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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 June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26483
VaxGen, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3236309
(I.R.S. Employer Identification Number)
1000 Marina Blvd., Suite 200
Brisbane, California 94005
(Address of Principal Administrative Offices) (Zip Code)
(650) 624-1000
(Registrants Telephone Number, Including Area Code)
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 [ ]
The issuer has one class of common stock with 14,462,618 shares outstanding as
of August 1, 2002.
VaxGen, Inc.
Form 10-Q
For the Quarter Ended June 30, 2002
Table of Contents
Part I. Financial Information Page
Item 1 Financial Statements:
Condensed Balance Sheets .................................. 2
Condensed Statements of Operations ........................ 3
Condensed Statements of Cash Flows ........................ 4
Notes to Condensed Financial Statements ................... 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Overview .................................................. 9
Results of Operations ..................................... 10
Liquidity and Capital Resources ........................... 11
Risk Factors ............................................. 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk. 19
Part II. Other Information
Item 4 Submission of Matters to a Vote of Security Holders......... 20
Item 5 Other Information .......................................... 22
Item 6 Exhibits and Reports on Form 8-K ........................... 23
Signature .................................................. 24
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VaxGen, Inc.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2002 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 3,528,000 $ 7,499,000
Investment securities 32,223,000 40,911,000
Interest receivable 464,000 620,000
Prepaid expenses and other current assets 888,000 1,156,000
------------- -------------
Total current assets 37,103,000 50,186,000
Property and equipment, net 3,235,000 2,987,000
Employee loans receivable 135,000 55,000
Other assets 144,000 144,000
------------- -------------
Total assets $ 40,617,000 $ 53,372,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Genentech $ 2,796,000 $ 2,250,000
Accounts payable 502,000 557,000
Accrued liabilities 2,466,000 2,106,000
Dividends payable to redeemable convertible
preferred stockholders 603,000 --
Current portion of long-term obligations 23,000 31,000
------------- -------------
Total current liabilities 6,390,000 4,944,000
Long-term obligations -- 22,000
Commitments and contingencies
Redeemable convertible preferred stock, $0.01 par
value, 20,500 shares authorized:
Series A 6% cumulative convertible stock, $0.01
par value, 20,000 shares issued and outstanding
at June 30, 2002 and December 31, 2001
(liquidation preference of $20,000,000 at
June 30, 2002) 16,487,000 15,845,000
Stockholders' equity:
Preferred stock, $0.01 par value, 19,979,500 shares
authorized; none issued or outstanding -- --
Common stock, $0.01 par value, 40,000,000 shares
authorized; 14,355,349 and 14,300,600 shares
issued and outstanding at June 30, 2002 and
December 31, 2001, respectively 144,000 143,000
Additional paid-in capital 128,796,000 128,387,000
Deferred stock compensation (267,000) (516,000)
Accumulated other comprehensive income -
unrealized gain on investment securities 495,000 877,000
Deficit accumulated during the development stage (111,428,000) (96,330,000)
------------- -------------
Total stockholders' equity 17,740,000 32,561,000
------------- -------------
Total liabilities and stockholders' equity $ 40,617,000 $ 53,372,000
============= =============
See accompanying notes to condensed financial statements.
2
VaxGen, Inc.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
Three Months Ended Six Months Ended Inception
June 30, June 30, (November 27, 1995)
-------------------------- --------------------------- through
2002 2001 2002 2001 June 30, 2002
------------ ------------ ------------ ------------ -------------
Revenue:
Contract revenue $ 220,000 $ 346,000 $ 238,000 $ 421,000 $ 1,408,000
Operating expenses:
Research and development:
Genentech expenses 1,000 107,000 607,000 502,000 12,385,000
Other 4,298,000 3,634,000 8,349,000 7,748,000 61,451,000
------------ ------------ ------------ ------------ -------------
Total research and development 4,299,000 3,741,000 8,956,000 8,250,000 73,836,000
General and administrative expenses 3,141,000 3,375,000 6,069,000 5,717,000 47,379,000
------------ ------------ ------------ ------------ -------------
Loss from operations (7,220,000) (6,770,000) (14,787,000) (13,546,000) (119,807,000)
------------ ------------ ------------ ------------ -------------
Other income (expense)
Investment income, net 559,000 923,000 1,163,000 1,775,000 12,425,000
Interest expense (2,000) (7,000) (4,000) (14,000) (92,000)
------------ ------------ ------------ ------------ -------------
Total other income, net 557,000 916,000 1,159,000 1,761,000 12,333,000
------------ ------------ ------------ ------------ -------------
Net loss (6,663,000) (5,854,000) (13,628,000) (11,785,000) (107,474,000)
Charges attributed to convertible preferred stock:
Dividends (303,000) (127,000) (603,000) (127,000) (1,343,000)
Accretion of redemption value (433,000) (142,000) (867,000) (142,000) (1,877,000)
Beneficial conversion charge -- (734,000) -- (734,000) (734,000)
------------ ------------ ------------ ------------ -------------
Net loss applicable to common stockholders $ (7,399,000) $ (6,857,000) $(15,098,000) $(12,788,000) $(111,428,000)
============ ============ ============ ============ =============
Net loss per share applicable to common
stockholders, basic and diluted $ (0.52) $ (0.49) $ (1.05) $ (0.91)
============ ============ ============ =============
Weighted average shares used in computing
basic and di1uted loss per share 14,343,000 14,100,000 14,331,000 14,081,000
============ ============ ============ =============
See accompanying notes to condensed financial statements.
3
VaxGen, Inc.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Six Months Ended Inception
June 30, (November 27, 1995)
---------------------------- through
2002 2001 June 30, 2002
------------ ------------ -------------
Cash flows from operating activities:
Net loss $(13,628,000) $(11,785,000) $(107,474,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 468,000 452,000 2,726,000
Amortization of premiums and
discounts on investment securities (548,000) 14,000 (1,378,000)
Stock compensation expense 376,000 868,000 14,933,000
Note receivable allowance -- -- 487,000
Warrants issued to consultants -- 114,000 228,000
Changes in assets and liabilities:
Interest receivable 156,000 57,000 (464,000)
Prepaid expenses and other current assets 268,000 1,849,000 (1,781,000)
Employee loans receivable and other assets (80,000) 99,000 (168,000)
Payable to Genentech 546,000 (1,734,000) 2,796,000
Accounts payable, accrued liabilities
and other long-term obligations 281,000 (510,000) 3,290,000
------------ ------------ -------------
Net cash used in operating activities (12,161,000) (10,576,000) (86,805,000)
------------ ------------ -------------
Cash flows from investing activities:
Purchase of investment securities (5,348,000) (16,152,000) (170,855,000)
Proceeds form sale and maturities of
investment securities 14,202,000 15,459,000 140,505,000
Purchase of property and equipment (716,000) (187,000) (5,814,000)
Long-term lease deposits -- -- (120,000)
------------ ------------ -------------
Net cash provided by (used in)
investing activities 8,138,000 (880,000) (36,284,000)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 18,406,000 18,342,000
Payments under capital lease obligations (30,000) (16,000) (115,000)
Stock issued to Genentech -- -- 1,025,000
Stock issued to other founders -- -- 20,000
Stock issued in private placements -- -- 65,164,000
Stock issued in initial public offering -- -- 46,345,000
Issuance costs of private placements -- -- (4,208,000)
Issuance costs of initial public offering -- -- (4,386,000)
Return of capital on redeemable convertible preferred stock (225,000) -- (225,000)
Exercise of employee stock options 198,000 924,000 3,444,000
Employee stock purchase plan 109,000 -- 211,000
Loans from Genentech -- -- 1,000,000
------------ ------------ -------------
Net cash provided by financing activities 52,000 9,314,000 126,617,000
------------ ------------ -------------
Increase (decrease) in cash and equivalents (3,971,000) 7,858,000 3,528,000
Cash and cash equivalents at beginning of
period 7,499,000 5,426,000 --
------------ ------------ -------------
Cash and cash equivalents at end
of period $ 3,528,000 $ 13,284,000 $ 3,528,000
------------ ------------ -------------
Supplemental schedule of non cash
investing and financing activities:
Stock dividend on redeemable convertible preferred stock $ 603,000 $ -- $ 1,343,000
Accretion of redemption value of redeemable
convertible preferred stock 867,000 -- 1,877,000
Recognition of beneficial conversion feature
of redeemable convertible preferred stock -- -- 734,000
Recognition of fair value of common stock warrants issued
with redeemable convertible preferred stock -- -- 3,507,000
Equipment acquired through capital leases -- -- 138,000
Issuance of stock through conversion of
Genentech note payable -- -- 1,000,000
Note receivable partially settled by severance obligation -- -- 406,000
------------ ------------ -------------
See accompanying notes to condensed financial statements.
