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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, 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  x   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 August 3, 2011, there were 23,810,302 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
1
   
Condensed Statements of Operations
2
   
Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
3
   
Condensed Statements of Cash Flows
5
   
Notes to Condensed Financial Statements
6
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
24
 
Item 4.
Controls and Procedures
24
       
Part II.  Other Information
 
 
Item 1.
Legal Proceedings
25
 
Item 1A.
Risk Factors
25
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
 
Item 3.
Defaults Upon Senior Securities
26
 
Item 4.
(Removed and Reserved)
26
 
Item 5.
Other Information
26
 
Item 6.
Exhibits
26
       
Signature Page
27

 
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.
 

 
 

 


PART I.                      FINANCIAL INFORMATION

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

Condensed Balance Sheets
(in thousands, except per share data)
(unaudited)

   
December 31,
2010
 
June 30,
 2011
ASSETS
Current assets:
  
             
Cash and cash equivalents                                                                                       
  
$
11,972
 
  
$
19,144
 
Short-term investments
   
                —
     
6,102
 
Deferred equity offering costs                                                                                       
  
 
41
 
  
 
                —
 
Prepaid expenses and other                                                                                       
  
 
492
 
  
 
583
 
Total current assets                                                                                
  
 
12,505
 
  
 
25,829
 
Property and equipment, net of accumulated depreciation of $19,830 and $21,913 as of December 31, 2010 and June 30, 2011, respectively
  
 
11,492
 
  
 
9,415
 
Other assets                                                                                           
  
 
147
 
  
 
1,094
 
Total assets                                                                                           
  
$
24,144
 
  
$
36,338
 
 
  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
  
             
Current portion of long-term debt                                                                                       
  
$
4,016
 
  
$
1,668
 
Current portion of lease liability                                                                                       
  
 
                —
 
  
 
220
 
Accounts payable                                                                                       
  
 
1,194
 
  
 
753
 
Accrued expenses                                                                                       
   
2,843
     
2,090
 
Warrant liability                                                                                       
   
     
7,009
 
Other current liabilities                                                                                       
  
 
205
 
  
 
205
 
Total current liabilities                                                                                
  
 
8,258
 
  
 
11,945
 
Long-term debt                                                                                           
  
 
4,585
 
  
 
3,948
 
Lease liability                                                                                           
  
 
            —
 
  
 
672
 
Other liabilities                                                                                           
  
 
241
 
  
 
229
 
Total liabilities                                                                                
  
 
13,084
 
  
 
16,794
 
Commitments and contingencies (Note 12)                                                                                           
  
 
            —
 
  
 
                —
 
 
  
             
Stockholders’ equity:
  
             
Preferred stock, $0.001 par value; 10,000 shares authorized; zero shares issued or outstanding at   December 31, 2010 and June 30, 2011, respectively
   
            —
 
  
 
                —
 
Common stock, $0.001 par value; 90,000 shares authorized; 12,386 and 23,810 shares issued and outstanding at December 31, 2010 and  June 30, 2011, respectively
  
 
12
 
  
 
24
 
Additional paid-in capital                                                                                       
  
 
222,231
     
234,834
 
Deficit accumulated during the development stage                                                                                       
  
 
(211,183
)
   
(215,314
)
Total stockholders’ equity                                                                                
  
 
11,060
 
  
 
19,544
 
Total liabilities and stockholders’ equity                                                                                           
  
$
24,144
   
$
36,338
 
                 

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

 
 
 
TENGION, INC.
 
