total current assets
    
    
    48,250
    
    
    
    72,981Property and equipment
    
    
    
    
    
    
    10,806Restricted cash
    
    
    1,562
    
    
    
    1,556Other assets
    
    
    577
    
    
    
    4,622Total assets
    
    $
    50,389
    
    
    $
    89,965LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    96
    
    
    $
    2,151Accrued and other current liabilities
    
    
    557
    
    
    
    2,326Derivative liability
    
    
    888
    
    
    
    3,500Total current liabilities
    
    
    1,541
    
    
    
    7,977Convertible senior subordinated notes
    
    
    7,860
    
    
    
    30,679Deferred rent and other liabilities
    
    
    4,687
    
    
    
    4,270Total liabilities
    
    
    14,088
    
    
    
    42,926Contingencies (Note 13)Stockholders equity:Common stock
    
    
    331
    
    
    
    331Additional paid-in capital
    
    
    302,791
    
    
    
    301,378Accumulated deficit
    
    
    (267,057
    )
    
    
    (254,678
    )Accumulated other comprehensive income
    
    
    236
    
    
    
    8Total stockholders equity
    
    
    36,301
    
    
    
    47,039Total liabilities and stockholders equity
    
    $
    50,389
    
    
    $
    89,965
   3




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VaxGen, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    
    
    
    $
    416
    
    
    $
    293
    
    
    $
    4,798Operating expenses:Research and development
    
    
    
    
    
    
    4,125
    
    
    
    1,387
    
    
    
    16,050General and administrative
    
    
    1,947
    
    
    
    5,403
    
    
    
    10,892
    
    
    
    16,778Restructuring
    
    
    328
    
    
    
    1,092
    
    
    
    1,313
    
    
    
    5,374Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    8,498
    
    
    
    Total operating expenses
    
    
    2,275
    
    
    
    10,620
    
    
    
    22,090
    
    
    
    38,202Loss from operations
    
    
    (2,275
    )
    
    
    (10,204
    )
    
    
    (21,797
    )
    
    
    (33,404
    )Other income (expense)Interest expense
    
    
    (202
    )
    
    
    (612
    )
    
    
    (1,571
    )
    
    
    (1,835
    )Interest income
    
    
    334
    
    
    
    1,163
    
    
    
    1,582
    
    
    
    3,682Valuation adjustments
    
    
    3,567
    
    
    
    (201
    )
    
    
    2,612
    
    
    
    3,843Gain on convertible debt repurchase
    
    
    3,078
    
    
    
    
    
    
    
    3,791
    
    
    
    Gain on sale of Anthrax Program
    
    
    1,000
    
    
    
    
    
    
    
    3,000
    
    
    
    Other, net
    
    
    14
    
    
    
    
    
    
    
    4
    
    
    
    Total other income, net
    
    
    7,791
    
    
    
    350
    
    
    
    9,418
    
    
    
    5,690Net income (loss)
    
    $
    5,516
    
    
    $
    (9,854
    )
    
    $
    (12,379
    )
    
    $
    (27,714
    )Net income (loss) per share:Basic
    
    $
    0.17
    
    
    $
    (0.30
    )
    
    $
    (0.37
    )
    
    $
    (0.84
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.30
    )
    
    $
    (0.37
    )
    
    $
    (0.84
    )Shares used
in computing net income (loss) per share:Basic
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107Diluted
    
    
    33,831
    
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
   4




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VaxGen, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (12,379
    )
    
    $
    (27,714
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    587
    
    
    
    4,606Impairment of assets held for sale
    
    
    8,498
    
    
    
    Valuation adjustments
    
    
    (2,612
    )
    
    
    (3,843
    )Stock-based compensation
    
    
    1,413
    
    
    
    1,885Amortization of premiums and discounts on investment securities
    
    
    (170
    )
    
    
    (988
    )Gain on convertible debt repurchase
    
    
    (3,791
    )
    
    
    Non-cash interest expense
    
    
    427
    
    
    
    535Raven merger costs previously capitalized
    
    
    1,932
    
    
    
    Changes in operating assets and liabilitiesReceivables
    
    
    199
    
    
    