4
VaxGen, Inc.
(A Development Stage Enterprise)
Notes to Condensed Financial Statements
June 30, 2002
(Unaudited)
1. Basis of Presentation
The unaudited condensed financial statements of VaxGen, Inc. included herein
have been prepared by VaxGen pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information or footnote disclosure
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
VaxGen's management, the accompanying unaudited condensed financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information included herein. While
VaxGen believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements should be read in
conjunction with VaxGen's audited financial statements contained in its Annual
Report on Form 10-K for the year ended December 31, 2001.
2. Non-Cash Compensation
On April 1, 1999, our stockholders approved an increase in the number of shares
of common stock reserved for grant under our 1996 Stock Option Plan to 1,750,000
shares. This represents the measurement date for stock options granted to
employees earlier in 1999 and in 1998, which were granted subject to stockholder
approval of the plan amendment. As a result, we recorded deferred compensation
in the amount of $3,223,000, representing the excess of fair market value of our
common stock on April 1, 1999, $13.00 per share, over the exercise price of the
options on the date stockholder approval was obtained. The balance of deferred
compensation is being amortized on a straight-line basis to expense over the
remaining vesting period of the options. Additional non-cash compensation has
been incurred as a result of stock option grants subsequent to our initial
public offering in June 1999 along with stock issued related to our 401(k)
company match. Total non-cash compensation for the six months ended June 30,
2002 was $376,000 as compared to $868,000 for the comparable period in 2001.
3. Loss per Share
Basic loss per share is computed as net loss applicable to common stockholders
divided by the weighted average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
from common shares to be issued through stock options, warrants and other
convertible securities. The potential dilutive effects of 2,702,646 shares of
common stock subject to outstanding stock options, 950,762 shares of common
stock subject to outstanding warrants and 861,383 shares of common stock
reserved for conversion of the Series A Preferred Stock are excluded from the
diluted earnings per share calculation for the period ended June 30, 2002, and
1,774,422 shares of common stock subject to outstanding stock options and
411,088 shares of common stock subject to outstanding warrants and 861,383
shares of common stock reserved for conversion of the Series A Preferred Stock
are excluded from the diluted earnings per share calculation for the period
ended June 30, 2001, because the representative share increments would be
antidilutive.
4. New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The adoption of SFAS No. 141 had no impact on our financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
adoption of SFAS No. 142 had no impact on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops
a single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. As the
adoption of SFAS No. 144 is prospective, we cannot predict the impact on our
financial statements.
5
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, SFAS No. 64, Extinguishment of Debt made to satisfy
Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This statement also amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the accounting for sale-leaseback
transactions and the accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. SFAS 145 is
effective for fiscal years beginning after, transactions entered into after and
financial statements issued on or subsequent to May 15, 2002. The adoption of
SFAS No. 145 had no impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS 146 addresses the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 supersedes Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), and requires liabilities associated with
exit and disposal activities to be expensed as incurred. SFAS 146 is effective
for exit or disposal activities that we initiate after December 31, 2002.
5. Redeemable Convertible Preferred Stock Financing
We entered into a Securities Purchase Agreement dated as of May 23, 2001 with
four investors, whereby we received approximately $20,000,000 in consideration
for the sale of 20,000 shares of our Series A 6% Cumulative Convertible
Preferred Stock (the "Preferred Stock") and the issuance of Common Stock
Purchase Warrants described below. Expenses relating to the transaction were
approximately $1,700,000, resulting in net proceeds to us of approximately
$18,300,000. These proceeds are being used to prepare our HIV/AIDS vaccine
candidate, AIDSVAX(R) ("AIDSVAX"), for commercial-scale manufacturing if it
proves effective, the potential development of new adjuvants and general
corporate purposes. During the quarter ended June 30, 2002, we paid $225,000 to
compensate one of our Preferred Stockholders for their agreement to limit
as-converted voting of their preferred shares. We have accounted for this
payment as a return of capital to the Preferred Stockholder.
A summary of the significant terms of the Preferred Stock financing is as
follows:
Conversion
Each share of Preferred Stock can be converted into common stock at the option
of the holder at any time after issuance according to a conversion ratio,
subject to adjustment for dilution or certain equity adjustments. The initial
conversion ratio is determined by dividing the liquidation value ($1,000 per
share plus accrued dividends) by the original conversion price of $23.2185 per
share then multiplied by the number of shares to be converted. We may also force
conversion of the Preferred Stock into common stock if, at any time after May
23, 2002, the weighted average price of our stock for at least 20 out of 30
consecutive trading days equals or exceeds 175% of the conversion price (175% of
$23.2185, or $40.63). As of June 30, 2002, no conversion had occurred.
Redemption
In the event that there is no earlier conversion, we must redeem the Preferred
Stock for cash on May 23, 2004, at a redemption price equal to $1,000 per share
plus all accrued and unpaid dividends. We may, within certain limits, pay up to
50% of such redemption price in shares of our common stock.
We account for the difference between the carrying amount of the Preferred Stock
and the redemption amount by increasing the carrying amount for periodic
accretion, so that the carrying amount will equal the redemption amount at the
scheduled redemption date. The accretion of the redemption value of the
Preferred Stock for the six months ended June 30, 2002 amounted to $867,000,
which is comprised of $584,000 related to the accretion of the fair value of the
Common Stock Purchase Warrants and $283,000 related to the accretion of offering
costs associated with the issuance of the Preferred Stock.
Dividends
Each share of Preferred Stock is entitled to receive annual dividends of 6%,
payable on June 30 and December 31, beginning on December 31, 2001. If not paid
within five days of either such date, the dividend will accumulate and compound.
Payment of the dividend accrued between January 1 and June 30, 2002, in the
amount of $30.17 per share of Preferred Stock, was made on July 1, 2002 in the
form of 106,794 shares of common stock. Net loss applicable to common
stockholders for the six months ended June 30, 2002 includes a non-cash charge
of $603,000 for Preferred Stock dividends.
Voting
Each share of Preferred Stock has voting rights equal to the number of shares of
common stock into which it is convertible on the record date of the vote.
6
Liquidation
In the event of liquidation, dissolution or winding up of VaxGen, either
voluntary or involuntary, each holder of shares of Preferred Stock will be
entitled to receive, out of our assets available for distribution to
stockholders and prior to any distribution to holders of common stock, $1,000
per preferred share plus accrued dividends.
Common Stock Purchase Warrants
In connection with the Preferred Stock financing, we issued Common Stock
Purchase Warrants (the "Warrants") initially for the purchase of 297,177 shares
of common stock to the Preferred Stock investors. The Warrants, which expire on
May 23, 2006, originally had an exercise price of $25.2375 per share; however,
effective as of May 23, 2002, the exercise price was automatically adjusted to
$14.133 per share and the number of shares issuable on exercise of the warrants
increased to 530,674, in accordance with the terms of the Warrants.
We have valued the Warrants at $11.80 per share, resulting in a total value of
approximately $3,500,000. This amount was accounted for as a reduction in the
carrying value of the Preferred Stock until the scheduled redemption of the
Preferred Stock, and an increase to additional paid-in-capital. The discount is
being amortized over three years, and accordingly, net loss to common
stockholders for the six months ended June 30, 2002 reflects a non-cash charge
of approximately $584,000. The fair value of the Warrants was calculated using
the Black-Scholes model.
Effect of Beneficial Conversion Feature
The Preferred Stock was issued with a beneficial conversion feature, which was
valued at $734,000. The beneficial conversion amount has been accounted for as
an increase in additional paid-in capital and as an in-substance dividend to the
preferred stockholders, which increases the net loss applicable to common
stockholders.
6. Celltrion Joint Venture
In February 2002, we and a group of South Korean investors announced the
formation of a joint venture, which intends to raise up to approximately $122
million, consisting of up to approximately $52 million in cash, a $40 million
bank loan and an in-kind investment of cell culture technology and production
support valued at a minimum of $30 million, to build and operate a facility in
Incheon, South Korea, to manufacture AIDSVAX. We have no further funding
obligation to Celltrion. The joint venture also intends to contribute $7 million
towards construction of a smaller facility in the South San Francisco,
California area. The facility is intended to support the licensure and
commercial launch of AIDSVAX. We would fund any additional capital costs related
to the smaller facility. We believe that both facilities, once constructed would
be designed for commercial manufacture of AIDSVAX, if it proves safe and
effective and is licensed by the U.S. Food and Drug Administration. The South
Korean investors participating in the joint venture, known as Celltrion Inc.,
are Nexol Corp., Nexol Biotech Co. Ltd., Korea Tobacco & Ginseng Corp., and J.
Stephen & Co. Ventures Ltd.