(A Development-Stage Company)
 
Condensed Statements of Operations
(in thousands, except per share data)
(unaudited)
 
                                         
                                   
Period from
July 10, 2003 (inception) through
June 30, 2011
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2010
 
2011
 
2010
 
2011
 
Operating expenses:
   
 
             
 
                 
Research and development
 
$
3,253
  
 
$
3,397
   
$
6,569
  
 
$
6,742
   
$
111,306
 
General and administrative
   
1,470
  
   
2,038
     
2,882
  
   
3,814
     
38,516
 
Depreciation
   
1,219
  
   
971
     
2,446
  
   
2,098
     
22,109
 
Other expense
   
     
27
     
         —
     
969
     
969
 
Total operating expenses
   
(5,942
   
(6,433
)
   
(11,897
   
(13,623
)
   
(172,900
)
Interest income
   
17
  
   
13
     
27
  
   
27
     
8,486
 
Interest expense
   
(580
)
   
(201
)
   
(1,261
)
   
(473
)
   
(14,513
)
Change in fair value of warrant liability
   
         —
     
9,519
     
192
     
 9,938
     
12,000
 
 
Net (loss) income
 
$
(6,505
 
$
2,898
   
$
(12,939
 
$
(4,131
)
 
$
(166,927
)
Accretion of redeemable convertible preferred stock to redemption value
   
(364
   
     
(3,993
   
         
Net (loss) income attributable to common stockholders
 
$
(6,869
 
$
2,898
   
$
(16,932
 
$
(4,131
)
       
Basic net (loss) income attributable to common stockholders per share
 
$
(0.61
 
$
0.12
   
$
(2.83
 
$
(0.21
)
       
Diluted net (loss) income attributable to common stockholders per share
 
$
(0.61
)
 
$
0.12
   
$
(2.83
)
 
$
(0.21
)
       
                                         
Shares used in computing basic and diluted net (loss) income attributable to common stockholders:
                                       
      Basic
   
11,203
     
23,486
     
5,981
     
19,620
         
      Diluted
   
11,203
     
23,968
     
5,981
     
19,620
         

 

 
The accompanying notes are an integral part of these financial statements
 

 

 

 
 
-2-

 
 
TENGION, INC.
(A Development-Stage Company)

Condensed Statements of Redeemable Convertible Preferred Stock
and Stockholders’ Equity (Deficit)
(in thousands, except per share data)
(unaudited)
 
               
Stockholders’ equity (deficit)
                                                 
Deficit accumulated during the development stage
       
 
Redeemable convertible
preferred stock
   
Common stock
 
Additional paid-in capital
 
Deferred
compensation
         
 
Shares
 
Amount
   
Shares
 
Amount
       
Total
                                                               
Balance, July 10, 2003
   
$
       
  
 
$
  
 
$
  
 
$
  
 
$
  
 
$
  
Issuance of common stock to initial stockholder
     
       
2,000
  
   
2
  
   
(2
   
  
   
  
   
  
Effect of reverse stock split (see Note 3)
     
       
(1,862
   
(2
   
2
  
   
  
   
  
   
  
Net loss
     
       
  
   
  
   
  
   
  
   
(1,032
   
(1,032
Balance, December 31, 2003
     
       
138
  
   
  
   
     
  
   
(1,032
   
(1,032
Issuance of Series A Redeemable Convertible Preferred stock at $1.62 per share, net of expenses
18,741
     
30,126
       
  
   
  
   
  
   
  
   
  
   
  
Conversion of notes payable, including interest
2,203
     
3,562
       
  
   
  
   
  
   
  
   
  
   
  
Issuance of restricted common stock to employees and nonemployees
     
       
240
  
   
1
  
   
336
  
   
(336
   
  
   
1
  
Issuance of common stock to consultants
     
       
140
  
   
  
   
21
  
   
  
   
  
   
21
  
Issuance of common stock to convertible noteholders
     
       
93
  
   
  
   
67
  
   
  
   
  
   
67
  
Issuance of options to purchase common stock to consultants for services rendered
     
       
  
   
  
   
14
  
   
(14
   
  
   
  
Amortization of deferred compensation
     
       
  
   
  
   
—  
  
   
23
  
   
  
   
23
  
Change in value of restricted common stock subject to vesting
     
       
  
   
  
   
11
  
   
(11
   
  
   
  
Accretion of redeemable convertible preferred stock to redemption value
     
1,035
       
  
   
  
   
  
   
  
   
(1,035
   
(1,035
Net loss
     
       
  
   
  
   
  
   
  