    7,907Prepaid expenses and other current assets
    
    
    442
    
    
    
    891Accounts payable
    
    
    (2,055
    )
    
    
    (2,297
    )Accrued and other current liabilities
    
    
    (1,769
    )
    
    
    (508
    )Other
    
    
    533
    
    
    
    620Net cash used in operating activities
    
    
    (8,745
    )
    
    
    (18,906
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    
    
    
    
    (19
    )Fees from sale of investment in affiliate
    
    
    
    
    
    
    (2,441
    )Proceeds from sale of assets held for sale
    
    
    590
    
    
    
    Proceeds from sale and maturity of investment securities
    
    
    22,989
    
    
    
    51,074Purchase of investment securities
    
    
    (17,942
    )
    
    
    (46,126
    )Loan to Raven biotechnologies, inc.
    
    
    (4,668
    )
    
    
    Repayment of loan by Raven biotechnologies, inc.
    
    
    6,000
    
    
    
    Change in restricted cash
    
    
    (6
    )
    
    
    Other
    
    
    
    
    
    
    (47
    )Net cash provided by investing activities
    
    
    6,963
    
    
    
    2,441Cash flows from financing activities:Repurchase of senior subordinated convertible notes
    
    
    (18,790
    )
    
    
    Net cash used in financing activities
    
    
    (18,790
    )
    
    
    Net decrease in cash and cash equivalents
    
    
    (20,572
    )
    
    
    (16,465
    )Cash and cash equivalents, beginning of period
    
    
    64,726
    
    
    
    73,075Cash and cash equivalents, end of period
    
    $
    44,154
    
    
    $
    56,610
   5




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VaxGen, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 1. Organization
 Nature of Business Activities
         Delisting from the Nasdaq National Market
   6




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Basis of Presentation
    2. Summary of Significant Accounting Policies
  Additional Significant Accounting Policy
 Accounting for the Impairment or Disposal of Long-Lived Assets
 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.
   Recent Accounting Pronouncements
 Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities Earnings per Share EITF 03-6-1
  7




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Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
 Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 SFAS 161
 Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160).
  8




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3. Net Income (Loss) per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss) attributable to common stockholders
    
    $
    5,516
    
    
    $
    (9,854
    )
    
    $
    (12,379
    )
    
    $
    (27,714
    )Effect of Dilutive Securities:Interest expense on convertible debt
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    Gain on convertible debt repurchase
    
    
    (3,078
    )
    
    
    
    
    
    
    
    
    
    
    Valuation adjustments
    
    
    (3,567
    )
    
    
    
    
    
    
    
    
    
    
    Net loss attributable to common stockholders and assumed conversion
    
    $
    (942
    )
    
    $
    (9,854
    )
    
    $
    (12,379
    )
    
    $
    (27,714
    )Denominator:Weighted-average common shares outstanding  basic
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107Dilutive effect of assumed conversion of convertible debt
    
    
    724
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average common shares outstanding  diluted
    
    
    33,831
    
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107Basic net income (loss) per share
    
    $
    0.17
    
    
    $
    (0.30
    )
    
    $
    (0.37
    )
    
    $
    (0.84
    )Diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.30
    )
    
    $
    (0.37
    )
    
    $
    (0.84
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Options to purchase common stock
    
    
    5,324
    
    
    
    5,552
    
    
    
    5,324
    
    
    
    5,552Warrants to purchase common stock
    
    
    2,317
    
    
    
    2,320
    
    
    
    2,317
    
    
    
    2,320Convertible senior subordinated notes
    
    
    
    
    
    
    2,134
    
    
    
    542
    
    
    
    2,134Total
    
    
    7,641
    
    
    
    10,006
    
    
    
    8,183
    
    
    
    10,006
 4. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    5,516
    
    
    $
    (9,854
    )
    
    $
    (12,379
    )
    
    $
    (27,714
    )Change in unrealized gains on investment securities
    
    
    236
    
    
    
    1
    
    
    
    228
    
    
    
    2Comprehensive income (loss)
    
    $
    5,752
    
    
    $
    (9,853
    )
    
    $
    (12,151
    )
    