We provided mammalian cell culture technology and biologics production expertise
to Celltrion in exchange for an initial 52% interest in the joint venture. After
three planned rounds of financing, our fully diluted ownership will be
approximately 44%. The South Korean partners plan to provide the funding that we
believe is necessary to design and construct the Incheon facility and to
validate and operate the Incheon facility. We intend to provide the funding
necessary to validate and operate a South San Francisco area facility. The
Incheon facility is being designed to be built on approximately 26 acres of land
sold to Celltrion by the city of Incheon at a discount to prevailing market
rates.
In its first phase of development, expected to be completed by 2005, we believe
the Incheon facility will be capable of producing up to 200 million doses of
AIDSVAX annually. Our facility in the South San Francisco area could produce up
to 10 million doses of the AIDS vaccine annually and may also be used to develop
other pharmaceutical products when it is licensed and operational, which we
believe will occur in 2005. We expect to complete construction of our facility
by the middle of 2003 and Celltrion the Incheon facility by the end of 2004.
Additional time will be required to validate and license each facility. If
AIDSVAX proves to be safe and effective, we intend to use the South San
Francisco area facility to validate its manufacturing process, which would be a
key component of its subsequent regulatory submission to the FDA. This facility,
which will be located near our research and development facility, is expected to
be used for commercial manufacturing of AIDSVAX at least through commissioning
of the Incheon facility.
As of June 30, 2002, the South Korean investors had contributed approximately
$38.4 million in cash to Celltrion and secured a $40 million loan with a Korean
bank. As a result of the cash investment, we currently have a 50.4% interest in
Celltrion, although if funding is completed as intended, our interest will be
approximately 44%. In the event that AIDSVAX is proven successful and the
Incheon facility is validated and licensed to produce AIDSVAX, Celltrion would
produce bulk material that will be sold to us. However, in the event that
AIDSVAX is proven to be unsuccessful, the Incheon facility will be used to
manufacture other biopharmaceutical products, in which we would share in the
profits based on our percentage ownership. The Board of Directors of Celltrion
is comprised of five individuals, two from VaxGen and the remaining three from
the joint venture partners. Based on the management structure of Celltrion, we
do not have outright control of Celltrion regardless of ownership. Also,
although we currently own greater than 50% ownership of the voting stock of
Celltrion, this is only a temporary situation. As a result, we will account for
the joint venture using the equity method of accounting from inception of the
joint venture. Since the historical cost of the non-monetary assets that we
contributed is zero, there is no investment to be recorded for the technology
contributed. Additionally, we would not be able to pick up equity in earnings
until such time that we have recovered losses not recognized.
Under the terms of the joint venture agreement, Celltrion will invest $7 million
to capitalize a new corporation, VaxGen-Celltrion, Inc. ("VCI"). The
capitalization of VCI will be used to design and construct the manufacturing
facility in the South San Francisco, California area for our use to support
licensure and commercial launch of AIDSVAX. Once the Incheon facility is
validated and licensed to produce AIDSVAX, the VCI facility will be utilized to
develop and manufacture other biopharmaceutical products for us. In addition, if
AIDSVAX is proven to be successful, we have an exclusive option to purchase all
VCI shares held by Celltrion during a five-year period commencing on February
25, 2003, at a purchase price of $1.00 per share plus interest. In July 2002,
Celltrion made an initial investment of $3 million to capitalize VCI. The Board
of Directors of VCI is comprised of three individuals, two of which are from
VaxGen. We will supervise the design and construction of the
7
manufacturing facility along with being responsible for costs of validation,
operation and licensure of the facility. Due to our significant influence over
VCI and the day to day management of its operations, we intend to consolidate
VCI into our financial statements. Our contribution to construction, validation
and operations of the South San Francisco facility will be accounted for as an
equity investment in VCI, such that when our direct contribution exceeds $7
million in aggregate, we will have a definitive majority ownership in the
facility. Since the initial investment and operations did not occur until July
2002, there is no consolidation activity as of June 30, 2002.
7. Equity Incentive Plans
On May 29, 2002, our stockholders approved amendments to the 1996 Stock Option
Plan (the "1996 Plan") and the 1998 Director Stock Option Plan (the "1998
Plan"). The amendments to the 1996 Plan increased the number of options
authorized for issuance from 3,250,000 to 4,750,000 and also added a provision
that will automatically increase the number of shares reserved under the 1996
Plan by 3.5% of the issued and outstanding common stock on the last trading day
of the December immediately preceding each fiscal year beginning with January
2003 and ending with January 2007. The amendments to the 1998 Plan increased the
number of options authorized for issuance from 37,500 to 300,000 and modified
the number of options granted to non-employee directors annually.
8. Related Party Transactions
On July 2, 2002, we announced that the Genentech license agreement had been
amended and restated to give us greater flexibility in commercializing AIDSVAX.
A summary of the significant changes to the Genentech license agreement is as
follows:
o Genentech no longer has an option to manufacture AIDSVAX on a
commercial basis.
o Genentech has an option to use, sell, offer for sale and import, on
an basis, AIDSVAX and certain other products in the United States,
Mexico and Canada (previously, this option extended to the entire
world). Genentech must exercise this option, if at all, prior to 90
days from the date we deliver to Genentech a report from our
phase III clinical that the trial has met all of its primary
endpoints, in a form suitable for filing with the FDA for marketing
approval.
o If Genentech exercises its option, VaxGen and Genentech will share
net profits from sales of the licensed products in North America,
30% and 70%, respectively.
o If Genentech does not exercise its option, and in any event for all
sales outside of North America, Genentech will receive a royalty
equal to 15% of net sales of the licensed products, except that the
royalty owed to Genentech for such sales shall be reduced by a
proportional amount, to a minimum rate of 7.5%, for sales to the
World Health Organization or the United Nations for use in a third
world country at a price lower than the average price charged in
private markets in such country.
o The license agreement cannot be terminated by Genentech for our
failure to maintain previously specified tangible net worth levels.
As of June 30, 2002, we had loans outstanding to two executive officers in the
amount of $135,000. In May 2002, an executive received a non-interest bearing
loan in the amount of $80,000. The loan will be forgiven at the rate of 25% per
year for each of the first four full years of the executive's employment with
us. The loan was made for the purchase of a residence in connection with the
job-related relocation. In August 2000, an executive received a non-interest
bearing loan in the amount of $55,000. The loan is payable in full on April 30,
2003 and is secured by the executive's stock options on a dollar for dollar
basis out of any proceeds received as a result of sale of shares of common
stock.
9. Comprehensive Loss
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Net loss $(6,663,000) $(5,854,000) $(13,628,000) $(11,785,000)
Net unrealized gains (losses) on
investment securities 77,000 (138,000) (382,000) 202,000
----------- ----------- ------------ ------------
Comprehensive loss $(6,586,000) $(5,992,000) $(14,010,000) $(11,583,000)
=========== =========== ============ ============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with our condensed
financial statements and related notes thereto appearing in Item 1 of this
report. In addition to historical information, this report contains
"forward-looking statements" within the meaning of the federal securities laws.
These forward-looking statements include without limitation statements regarding
our expectations and beliefs about our market and industry; uncertainties
related to the progress, costs and results of our Phase III clinical trials;
domestic and foreign regulatory approvals of AIDSVAX; the ability to manufacture
AIDSVAX; our ability to commercialize AIDSVAX; our ability to manage our
Celltrion manufacturing joint venture; the timing, and announcement of results,
of either of our Phase III clinical trials, including the timing and
announcement of results from any interim analyses; our intent to continue to
invest resources in research and development; our intent to develop
relationships and strategic alliances; our beliefs regarding the future success
of AIDSVAX and other products currently under development or proposed to be
developed or licensed; our beliefs regarding period to period results of
operations; our beliefs regarding future growth and financial performance; our
beliefs regarding the term, or termination, of our license agreement with
Genentech; our beliefs regarding our revenues and revenue growth; our
expectations regarding fluctuations in revenues and operating results; our
intent to use all available funds for the development of vaccines; our intent
not to declare or pay any cash dividends; our beliefs regarding our liquidity
and capital resources; the ability of our Celltrion joint venture to raise
necessary funding for execution of its business plan; and our beliefs regarding
the impact of recent accounting pronouncements and revenue recognition matters.
Reference should be made to the section of this report entitled "Risk Factors,
and to our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on April 1, 2002 under the heading "Business," for a more detailed
description of such factors. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrence of
anticipated events.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We currently believe that none of our accounting policies or estimates are
critical. However, as the nature and scope of our business operations mature,
certain of our accounting policies and estimates may become critical. You should
understand that generally accepted accounting principles require our management
to make estimates and assumptions that affect the amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
our financial statements, as well as the amounts of revenues and expenses during
the periods covered by our financial statement, the actual amounts of these
items could differ materially from those estimates. For example, we estimate the
fair value of stock options and warrants issued to non-employees using an option
valuation method that considers market indicators.