   
(2,438
   
(2,438
Balance, December 31, 2004
20,944
     
34,723
       
611
  
   
1
  
   
449
  
   
(338
   
(4,505
   
(4,393
Issuance of Series A Redeemable Convertible Preferred stock at $1.62 per share, net of expenses
3,247
     
5,223
       
  
   
  
   
  
   
  
   
  
   
  
Issuance of restricted common stock to employees and nonemployees at $2.32 per share
     
       
60
  
   
  
   
140
  
   
(139
   
  
   
1
  
Issuance of warrants to purchase preferred stock to noteholders
     
       
  
   
  
   
681
  
   
  
   
  
   
681
  
Issuance of options to purchase common stock to consultants for services rendered
     
       
  
   
  
   
7
  
   
(7
   
  
   
  
Amortization of deferred compensation
     
       
  
   
  
   
  
   
111
  
   
  
   
111
  
Accretion of redeemable convertible preferred stock to redemption value
     
3,164
       
  
   
  
   
  
   
  
   
(3,164
   
(3,164
Net loss
     
       
  
   
  
   
  
   
  
   
(9,627
   
(9,627
Balance, December 31, 2005
24,191
     
43,110
       
671
  
   
1
  
   
1,277
  
   
(373
   
(17,296
   
(16,391
Issuance of Series B Redeemable Convertible Preferred stock at $1.82 per share, net of expenses
27,637
     
50,040
       
  
   
  
   
  
   
  
   
  
   
  
Issuance of restricted common stock to employees
     
       
3
  
   
  
   
  
   
     
  
   
  
Issuance of common stock upon exercise of options
     
       
4
  
   
  
   
9
  
   
  
   
  
   
9
  
Repurchased nonvested restricted stock
     
       
(14
   
  
   
  
   
     
  
   
  
Reclassification of deferred compensation
     
       
  
   
  
   
(373
)
   
373
  
   
  
   
  
Reclassification of warrants to purchase preferred stock
     
       
  
   
  
   
(681
)
   
  
   
  
   
(681
Stock-based compensation expense
     
       
  
   
  
   
400
     
  
   
  
   
400
 
Accretion of redeemable convertible preferred stock to redemption value
     
5,640
       
  
   
  
   
  
   
  
   
(5,640
   
(5,640
Net loss
     
       
  
   
  
   
  
   
  
   
(20,873
   
(20,873
Balance, December 31, 2006
51,828
     
98,790
       
664
  
   
1
  
   
632
  
   
     
(43,809
   
(43,176
Issuance of Series C Redeemable Convertible Preferred stock at $1.82 per share, net of expenses
18,333
     
33,219
       
  
   
  
   
  
   
  
   
  
   
  
Issuance of common stock upon exercise of options
     
       
16
  
   
  
   
60
  
   
  
   
  
   
60
  
Repurchased vested restricted stock
     
       
(5
   
  
   
(94
)
   
     
  
   
(94
)
Stock-based compensation expense
     
       
  
   
  
   
664
     
  
   
  
   
664
 
Accretion of redeemable convertible preferred stock to redemption value
     
8,742
       
  
   
  
   
  
   
  
   
(8,742
   
(8,742
Net loss
     
       
  
   
  
   
  
   
  
   
(30,988
   
(30,988
Balance, December 31, 2007
70,161
   
$
140,751
       
675
  
 
1
  
 
$
1,262
  
 
$
   
$
(83,539
 
$
(82,276

 
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) – (continued)
(in thousands, except per share data)
 (unaudited)
                                                               
               
Stockholders’ equity (deficit)
                                                 
Deficit accumulated during the development stage
       
 
Redeemable convertible
preferred stock
   
Common stock
 
Additional paid-in capital
 
Deferred
compensation
         
 
Shares
 
Amount
   
Shares
 
Amount
       
Total
                                                               
Balance, December 31, 2007
70,161
     
140,751
       
675
  
   
1
  
   
1,262
  
   
     
(83,539
   
(82,276
Issuance of Series C Redeemable Convertible Preferred stock at $1.82 per share, net of expenses
11,793
     
21,352
       
  
   
  
   
