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EX-10.7 - EXHIBIT 10.7 - TENGION INCex10-7.htm
EX-31.2 - EXHIBIT 31.2 - TENGION INCex31-2.htm
EX-32.1 - EXHIBIT 32.1 - TENGION INCex32-1.htm
EX-10.6 - EXHIBIT 10.6 - TENGION INCex10-6.htm
EX-31.1 - EXHIBIT 31.1 - TENGION INCex31-1.htm
EX-32.2 - EXHIBIT 32.2 - TENGION INCex32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended March 31, 2011

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from _____ to _____

Commission file number 001-34688

 
Tengion, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
20-0214813
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
 
(610) 292-8364
(Address of principal executive offices)
 
(Registrant’s telephone number,
including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
     

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o  Accelerated filer  o  Non-accelerated filer  o  Smaller reporting company x

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes o     No x

As of May 10, 2011 there were 23,476,859 shares of the registrant’s common stock outstanding.
 
 
 
 

 
 
TENGION, INC.

FORM 10-Q

INDEX

Part I.  Financial Information
 
Item 1.
 
Financial Statements
 
   
Condensed Balance Sheets
   
Condensed Statements of Operations
   
Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
   
Condensed Statements of Cash Flows
   
Notes to Condensed Financial Statements
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
 
Controls and Procedures
 
Part II.  Other Information
 
Item 1.
 
Legal Proceedings
Item 1A.
 
Risk Factors
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
 
Defaults Upon Senior Securities
Item 4.
 
(Removed and Reserved)
Item 5.
 
Other Information
Item 6.
 
Exhibits
       
Signature Page

 
NOTE REGARDING COMPANY REFERENCES
 
Throughout this report, "Tengion", the "Company," "we," "us" and "our" refer to Tengion, Inc.

NOTE REGARDING TRADEMARKS
 
Tengion® and the Tengion logo® are our registered trademarks and Tengion Neo-Urinary Conduit™, Tengion Neo-Kidney™, Tengion Neo-Kidney Augment™, Tengion Neo-Vessel™, Tengion Neo-Vessel Replacement™, Tengion Neo-Bladder Replacement™, Neo-Bladder Augment™, Tengion Organ Regeneration Platform™ and Organ Regeneration Platform™ are our trademarks. Other names are for informational purposes only and may be trademarks of their respective owners.
 
 

 
- i -

 
 
PART I.    FINANCIAL INFORMATION

Item 1.       Financial Statements.
 
TENGION, INC.
(A Development-Stage Company)

CONDENSED BALANCE SHEETS
(unaudited)

             
   
December 31,
2010
 
March 31,
 2011
ASSETS
Current assets:
  
             
Cash and cash equivalents                                                                                 
  
$
11,971,660
 
  
$
31,478,421
 
Deferred equity offering costs                                                                                 
  
 
40,900
 
  
 
                —
 
Prepaid expenses and other                                                                                 
  
 
492,205
 
  
 
362,858
 
Total current assets                                                                          
  
 
12,504,765
 
  
 
31,841,279
 
Property and equipment, net of accumulated depreciation of
        $19,830,473 and $20,941,628 as of December 31, 2010 and
March 31, 2011, respectively
  
 
11,492,577
 
  
 
10,373,075
 
Other assets                                                                                     
  
 
147,091
 
  
 
1,105,500
 
Total assets                                                                                     
  
$
24,144,433
 
  
$
43,319,854
 
 
  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
  
             
Current portion of long-term debt                                                                                 
  
$
4,016,174
 
  
$
1,408,408
 
Current portion of lease liability                                                                                 
  
 
                —
 
  
 
217,812
 
Accounts payable                                                                                 
  
 
1,193,625
 
  
 
1,201,736
 
Accrued expenses                                                                                 
   
2,843,056
     
1,889,852
 
Warrant liability                                                                                 
   
     
16,528,000
 
Other current liabilities                                                                                 
  
 
205,000
 
  
 
205,000
 
Total current liabilities                                                                          
  
 
8,257,855
 
  
 
21,450,808
 
Long-term debt                                                                                     
  
 
4,585,493
 
  
 
4,535,215
 
Lease liability                                                                                     
  
 
            —
 
  
 
705,496
 
Other liabilities                                                                                     
  
 
241,165
 
  
 
238,084
 
Total liabilities                                                                          
  
 
13,084,513
 
  
 
26,929,603
 
 
  
             
Commitments and contingencies (note 12)                                                                                     
  
 
            —
 
  
 
                —
 
 
  
             
Stockholders’ equity:
  
             
Common stock, $0.001 par value; 90,000,000 shares authorized;
          12,385,793, and 23,471,249 shares issued and outstanding at
          December 31, 2010 and March 31, 2011, respectively
  
 
12,386
 
  
 
23,471
 
Additional paid-in capital                                                                                 
  
 
222,230,864
     
234,579,570
 
Deficit accumulated during the development stage                                                                                 
  
 
(211,183,330
)
   
(218,212,790
)
Total stockholders’ equity                                                                          
  
 
11,059,920
 
  
 
16,390,251
 
Total liabilities and stockholders’ equity                                                                                     
  
$
24,144,433
   
$
43,319,854
 
                 

The accompanying notes are an integral part of these financial statements.
 
 
 
- 1 -

 
 
 
(A Development-Stage Company)
 
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
 
                         
   
Three Months Ended March 31,
 
Period from
July 10, 2003
(inception)
through
March 31, 2011
   
2010
 
2011
 
Operating expenses:
   
 
                 
Research and development                                                       
 
$
3,316,126
  
 
$
3,345,173
   
$
107,909,292
 
General and administrative                                                       
   
1,412,412
  
   
1,775,979
     
36,478,177
 
Depreciation                                                       
   
1,226,809
  
   
1,126,573
     
21,137,221
 
Other expense                                                       
   
            —
     
942,567
     
942,567
 
Total operating expenses                                                    
   
(5,955,347
   
(7,190,292
)
   
(166,467,257
)
Interest income                                                             
   
10,469
  
   
13,735
     
8,472,115
 
Interest expense
   
(681,439
)
   
(271,903
)
   
(14,312,078
)
Change in fair value of warrant liability
   
191,527
     
               419,000
     
2,481,454
 
                         
Net loss      
 
$
(6,434,790
  $
(7,029,460
)
 
$
(169,825,766
)
Accretion of redeemable convertible preferred stock to redemption value
   
(3,628,841
   
                —
         
Net loss attributable to common stockholders
 
$
(10,063,631
 
$
(7,029,460
)
       
Basic and diluted net loss attributable to common
stockholders per share
 
$
(14.33
 
$
(0.45
)
       
Weighted average common stock outstanding-
basic and diluted
   
702,144
  
   
15,710,671
  
       

 
The accompanying notes are an integral part of these financial statements.
 