    $
    (27,712
    )
 5. Sale of Anthrax Program
   9




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6. Assets Held For Sale
    7. Accrued and Other Current Liabilities
  September 30,
    
    
    December 31,2008
    
    
    2007Employee benefits and severance
    
    $
    127
    
    
    $
    1,398Income taxes
    
    
    
    
    
    
    60Interest on convertible notes
    
    
    
    
    
    
    433Deferred Rent
    
    
    226
    
    
    
    94Other
    
    
    204
    
    
    
    341Total accrued and other current liabilities
    
    $
    557
    
    
    $
    2,326
 8. Note Repurchases
   9. Restructuring
 Accounting for Costs Associated with Exit or Disposal Activities
   10




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Consolidationof ExcessWorkforce
    
    
    Facilities andReduction
    
    
    Other
    
    
    TotalRestructuring CostsCosts incurred
    
    $
    4,368
    
    
    $
    1,006
    
    
    $
    5,374Amounts paid
    
    
    (4,068
    )
    
    
    (1,006
    )
    
    
    (5,074
    )Balance accrued as of December 31, 2007
    
    
    300
    
    
    
    
    
    
    
    300Costs incurred
    
    
    1,313
    
    
    
    
    
    
    
    1,313Amounts paid
    
    
    (1,613
    )
    
    
    
    
    
    
    (1,613
    )Balance accrued as of September 30, 2008
    
    $
    
    
    
    $
    
    
    
    $
    
 10. Income Taxes
  Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
     11




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11. Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development
    
    $
    
    
    
    $
    162
    
    
    $
    42
    
    
    $
    883General and administrative
    
    
    291
    
    
    
    187
    
    
    
    1,371
    
    
    
    1,002$
    291
    
    
    $
    349
    
    
    $
    1,413
    
    
    $
    1,885
  12. Celltrion
   13. Contingencies
  14. Fair Value Measurements
 Fair Value
Measurement The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115
  
    
    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.
  12




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##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:Cash equivalents:Money market funds
    
    $
    18,481
    
    
    $
    
    
    
    $
    
    
    
    $
    18,481Commercial paper
    
    
    
    
    
    
    25,189
    
    
    
    
    
    
    
    25,189Certificates of deposit
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125Investment securities:Certificates of deposit
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,000Common shares
    
    
    240
    
    
    
    
    
    
    
    
    
    
    
    240Restricted cash:Certificates of deposit
    
    
    
    
    
    
    1,562
    
    
    
    
    
    
    
    1,562Total Financial Assets
    
    $
    18,721
    
    
    $
    28,876
    
    
    $
    
    
    
    $
    47,597Liabilities:Derivative liability
    
    $
    
    
    
    $
    
    
    
    $
    888
    
    
    $
    888
   Three Months Ended
    
    
    Nine Months EndedDerivative Liability
    
    September 30, 2008
    
    
    September 30, 2008Beginning balance
    
    $
    4,455
    
    
    $
    3,500Valuation adjustment
    
    
    (3,567
    )
    
    
    (2,612
    )Ending balance
    
    $
    888
    
    
    $
    888
 15. Subsequent Events
 Note Repurchases
   13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Special Note Regarding Forward - Looking Statements
  forward-looking
 
 OVERVIEW
      14




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Consolidationof ExcessWorkforce
    
    
    Facilities andReduction
    
    
    Other
    
    
    TotalRestructuring CostsCosts incurred
    
    $
    4,368
    
    
    $
    1,006
    
    
    $
    5,374Amounts paid
    
    
    (4,068
    )
    
    
    (1,006
    )
    
    
    (5,074
    )Balance accrued as of December 31, 2007
    
    
    300
    
    
    
    
    
    
    
    300Costs incurred
    
    
    1,313
    
    
    
    
    
    
    
    1,313Amounts paid
    
    
    (1,613
    )
    
    
    
    
    
    
    (1,613
    )Balance accrued as of September 30, 2008
    
    $
    
    
    
    $
    
    
    
    $
    
     15




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##### Table of Contents



Celltrion
  
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Assets Held for Sale
 Accounting for the Impairment or Disposal of Long-Lived Assets,
 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.
    16