  
   
  
   
  
   
  
Issuance of common stock upon exercise of options
     
       
8
  
   
  
   
28
  
   
  
   
  
   
28
  
Repurchased vested restricted stock
     
       
(1
   
  
   
     
     
  
   
 
Stock-based compensation expense
     
       
  
   
  
   
1,317
     
  
   
  
   
1,317
 
Accretion of redeemable convertible preferred stock to redemption value
     
11,754
       
  
   
  
   
  
   
  
   
(11,754
   
(11,754
Net loss
     
       
  
   
  
   
  
   
  
   
(42,393
   
(42,393
Balance, December 31, 2008
81,954
     
173,857
       
682
  
   
1
  
   
2,607
  
   
     
(137,686
   
(135,078
Issuance of common stock upon exercise of options
     
       
20
  
   
  
   
54
  
   
  
   
  
   
54
  
Stock-based compensation expense
     
       
  
   
  
   
855
     
  
   
  
   
855
 
Accretion of redeemable convertible preferred stock to redemption value
     
14,059
       
  
   
  
   
  
   
  
   
(14,059
   
(14,059
Net loss
     
       
  
   
  
   
  
   
  
   
(29,845
   
(29,845
Balance, December 31, 2009
81,954
     
187,916
       
702
  
   
1
  
   
3,516
  
   
     
(181,590
   
(178,073
Issuance of common stock upon exercise of options
     
       
32
  
   
  
   
14
  
   
  
   
  
   
14
  
Accretion of redeemable convertible preferred stock to redemption value
     
3,993
       
  
   
  
   
  
   
  
   
(3,993
   
(3,993
Conversion of preferred stock to common stock
(81,954
)
   
(191,909
)
 
5,652
  
   
5
  
   
191,904
     
  
   
  
   
191,909
 
Conversion of preferred stock warrants to common stock warrants
     
       
  
   
  
   
123
     
  
   
  
   
123
 
Proceeds from initial public offering, net of expenses
     
       
6,000
  
   
6
  
   
25,721
     
  
   
  
   
25,727
 
Stock-based compensation expense
     
       
  
   
  
   
953
     
  
   
  
   
953
 
Net loss
     
       
  
   
  
   
  
   
  
   
(25,600
   
(25,600
Balance, December 31, 2010
     
       
12,386
  
   
12
  
   
222,231
  
   
     
(211,183
   
11,060
 
Proceeds from equity financing, net of expenses
     
       
11,079
  
   
11
  
   
28,930
     
  
   
  
   
28,941
 
Issuance of warrants to purchase common stock issued in connection with equity financing
     
       
  
   
  
   
(16,947
)
   
  
   
  
   
(16,947
)
Issuance of common stock upon exercise of options
     
       
34
     
1
  
   
14
  
   
  
   
  
   
15
  
Issuance of restricted stock to employees
     
       
311
     
     
     
     
     
 
Issuance of warrants to purchase common stock in connection with debt financing
     
       
  
   
  
   
105
  
   
  
   
  
   
105
  
Stock-based compensation expense
     
       
  
   
  
   
501
     
  
   
  
   
501
 
Net loss
     
       
  
   
  
   
  
   
  
   
(4,131
   
(4,131
Balance, June 30, 2011
   
$
       
23,810
  
 
$
24
  
 
$
234,834
  
 
$
   
$
(215,314
 
$
19,544
 
                                                               

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

 

TENGION, INC.
 
(A Development-Stage Company)
 
Condensed Statements of Cash Flows
(in thousands)
 (unaudited)
                         
   
Six Months Ended
June 30,
 
Period from
July 10, 2003
(inception)
through
June 30, 2011
   
2010
 
2011
 
Cash flows from operating activities:
                       
Net income (loss)                                                                                        
 
$
(12,939
)
 
$
(4,131
)
 
$
(166,927
)
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation                                                                                     
   
2,446
     
2,098
     
22,109
 
Change in fair value of warrant liability                                                                                     
   
(192
)
   
(9,938
)
   