 
- 2 -

 
 
(A Development-Stage Company)

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
 
             
Stockholders' equity (deficit)
 
 
Redeemable
convertible
preferred stock
     
Common stock
   
Additional
paid-in
capital
   
Deferred
compensation
 
Deficit
accumulated
during the
development
stage
   
Total
 
 
Shares
 
Amount
     
Shares
   
Amount
       
Balance, July 10, 2003
—  
 
$
—  
     
—  
  
 
$
—  
  
 
$
         —  
  
 
$
        —  
  
$
            —  
  
 
$
            —  
  
Issuance of common stock to initial stockholder
—  
   
—  
     
2,000,000
  
   
2,000
  
   
(1,999
   
—  
  
 
—  
  
   
1
  
Effect of reverse stock split (see Note 3)
—  
   
—  
     
(1,862,068
   
(1,862
   
1,862
  
   
—  
  
 
—  
  
   
—  
  
Net loss
—  
   
—  
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
(1,031,756
   
(1,031,756
                                                         
Balance, December 31, 2003
—  
   
—  
     
137,932
  
   
138
  
   
(137
   
—  
  
 
(1,031,756
   
(1,031,755
Issuance of Series A Redeemable Convertible
        Preferred stock at $1.61683 per share, net of
        expenses
18,740,371
   
30,125,610
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
—  
  
   
—  
  
Conversion of notes payable, including interest
2,203,206
   
3,562,211
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
—  
  
   
—  
  
Issuance of restricted common stock to employees
        and nonemployees
—  
   
—  
     
240,318
  
   
240
  
   
336,041
  
   
(335,474
 
—  
  
   
807
  
Issuance of common stock to consultants
—  
   
—  
     
140,003
  
   
140
  
   
20,960
  
   
—  
  
 
—  
  
   
21,100
  
Issuance of common stock to convertible noteholders
—  
   
—  
     
92,682
  
   
93
  
   
67,098
  
   
—  
  
 
—  
  
   
67,191
  
Issuance of options to purchase common stock to
        consultants for services rendered
—  
   
—  
     
—  
  
   
—  
  
   
14,105
  
   
(14,105
 
—  
  
   
—  
  
Amortization of deferred compensation
—  
   
—  
     
—  
  
   
—  
  
   
—  
  
   
22,554
  
 
—  
  
   
22,554
  
Change in value of restricted common stock subject
        to vesting
—  
   
—  
     
—  
  
   
—  
  
   
11,400
  
   
(11,400
 
—  
  
   
—  
  
Accretion of Series A Redeemable Convertible
        Preferred stock to redemption value
—  
   
1,035,205
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
(1,035,205
   
(1,035,205
Net loss
—  
   
—  
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
(2,438,912
   
(2,438,912
Balance, December 31, 2004
20,943,577
   
34,723,026
     
610,935
  
   
611
  
   
449,467
  
   
(338,425
 
(4,505,873
   
(4,394,220
Issuance of Series A Redeemable Convertible
        Preferred stock at $1.61683 per share, net of
        expenses
3,247,095
   
5,222,430
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
—  
  
   
—  
  
Issuance of restricted common stock to employees
        and nonemployees at $2.32 per share
—  
   
—  
     
60,477
  
   
60
  
   
140,241
  
   
(139,424
 
—  
  
   
877
  
Issuance of warrants to purchase preferred stock to
        noteholders
—  
   
—  
     
—  
  
   
—  
  
   
681,026
  
   
—  
  
 
—  
  
   
681,026
  
Issuance of options to purchase common stock to
        consultants for services rendered
—  
   
—  
     
—  
  
   
—  
  
   
6,693
  
   
(6,693
 
—  
  
   
—  
  
Amortization of deferred compensation
—  
   
—  
     
—  
  
   
—  
  
   
—  
  
   
111,688
  
 
—  
  
   
111,688
  
Accretion of Series A Redeemable Convertible
        Preferred stock to redemption value
—  
   
3,164,308
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
(3,164,308
   
(3,164,308
Net loss
—  
   
—  
     
—  
  
   
—  
  
   
—  
  
   
—  
  
 
(9,626,910
   
(9,626,910
                                                         
Balance, December 31, 2005
24,190,672
 
$
43,109,764
     
671,412
  
 
 $
671
  
 
$
1,277,427
  
 
 $
(372,854
$
(17,297,091
 
$
(16,391,847

 
The accompanying notes are an integral part of these financial statements.
 
 
- 3 -

 

TENGION, INC.
(A Development-Stage Company)

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
 AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(continued)
           
Stockholders' equity (deficit)
 
Redeemable
convertible
preferred stock
   
Common stock
   
Additional
paid-in
capital
   
Deferred
compensation
Deficit
accumulated
during the
development
stage
   
Total
   
 
Shares
 
Amount
   
Shares
   
Amount
         
Issuance of Series B Redeemable Convertible
        Preferred stock at $1.82 per share, net of
        expenses
27,637,363
 
 $
50,040,289
   
—    
  
 
 $
—    
  
 
 $
—    
  
 
 $
—    
 $
—    
  
 
 $
—    
  
 
Issuance of restricted common stock to employees
—    
   
—    
   
3,449
  
   
3
  
   
47
  
   
—    
 
—    
  
   
50
  
 
Issuance of common stock upon exercise of
        options
—    
   
—    
   
3,665
  
   
4
  
   
8,496
  
   
—    
 
—    
     
8,500
  
 
Repurchased nonvested restricted stock
—    
   
—    
   
(14,120
   
(14
   
(191
   
—    
 
—    
  
   
(205
 
Reclassification of deferred compensation
—    
   
—    
   
—    
  
   
—    
  
   
(372,854
   
372,854
 
—    
  
   
—    
  
 
Reclassification of warrants to purchase preferred
        stock
—    
   
—    
   
—    
  
   
—    
  
   
(681,026
   
—    
 
—    
  
   
(681,026
 
Stock-based compensation expense
—    
   
—    
   
—    
  
   
—    
  
   
399,559
  
   
—    
 
—    
  
   
399,559
  
 
Accretion of Series A and Series B Redeemable
        Convertible Preferred stock to redemption
        value
—    
   
5,639,599
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(5,639,599
   
(5,639,599
 
Net loss
—    
   
—    
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(20,872,911
   
(20,872,911
 
                                                       
Balance, December 31, 2006
51,828,035
   
98,789,652
   
664,406
  
   
664
  
   
631,458
  
   
—    
 
(43,809,601
   
(43,177,479
 
Issuance of Series C Redeemable Convertible
        Preferred stock at $1.82 per share, net of
        expenses
18,332,965
   
33,219,379
   
—    
  
   
—    
  
   
—    
  
   
—    
 
—    
  
   
    —    
  
 
Issuance of common stock upon exercise of
        options
—    
   
—    
   
15,952
  
   
16
  
   
60,145
  
   
—    
 
—    
  
   
60,161
  
 
Repurchased vested restricted stock
—    
   
—    
   
(5,492
   
(5
   
(93,947
   
—    
 
—    
  
   
(93,952
 
Stock-based compensation expense
—    
   
—    
   
—    
  
   
—    
  
   
663,948
  
   
—    
 
—    
  
   
663,948
  
 
Accretion of Series A, Series B, and Series C
        Redeemable Convertible Preferred stock to
        redemption value
—    
   
8,742,100
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(8,742,100
   
(8,742,100
 
Net loss
—    
   
—    
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(30,987,544
   
(30,987,544
 
Balance, December 31, 2007
70,161,000
   
140,751,131
   
674,866
  
   
675
  
   
1,261,604
  
   
—    
 
(83,539,245
   
(82,276,966
 
Issuance of Series C Redeemable Convertible
        Preferred stock at $1.82 per share, net of
        expenses
11,793,127
   
