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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 March 31, 2012

OR

 [   ]
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.)
     
3929 Westpoint Boulevard, Suite G
Winston-Salem, NC 27103
 
(336) 722-5855
(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 May 7, 2012, there were 24,665,818 shares of the registrant’s common stock outstanding.
 
 
 
 
 
 

 
 
 
 
TENGION, INC.

FORM 10-Q

INDEX

Part I.  Financial Information
Item 1.
Financial Statements (unaudited)
 
 
Balance Sheets
 
Statements of Operations
 
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
 
Statements of Cash Flows
 
Notes to  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.
Mine Safety Disclosures
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)

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

    December 31,
2011
    March 31,
 2012
 
ASSETS  
Current assets:
  
             
Cash and cash equivalents, including $1,194 of cash at December 31, 2011 and March 31, 2012, collateralizing letters of credit (Note 14)
  
$
9,244
 
  
$
7,349
 
Short-term investments                                                                                       
   
6,066
     
1,517
 
Prepaid expenses and other                                                                                       
  
 
408
 
  
 
450
 
Total current assets                                                                                
  
 
15,718
 
  
 
9,316
 
Property and equipment, net of accumulated depreciation of $12,622 and $12,752 as of December 31, 2011 and March 31, 2012, respectively
  
 
1,021
 
  
 
888
 
Other assets                                                                                           
  
 
1,078
 
  
 
1,069
 
Total assets                                                                                           
  
$
17,817
 
  
$
11,273
 
 
  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
  
             
Current portion of long-term debt                                                                                       
  
$
2,205
 
  
$
2,363
 
Current portion of lease liability                                                                                       
  
 
739
 
  
 
721
 
Accounts payable                                                                                       
  
 
829
 
  
 
546
 
Accrued compensation and benefits                                                                                       
  
 
2,354
     
837
 
Accrued expenses                                                                                       
   
437
     
578
 
Warrant liability                                                                                       
  
 
2,511
 
  
 
3,034
 
Total current liabilities                                                                                
  
 
9,075
 
  
 
8,079
 
Long-term debt                                                                                           
  
 
2,782
 
  
 
2,172
 
Lease liability                                                                                           
  
 
943
 
  
 
813
 
Other liabilities                                                                                           
  
 
2
 
  
 
4
 
Total liabilities                                                                                
  
 
12,802
 
  
 
11,068
 
Commitments and contingencies (Note 14)                                                                                           
  
 
 
  
 
 
 
  
             
Stockholders’ equity:
  
             
Preferred stock, $0.001 par value; 10,000 shares authorized; zero shares issued or outstanding at December 31, 2011 and March 31, 2012, respectively
   
 
  
 
 
Common stock, $0.001 par value; 90,000 shares authorized; 23,814 and 24,495 shares issued and outstanding at December 31, 2011 and  March 31, 2012, respectively
  
 
24
 
  
 
25
 
Additional paid-in capital                                                                                       
  
 
235,235
     
235,373
 
Deficit accumulated during the development stage                                                                                       
  
 
(230,244
)
   
(235,193
)
Total stockholders’ equity                                                                                
  
 
5,015
 
  
 
205
 
Total liabilities and stockholders’ equity                                                                                           
  
$
17,817
   
$
11,273
 
                 

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

 
 
 
TENGION, INC.
(A Development-Stage Company)
 
 Statements of Operations
(in thousands, except per share data)
(unaudited)
 
    Three Months Ended
March 31,
    Period from
July 10, 2003
(inception)
through
March 31,
 
    2011     2012      2012  
                         
Revenues  
 
$
   
$
   
$
 
                         
Operating expenses:
   
 
                 
Research and development  
   
3,345
  
   
2,694
   
 
120,551
 
General and administrative  
   
1,776
  
   
1,381
     
43,274
 
Depreciation   
   
1,127
  
   
136
     
23,288
 
Impairment of property and equipment     
   
     
     
7,371
 
Other expense    
   
942
     
48
     
1,753
 
  Total operating expenses  
   
7,190
     
4,259
     
196,237
 
                         
Loss from operations
   
(7,190
   
(4,259
)
   
(196,237
)
                         