OVERVIEW
In November 1995, VaxGen was formed to continue development of AIDSVAX. At that
time, Genentech, Inc. licensed to us the technology necessary for completing
development and commercialization of AIDSVAX. Currently, Genentech owns
approximately 11% of our common stock.
Since our formation, we have focused on developing and testing AIDSVAX, a
vaccine candidate designed to prevent infection by HIV, the virus that causes
AIDS. We have developed formulations of AIDSVAX that focus on the predominant
HIV subtype in North America, Europe, the Caribbean, and Australia (subtype B)
and the predominant HIV subtype in Southeast Asia and parts of East Asia
(subtype E). We have commenced two Phase III clinical trials, one in North
America and Europe and one in Thailand, to determine the efficacy of AIDSVAX. In
October 1999, we completed the enrollment of over 5,400 trial volunteers for the
North American/European Phase III clinical trial, which is being conducted in 59
clinical centers. In August 2000, we completed the enrollment of over 2,500
volunteers for the Thai Phase III clinical trial, which is being conducted in 17
clinical centers in Bangkok. Our laboratory, with funding from the National
Institutes of Health ("NIH"), is also working on a formulation of AIDSVAX for
use in Sub-Saharan Africa, India and China.
To date, we have generated $1,408,000 in revenue from grants from the NIH for
research and development of HIV vaccine candidates along with funds received
through a collaborative agreement with BBI Biotech Research Laboratories, Inc.
("BBI Biotech"), which is funded by the National Institute of Allergy and
Infectious Diseases ("NIAID"), to obtain and store clinical specimens from our
North American/European Phase III clinical trial. We anticipate only modest
revenues from other governmental agencies or other grants or from collaborations
with other entities over the next three to four years. We have incurred losses
since inception as a result of research and development and general and
administrative expenses in support of our operations. As of June 30, 2002, we
had a deficit accumulated during the development stage of approximately
$111,428,000. We anticipate incurring substantial losses over at least the next
three to four years as we complete our clinical trials, apply for regulatory
approvals, continue development of our technology and expand our operations.
Our strategy is to develop, test and obtain regulatory approval for various
formulations of AIDSVAX. The first two approvals we plan to obtain are in North
America/Europe for the formulation being tested in the North America/Europe
trial and in Thailand for the formulation being tested in the Thai trial. We
intend to use Celltrion, a South Korean manufacturing joint venture in which we
hold a significant interest, and/or other third parties, as our partner(s) for
manufacturing and distribution. Genentech has an exclusive option to market and
sell AIDSVAX products in North America. If Genentech does not exercise its
exclusive marketing and sales option, we have the right to pursue third party
arrangements for the marketing and sales of AIDSVAX products in North America.
9
RESULTS OF OPERATIONS
Six months ended June 30, 2002 compared to the six months ended June 30, 2001
Contract Revenue
There was $238,000 in contract revenue for the six months ended June 30, 2002,
compared to $421,000 for the six months ended June 30, 2001. Contract revenue in
2002 consisted of funds received as reimbursement of costs incurred related to a
grant from the NIH for research and development of HIV vaccines. Research
contract revenue earned in one period is not indicative of research contract
revenue to be earned in future periods.
Research and Development Expenses
Research and development expenses increased 9%, from $8,250,000 for the six
months ended June 30, 2001 to $8,956,000 for the six months ended June 30, 2002.
The increase is attributable to a $681,000 increase in salaries and benefits
related to additional personnel hired in our Regulatory Affairs, Quality Systems
and Manufacturing groups in preparation for the completion of our AIDSVAX phase
III trials and advancing commercial development along with an increase of
$306,000 for professional service fees offset by lower clinical site costs and
fees paid to third parties associated with conducting the clinical trials.
General and Administrative Expenses
General and administrative expenses increased 6%, from $5,717,000 for the six
months ended June 30, 2001 to $6,069,000 for the six months ended June 30, 2002.
The increase was primarily due to the building of our infrastructure with an
increase in salaries and related benefits expense of $328,000 along with higher
occupancy costs of $365,000, offset by a decrease of $545,000 in legal fees.
Other Income, Net
Other income, net, consisting primarily of interest income, decreased 34%, from
$1,761,000 for the six months ended June 30, 2001 to $1,159,000 for the six
months ended June 30, 2002. This was primarily attributable to lower average
balances of cash, cash equivalents and investment securities, along with lower
yields.
Three months ended June 30, 2002 compared to the three months ended June 30,
2001
Contract Revenue
There was $220,000 in contract revenue for the three months ended June 30, 2002,
compared to $346,000 for the three months ended June 30, 2001. Contract revenue
in 2002 consisted of funds received as reimbursement of costs incurred related
to a grant from the NIH for research and development of HIV vaccines. Research
contract revenue earned in one period is not indicative of research contract
revenue to be earned in future periods.
Research and Development Expenses
Research and development expenses increased 15%, from $3,741,000 for the three
months ended June 30, 2001 to $4,299,000 for the three months ended June 30,
2002. The increase is attributable to a $417,000 increase in salaries and
benefits related primarily to additional personnel hired in our Regulatory
Affairs and Quality Systems group in preparation for the completion of our
AIDSVAX phase III trials and advancing commercial development along with an
increase of $263,000 for professional service fees offset by lower clinical site
costs and fees paid to third parties associated with conducting the clinical
trials.
General and Administrative Expenses
General and administrative expenses decreased 7%, from $3,375,000 for the three
months ended June 30, 2001 to $3,141,000 for the three months ended June 30,
2002. The decrease was primarily due to higher non-cash compensation expense in
2001 in the amount of $293,000, as a result of an employee settlement in the
second quarter of 2001.
Other Income, Net
Other income, net, consisting primarily of interest income, decreased 39%, from
$916,000 for the three months ended June 30, 2001 to $557,000 for the three
months ended June 30, 2002. This was primarily attributable to lower average
balances of cash, cash equivalents and investment securities, along with lower
yields.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities were $35,751,000 at June 30,
2002. We have financed our operations since inception through private placements
of common stock and preferred stock, our initial public offering and capital
provided by Genentech. Genentech has no obligation to provide future funding to
us.
We completed our initial public offering in July 1999, in which we issued and
sold 3,565,000 shares of common stock for aggregate proceeds to us in the amount
of $46,345,000. Of the aggregate proceeds received in the offering,
approximately $4,386,000 was used to pay underwriting discounts and commissions
and expenses related to the offering, resulting in net proceeds to us of
approximately $41,959,000. In early 1999, we received net proceeds of $5,273,000
from private placement financing activities, which were completed prior to our
initial public offering.
In December 1999, we completed a private placement of common stock with Vulcan
Ventures, Inc. The funds from the private placement help support our on-going
operations along with our current clinical trials. This private placement has
also enabled us to commence development of a formulation of AIDSVAX, that
focuses on the predominant HIV type found in Africa, China, India and South
America (subtype C). Currently, we have developed formulations of AIDSVAX, that
focus on the predominant HIV type in North America, Europe, the Caribbean and
Australia (subtype B) and the predominant HIV subtype in Southeast Asia and East
Asia (subtype E). The private placement consisted of approximately 2,174,000
shares of common stock, which resulted in proceeds, net of expenses, to us of
approximately $24,100,000.
On May 23, 2001 we completed a preferred stock financing through which four
investors paid us an aggregate of approximately $20,000,000 in consideration for
20,000 shares of our Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock") at a price of $1,000 per share, convertible into shares of
our common stock, at an initial conversion price of $23.2185 per share. In the
event that there is no earlier conversion, we must redeem the Preferred Stock
for cash on May 23, 2004, at a redemption price equal to $1,000 per share plus
all accrued and unpaid dividends. Expenses relating to the transaction were
approximately $1,700,000, resulting in net proceeds to us of $18,300,000. The
proceeds from the Preferred Stock financing will be used to prepare our HIV/AIDS
vaccine candidate, AIDSVAX, for commercial-scale manufacturing if it proves
effective, the potential development of new adjuvants and general corporate
purposes.
In connection with the Preferred Stock financing, we issued warrants for the
purchase of 297,177 shares of our common stock to our Preferred Stock investors.
The warrants, which expire on May 23, 2006, originally had an exercise price of
$25.2375 per share. On May 23, 2002, the exercise price was automatically
adjusted to $14.133 per share, and the number of shares of common stock issuable
on exercise of the warrants increased to 530,674, pursuant to the terms of the
warrants.