21,351,814
   
—    
  
   
—    
  
   
—    
  
   
—    
 
—    
  
   
    —    
  
 
Issuance of common stock upon exercise of
        options
—    
   
—    
   
7,531
  
   
8
  
   
28,487
  
   
—    
 
—    
  
   
28,495
  
 
Repurchased vested restricted stock
—    
   
—    
   
(821
   
(1
   
(11
)
   
—    
 
—    
  
   
(12
 
Stock-based compensation expense
—    
   
—    
   
—    
  
   
—    
  
   
1,316,724
  
   
—    
 
—    
  
   
1,316,724
  
 
Accretion of Series A, Series B, and Series C
        Redeemable Convertible Preferred stock to
        redemption value
—    
   
11,753,958
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(11,753,958
   
(11,753,958
 
Net loss
—    
   
—    
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(42,392,968
   
(42,392,968
 
Balance, December 31, 2008
81,954,127
   
173,856,903
   
681,576
  
   
682
  
   
2,606,804
  
   
—    
 
(137,686,171
   
(135,078,685
 
Issuance of common stock upon exercise of
        options
—    
   
—    
   
20,005
  
   
20
  
   
54,091
  
   
—    
 
—    
  
   
54,111
  
 
Stock-based compensation expense
—    
   
—    
   
—    
  
   
—    
  
   
855,136
  
   
—    
 
—    
  
   
855,136
  
 
Accretion of Series A, Series B, and Series C
        Redeemable Convertible Preferred stock to
        redemption value
—    
   
14,059,265
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(14,059,265
   
(14,059,265
 
Net loss
—    
   
—    
   
—    
  
   
—    
  
   
—    
  
   
—    
 
(29,845,036
   
(29,845,036
 
Balance, December 31, 2009
81,954,127
 
$
187,916,168
   
701,581
  
 
$
702
  
 
$
3,516,031
  
 
$
   —    
$
(181,590,472
 
$
(178,073,739
 

 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
- 4 -

 
 
TENGION, INC.
(A Development-Stage Company)

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
 AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(continued)
           
Stockholders' equity (deficit)
 
 
Redeemable
convertible
preferred stock
   
Common stock
   
Additional
paid-in
capital
 
Deferred
compensation
Deficit
accumulated
during the
development
stage
   
 
Shares
 
Amount
   
Shares
 
Amount
     
Total
 
Issuance of common stock upon exercise of
        options
—    
 
 $
—    
   
32,257
 
$
32
  
 
 $
14,153
  
$
—    
 $
—    
  
 $
14,185
  
 
Stock-based compensation expense
—    
   
—    
   
—    
   
—    
  
   
953,858
  
 
—    
 
—    
  
 
953,858
  
Accretion of Series A, Series B, and Series C
        Redeemable Convertible Preferred
        stock to redemption value
—    
   
3,992,589
   
—    
   
—    
  
   
—    
  
 
—    
 
(3,992,589
)
 
(3,992,589
Conversion of preferred stock to common
        stock
(81,954,127
)
 
(191,908,757
)  
5,651,955
   
5,652
     
191,903,105
   
—    
 
—    
   
191,908,757
 
Conversion of preferred stock warrants to
        common stock warrants
—   
   
—    
   
—   
   
—   
     
122,904
   
—    
 
—    
   
122,904
 
Proceeds from initial public offering, net of
     offering expenses
—   
   
—    
   
6,000,000
   
6,000
     
25,720,813
   
—    
 
—    
   
25,726,813
 
 
Net loss
—   
   
—    
   
—    
   
—    
  
   
—    
  
 
—    
 
(25,600,269
 
(25,600,269
Balance, December 31, 2010
—   
   
—    
   
12,385,793
   
12,386
     
222,230,864
   
—   
 
(211,183,330
)
 
11,059,920
 
Proceeds from equity financing, net of
     offering expenses
—   
   
—    
   
11,079,250
   
11,079
     
28,930,394
   
—    
 
—    
   
28,941,473
 
Issuance of warrants to purchase common
     stock in connection with equity
     financing
—    
   
—    
   
—    
   
—    
  
   
(16,947,000
)
 
—    
 
—    
  
 
(16,947,000
)
Issuance of common stock upon exercise of
     options
—    
   
—    
   
6,206
   
6
  
   
2,724
  
 
—    
 
—    
  
 
2,730
  
Issuance of warrants to purchase common
     stock in connection with debt financing
—    
   
—    
   
—    
   
—    
  
   
105,342
   
—    
 
—    
  
 
105,342
 
 
Stock-based compensation expense
—    
   
—    
   
—    
   
—    
  
   
257,246
  
 
—    
 
—    
  
 
257,246
  
Net loss
—   
   
—    
   
—    
   
—    
  
   
—    
  
 
—    
 
(7,029,460
 
(7,029,460
Balance, March 31, 2011
—   
 
$
—    
   
23,471,249
 
$
23,471
   
$
234,579,570
 
$
—   
$
(218,212,790
)
$
16,390,251
 

 
The accompanying notes are an integral part of these financial statements.
 
 
 
- 5 -

 
 
(A Development-Stage Company)
 
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
                         
   
Three Months Ended
March 31,
 
Period from
July 10, 2003
(inception)
through
March 31, 2011
   
2010
 
2011
 
Cash flows from operating activities:
                       
Net loss
 
$
(6,434,790
)
 
$
(7,029,460
)
 
$
(169,825,766
)
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation
   
1,226,809
     
1,126,573
     
21,137,221
 
Change in fair value of warrant liability
   
(191,527
)
   
(419,000
)
   
(2,481,454
)
Change in value of lease liability
   
     
942,567
     
942,567
 
Loss on disposition of property and equipment
   
1,618
     
     
119,116
 
Amortization of net discount on short-term investments
   
     
     
(149,150
)
Noncash interest expense
   
83,049
     
 69,219
     
2,455,586
 
Noncash rent expense (income)
   
 2,710
     
(3,083
)
   
238,083
 
Stock-based compensation expense
   
 198,266
     
257,246
     
4,601,808
 
Changes in operating assets and liabilities:
                       
Prepaid expenses and other assets
   
 (98,663
)
   
(748,243
)
   
(1,573,655
)
Accounts payable
   
 (320,287
)
   
39,322
     
1,191,992
 
Accrued expenses and other
   
(143,518
)
   
(1,069,669
)
   
2,188,655
 
Net cash used in operating activities
   
(5,676,333
)
   
(6,834,528
)
   
(141,154,997
)
Cash flows from investing activities:
                       
Purchases of short-term investments
   
 (1,499,160
)
   
     
(311,441,850
)
Sales and redemption of short-term investments
   
2,998,668
     
     
311,591,000
 
Cash paid for property and equipment
   
 (88,167
)
   
(48,057
)
   
(31,640,647
)
Proceeds from the sale of property and equipment
   
     
     
11,306
 
Net cash provided by (used in) investing activities
   
1,411,341
     
(48,057
)
   
(31,480,191
)
Cash flows from financing activities:
                       
Proceeds from sales of redeemable convertible preferred stock and warrants, net
   
     
     
139,959,522
 
Proceeds (offering costs) from sales of common stock and warrants, net
   
(1,271,952
)
   
29,092,085
     
54,986,091
 
Repurchase of restricted stock
   
             —
     
     
(94,169
)
Proceeds from long-term debt, net
   
     
4,907,628
     
39,516,585
 
Payments on long-term debt
   
(3,139,924
)
   
(7,610,367
)
   
(30,254,420
)
Net cash provided by (used in) financing activities
   
(4,411,876
)
   
26,389,346
     
204,113,609
 
Net increase (decrease) in cash and cash equivalents
   
(8,676,868
)
   
19,506,761
     
31,478,421
 
Cash and cash equivalents, beginning of period
   
16,804,129
     
11,971,660
     
 
Cash and cash equivalents, end of period
 
$
8,127,261
   
$
31,478,421
   
$
31,478,421
 
                         
Supplemental cash flow disclosures:
                       
Noncash investing and financing activities:
                       
Conversion of note principal to redeemable convertible preferred stock
 
$
   
$
   
$
3,562,211
 
Convertible note issued to stockholder for consulting expense
   
     
     
  210,372
 
Fair value of warrants issued with long-term debt
   
     
105,342
     
2,290,700
 
Fair value of warrants issued with sale of common stock
   
     
16,947,000
     
16,947,000
 
Noncash property and equipment additions
   
25,227
     
70
     
70
 

The accompanying notes are an integral part of these financial statements.