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Adoption of SFAS 157
 Fair Value
Measurement The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (SFAS 159), which
  
    
    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.
    risk-free
   17




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RESULTS OF OPERATIONS
 Comparison of Fiscal Quarters and Nine Months Ended September 30, 2008 and 2007
 Revenues
 Three Months Ended
    
    
    Percent
    
    
    Nine Months Ended
    
    
    PercentSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)Revenues
    
    $
    
    
    
    $
    416
    
    
    
    -100
    %
    
    $
    293
    
    
    $
    4,798
    
    
    
    -94
    %
   Research and development expenses
 Three Months Ended
    
    
    Percent
    
    
    Nine Months Ended
    
    
    PercentSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)
    
    
    
    
    
    (in thousands)Research and development expenses
    
    $
    
    
    
    $
    4,125
    
    
    
    -100
    %
    
    $
    1,387
    
    
    $
    16,050
    
    
    
    -91
    %
   
    
    Labor and related expenses, which decreased by $4.5 million primarily due to no
research and development expenses during the second and third quarters of 2008 and
decreased headcount following multiple reductions in force during 2007 and 2008; and
    
    Facilities and overhead costs, which decreased by $10.1 million due to reduced
operations and consolidation of facilities during the first quarter of 2008 and no
research and development expenses during the second and third quarters of 2008.
  General and administrative expenses
 Three Months Ended
    
    
    Percent
    
    
    Nine Months Ended
    
    
    PercentSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)General and administrative expenses
    
    $
    1,947
    
    
    $
    5,403
    
    
    
    -64
    %
    
    $
    10,892
    
    
    $
    16,778
    
    
    
    -35
    %
   18




---



##### Table of Contents




    
    Labor and benefits, which decreased by $0.8 million primarily associated with the
2007 and 2008 reductions in force; and
    
    Consultant and outside labor costs, which decreased by $2.1 million due to
non-recurring costs incurred during the third quarter of 2007 to file multiple SEC
filings.
  
    
    Labor and benefits, which decreased by $1.7 million primarily associated with the
2007 and 2008 reductions in force; and
    
    Consultant and outside labor costs, which decreased by $4.1 million due to
non-recurring costs incurred during the first nine months of 2007 to file multiple SEC
filings.
  Restructuring expenses
 Three Months Ended
    
    
    Percent
    
    
    Nine Months Ended
    
    
    PercentSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)Restructuring expenses
    
    $
    328
    
    
    $
    1,092
    
    
    
    -70
    %
    
    $
    1,313
    
    
    $
    5,374
    
    
    
    -76
    %
  Impairment of assets held for sale
 Three Months Ended
    
    
    Percent
    
    
    Nine Months Ended
    
    
    PercentSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)Impairment of assets held for sale
    
    $
    
    
    
    $
    
    
    
    
    0
    %
    
    $
    8,498
    
    
    $
    
    
    
    
    100
    %
  Other income (expense)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Interest expense
    
    $
    (202
    )
    
    $
    (612
    )
    
    $
    (1,571
    )
    
    $
    (1,835
    )Interest income
    
    
    334
    
    
    
    1,163
    
    
    
    1,582
    
    
    
    3,682Valuation adjustments
    
    
    3,567
    
    
    
    (201
    )
    
    
    2,612
    
    
    
    3,843Gain on convertible debt repurchase
    
    
    3,078
    
    
    
    
    
    
    
    3,791
    
    
    
    Gain on sale of Anthrax Program
    
    
    1,000
    
    
    
    
    
    
    
    3,000
    
    
    
    Other, net
    
    
    14
    
    
    
    
    
    
    
    4
    
    
    
    Other income, net
    
    $
    7,791
    
    
    $
    350
    
    
    $
    9,418
    
    
    $
    5,690
  19




---



##### Table of Contents




    
    Valuation gain of $3.6 million in 2008 reflects the decrease in the fair value
on mark-to-market adjustments related to the valuation of our outstanding derivatives on
our 5 1/2% Convertible Senior Subordinated Notes, due April 1, 2010, or Notes, due to
the repurchase of $22 million principal amount of the Notes;
    
    Gain of $3.1 million on the repurchase of $22.0 million principal amount of our
Notes at a discount;
    
    Gain on the sale of our Anthrax Program of $1.0 million; and
    
    Partially offset by decreased interest income due to lower overall cash, cash
equivalent and investment balances primarily due to our operating losses.
  