Since our inception, investing activities, other than purchases and sales of
investment securities, have consisted entirely of equipment acquisitions and
leasehold improvements. From inception through June 30, 2002, our gross
investment in equipment and leasehold improvements was $5,814,000. The increase
in equipment and leasehold improvements has been primarily due to the
development of our research and development laboratory and the establishment of
larger office facilities. Net cash used in operating activities for the six
months ended June 30, 2002 was $12,161,000, representing expenditures for
research and development costs and general and administrative expenses.
In October 1999, we entered into collaboration with the federal Centers for
Disease Control and Prevention ("CDC") to support research at six of the 54
clinics in the United States currently conducting Phase III clinical trials of
our AIDSVAX vaccine candidiate. The participating sites have continued to
implement our Phase III protocol, as well as conducting epidemiological, social
and behavioral research, which has been shared by us and the CDC. The sites have
been compensated directly by the CDC for the clinical costs, which would have
been incurred by us, and for conducting the additional research. The CDC has
agreed to contribute approximately $8,000,000 to the participating sites over a
four-year period.
In 2001, we finalized a collaborative agreement with BBI Biotech, which is being
funded by the NIAID, an agency within the National Institutes of Health, to
obtain and store clinical specimens from our North American/European Phase III
clinical trial. The project is being funded under a contract, which NIAID
awarded BBI Biotech for seven years. Under a subcontract with BBI Biotech, we
will receive a gross amount of approximately $1,730,000 to support the
establishment of the sample collection. We recognized approximately $780,000 for
the year ended December 31, 2001. In 2002, we have recognized no income. If
AIDSVAX proves successful in our Phase III clinical trials, the samples will be
used to determine if the vaccine candidate induced a cellular immune response in
the volunteers who received the active vaccine.
Also in 2001, we were awarded a grant from the NIH to continue the development
of a vaccine candidate designed to prevent infection by HIV subtype C, the most
widespread form of the virus. The Small Business Innovation Research Fast Track
grant, which is split into two phases, provides up to $1,131,000 for the
development program. We earned approximately $238,000 for the six months ended
June 30, 2002 as part of the second phase of the grant. We had received an
aggregate amount of $150,000 in 2000 and 2001 related to the first phase of the
grant. The NIH grant will allow us to create and conduct laboratory tests of a
subtype C vaccine candidate that could be used alone in Southern Africa and
India, or it could be combined with a vaccine against the B and E subtypes for
regions of the world, such as China, where all three subtypes are in
circulation.
In February 2002, we and a group of South Korean investors announced the
formation of a joint venture, named Celltrion, which intends to raise up to
approximately $122 million, consisting of up to approximately $52 million in
cash, a $40 million bank loan and an in-kind investment of mammalian cell
culture technology and production support valued at a minimum of $30 million, to
build and operate a facility in Incheon, South Korea, to
11
manufacture AIDSVAX. We have no further funding obligation to Celltrion. The
joint venture also intends to fund a capital contribution of $7 million towards
construction of a smaller facility in the South San Francisco, California area
to support licensure and commercial launch of AIDSVAX. We believe that both
facilities, once constructed, would be designed for commercial manufacture of
AIDSVAX, if it proves safe and effective and is approved by the FDA.
We provided mammalian cell culture technology and biologics production expertise
to the joint venture, in exchange for an initial 52% interest in the joint
venture. We currently are Celltrion's single-largest stockholder. After three
planned rounds of financing, our fully diluted ownership will be approximately
44%. As of June 30, 2002, the South Korean investors had contributed
approximately $38.4 million in cash. As a result, we currently have a 50.4%
interest in the joint venture. The South Korean partners will provide the
funding necessary to design and construct both facilities and to validate and
operate the Incheon facility. We will provide the funding necessary to validate
and operate the South San Francisco area facility. In the event that AIDSVAX is
proven successful and the Incheon facility is validated and licensed to produce
AIDVAX, Celltrion would produce bulk material that will be sold to us.
We believe that our existing cash and cash equivalents and investment
securities, together with investment income and funds from other potential
collaborative arrangements, will enable us to meet our forecasted expenditures
through the anticipated completion of our North American/European and Thai Phase
III clinical trials and into the second half of 2003. However, we may need to
raise additional funds to support the necessary manufacturing and development
programs if we apply for regulatory approval of the vaccine.
We will also need to raise additional capital if the Phase III clinical trials
are delayed or more costly than currently anticipated, or to continue operations
if the Phase III clinical trials are not successful, or if commercialization is
delayed for any other reason. Our future capital requirements are also dependent
on several other factors, including:
o the progress of other internal research and development projects;
o the need for leasehold improvements to facilities and the purchase of
additional capital equipment including the funds that may be needed to complete
the construction of the South San Francisco area facility;
o the ability to attract and negotiate business development opportunities; and
o the timing of revenue, if any, from AIDSVAX.
We cannot assure you that we will be able to raise funds when needed, or that
such funds will be available on satisfactory terms. We expect that our ability
to raise additional capital will be adversely affected if AIDSVAX does not
achieve clinical success.
12
Risk Factors
Risks Relating to our Business
If we are unable to commercialize our sole product candidate, AIDSVAX, we will
not have revenues to continue operations.
AIDSVAX is our only product candidate. We do not know whether the current or
planned formulations of AIDSVAX will be effective in preventing HIV infection.
The overall scientific knowledge of HIV is limited. Although our research has
indicated that AIDSVAX contains a protein that is critical in the infection
process, other proteins and elements may be necessary to develop an effective
vaccine.
Our success may depend entirely on the success of AIDSVAX. In particular, we
must be able to:
o establish the safety, purity, potency and efficacy of AIDSVAX in humans;
o obtain regulatory approvals for AIDSVAX, including a preapproval inspection of
a manufacturing facility; and
o successfully commercialize AIDSVAX through collaborative relationships.
If we are unable to commercialize AIDSVAX, we do not have other products from
which to derive revenue.
We may not be able to obtain regulatory approval to market AIDSVAX in the United
States or abroad on a timely basis, or at all.
Clinical testing is a long, expensive and uncertain process. We cannot assure
you that the data collected from our clinical trials will be sufficient to
support approval of AIDSVAX by the FDA or any foreign regulatory authorities,
that the clinical trials will be completed on schedule or, even if the clinical
trials are successfully completed and on schedule, that the FDA or any foreign
regulatory authorities will ultimately approve AIDSVAX for commercial sale.
To gain FDA regulatory approval for the sale of AIDSVAX in the United States, we
believe, based on discussions with the FDA and the recommendations of its
Vaccine and Related Biological Products Advisory Committee, that we will need to
demonstrate that the AIDSVAX vaccine reduces the level of HIV infection by at
least 30% at a 95% confidence level of statistical significance. While these
discussions and the vote of the Vaccine and Related Biological Products Advisory
Committee are not binding on the FDA, they are generally followed. A confidence
level of 95% means that if the clinical trial were repeated, 95 times out of 100
we would see at least a 30% greater reduction in HIV infections among volunteers
who received AIDSVAX compared with volunteers who received a placebo. In the
context of our North American/European clinical trial, which represents a small
sampling from the entire population, this means that, in order to establish at
least a 30% efficacy at a statistically significant level, there must be an
observed reduction in the incidence of HIV in the group receiving the vaccine
compared to the control group of between 45% to 65%, or possibly a higher
percentage, depending on various factors that will have a bearing on the
statistical significance of the clinical trial results. These factors include
the number of patients ultimately retained in the study, the rate of HIV
infection in the control group and the length of time associated with the
clinical observation period. We anticipate that the efficacy required to obtain
regulatory approval to market AIDSVAX in foreign countries will vary from one
country to another and may differ significantly from that required by the FDA.
Delay in completing our clinical trials could jeopardize our ability to obtain
regulatory approval to market AIDSVAX in the United States or abroad on a timely
basis.
Our clinical trials could be delayed for a variety of reasons, including:
o lower-than-anticipated retention rate of volunteers in the trial;
o serious adverse events related to the vaccine; or
o different interpretations of our preclinical and clinical data, which could
lead initially to inconclusive results.
Our inability to complete our clinical trials in a timely manner could
jeopardize our ability to obtain domestic or foreign regulatory approval.
13
If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory authorities, the commercialization of AIDSVAX could be prevented or
delayed.