(12,000
)
Change in value of lease liability                                                                                     
   
     
969
     
969
 
Loss on disposition of property and equipment                                                                                     
   
2
     
     
119
 
Amortization of net discount on short-term investments
   
     
     
(149
)
Noncash interest expense                                                                                     
   
166
     
 100
     
2,486
 
Noncash rent expense (income)                                                                                     
   
 3
     
(12
)
   
229
 
Stock-based compensation expense                                                                                     
   
 434
     
501
     
4,846
 
Changes in operating assets and liabilities:
                       
Prepaid expenses and other assets                                                                                  
   
 (17
)
   
(968
)
   
(1,794
)
Accounts payable                                                                                  
   
 (881
)
   
(359
)
   
794
 
Accrued expenses and other                                                                                  
   
(57
)
   
(900
)
   
2,358
 
Net cash used in operating activities                                                                              
   
(11,035
)
   
(12,640
)
   
(146,960
)
Cash flows from investing activities:
                       
Purchases of short-term investments                                                                                        
   
 (13,050
)
   
(6,102
)
   
(317,544
)
Sales and redemption of short-term investments                                                                                        
   
10,000
     
     
311,591
 
Cash paid for property and equipment                                                                                        
   
 (108
)
   
(61
)
   
(31,654
)
Proceeds from the sale of property and equipment                                                                                        
   
     
     
11
 
Net cash provided by (used in) investing activities
   
(3,158
)
   
(6,163
)
   
(37,596
)
Cash flows from financing activities:
                       
Proceeds from sales of redeemable convertible preferred stock and warrants, net
   
     
     
139,960
 
Proceeds (offering costs) from sales of common stock and warrants, net
   
25,906
     
29,025
     
54,919
 
Repurchase of restricted stock                                                                                        
   
        —
     
     
(94
)
Proceeds from long-term debt, net of issuance costs                                                                                        
   
     
4,908
     
39,517
 
Payments on long-term debt                                                                                        
   
(6,639
)
   
(7,958
)
   
(30,602
)
Net cash provided by (used in) financing activities
   
19,267
     
25,975
     
203,700
 
Net increase (decrease) in cash and cash equivalents                                                                                           
   
5,074
     
7,172
     
19,144
 
Cash and cash equivalents, beginning of period                                                                                           
   
16,804
     
11,972
     
 
Cash and cash equivalents, end of period                                                                                           
 
$
21,878
   
$
19,144
   
$
19,144
 
                         
Supplemental cash flow disclosures:
                       
Noncash investing and financing activities:
                       
Conversion of note principal to redeemable convertible preferred stock
 
$
   
$
   
$
3,562
 
Convertible note issued to stockholder for consulting expense
   
     
     
  210
 
Fair value of warrants issued with long-term debt                                                                                     
   
     
105
     
2,290
 
Fair value of warrants issued with sale of common stock
   
     
16,947
     
16,947
 
Conversion of redeemable convertible preferred stock into 5,652 shares of common stock
   
191,909
     
     
191,909
 
Conversion of warrant liability                                                                                     
   
123
     
     
123
 
Noncash property and equipment additions                                                                                     
   
31
     
     
 

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

 
 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements
(unaudited)

(1)  
Background
 
Tengion, Inc. (the Company) 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 $215.3 million as of June 30, 2011, including $48.4 million 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.  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.
 
 
 
-6-

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements – (continued)
(unaudited)
 
 
(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) Income Attributable to Common Stockholders Per Share
 
Basic net (loss) income attributable to common stockholders per share is calculated by dividing net (loss) income attributable to common stockholders by the weighted-average number of common shares outstanding.  Diluted net (loss) income attributable to common stockholders per share includes the determinants of basic net (loss) income attributable to common stockholders per share and, in addition, reflects the dilutive effect of stock options and restricted stock. The following table presents computations of net (loss) income per share (in thousands, except per share data).
 