    
    Gain of $3.8 million on the repurchase of $23.5 million principal amount of our
Notes at a discount;
    
    Gain on the sale of our Anthrax Program of $3.0 million;
    
    Decreased interest income due to lower overall cash, cash equivalent and
investment balances primarily due to our operating losses; and
    
    Partially offset by the valuation gain on the outstanding derivatives of the
Notes of $2.6 million in the nine months of 2008 primarily due to the repurchase of our
Notes versus $3.8 million for the corresponding period in 2007 primarily due to changes
in the likelihood of a change in control potentially triggering the redemption option to
the Notes.
  
 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 2008
    
    
    2007(in thousands)As of September 30:Cash, cash equivalents and investment securities
    
    $
    46,394
    
    
    $
    77,320Working capital
    
    
    46,709
    
    
    
    70,054Nine Months ended September 30:Cash provided by (used in)Operating activities
    
    $
    (8,745
    )
    
    $
    (18,906
    )Investing activities
    
    
    6,963
    
    
    
    2,441Financing activities
    
    
    (18,790
    )
    
    
    
   20




---



##### Table of Contents




    
    Depreciation expense of $0.6 million in 2008 and $4.6 million in 2007, reflecting
the $10.7 impairment of property and equipment in the fourth quarter of 2007;
    
    Impairment of assets held for sale of $8.5 million in 2008;
    
    Valuation gains of $2.6 million in 2008 and $3.8 million in 2007, reflecting
changes in the fair value of outstanding derivatives from the Notes;
    
    Gain on redemption of the Notes of $3.8 million in 2008; and
    
    $1.9 million of Raven merger costs capitalized at December 31, 2007 that were
expensed as general and administrative expense during the nine months ended September
30, 2008.
     
    
    Cash and cash equivalents and Investments which decreased by $30.9 million
primarily due to operating losses and note repurchases; and
    
    Partially offset by the decrease of the outstanding derivatives on the Notes of
$3.5 million.
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities Earnings per Share
 Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
  21




---



##### Table of Contents



Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
 Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160).
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
 weighted-average
  22




---



##### Table of Contents



Indebtedness
  Derivative Valuation Risk
 .
 
 ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  Inherent Limitations on Effectiveness of Controls.
   23




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  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.
    24




---



##### Table of Contents



If we fail to manage successfully any company or product acquisitions, joint ventures or
in-licensed product candidates, we may be limited in our ability to develop our product
candidates and to rebuild our product candidate pipeline.
   
    
    exposure to unknown liabilities of acquired companies;
    
    higher than anticipated acquisition costs and expenses;
    
    the difficulty and expense of integrating operations and personnel of acquired companies;
    
    disruption of our ongoing business;
    
    diversion of managements time and attention; and
    
    possible dilution to stockholders.
  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.
   25




---



##### Table of Contents



Biopharmaceutical product development is a long, expensive and uncertain process and the approval
requirements for many products, including vaccines used to fight bioterrorism, are still evolving.
If we are unable to successfully develop and test product candidates in accordance with such
requirements, our business will suffer.
   Our future product development efforts may not yield marketable products due to results of studies
or trials, failure to achieve regulatory approvals or market acceptance, proprietary rights of
others or manufacturing issues.
  
    
    the lack of adequate quality or sufficient prevention benefit, or unacceptable safety
during preclinical studies or clinical trials;
 
    
    their failure to receive necessary regulatory approvals;
 
    
    the existence of proprietary rights of third parties; or
 
    
    the inability to develop manufacturing methods that are efficient, cost-effective and
capable of meeting stringent regulatory standards.
 We may fail to protect our intellectual property or may infringe on the intellectual property
rights of others, either of which could harm our business.
    
    
    others will not independently develop similar or alternative technologies or duplicate
any of our technologies;
 
    
    we or any of our current or future licensors will adequately protect trade secrets; or
 
    
    we will develop additional proprietary technologies that are patentable; or the patents
of others will not have a material adverse effect on our business.
    26