 
- 6 -

 
 
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)

(1)   Background
 
Tengion, Inc. is a regenerative medicine company incorporated in Delaware on July 10, 2003. The Company is focused on discovering, developing, manufacturing and commercializing a range of neo-organs, which it defines as products composed of living cells, with or without synthetic or natural materials, implanted into the body to incorporate, replace or regenerate a damaged tissue or organ.  The Company currently creates these functional neo-organs using a patient’s own cells, or autologous cells, in conjunction with its Organ Regeneration Platform.  Building on clinical and preclinical experience, the Company is leveraging its Organ Regeneration Platform to develop the Neo-Urinary Conduit for bladder cancer patients who are in need of a urinary diversion. The Company intends to develop its technology to address unmet medical needs in urologic, renal, and other diseases and disorders.  The Company operates as a single business segment.
 
(2)   Development-Stage Risks and Liquidity
 
The Company has incurred losses since inception and has a deficit accumulated during the development stage of $218,212,790 as of March 31, 2011, including $48,387,024 of cumulative accretion on redeemable convertible preferred stock through April 2010.  The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its therapeutic product candidates currently in development or enters into cash flow positive business development transactions. In March 2011, the Company closed a private placement transaction, pursuant to which the Company received net proceeds of approximately $28.9 million.  In March 2011, the Company also refinanced its working capital loan.  See Notes 8 and 9 for additional information.  Following completion of these financing activities and based upon its current expected level of operating expenditures and debt repayment, and assuming it is not required to settle any outstanding warrants in cash, the Company expects to be able to fund its operations through May 2012.  The Company continues to explore external financing alternatives, including entering into collaborative agreements, that will be needed to fund its operations and to commercially develop its products. In the event financing is not obtained, the Company could pursue headcount reductions and other cost cutting measures to preserve cash as well as explore the sale of selected assets to generate additional funds.  There is no assurance that such financing will be available when needed or, if available, on terms acceptable to the Company.
 
Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of product candidate development; technological uncertainty; dependence on collaborative partners; uncertainty regarding patents and proprietary rights; comprehensive government regulations; having no commercial manufacturing experience, marketing or sales capability or experience; and dependence on key personnel.
 
(3)   Basis of Presentation and Reverse Stock Split
 
The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as amended, filed with the Securities and Exchange Commission (SEC). The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or full year.

A reverse stock split of the Company’s common stock was effective March 24, 2010 at a ratio of one share for every 14.5 shares previously held.  All common share and per-share data included in these financial statements reflect such reverse stock split.
 
 
 
- 7 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
 
 
(4)   Use of Estimates
 
The preparation of financial statements, in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  Actual results could differ from those estimates.
 
(5)   Net Loss Per Share
 
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding less the weighted-average shares subject to repurchase during the period.  For all periods presented, the outstanding shares of redeemable convertible preferred stock, common stock options, and preferred and common warrants have been excluded from the calculation because their effect would be anti-dilutive.  Therefore, the weighted-average shares used to calculate both basic and diluted loss per share are the same.
 
The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as of March 31, 2010 and 2011, as they would be anti-dilutive:
 
   
March 31,
 
   
2010
   
2011
 
Shares of redeemable convertible preferred stock
    81,954,127        
Shares underlying options outstanding
    709,755       1,370,263  
Shares underlying warrants outstanding
    216       10,645,888  
Unvested restricted stock
    1,605,439        

(6)   Fair Value of Financial Instruments
 
As of December 31, 2010 and March 31, 2011, the carrying amounts of financial instruments held by the Company, which include cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued expenses, approximate fair value due to the short-term nature of those instruments.  In addition, the carrying value of the Company’s debt instruments, which do not have readily ascertainable market values, approximate fair value, given that the interest rates on outstanding borrowings approximate market rates.  See below and Note 10 for a discussion of the fair value of warrants.
 
Fair value guidance requires fair value measurements be classified and disclosed in one of the following three categories:
 
·  
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
·  
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;
 
·  
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
 
 
 
- 8 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
 
The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liability measured at fair value on a recurring basis as of December 31, 2010 and March 31, 2011.
                         
   
Fair value measurement at reporting date using
 
   
Quoted prices
in active
markets for
identical assets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
Significant
unobservable
inputs
(Level 3)
   
Total
 
                         
At December 31, 2010:
                       
Assets:
                       
Cash and cash equivalents
  $ 11,971,660     $     $     $ 11,971,660  
                                 
At March 31, 2011:
                               
Assets:
                               
Cash and cash equivalents
  $ 31,478,421     $     $     $ 31,478,421  
Liabilities:
                               
Warrant liability 
  $     $     $ 16,528,000     $ 16,528,000  
                                 

The reconciliation of warrant liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
 
   
Warrant liability
         
Balance at December 31, 2010
 
$
 
Issuance of warrants
   
16,947,000
 
Change in fair value of warrant liability
  
 
(419,000
)
Balance at March 31, 2011
  
$
16,528,000
 
         
The fair value of the warrant liability is based on Level 3 inputs.  For this liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the fair value.  See Note 10 for further discussion of the warrant liability.
 
(7) 
Lease Liability
 
The Company entered into an agreement in February 2006 to lease warehouse space effective March 1, 2011, at which time the Company determined it was not likely to utilize the space during the five-year lease term.  Therefore, the Company recorded a liability as of March 1, 2011, the cease-use date, for the fair value of its obligations under the lease.  The most significant assumptions used in determining the amount of the estimated liability are the amount of potential sublease revenues and the credit-adjusted risk-free rate utilized to discount the estimated future cash flows.  The fair value estimate for the lease liability is based on significant unobservable inputs (Level 3).

 
- 9 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
 
 
As of March 1, 2011, the Company recorded a liability and corresponding expense, which is included in other expense on the statement of operations, of $933,427, based on the Company’s estimate of the fair value of its obligations.  The following table summarizes the activity related to the lease liability for the three months ended March 31, 2011.
 