AIDSVAX is subject to extensive government regulations related to development,
clinical trials, manufacturing and commercialization. The process of obtaining
and complying with FDA, other governmental and foreign regulatory approvals and
regulations is costly, time consuming, uncertain and subject to unanticipated
delays. It also subjects us to the following risks and obligations, among
others.
o The FDA or foreign regulators may refuse to approve an application if they
believe that applicable regulatory criteria are not satisfied.
o The FDA or foreign regulators may require additional testing for safety and
efficacy.
o If regulatory approval of a product is granted, the approval may be limited to
specific indications or limited with respect to its distribution; for example,
the FDA may approve the licenses for only high-risk populations.
o The FDA or foreign regulators may not approve the AIDSVAX manufacturing
processes or manufacturing facilities, or may require additional clinical
studies to establish the safety, purity and potency of AIDSVAX.
o Even if United States regulatory approval for AIDSVAX is obtained, the license
will be subject to continual review, and newly discovered or developed safety or
efficacy data may result in revocation of the marketing license.
o If regulatory approval of the vaccine candidate is granted, the marketing of
AIDSVAX would be subject to adverse event reporting requirements and the FDA's
general prohibition against promoting products for unapproved or "off-label"
uses.
o We will be subject to continual regulatory review and periodic inspection and
approval of manufacturing modifications, including compliance with the FDA's
Good Manufacturing Practices regulations.
In addition, the FDA stringently applies regulatory standards for manufacturing.
Failure to comply with any of these post-approval requirements can, among other
things, have resulted in warning letters, product seizures, recalls, fines,
injunctions, suspensions or revocations of marketing licenses, operating
restrictions and criminal prosecutions.
There can be no assurance that we will avoid incurring significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect on us.
We have only a limited operating history and we expect to continue to generate
losses.
To date, we have engaged primarily in research, development and clinical
testing. At June 30, 2002, we had an accumulated deficit of approximately $111.4
million. We sustained net losses of approximately $2.1 million in 1996, $3.1
million in 1997, $9.2 million in 1998, $23.3 million in 1999, $31.8 million in
2000 and $24.4 million in 2001. We expect to incur substantial losses for at
least an additional three to four years.
If we need additional funds, and are unable to raise them, we would have to
curtail or cease operations.
We cannot be certain that our existing capital resources, together with the
funding from the Centers for Disease Control and Prevention and the funding from
the National Institute of Allergy and Infectious Diseases, will be sufficient to
support our current and planned operations through commercialization of AIDSVAX.
We do not expect AIDSVAX to be commercially available until at least the fourth
quarter of 2004. The North American/European Phase III clinical trial is
anticipated to be completed in the fourth quarter of 2002. Once the trial is
completed, we will need to analyze the data and, if favorable, prepare our
Biologics License Application for submission to the FDA, which typically takes
between six and 12 months to be accomplished. The FDA review process could take
at least an additional six months. We anticipate that it would take at least six
months after obtaining regulatory approval for the pilot manufacturing facility,
or another third party, to begin commercialization of AIDSVAX.
We may need to raise additional funds if:
o AIDSVAX is not sufficiently safe, pure and potent to commercialize
in its current formulation;
o our Phase III clinical trials are delayed, are not successful or are
more costly than currently estimated;
o commercialization of AIDSVAX is delayed for any other reason;
o we need to manufacture AIDSVAX ourselves using our own facilities;
or
o additional trials are required.
14
We cannot assure you that we will be able to raise sufficient funds in the
future. If we fail to raise sufficient funds, we would have to curtail or cease
operations. We believe that our existing cash and cash equivalents and
investment securities, together with investment income and funds from
collaborative arrangements, will enable us to meet our forecasted expenditures
through the anticipated completion of our North American/European and Thai Phase
III clinical trials. However, we may need to raise additional funds to support
the necessary manufacturing and development programs required to obtain
regulatory approval.
Formation of our South Korean manufacturing joint venture is not yet completed,
and even if completed, may not be successful at manufacturing or supplying
AIDSVAX in necessary quantities, or at all.
In February 2002 we entered into a joint venture, Celltrion, with a group of
South Korean investors for the purpose of building and operating a manufacturing
facility in Incheon, South Korea, and a smaller manufacturing facility in the
South San Francisco area. We have not yet completed the full capitalization of,
or the transfer of all technology to, Celltrion. If:
o the investors in Celltrion are unable or unwilling for any reason to complete
funding Celltrion;
o Celltrion is otherwise unable to raise the anticipated, or necessary, funding;
o we are for any reason unable to transfer to Celltrion the technology necessary
for the manufacture of AIDSVAX;
o the remaining capitalization of Celltrion is not raised; or
o for any other reason Celltrion is not properly capitalized or does not receive
the necessary technology for the manufacture of AIDSVAX,
Celltrion will be unable to complete its capitalization, and would be unable to
build a manufacturing facility in Incheon, South Korea or in the South San
Francisco area. Even if Celltrion successfully builds its manufacturing
facility, there can be no assurance that the facilities will pass domestic or
foreign regulatory approvals or be able to manufacture AIDSVAX in commercial
quantities, or at all, or that they will be able to manufacture AIDSVAX on a
cost-effective basis. There also can be no assurance that the building of either
manufacturing facility will be completed on time and will not be subject to cost
overruns.
Our proposed South Korean international manufacturing operations may expose us
to numerous business risks.
South Korea is still in the process of developing its economic, social and other
infrastructure and is susceptible to various uncertainties. The political,
social and economic situation of South Korea may not continue to provide an
environment in which we would be able to manufacture AIDSVAX cost-efficiently or
at all. The South Korean government may impose regulations or restrictions that
would make it difficult, impractical or impossible, whether economically,
legally or otherwise, for us to conduct our business there. Our future South
Korean manufacturing operations may expose our business to numerous risks that
could harm our business, including:
o international currency fluctuations;
o general strikes or other disruptions in working conditions;
o political instability;
o trade restrictions or changes in tariffs;
o the difficulties associated with staffing and managing international
operations;
o generally longer receivables collection periods;
o unexpected changes in or imposition of new legislative or regulatory
requirements;
o potentially limited protection for intellectual property rights; and
o potentially adverse taxes.
15
We face competition from several companies with greater financial, personnel and
research and development resources than ours.
The goal of developing an HIV vaccine is an area of interest to competitors, and
several companies with substantially greater financial, personnel and research
and development resources than ours have announced that they are trying to
develop an HIV vaccine and are planning, conducting or have completed Phase I or
Phase II clinical trials. Although our research has indicated that AIDSVAX
contains a protein that is critical in the infection process, other proteins and
elements may be necessary to develop an effective vaccine, and several of our
competitors are working to develop vaccines that activate a different arm of the
immune system. In addition, several of these companies are developing new "drug
cocktails" and other treatments that may mitigate the impact of the disease.
Even if we complete our Phase III clinical trials, obtain FDA and other required
regulatory approvals and commercialize AIDSVAX, our competitors may develop
vaccines or treatments that are as or more effective, or less complex or less
expensive to produce, than AIDSVAX.
Adverse publicity regarding the safety or side effects of AIDSVAX could harm our
business and cause our stock price to fall.
Despite the favorable safety tests that have been completed with respect to
AIDSVAX and our clinical trials, there still may be potential side effects or
safety concerns that have not yet come to light. If our studies or other
researchers' studies were to raise or substantiate concerns over the safety or
side effects of AIDSVAX or vaccine development efforts generally, our reputation
and public support for our clinical trials could be harmed, which would harm our
business and could cause our stock price to fall.
Failure to hire and retain key management employees could adversely affect our
ability to obtain financing, develop AIDSVAX, conduct clinical trials or execute
our business strategy.
We are highly dependent on our senior management and scientific staff,
particularly Lance Gordon, Ph.D., our Chief Executive Officer, Donald Francis,
M.D., D.Sc., our President, and Phillip Berman, Ph.D., our Senior Vice
President, Research & Development. These individuals have played a critical role
in raising financing, negotiating business development opportunities, developing
the vaccine and conducting clinical trials. The loss of the services of any of
these key members of senior management and scientific staff may prevent us from
achieving our business objectives.
If we are unable to protect our intellectual property, we may be unable to
prevent other companies from using our technology in competitive products. If we
infringe the intellectual property rights of others, we may be prevented from
developing or marketing AIDSVAX.
We rely on patent and other intellectual property protection to prevent our
competitors from manufacturing and marketing AIDSVAX. Our technology, including
technology licensed from Genentech, will be protected from unauthorized use by
others only to the extent that it is covered by valid and enforceable patents or
effectively maintained as trade secrets. As a result, our success depends on our
ability, and Genentech's ability, to:
o obtain patents;
o protect trade secrets;
o operate without infringing upon the proprietary rights of others; and
o prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from Genentech
will be enforceable and afford protection against competitors. We cannot assure
you that our operations or technology will not infringe intellectual property
rights of others. If we infringe the intellectual property of others, there can
be no assurance that we would be able to obtain licenses to use the technology
on commercially reasonable terms or at all.
We may become subject to product liability claims, which could reduce demand for
AIDSVAX or result in damages that exceed our insurance limitation.