---



##### Table of Contents



Natural disasters, including earthquakes, may damage our facilities.
  Our use of hazardous materials and chemicals require us to comply with regulatory requirements and
exposes us to potential liabilities.
  We may become subject to product liability claims, which could result in damages that exceed our
insurance coverage.
  We may be subject to claims that our employees or we have wrongfully used or disclosed alleged
trade secrets of their former employers.
  We are not currently listed on a national exchange and cannot assure you 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.
   27




---



##### Table of Contents



Shares of our common stock eligible for future sale may adversely affect the market for our
common stock.
 non-affiliated
 Our stock price is likely to be volatile.
   
    
    timing and consistency of filing financial statements;
 
    
    announcements or speculation about any strategic transactions we may enter into;
 
    
    failure to win future government contracts and government activities relating to prior
contracts;
 
    
    adverse results or delays in clinical trials;
 
    
    delays in our product development efforts;
 
    
    real or perceived safety issues with any of our product candidates;
 
    
    failure to obtain or maintain required regulatory approvals;
 
    
    changes in financial estimates by securities analysts and our failure to meet or exceed
such estimates;
 
    
    rumors about our business prospects, product development efforts or the progress,
timing and completion of our clinical trials;
 
    
    new products or services offered by us or our competitors or announcements relating to
product developments by our competitors;
 
    
    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; and
 
    
    other events or factors, many of which are beyond our control.
  We have no history of paying dividends on our common stock.
   28




---



##### Table of Contents



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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  
 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.
    
    Herewith2.1
    
    
    Agreement and Plan of Merger, dated
November 12,
2007, by and among VaxGen, Inc., TLW Merger Sub,
Inc., TLW, LLC, and Raven biotechnologies, inc.
    
    8-K
    
    000-26483
    
    11-13-07
    
    
    2.12.2
    
    
    Amendment No. 1 to Agreement and Plan of
Merger,
dated December 20, 2007, by and among VaxGen,
Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4
    
    333-148312
    
    12-24-07
    
    
    2.22.3
    
    
    Amendment No. 2 to Agreement and Plan of
Merger,
dated February 6, 2008, by and among VaxGen, Inc.,
TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4/A
    
    333-148312
    
    02-06-08
    
    
    2.33.1
    
    
    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
    
    
    4.33.4
    
    
    Amended and Restated Bylaws, dated as of
May 18,
2007.
    
    8-K
    
    000-26483
    
    05-23-07
    
    
    3.13.5
    
    
    Amendment to the Amended and Restated
Certificate
of Incorporation, dated as of August 10, 2005.
    
    10-Q
    
    0-26483
    
    05-31-07
    
    
    3.4
  29




---



##### Table of Contents



Incorporated by
ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith4.1
    
    
    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
    
    
    Securities Purchase Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.14.4
    
    
    Registrant Rights Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.24.5
    
    
    Form of Common Stock Purchase Warrant.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    4.14.6
    
    
    Specimen Stock Certificate for Common Stock of
Registrant.
    
    S-1
    
    333-78065
    
    6-11-99
    
    
    4.110.4
    
    
    VaxGen, Inc. Amended and Restated 1996 Stock
Option Plan. +
    
    
    
    
    
    
    
    
    
    
    
    X10.104
    
    
    Note Repurchase Agreement, dated July 1,
2008, by
and between VaxGen, Inc. and Alexandra Global
Master Fund Ltd.
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.110.105
    
    
    Amendment No. 1 to Note Repurchase
Agreement,
dated July 7, 2008 by and between Alexandra Global
Master Fund Ltd. and VaxGen, Inc.
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.210.106
    
    
    Note Repurchase Agreement, dated July 3,
2008, by
and between VaxGen, Inc. and Whitebox Convertible
Arbitrage Partners, LP
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.310.107
    
    
    Note Repurchase Agreement, dated July 3,
2008, by
and between VaxGen, Inc. and Guggenheim Portfolio
Company XXXI, LLC
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.410.108
    
    
    Note Repurchase Agreement, dated July 22,
2008, by
and between VaxGen, Inc. and QVT Fund LP.
    