   
Initial fair value as of
March 1, 2011
   
Payments
   
Additional
Charges to
Operations
   
Balance at
March 31, 2011
 
Lease liability
  $ 933,427     $ (19,259 )   $ 9,140     $ 923,308  

(8)  
Debt
 
Total debt outstanding consists of the following:
             
   
December 31,
2010
 
March 31,
 2011
Working Capital Note                                                                               
  
$
7,257,159
 
  
$
5,000,000
 
Equipment and Supplemental Working Capital Notes
  
 
1,015,474
 
  
 
779,444
 
Machinery and Equipment Loan                                                                               
  
 
477,609
 
  
 
360,432
 
Unamortized debt discount                                                                               
  
 
(148,575
)
  
 
(196,253
)
 
  
 
8,601,667
 
  
 
5,943,623
 
Less current portion                                                                               
  
 
(4,016,174
)
  
 
(1,408,408
)
 
  
$
4,585,493
 
  
$
4,535,215
 
 
Working Capital Note
 
The Company has an outstanding working capital loan (the Working Capital Note) with a lender, which loan was utilized to fund working capital needs of the Company.  In March 2011, the Company refinanced the outstanding debt owed to its lender of the Working Capital Note.  Pursuant to the terms of the refinancing, the Company simultaneously borrowed $5.0 million and repaid the then outstanding principal amount of $4.5 million.  Borrowings under the Working Capital Note are secured by all assets of the Company, except for Intellectual Property and permitted liens that have priority, including liens on equipment subsequently acquired to secure the purchase price or lease obligation, as defined in the loan agreement.  The Company is obligated to make interest-only payments through January 2012, followed by 24 monthly payments of principal and interest at an interest rate of 11.75% per annum.  In connection with the refinancing, the Company granted a warrant to the lender to purchase 70,671 shares of common stock.  The fair value of the warrant issued in connection with the refinancing for the three month period ended March 31, 2011 was $105,342, using the Black-Scholes model.  See Note 10 for further discussion on warrants.
 
The Company recorded interest expense related to the Working Capital Note of $488,501 and $170,770 for the three month periods ended March 31, 2010 and March 31, 2011, respectively.
 
The relative fair value of the warrants issued to the lender of the Working Capital Note has been recorded against the carrying value as an original issue discount (OID), which is being amortized as interest expense over the term of the Working Capital Note. The Company recognized a noncash charge to interest expense of $62,508 and $55,029, for the three month periods ended March 31, 2010 and 2011, respectively, for the amortization of OID.
 
Equipment and Supplemental Working Capital Notes
 
In 2005, the Company executed a loan facility with another lender to fund equipment (the Equipment Note) and other asset purchases (the Supplemental Working Capital Note) from July 2005 through December 2010. Borrowings under the Equipment and Supplemental Working Capital Note are secured by equipment, as defined in the loan agreements.  As of March 31, 2011, the Equipment Note and the Supplemental Working Capital Note bear interest at an average rate of 11.69% and 12.49%, respectively.  The Company will make its final scheduled payment in April 2012 for each of the Equipment Note and the Supplemental Working Capital Note. The Company recorded interest expense related to the Equipment and Supplemental Working Capital Notes of $98,426 and $26,389 for the three month periods ended March 31, 2010 and 2011, respectively.
 
 
 
- 10 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
 
The relative fair value of the warrants issued to the lender of the Equipment and Supplemental Working Capital Notes has been recorded against the carrying value as OID, which is being amortized as interest expense over the term of the Equipment and Supplemental Working Capital Notes. The Company recognized a noncash charge to interest expense of $9,468 and $2,636 for the three month periods ended March 31, 2010 and 2011, respectively, for the amortization of OID.
 
Machinery and Equipment Loan
 
In December 2007, the Company executed a $1.65 million agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other asset purchases (MELF Loan) through December 31, 2010. In December 2007, the Company borrowed $1.3 million of the MELF loan to fund equipment purchases. In March 2009, the Company borrowed an additional $0.3 million of the MELF loan to fund equipment purchases. Borrowings under the MELF Loan are secured by equipment, as defined in the loan agreement.  Under the terms of the MELF Loan, the Company has a four year period of payments of principal and accrued interest at an annual interest rate of 5% until September 2011 and 5.25% from September 2011 through maturity of the loan. The Company recorded interest expense related to the MELF Loan of $11,186 and $5,483 for the three months ended March 31, 2010 and 2011, respectively.
 
In connection with the Working Capital Note, Equipment Note, Supplemental Working Capital Note, and the MELF Loan, the Company incurred financing costs of $282,143, recorded as other assets on the accompanying balance sheets, which are being amortized on a straight-line basis until maturity of the related notes. The Company recorded amortization of these deferred financing costs of $11,073 and $11,544 during the three months ended March 31, 2010 and 2011, respectively, which was included in interest expense on the accompanying statements of operations.
 
(9)           Capital Structure
 
Initial Public Offering
 
In April 2010, the Company completed its initial public offering, selling 6,000,000 shares at an initial public offering price of $5.00 per share resulting in gross proceeds of $30.0 million.  Net proceeds received after underwriting fees and offering expenses were approximately $25.7 million.  In connection with the closing of the initial public offering, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into an aggregate of 5,651,955 shares of common stock, and all outstanding warrants to purchase preferred stock were converted into aggregate of 110,452 warrants to purchase common stock.

March 2011 Equity Financing
 
In March 2011, the Company closed a private placement transaction pursuant to which the Company sold securities consisting of 11,079,250 shares of common stock, $0.001 par value per share, and warrants to purchase 10,460,875 shares of common stock.  The purchase price per security was $2.83.  The Company received net proceeds of approximately $28.9 million. See Note 10 for discussion of the warrant liability.

In connection with the March 2011 equity financing, we were obligated to file a registration statement with the SEC for the registration of the total number of shares sold to the investors and shares issuable upon exercise of the warrants. We are required under an agreement to use commercially reasonable efforts to cause the registration statement to be declared effective by the SEC, and to remain continuously effective until such time when all of the registered shares are sold or such shares may be sold by non-affiliates without volume or manner-of-sale restrictions pursuant to Rule 144 of the Securities Act, without the requirement for us to be in compliance with the current public information requirement under Rule 144.  In the event we fail to meet certain legal requirements in regards to the registration statement, we will be obligated to pay the investors, as partial liquidated damages and not as a penalty, an amount in cash equal to 1.5% of the aggregate purchase price paid by investors for each monthly period that the registration statement is not effective, up to a maximum aggregate payment of 6% of the purchase price paid by investors, except that if we fail to satisfy the current public information requirement pursuant to Rule 144(c)(1), the maximum aggregate payment would be 12% of the purchase price paid by investors.  If we determine a registration payment arrangement in connection with the securities issued in March 2011 is probable and can be reasonably estimated, a liability will be recorded. As of March 31, 2011, we concluded the likelihood of having to make any payments under the arrangements was remote, and therefore did not record any related liability.
 
 
 
- 11 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
(10)        Warrants
 
We account for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement.  Stock warrants are accounted for as derivative liabilities under FASB Accounting Standard Codification (ASC) 815, Derivatives and Hedging (ASC 815) if the stock warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of common stock are at a lower price per share than the then-current warrant exercise price.  We classify derivative warrant liabilities on the balance sheet as a current liability, which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant. 