                                   
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2010
 
2011
 
2010
 
2011
 
Numerator for basic and diluted net (loss) income per share – net (loss) income attributable to common stockholders
 
$
(6,869
 
$
2,898
   
$
(16,932
 
$
(4,131
)
 
Denominator for basic net (loss) income attributable to common stockholders per share – weighted-average common shares outstanding
   
11,203
  
   
23,486
     
5,981
  
   
19,620
   
Effect of dilutive securities:
                                 
Stock options                                                                     
   
     
285
     
     
   
Restricted stock                                                                     
   
         —
     
197
     
         —
     
         —
   
Dilutive potential common shares
   
     
482
     
     
   
Denominator for diluted net (loss) income attributable to common stockholders per share – weighted-average number of common shares outstanding and dilutive potential common shares
   
11,203
     
23,968
     
5,981
     
19,620
   
Basic net (loss) income attributable to common stockholders per share
 
$
(0.61
)
 
$
0.12
   
$
(2.83
)
 
$
(0.21
)
 
Diluted net (loss) income attributable to common stockholders per share
 
$
(0.61
 
$
0.12
   
$
(2.83
 
$
(0.21
)
 
                                   

The following potential common shares have been excluded from the calculation of diluted net (loss) income per share as their effect would be anti-dilutive:
                                   
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2010
 
2011
 
2010
 
2011
 
Shares underlying warrants outstanding
   
114,342
     
10,645,888
     
114,342
     
10,645,888
   
Shares underlying options outstanding
   
888,094
     
1,245,667
     
888,094
     
1,755,038
   
Unvested restricted stock                                                                   
   
     
     
     
309,450
   
                                   

(6)  
Short-term Investments and Fair Value of Financial Instruments
 
As of December 31, 2010 and June 30, 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 fair value of the warrants.
 
 
 
-7-

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements – (continued)
(unaudited)
 
Short-term investments consist of investments in commercial paper and U.S. government agency and corporate securities as of June 30, 2011. The Company has the ability and intent to hold these investments until maturity and, therefore, has classified the investments as held-to-maturity. Due to the short-term nature of these investments, unrealized gains and losses have been deemed temporary and, therefore, not recognized in the accompanying financial statements. Income generated from short-term investments is recorded to interest income. As of June 30, 2011, the investments are classified as short-term as the dates to maturity of such instruments are less than one year.
 
The following is a summary of the Company’s short-term investments (in thousands):
 
   
December 31, 2010
   
June 30, 2011
Held-to-Maturity
         
Marketable securities……………………………………..
$
 
$
6,102
Total Short-term investments…………………………………
$
 
$
6,102
           

 
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 – (continued)
(unaudited)
 
 
The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and June 30, 2011 (in thousands).
                         
   
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
  
$
11,972
 
$
 
$
  
$
11,972
                         
At June 30, 2011:
                       
Assets:
                       
Cash and cash equivalents
 
$
19,144
 
$
 
$
 
$
19,144
Short-term investments
   
6,102
   
   
   
6,102
   
$
25,246
 
$
 
$
  
$
25,246
Liabilities:
                       
Warrant liability 
 
$
 
$
 
$
7,009
  
$
7,009
                         

The reconciliation of warrant liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows (in thousands):
   
Warrant liability
         
Balance at December 31, 2010                                                                                                        
 
$
 
Issuance of warrants                                                                                                   
   
16,947
 
Change in fair value of warrant liability                                                                                                   
  
 
(9,938
)
Balance at June 30, 2011                                                                                                        
  
$
7,009
 
         
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 potential sublease revenues and the credit-adjusted risk-free rate utilized to discount the estimated future cash flows.

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 $0.9 million, based on the Company’s estimate of the fair value of its obligations.
 
 
 
-9-

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements – (continued)
(unaudited)
 
 
The following table summarizes the activity related to the lease liability for the six months ended June 30, 2011 (in thousands).
 