    8-K
    
    000-26483
    
    7-24-2008
    
    
    10.110.109
    
    
    Note Repurchase Agreement, dated July 22,
2008, by
and between VaxGen, Inc. and Quintessence Fund
L.P.
    
    8-K
    
    000-26483
    
    7-24-2008
    
    
    10.210.110
    
    
    Note Repurchase Agreement, dated July 22,
2008, by
and between VaxGen, Inc. and Deutsche Bank AG
London.
    
    8-K
    
    000-26483
    
    7-24-2008
    
    
    10.331.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Section 1350 Certification
    
    
    
    
    
    
    
    
    
    
    
    X
  30




---



##### Table of Contents



Signatures
  VaxGen, Inc.Dated: November 7, 2008
    By:
    /s/ James P. PanekJames P. PanekChief Executive Officer
(Principal Executive Officer and 
Principal
Financial Officer)  31




---



##### Table of Contents



EXHIBIT INDEX
 Incorporated by
ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith2.1
    
    
    Agreement and Plan of Merger, dated
November 12,
2007, by and among VaxGen, Inc., TLW Merger Sub,
Inc., TLW, LLC, and Raven biotechnologies, inc.
    
    8-K
    
    000-26483
    
    11-13-07
    
    
    2.12.2
    
    
    Amendment No. 1 to Agreement and Plan of
Merger,
dated December 20, 2007, by and among VaxGen,
Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4
    
    333-148312
    
    12-24-07
    
    
    2.22.3
    
    
    Amendment No. 2 to Agreement and Plan of
Merger,
dated February 6, 2008, by and among VaxGen, Inc.,
TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4/A
    
    333-148312
    
    02-06-08
    
    
    2.33.1
    
    
    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
    
    
    4.33.4
    
    
    Amended and Restated Bylaws, dated as of
May 18,
2007.
    
    8-K
    
    000-26483
    
    05-23-07
    
    
    3.13.5
    
    
    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
    
    
    Securities Purchase Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.14.4
    
    
    Registrant Rights Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.24.5
    
    
    Form of Common Stock Purchase Warrant.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    4.14.6
    
    
    Specimen Stock Certificate for Common Stock of
Registrant.
    
    S-1
    
    333-78065
    
    6-11-99
    
    
    4.1
  32




---



##### Table of Contents



Incorporated by
ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith10.4
    
    
    VaxGen, Inc. Amended and Restated 1996 Stock
Option Plan. +
    
    
    
    
    
    
    
    
    
    
    
    X10.104
    
    
    Note Repurchase Agreement, dated July 1,
2008, by
and between VaxGen, Inc. and Alexandra Global
Master Fund Ltd.
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.110.105
    
    
    Amendment No. 1 to Note Repurchase
Agreement,
dated July 7, 2008 by and between Alexandra Global
Master Fund Ltd. and VaxGen, Inc.
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.210.106
    
    
    Note Repurchase Agreement, dated July 3,
2008, by
and between VaxGen, Inc. and Whitebox Convertible
Arbitrage Partners, LP
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.310.107
    
    
    Note Repurchase Agreement, dated July 3,
2008, by
and between VaxGen, Inc. and Guggenheim Portfolio
Company XXXI, LLC
    
    8-K
    
    000-26483
    
    7-8-2008
    
    
    10.410.108
    
    
    Note Repurchase Agreement, dated July 22,
2008, by
and between VaxGen, Inc. and QVT Fund LP.
    
    8-K
    
    000-26483
    
    7-24-2008
    
    
    10.110.109
    
    
    Note Repurchase Agreement, dated July 22,
2008, by
and between VaxGen, Inc. and Quintessence Fund
L.P.
    
    8-K
    
    000-26483
    
    7-24-2008
    
    
    10.210.110
    
    
    Note Repurchase Agreement, dated July 22,
2008, by
and between VaxGen, Inc. and Deutsche Bank AG
London.
    
    8-K
    
    000-26483
    
    7-24-2008
    
    
    10.331.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Section 1350 Certification
    
    
    
    
    
    
    
    
    
    
    
    X
  33