The following table summarizes outstanding warrants to purchase common stock as of March 31, 2011:
             
 
Number of
shares
 
Exercise
price
 
Expiration
Equity–classified warrants
           
Issued to vendors
3,890
 
$
2.32
 
September 2015 through December 2016
Issued pursuant to March 2011 refinancing of Working Capital Note
70,671
 
$
2.88
 
March 2016
Issued to lenders
64,409
 
$
23.44
 
August 2013 through December 2016
Issued to lenders
46,043
 
$
26.39
 
October 2015 through September 2019
 
185,013
         
Liability–classified warrants
           
Issued pursuant to March 2011 equity financing
10,460,875
 
$
2.88
 
March 2016
 
10,645,888
         
             
Equity-classified Warrants
 
In March 2011, the Company granted a warrant to a lender to purchase 70,671 shares of common stock in connection with the refinancing of the Company’s Working Capital Note.  See Note 8 for a discussion of the refinancing.  The Company determined the fair value of the warrant as of March 14, 2011 was $1.49 per share by utilizing the Black-Scholes model.  In estimating the fair value of the warrant, the Company assumed the following: closing price per share of common stock of $2.74, volatility of 64.96%, expected term of 5 years, risk-free interest rate of 2.0% and dividend yield of zero.
 
In conjunction with the Working Capital Note, Equipment Note, and the Supplemental Working Capital Note, the Company issued warrants to purchase shares of Series A, B, and C Preferred Stock.  Upon the close of the Company’s initial public offering the preferred stock warrants automatically converted into warrants to purchase 110,452 shares of common stock.  Warrants related to the Working Capital Note expire ten years from the date of issuance. Warrants related to the Equipment and Supplemental Working Capital Notes expire the earlier of eight years from the date of issuance or upon acquisition of the Company as defined in the warrant agreement.
 
 
 
- 12 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
 
Prior to the Company’s initial public offering, the warrants were classified as a warrant liability on the balance because the warrants entitled the holder to purchase shares of preferred stock, which the holder could have caused the Company to redeem at the option of the holder.  Subsequent to the closing of the initial public offering, the warrants no longer are exercisable for a redeemable security, and therefore such warrants are now classified within stockholders’ equity.
 
At March 31, 2010, the aggregate fair value of these warrants decreased from their fair value as of December 31, 2009, resulting in a noncash credit to change in fair value of common stock warrants of $191,527 during the three months ended March 31, 2010.
 
Liability-classified Warrants
 
In March 2011, the Company issued warrants to purchase 10,460,875 shares of common stock in connection with a private placement transaction (see Note 9).  Each warrant is exercisable in whole or in part at any time until March 4, 2016 at a per share exercise price of $2.88, subject to certain adjustments as specified in the warrant agreement.  The Company valued the warrants as derivative financial instruments as of the date of issuance (March 4, 2011) and will continue to do so at each reporting date, with any changes in fair value being recorded on the Statement of Operations.

The warrants contain provisions that require the modification of the exercise price and shares to be issued under certain circumstances, including in the event the Company completes subsequent equity financings at a price per share lower than the then-current warrant exercise price.  In addition, the warrants contain a net cash settlement provision under which the warrant holders may require the Company to purchase the warrants in exchange for a cash payment following the announcement of specified events defined as Fundamental Transactions involving the Company (e.g., merger, sale of all or substantially all assets, tender offer, or share exchange) or a Delisting, which is deemed to occur when the common stock is no longer listed on a national securities exchange.  The net cash settlement provision requires use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a Delisting.

The net cash settlement value at the time of any future Fundamental Transaction or Delisting will depend upon the value of the following inputs at that time: the price per share of the Company’s common stock, the volatility of the Company’s common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and the Company’s dividend yield.  The warrant requires use of a volatility assumption equal to the greater of (i) 100%, (ii) the 30-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting, or (iii) the arithmetic average of the 10, 30, and 50-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting.

The fair value of the warrants is determined using a risk-neutral lattice methodology within a Monte Carlo analysis to model the impact of potential modifications to the warrant exercise price and to include the probability of a Fundamental Transaction or Delisting into the calculation of fair value.  The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of the Company’s common stock, assumptions regarding the expected amounts and dates of future equity financing activities, assumptions regarding the likelihood and timing of Fundamental Transactions or a Delisting, the historical volatility of the stock prices of the Company’s peer group, risk-free rates based on U.S. Treasury security yields, and the Company’s dividend yield.  Changes in these assumptions can materially affect the fair value estimate.  We could, at any point in time, ultimately incur amounts significantly different than the carrying value.  For example, as of March 31, 2011, the calculated cash settlement value of $19.9 million exceeded the fair value of $16.5 million.  The Company will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability.
 
 
 
- 13 -

 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)

 
The following table summarizes the calculated aggregate fair values and net cash settlement value as of the dates indicated along with the assumptions utilized in each calculation.
                   
   
Fair value as of:
   
Net cash settlement
value as of
March 31, 2011
 
   
March 4,
2011
   
March 31,
2011
 
                   
Calculated aggregate value                                                                 
  $ 16,947,000     $ 16,528,000     $ 19,946,000  (1)
Exercise price per share of warrant                                                                 
  $ 2.88     $ 2.88     $ 2.88  
Closing price per share of common stock
  $ 2.60     $ 2.55     $ 2.55  
Volatility                                                                 
    65.0 %     65.0 %     103.5 % (2)
Probability of Fundamental Transaction or Delisting
    48.9 %     48.9 %  
Not applicable
 
Expected term (years)                                                                 
 
Not applicable
   
Not applicable
      4.9  
Risk-free interest rate                                                                 
    2.2 %     2.3 %     2.3 %
Dividend yield                                                                 
 
None
   
None
   
None
 
                         
 

(1) Represents the net cash settlement value of the warrant as of March 31, 2011, which value was calculated utilizing the Black-Scholes model specified in the warrant.
 
(2) Represents the volatility assumption used to calculate the net cash settlement value as of March 31, 2011.
 
(11)         Stock-Based Compensation
 
The Company currently maintains two stock-based compensation plans.  Under the 2004 Stock Option Plan (the 2004 Plan), stock awards were granted to employees, directors, and consultants of the Company, in the form of restricted stock and stock options. The amounts and terms of options granted were determined by the Company’s compensation committee. The equity awards granted under the Plan generally vest over four years and have terms of up to ten years after the date of grant, and options are exercisable in cash or as otherwise determined by the board of directors. There are no shares available for future grants under the 2004 Plan, as grants from the 2004 Plan ceased upon the Company’s initial public offering in April 2010.
 
The 2010 Stock Incentive and Option Plan (2010 Plan) became effective upon the closing of the Company’s initial public offering.  Under the 2010 Plan, stock awards may be granted to employees, directors, and consultants of the Company, in the form of restricted or unrestricted stock, stock appreciation rights, cash-based or performance share awards and stock options. The amounts and terms of options granted are determined by the Company’s compensation committee. The equity awards granted under the Plan generally vest over four years and have terms of up to ten years after the date of grant, and options are exercisable in cash or as otherwise determined by the board of directors.  The 2010 Plan allows for the transfer of forfeited shares from the 2004 Plan.  As of March 31, 2011, 1,446,137 shares of common stock were available for future grants under the Plan.
 