We face an inherent risk of exposure to product liability suits in connection
with AIDSVAX vaccines being tested in human clinical trials and products that
may be sold commercially. We may become subject to a product liability suit if
AIDSVAX causes injury, or if vaccinated individuals subsequently become infected
with HIV. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a vaccine, injury to our reputation, withdrawal
of clinical trial volunteers and loss of revenues.
Political or social factors may delay or reduce revenues by delaying or
impairing our ability to market AIDSVAX.
Products developed for use in addressing the HIV/AIDS epidemic have been, and
will continue to be, subject to competing and changing political and social
pressures. The political and social response to the HIV/AIDS epidemic has been
highly charged and unpredictable. Political or social pressures may delay or
cause resistance to bringing our product to market or limit pricing of our
product.
16
Risks Relating to our Relationship with Genentech
We intend to rely on third parties for the sale, marketing and commercialization
of AIDSVAX. Our lack of sales and marketing personnel and distribution
relationships may impair our ability to generate revenues.
We have no sales, marketing or commercialization capability. Genentech currently
has an exclusive option to market and sell AIDSVAX in North America. If
Genentech does not elect to exercise its option to market and sell the product
in North America, we will need to identify and engage another partner to market
and commercialize AIDSVAX. We cannot assure you that we would be able to
establish marketing or commercialization arrangements with third parties in a
timely manner or on favorable terms, or at all.
If Genentech were to terminate our license agreement, we would not be able to
develop or market AIDSVAX.
Our license agreement with Genentech, as amended effective as of May 1, 2002,
permits Genentech to terminate the agreement, or terminate the exclusivity of
our license, if we:
o fail to use due diligence in developing, seeking regulatory approval
for, marketing or commercializing products covered by the amended Genentech
license agreement;
o fail to file the first market approval application for AIDSVAX with the
FDA prior to May 1, 2004; provided, that this date may be extended to May 1,
2006 if our phase III clinical trials do not meet all of their primary
endpoints;
o breach the license agreement and fail to cure the breach within the time
period provided in the agreement.
Risks Related to the Issuance of Series A Preferred Stock and Warrants
We may be obligated to redeem the Series A Preferred Stock, the common stock
issued on exercise of the warrants and/or the warrants at a premium to the
purchase or exercise price.
On May 23, 2001 we completed a private placement in which we issued 20,000
shares of our Series A 6% Cumulative Convertible Preferred Stock and common
stock purchase warrants for aggregate proceeds of $20.0 million. The terms of
our Series A preferred stock, and the warrants, give the selling stockholders
the right to require us to redeem all of the Series A preferred stock, common
stock issued on exercise of the warrants, and/or the warrants, under certain
circumstances, including:
o on May 23, 2004, with respect to the Series A preferred stock;
o upon a change of control, at a 15% premium to the purchase price, plus accrued
dividends, with respect to the Series A preferred stock;
o a 20% premium, if:
o the selling stockholders are unable to sell common stock under the
registration statement after the expiration of the time periods described in the
registration rights agreement;
o our stock is delisted or not quoted on an approved stock exchange or on the
Nasdaq National Market or Small Cap Market for 5 consecutive trading days;
o we do not have a sufficient number of shares of common stock authorized to
satisfy our obligations in connection with the conversion of the Series A
preferred stock or exercise of the warrants;
o we commit a material breach under, or otherwise materially violate the terms
of, the transaction documents entered into in connection with the issuance of
the Series A preferred stock and the warrants; or
o we are insolvent or take other actions, or allow actions to be taken, as part
of a bankruptcy proceeding.
Our redemption of the Series A preferred stock, common stock issued on
conversion of the Series A preferred stock or on exercise of the warrants,
and/or the warrants, would require the expenditure of a significant amount of
cash that would substantially exceed the proceeds that we received in the
private placement and could exceed our ability to make such payment or raise
additional capital.
We cannot issue common stock to a selling stockholder, whether as a dividend or
in redemption of securities, if after such issuance such selling stockholder
would be deemed the beneficial owner of more than 9.9% of our common stock.
Under the terms of the agreements between us and the selling stockholders, we
are, under limited circumstances, permitted to satisfy dividend and redemption
obligations through the issuance of common stock rather than the payment of
cash. We are not permitted to issue common stock to a selling stockholder if
after such issuance such selling stockholder would be deemed the beneficial
owner of more than 9.9% of our
17
common stock. If we are unable to issue common stock to satisfy our dividend and
redemption obligations, we would be required to use cash to satisfy our
obligations, which could adversely affect our business and operating results.
Our stockholders could experience substantial dilution as result of the terms of
our Series A preferred stock and warrants issued in the private placement to the
selling stockholders or our ability to issue additional preferred stock.
The 20,000 outstanding shares of Series A preferred stock are initially
convertible into approximately 861,383 shares of common stock, obtained by
dividing $20 million by $23.2185, which represents a 15% premium to the closing
price of $20.19, calculated for purposes of the private placement that closed on
May 23, 2001. The outstanding warrants were initially exercisable for 297,177
shares of common stock; however, on May 23, 2002 the exercise price of the
warrants was automatically adjusted to $14.133 per share, and the number of
shares of common stock issuable on exercise of the outstanding warrants
increased to 530,674, pursuant to the terms of the warrants. The number of
shares of common stock issuable by us upon conversion of the Series A preferred
stock and exercise of the warrants can increase substantially in certain events,
including our issuance of common stock at prices less than the conversion price
of the Series A preferred stock or the exercise price of the warrants. If a
warrant is exercised, then the conversion price of the Series A preferred stock
would automatically be reduced to $14.133 per share. Any such conversion price
adjustment could result in the issuance of up to approximately 554,000
additional shares, assuming a conversion price of $14.133 per share.
In addition, we are permitted under limited circumstances to satisfy dividend
and redemption obligations on the preferred stock through the issuance of common
stock rather than through the expenditure of cash. Any increase in the number of
shares of common stock issuable pursuant to the terms of the Series A preferred
stock and the warrants, or our issuance of common stock to the selling
stockholders to satisfy our dividend and redemption obligations, may result in a
decrease in the value of the outstanding shares of our common stock.
Our board of directors has the authority to establish the designation of
19,979,500 additional shares of preferred stock that are convertible into common
stock without any action by our stockholders, and to fix the rights,
preferences, privileges and restrictions, including voting rights, of such
shares. The issuance and conversion of any such preferred stock would further
dilute the percentage ownership of our stockholders.
The perceived risk of dilution or any actual dilution occasioned by Series A
preferred stock; the warrant or additional preferred stock may cause our
stockholders to sell their shares, which would contribute to the downward
movement in stock price of the common stock. In addition, the significant
downward pressure on the trading price of the common stock could encourage
investors to engage in short sales, which would further contribute to a downward
pricing of the common stock.
If the holders of the Series A preferred stock and the warrants elect to have
the Series A preferred stock and the warrants assumed by a potential acquirer of
VaxGen, or redeemed by VaxGen, the acquirer could be deterred from completing
the acquisition.
The Series A preferred stock and the warrants permit the holders to elect to
have their shares of Series A preferred stock and the warrants remain
outstanding after an acquisition of VaxGen, and to have the acquirer assume all
of our obligations to the holder. The Series A preferred stock also permits the
holders of Series A preferred stock to require us to repurchase the Series A
preferred stock, at a premium, in connection with an acquisition. The ability to
force an acquirer to assume the Series A preferred stock and the warrants, and
the ability to force us to repurchase the Series A preferred stock at a premium,
in the event of a merger could deter a potential acquirer from completing an
acquisition of VaxGen.
Among our obligations that an acquirer might be forced to assume which would act
as a deterrent are:
o the price adjustment provisions, which could have an adverse effect on the
market value of the acquirer's outstanding securities;
o the obligation to register the resale of the common stock issuable upon
conversion of the Series A preferred stock and the warrants, which could result
in the sale of a substantial number of shares in the market;
o the obligation to pay dividends on the Series A preferred stock;
o the obligation to redeem the Series A preferred stock, including redemption at
a premium to the purchase price, on the occurrence of certain events or on May
23, 2004;
o the obligation to pay the holders of Series A preferred stock the amount
invested plus accrued dividends before any other stockholder receives any
payment if we are liquidated; and
o the obligation to seek the consent of the holders of the Series A preferred
stock before we can take certain actions, including the issuance of securities
that have senior or equal rights as the Series A preferred stock or incurring
unsecured indebtedness for borrowed money, or take other actions with respect to
the Series A preferred stock or securities that have fewer rights than the
Series A preferred stock.
18
We may be required to obtain the consent of the holders of Series A preferred
stock before taking corporate actions, which could harm our business.