 
Initial fair value as of
March 1, 2011
 
Payments
 
Additional Charges to Operations
 
Balance at
June 30, 2011
Lease liability
$ 933
 
$ (77)
 
$36
 
$ 892

(8)  
Debt
 
Total debt outstanding consists of the following (in thousands):
             
   
December 31,
2010
 
June 30,
 2011
Working Capital Note                                                                               
  
$
7,257
 
  
$
5,000
 
Equipment and Supplemental Working Capital Notes
  
 
1,015
 
  
 
551
 
Machinery and Equipment Loan                                                                               
  
 
477
 
  
 
242
 
Unamortized debt discount                                                                               
  
 
(148
)
  
 
(177
)
 
  
 
8,601
 
  
 
5,616
 
Less current portion                                                                               
  
 
(4,016
)
  
 
(1,668
)
 
  
$
4,585
 
  
$
3,948
 
 
  
             
Working Capital Note
 
The Company has an outstanding working capital loan (the Working Capital Note) that 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 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 was $0.1 million, 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 $0.4 million and $0.1 million for the three months ended June 30, 2010 and June 30, 2011, respectively.  The Company recorded interest expense related to the Working Capital Note of $0.9 million and $0.3 million for the six months ended June 30, 2010 and June 30, 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 $16,970 for the three months ended June 30, 2010 and 2011, respectively, for the amortization of OID.  The Company recognized a noncash charge to interest expense of $0.1 million and $71,999 for the six months ended June 30, 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 June 30, 2011, the Equipment Note and the Supplemental Working Capital Note bear interest at an average rate of 11.69% and 13.52%, respectively.  The Company will make its final monthly principal and interest 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 $75,595 and $19,304 for the three months ended June 30, 2010 and 2011, respectively.  The Company recorded interest expense related to the Equipment and Supplemental Working Capital Notes of $0.2 million and $45,693 for the six months ended June 30, 2010 and 2011, respectively.
 
 
 
-10-

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements – (continued)
(unaudited)
 
 
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 $2,542 for the three months ended June 30, 2010 and 2011, respectively, for the amortization of OID.  The Company recognized a noncash charge to interest expense of $18,936 and $5,178 for the six months ended June 30, 2010 and 2011, respectively, for the amortization of OID.
 
Machinery and Equipment Loan
 
In December 2007, the Company executed an agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other asset purchases (MELF Loan) through December 31, 2010.  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 $9,787 and $4,012 for the three months ended June 30, 2010 and 2011, respectively.  The Company recorded interest expense related to the MELF Loan of $20,973 and $9,495 for the six months ended June 30, 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 $0.3 million, 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 deferred financing costs of $11,073 and $11,727 during the three months ended June 30, 2010 and 2011, respectively, which was included in interest expense on the accompanying statements of operations.  The Company recorded amortization of deferred financing costs of $22,146 and $23,281 during the six months ended June 30, 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 of common stock 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 $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 warrants to purchase 110,452 shares of 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 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 $28.9 million. See Note 10 for discussion of the warrant liability.

In connection with the March 2011 equity financing, the Company filed 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 and the registration statement was declared effective by the SEC on May 16, 2011.  The Company is required to use commercially reasonable efforts to cause the registration statement 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 and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144.  In the event the Company fails to meet certain legal requirements in regards to the registration statement, it 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 the Company fails 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 the Company determines 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 June 30, 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 – (continued)
(unaudited)

 
(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 June 30, 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 the date of grant was $1.49 per share by utilizing the Black-Scholes model.  In estimating the fair value of the warrant, the Company utilized the following inputs: 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 – (continued)
(unaudited)
 
 
Prior to the Company’s initial public offering, the warrants were classified as a warrant liability on the balance sheet 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.
 
The aggregate fair value of these warrants as of date of the initial public offering was lower than the aggregate fair value as of December 31, 2009, resulting in a noncash credit to change in fair value of common stock warrants of $0.2 million during the six months ended June 30, 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.  During the three and six months ended June 30, 2011, the Company recorded non-operating income of $9.5 million and $9.9 million, respectively, due to decreases in the estimated fair value of these warrants. 

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 June 30, 2011, the calculated cash settlement value of $7.5 million exceeded the fair value of $7.0 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.
 
 
 
 
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Tengion, Inc.
(A Development-Stage Company)

Notes to Condensed Financial Statements – (continued)
(unaudited)

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.