 
 
- 14 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)
(continued)
Stock Options
 
The following table summarizes stock option activity under the Plans:
 
   
Number of
shares
   
Weighted-
average
exercise
price
   
Weighted-
average
remaining
contractual
term (in
years)
 
Aggregate
intrinsic
value
Outstanding at December 31, 2010
1,377,710
   
$
2.49
       
Granted
   
$
       
Exercised
(6,206
)
 
$
0.44
       
Forfeited
(1,241
)
 
$
0.44
       
Outstanding at March 31, 2011
1,370,263
   
$
2.50
 
8.40
 
$
1,178,990
                   
Vested and expected to vest at March 31, 2011
1,289,689
   
$
2.48
 
8.36
 
$
1,143,367
                   
Exercisable at March 31, 2011
417,936
   
$
1.51
 
6.74
 
$
755,660
                   
Total stock-based compensation expense recognized for stock options to employees and non-employee directors for the three months ended March 31, 2010 and 2011 was $196,081 and $257,246, respectively.  As of March 31, 2011, there was $1,611,866 of unrecognized compensation expense, net of forfeitures, related to unvested employee stock options and $50,361 of unrecognized compensation expense related to unvested non-employee director stock options, which is expected to be recognized over a weighted-average period of approximately 3.05 years.

(12)        Commitments and Contingencies
 
The Company leases office space and office equipment under operating leases, which expire at various times through February 2016. Excluding the lease liability activity described in Note 7, rent expense under these operating leases was $179,739 and $189,759 for the three months ended March 31, 2010 and 2011, respectively.  The following table summarizes future minimum lease payments as of March 31, 2011:
         
2011                                                                                                    
 
$
705,282
 
2012                                                                                                    
   
836,668
 
2013                                                                                                    
   
856,669
 
2014                                                                                                    
   
876,670
 
2015                                                                                                    
   
896,671
 
2016                                                                                                    
   
150,001
 
Total minimum lease payments
  
$
4,321,961
 
         
Effective March 2011, the lease agreement for our corporate headquarters required us to provide security and restoration deposits totaling $2.2 million to the landlord, an increase from the prior amount of $1.7 million. Until January 2011, we obtained letters of credit from a bank in favor of the landlord to satisfy the obligation.  In January 2011, we deposited $1.0 million with the landlord, which amount is recorded as a non-current other asset on the Company’s balance sheet as of March 31, 2011.  As of March 31, 2011, an outstanding letter of credit is satisfying the remaining obligation of $1.2 million.  The letter of credit is collateralized by an account held at the bank.  If the bank determines the collateral to be insufficient, the bank has the right to demand additional collateral.  If we fail to provide additional collateral, the bank has the right to withdraw the letter of credit.  In that event, the landlord would have the right to require us to deposit cash of up to $1.2 million in an account to satisfy our deposit obligation.

 
- 15 -

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Forward-Looking Statements
Any statements herein or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like “believe,” “expect,” “designed,” “may,” “will,” “should,” “seek,” or “anticipate,” and similar expressions. These forward looking statements may include, but are not limited to, statements concerning: (i) our plans to develop and commercialize our product candidates; (ii) our ongoing and planned preclinical studies and clinical trials; (iii) the timing of and our ability to obtain and maintain marketing approvals for our product candidates; (iv) the rate and degree of market acceptance and clinical utility of our products; (v) our plans to leverage our Organ Regeneration Platform to discover and develop product candidates; (vi) our ability to identify and develop product candidates; (vii) our commercialization, marketing and manufacturing capabilities and strategy; (viii) our intellectual property position; (ix) our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and (x) other risks and uncertainties, including those under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, , in the section entitled “Risk Factors” in Item IA of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010, as amended, as well as in other documents filed by us with the SEC.
 
Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, the forward-looking statements contained in this document are neither promises nor guarantees. Our business is subject to significant risks and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. Factors which could cause actual results to differ materially from our expectations set forth in our forward-looking statements are set forth in the section entitled “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, in the section entitled “Risk Factors” in Item IA of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010, as amended,  as well as in other documents filed by us with the SEC and include, among others: (i) the FDA could place our  Neo-Urinary Conduit clinical on clinical hold;  (ii) patients enrolled in our Neo-Urinary Conduit clinical trial may experience adverse events related to our product candidates, which could delay our clinical trial or cause us to terminate the development of the Neo-Urinary Conduit; (iii) we may have difficulty enrolling patients in our clinical trials, including our Phase I clinical trial for our Neo-Urinary Conduit; (iv) we have a substantial amount of debt that exposes us to risks that could adversely affect our business, operating results and financial condition; (v) we may be unable to progress our product candidates that are undergoing preclinical testing into clinical trials; and (vi) we will need to raise additional funds to execute our business plan beyond May 2012 and such financing may not be available to us or, if available, on terms acceptable to us.
 
The forward-looking statements made in this document are made only as of the date hereof and we do not intend to update any of these factors or to publicly announce the results of any revisions to any of our forward-looking statements other than as required under the federal securities laws.
 
Overview
 
We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement neo-organs and neo-tissues.  Our Organ Regeneration Platform enables us to create proprietary product candidates that are intended to harness the intrinsic regenerative pathways of the body to produce a range of native-like organs and tissues.  Our product candidates eliminate the need to utilize other tissues of the body for a purpose to which they are poorly suited, to procure donor organs or to administer anti-rejection medications. We produce neo-organs and neo-tissues in our scalable manufacturing facilities using efficient and repeatable proprietary processes, and have implanted neo-organs in our clinical trials. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases and disorders.
 
To date, we have devoted substantially all of our resources to the development of our Organ Regeneration Platform and product candidates, as well as to our facilities that we employ to manufacture our neo-organs.  Since our inception in July 2003, we have had no revenue from product sales, and have funded our operations principally through the private and public sales of equity securities and debt financings.  We have never been profitable and, as of March 31, 2011, we had an accumulated deficit of $218.2 million, including $48.4 million of cumulative accretion on redeemable convertible preferred stock through April 2010.  We expect to continue to incur significant operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials and seek marketing approval and eventual commercialization.
 
 
 
- 16 -

 
 
Cash and cash equivalents at March 31, 2011 were $31.5 million, representing 72.7% of total assets.  Based upon our current expected level of operating expenditures and debt repayment, we expect to be able to fund our operations through May 2012.  This period will be shortened if there are any significant increases in planned spending on development programs or if we are required to settle any outstanding warrants in cash.  We will need to raise additional funds to complete the Phase I clinical trial for our Neo-Urinary Conduit and our preclinical research and development activities for our Neo-Kidney Augment.  We will need to raise additional funds through collaborative arrangements, public or private sales of debt or equity securities, commercial loan facilities, or some combination thereof.  There is no assurance that such financing will be available or, if available, on terms acceptable to us.
 
Recent Developments

In March 2011, we closed a private placement transaction pursuant to which we sold securities consisting of 11,079,250 shares of common stock and warrants to purchase 10,460,875 shares of common stock.  The purchase price per security was $2.83.  The warrants have a term of five years and are immediately exercisable for $2.88 per share.  We received net proceeds of approximately $28.9 million.

In March 2011, we refinanced the outstanding debt owed to one of our lenders.  Pursuant to the terms of the refinancing, we simultaneously borrowed $5.0 million from the lender and repaid the then outstanding principal amount of $4.5 million.  We are obligated to make interest-only payments through January 2012, followed by 24 monthly payments of principal and interest at an interest rate of 11.75% per annum.

In April 2011, we terminated the pediatric and adult Neo-Bladder Augment clinical trials.  Both trials have provided long-term follow-up data for all patients.  Pediatric patients in the neurogenic bladder in spina bifida trial have completed 36 months of follow-up and adult patients in the neurogenic bladder in spinal cord injury trial have completed 24 months of follow-up.   We subsequently withdrew the IND.
 