Our certificate of incorporation requires us to obtain the consent of the
holders of the Series A preferred stock before we may issue securities that have
senior or equal rights as the Series A preferred stock or incur unsecured
indebtedness for borrowed money, or take other actions with respect to the
Series A preferred stock or securities that have fewer rights than the Series A
preferred stock. We are also required to obtain the consent of the holders of
the Series A preferred stock before we amend or modify our certificate of
incorporation or bylaws to change any of the rights of the Series A preferred
stockholders. While these obligations may deter a potential acquirer from
completing a transaction with us, they may also prevent us from taking corporate
actions that would be beneficial to us and our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate changes is related primarily to our debt securities
included in our investment portfolio. We do not have any derivative financial
instruments. By policy, we invest in debt instruments of the U.S. Government,
Federal agencies and high-quality corporate issuers, limit the amount of credit
exposure to any one issuer, limit duration by restricting the term, and hold
investments to maturity except under rare circumstances. Investments in both
fixed rate and floating rate instruments carry a degree of interest rate risk.
Fixed rate securities may have their fair market value adversely impacted due to
a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may decrease due to changes in interest rates or due to losses
we may suffer when securities decline in market value. At June 30, 2002, we held
government debt instruments and corporate obligations in the principal amount of
$31,489,000. If market interest rates were to increase immediately and uniformly
by 10% from levels at June 30, 2002, the fair value of our portfolio would
decline by an immaterial amount. Our exposure to losses as a result of interest
rate changes is managed through investing primarily in securities that mature in
a period of one year or less.
We have exposure to foreign exchange rate risk primarily related to our
conducting a clinical trial in Thailand. Thailand is currently considered an
emerging economy. A material increase in the value of Thailand's currency
against the U.S. Dollar could cause an increase in our expenses. The majority of
our contracts associated with conducting the clinical trial in Thailand are
priced in Baht. For the six months ended June 30, 2002, we have incurred no
foreign exchange gains or losses.
19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2002 Annual Meeting of Stockholders held on May 29, 2002, the
stockholders were asked to vote on five items as follows:
1. To elect seven directors, Lance K. Gordon, Donald P. Francis, Phillip W.
Berman, David W. Beier, Randall L-W. Caudill, Stephen C. Francis and William D.
Young to serve until the 2003 Annual Meeting of Stockholders or until their
earlier retirement, resignation or removal;
2. To ratify the selection of KPMG LLP as our independent auditors for the 2002
fiscal year;
3. To approve an amendment to the 1996 Stock Option Plan to increase the number
of options authorized for issuance thereunder from 3,250,000 to 4,750,000;
4. To approve an amendment to the 1996 Stock Option Plan to add a provision that
will automatically increase the number of shares reserved under that plan by
3.5% of the issued and outstanding common stock on the last trading day of the
December immediately preceding each fiscal year beginning with January 2003 and
ending with January 2007; and
5. To approve amendments to the 1998 Director Stock Option Plan to increase the
number of options authorized for issuance thereunder from 37,500 to 300,000 and
to modify the number of options granted to non-employee directors annually.
The results of the matters presented at the annual meeting, were as follows:
1. Lance K. Gordon, Donald P. Francis, Phillip W. Berman, David W. Beier,
Randall L-W. Caudill, Stephen C. Francis and William D. Young were elected as
directors of VaxGen until the 2003 Annual Meeting of Stockholders as follows:
For Withheld
---------- -------
Lance K. Gordon 12,759,639 51,170
Donald P. Francis 12,695,599 115,210
Phillip W. Berman 12,760,029 50,780
David W. Beier 12,758,284 52,525
Randall L-W. Caudill 12,760,579 50,230
Stephen C. Francis 12,759,678 51,131
William D. Young 12,760,789 50,020
2. The ratification of KPMG LLP as independent auditors of VaxGen for the 2002
fiscal year was approved as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
12,712,048 89,054 9,707 0
3. The approval of an amendment to the 1996 Stock Option Plan to increase the
number of options authorized for issuance thereunder from 3,250,000 to 4,750,000
was approved as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,837,174 583,486 18,753 0
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4. The approval of an amendment to the 1996 Stock Option Plan to add a provision
that will automatically increase the number of shares reserved under that plan
by 3.5% of the issued and outstanding common stock on the last trading day of
the December immediately preceding each fiscal year beginning with January 2003
and ending with January 2007 was approved as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,816,852 605,701 16,861 0
5. The approval of amendments to the 1998 Director Stock Option Plan to increase
the number of options authorized for issuance thereunder from 37,500 to 300,000
and to modify the number of options granted to non-employee directors annually
were approved as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,818,971 602,835 17,607 0
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ITEM 5. OTHER INFORMATION
Amended and Restated License and Supply Agreement with Genentech
Our License and Supply Agreement with Genentech defines the working relationship
between our two companies. The Genentech license agreement covers a vaccine
based on, containing, incorporating or using the recombinant gp120 subunit
protein developed by Genentech to prevent, but not treat, HIV infection and/or
AIDS. Under the agreement, Genentech has granted us an exclusive license to all
patents, patent applications and know-how directly related to this product.
Certain portions of the licensed technology are sub-licensed to us under
licenses from third parties to Genentech.
On July 2, 2002, we announced that the Genentech license agreement had been
amended and restated to give us greater flexibility in commercializing AIDSVAX.
A summary of the significant changes to the Genentech license agreement is as
follows:
o Genentech no longer has an option to manufacture AIDSVAX on a
commercial basis.
o Genentech has an option to use, sell, offer for sale and import, on
an basis, AIDSVAX and certain other products in the United States,
Mexico and Canada (previously, this option extended to the entire
world). Genentech must exercise this option, if at all, prior to 90
days from the date we deliver to Genentech a report from our
phase III clinical that the trial has met all of its primary
endpoints, in a form suitable for filing with the FDA for marketing
approval.
o If Genentech exercises its option, VaxGen and Genentech will share
net profits from sales of the licensed products in North America,
30% and 70%, respectively.
o If Genentech does not exercise its option, and in any event for all
sales outside of North America, Genentech will receive a royalty
equal to 15% of net sales of the licensed products, except that the
royalty owed to Genentech for such sales shall be reduced by a
proportional amount, to a minimum rate of 7.5%, for sales to the
World Health Organization or the United Nations for use in a third
world country at a price lower than the average price charged in
private markets in such country.
o The license agreement cannot be terminated by Genentech for our
failure to maintain previously specified tangible net worth levels.
Licensed Patents
Under the Genentech license agreement, we have licensed from Genentech exclusive
rights to a portfolio of United States and foreign patents. These include nine
issued United States patents and eight pending United States patent applications
as well as 85 issued foreign patents and 36 pending foreign applications. The
technology claimed in these patents and applications involves a range of HIV
vaccine product development activities, including the cloning and expression of
recombinant virus glycoproteins for use as vaccine products and sustained
release formulations of HIV gp120. Also claimed by patent filings are specific
compositions of matter for the components of our vaccine products, and
proprietary production, recovery and purification process technology. Together,
these filings provide intellectual property that we believe will enhance the
value of our products.
Under the Genentech license agreement, Genentech has retained title to the
licensed patents and patent applications and other licensed technology
previously owned by Genentech, while we will retain title to any improvements
developed by us. Both parties will jointly own any improvements to the licensed
patents and patent applications or other licensed technology developed or
invented jointly.
Under the Genentech license agreement, if Genentech exercises its exclusive
marketing and sales option in North America, it would have a fully paid-up,
exclusive, license in North America under all improvements to the licensed
know-how or patent rights that we own. Furthermore, Genentech will have such a
license if Genentech terminates the Genentech license agreement before the
expiration of the 15-year term or if we voluntarily terminate the agreement.
Genentech will remain responsible for the filing, prosecution and maintenance of
all licensed patent rights, in consultation with us, at our expense.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
The following exhibits are filed as part of this report:
Exhibit
No. Description
--- -----------
10.38 Amended and Restated License and Supply Agreement between VaxGen, Inc.
and Genentech, Inc., entered into effective as of May 1, 2002
(incorporated by reference to Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on July 15, 2002).
99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K:
A current report on Form 8-K, dated May 13, 2002, was filed with the Securities
and Exchange Commission, reporting under Item 5 that we had announced (i) that
AIDSVAX had cleared its seventh safety review with the Data and Safety
Monitoring Board, (ii) our first quarter financial results, and (iii) the
resignation of Ruth B. Kunath from our Board of Directors and Audit and
Compensation Committees.
A current report on Form 8-K, dated July 15, 2002, was filed with the Securities
and Exchange Commission, reporting under Item 5 that we had announced (i) that
it had entered into an Amended and Restated License and Supply Agreement with
Genentech, and (ii) that it had hired Piers Whitehead as Vice President of
Corporate and Business Development.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VaxGen, Inc.
Dated: August 14, 2002 By: /s/ Carter A. Lee
-----------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Financial Officer)
24