As was announced on May 12, 2011, with regard to our Neo-Urinary Conduit clinical trial, three patients have been enrolled and implanted in the clinical trial.  Clinical investigators have made surgical modifications in an effort to address conduit patency and vascular supply.  Based on clinical observations and complications to date, including recent events, we are extending the objective of reaching interim data in five patients into 2012.  We intend to provide an updated clinical timeline after a full assessment of the clinical data and plans for subsequent patient implants with investigators, the Data Safety Monitoring Committee and the FDA.

Warrants Issued in March 2011 Equity Financing
The warrants issued in our March 2011 equity financing contain a net cash settlement provision under which the warrant holders may require the Company to purchase the warrants in exchange for a cash payment following the announcement of specified events defined as Fundamental Transactions involving the Company (e.g., merger, sale of all or substantially all assets, tender offer, or share exchange) or a Delisting, which is deemed to occur when the common stock is no longer listed on a national securities exchange.

Assuming announcement of a Fundamental Transaction or Delisting, the net cash settlement value as of March 31, 2011 would have been approximately $19.9 million.  This value was calculated utilizing the Black-Scholes model required by the warrant using the following assumptions as of March 31, 2011:  closing price per share of common stock of $2.55, volatility of 103.5%, expected term of 4.9 years, risk-free interest rate of 2.3% and dividend yield of zero. This net cash settlement value is not fixed.  Therefore, the net cash settlement value at the time of any future Fundamental Transaction or Delisting will depend upon the assumption values at that time.

Financial Operations Overview

Research and Development Expense
Our research and development expense consists of expenses incurred in developing and testing our product candidates and are expensed as incurred. Research and development expense consists of:

·  
personnel related expenses, including salaries, benefits, travel and other related expenses including stock-based compensation;
·  
payments made to third-party contract research organizations for preclinical studies, investigative sites for clinical trials and consultants;
·  
costs associated with regulatory filings and the advancement of our product candidates through preclinical studies and clinical trials;
·  
laboratory and other supplies;
·  
manufacturing development costs; and
·  
facility maintenance.
 
 
 
- 17 -

 

 
Preclinical study and clinical trial costs for our product candidates are a significant component of our current research and development expenses. We track and record information regarding external research and development expenses on a per study basis. Preclinical studies are currently coordinated with third-party contract research organizations and expense is recognized based on the percentage completed by study at the end of each reporting period.  Clinical trials are currently coordinated through a number of contracted sites and expense is recognized based on a number of factors, including actual and estimated patient enrollment and visits, direct pass-through costs and other clinical site fees.  We utilize internal employees, resources and facilities across multiple product candidates.  We do not allocate internal research and development expenses among product candidates.

The following table summarizes our research and development expense for the three months ended March 31, 2010 and 2011:
                 
   
Three months ended March 31,
 
   
2010
   
2011
 
   
(in thousands)
 
Third-party direct program expenses:
       
  
     
Urologic
 
$
124
 
  
$
278
 
Renal
   
438
 
  
 
464
 
Total third-party direct program expenses
   
562
 
  
 
742
 
Other research and development expense
   
2,754
 
  
 
2,603
 
Total research and development expense
 
$
3,316
 
  
$
3,345
 

From our inception in July 2003 through March 31, 2011, we have incurred research and development expense of $107.9 million. We expect that a large percentage of our research and development expense in the future will be incurred in support of our current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We expect to continue to test our product candidates in preclinical studies for toxicology, safety and efficacy, and to conduct additional clinical trials for each product candidate. If we are not able to engage a partner prior to the commencement of later stage clinical trials, we may fund these trials ourselves. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus our resources on more promising product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

·  
the number of sites included in the trials;
·  
the length of time required to enroll suitable patients;
·  
the number of patients that participate in the trials;
·  
the duration of patient follow-up;
·  
the development stage of the product candidate; and
·  
the efficacy and safety profile of the product candidate.

None of our product candidates have received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that clinical data establishes the safety and efficacy of our product candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our product candidates. In the event that third parties have control over the clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plan or capital requirements.
 
 
 
- 18 -

 

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale of an approved product candidate.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments or conditions.  There were no material changes to our critical accounting policies and use of estimates previously disclosed in our 2010 Annual Report on Form 10-K except for the following:

Warrant Liability
 
We account for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement.  Stock warrants that allow for cash settlement or provide for modification of the warrant exercise price are accounted for as derivative liabilities under FASB Accounting Standard Codification (ASC) 815, Derivatives and Hedging (ASC 815).  We classify derivative warrant liabilities on the balance sheet as a current liability, which is revalued at each balance sheet date subsequent to the initial issuance.

In March 2011, we issued warrants to purchase 10,460,875 shares of common stock in connection with a private placement transaction.  We valued the warrants as derivative financial instruments as of the date of issuance (March 4, 2011) and will continue to do so at each reporting date, with any changes in fair value being recorded on the Statements of Operations.

The warrants contain provisions that require the modification of the exercise price and shares to be issued under certain circumstances, including in the event we complete subsequent equity financings at a price per share lower than the then-current warrant exercise price.  In addition, the warrants contain a net cash settlement provision under which the warrant holders may require us to purchase the warrants in exchange for a cash payment following the announcement of specified events defined as Fundamental Transactions involving the Company (e.g., merger, sale of all or substantially all assets, tender offer, or share exchange) or a Delisting, which is deemed to occur when the common stock is no longer listed on a national securities exchange.

The net cash settlement provision requires use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a Delisting.  The net cash settlement value at the time of any future Fundamental Transaction or Delisting will depend upon the value of the following inputs at that time: the price per share of our common stock, the volatility of our common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and our dividend yield.  The warrant requires use of a volatility assumption equal to the greater of (i) 100%, (ii) the 30-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting, or (iii) the arithmetic average of the 10, 30, and 50-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting.

The fair value of the warrants is determined using a risk-neutral lattice methodology within a Monte Carlo analysis to model the impact of potential modifications to the warrant exercise price and to include the probability of a Fundamental Transaction or Delisting into the calculation of fair value.  The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of our common stock, assumptions regarding the expected amounts and dates of future equity financing activities, assumptions regarding the likelihood and timing of Fundamental Transactions or a Delisting, the historical volatility of the stock prices of our peer group, risk-free rates based on U.S. Treasury security yields, and our dividend yield.  Changes in these assumptions can materially affect the fair value estimate.  We could, at any point in time, ultimately incur amounts significantly different than the carrying value.  For example, as of March 31, 2011, the calculated cash settlement value of $19.9 million exceeded the fair value of $16.5 million.  We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability.
 
 
 
- 19 -

 

 
The following table summarizes the calculated aggregate fair values and net cash settlement value as of the dates indicated along with the assumptions utilized in each calculation.
                   
   
Fair value as of:
   
Net cash settlement
value as of
March 31, 2011
 
   
March 4,
2011
   
March 31,
2011
 
                   
Calculated aggregate value                                                                 
  $ 16,947,000     $ 16,528,000     $ 19,946,000  (1)
Exercise price per share of warrant                                                                 
  $ 2.88     $ 2.88     $ 2.88  
Closing price per share of common stock
  $ 2.60     $ 2.55     $ 2.55  
Volatility                                                                 
    65.0 %     65.0 %     103.5 % (2)
Probability of Fundamental Transaction or Delisting
    48.9 %     48.9 %  
Not applicable