Interest income  
   
14
  
   
7
     
8,519
 
Interest expense   
   
(272
)
   
(174
)
   
(15,063
)
Change in fair value of warrant liability 
   
419
     
(523
)
   
15,975
 
 
Net loss    
 
$
(7,029
 
$
(4,949
)
 
$
(186,806
)
                         
Basic and diluted net loss attributable to common stockholders per share
 
$
(0.45
 
$
(0.21
)
       
                         
Weighted-average common stock outstanding :
                       
      Basic and diluted   
   
15,711
     
23,699
         

 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
- 2 -

 
 

 

 
TENGION, INC.
(A Development-Stage Company)

 Statements of Redeemable Convertible Preferred Stock
and Stockholders’ Equity (Deficit)
(in thousands, except per share data)
(unaudited)
 
                Stockholders’ equity (deficit)  
   
Redeemable convertible
preferred stock
    Common stock     Additional paid-in     Deferred     Deficit
 accumulated
during the
 development
       
    Shares     Amount     Shares     Amount     capital     compensation     stage     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 the financial statements.

 
 
 
 
 
- 3 -

 
 
 

 
TENGION, INC.
(A Development-Stage Company)

 Statements of Redeemable Convertible Preferred Stock
 and Stockholders’ Equity (Deficit) – (continued)
(in thousands, except per share data)
 (unaudited)
 
               
Stockholders’ equity (deficit)
 
   
Redeemable
convertible
preferred stock
    Common stock    
Additional
paid-in
   
Deferred
   
Deficit accumulated during the development
       
    Shares     Amount     Shares     Amount     capital     compensation     stage     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
                187       1       82                   83  
Issuance of restricted stock to employees
                311                                
Cancellation of restricted stock to employees
                (149 )                              
Issuance of warrants to purchase common stock in connection with debt financing
                            105                   105  
Stock-based compensation expense
                            834                   834  
Net loss
                                        (19,061     (19,061
Balance, December 31, 2011
                23,814       24       235,235             (230,244 )     5,015  
Issuance of common stock upon exercise of options
                19             8                   8  
Issuance of restricted stock to employees
                679       1       (1 )                  
Cancellation of restricted stock to employees
                (17 )           (4 )                 (4 )
Stock-based compensation expense
                            135                   135  
Net loss
                                        (4,949     (4,949
Balance, March 31, 2012
        $       24,495     $ 25     $ 235,373     $     $ (235,193 )   $ 205  
                                                                 

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

 
 
 
 

TENGION, INC.
(A Development-Stage Company)
 
 Statements of Cash Flows
(in thousands)
 (unaudited)
                         
   
Three Months Ended
March 31,
 
Period from
July 10, 2003
(inception)
through
March 31, 2012
   
2011
 
2012
 
Cash flows from operating activities:
                       
Net loss                                                                                        
 
$
(7,029
)
 
$
(4,949
)
 
$
(186,806
)
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation                                                                                     
   
1,127
     
136
     
23,288
 
Change in fair value of warrant liability                                                                                     
   
(419
)
   
523
     
(15,975
)
Charge related to lease liability                                                                                     
   
942
     
48
     
1,753
 
Loss on disposition of property and equipment                                                                                     
   
     
     
119
 
Impairment of property and equipment                                                                                     
   
     
     
7,371
 
Amortization of net discount on short-term investments
   
     
     
(149
)
Noncash interest expense                                                                                     
   
69
     
30
     
2,578
 
Noncash rent (income) expense                                                                                     
   
(3
)
   
2
     
219
 
Stock-based compensation expense                                                                                     
   
257
     
135
     
5,314
 
Changes in operating assets and liabilities:
                       
Prepaid expenses and other assets                                                                                  
   
(748
)
   
(45
)
   
(1,673
)
Accounts payable                                                                                  
   
39
     
(283
)
   
587
 
Accrued expenses and other                                                                                  
   
(1,070
)
   
(1,571
)
   
1,192
 
Net cash used in operating activities                                                                              
   
(6,835
)
   
(5,974
)
   
(162,182
)
Cash flows from investing activities:
                       
Purchases of short-term investments                                                                                        
   
     
     
(324,508
)
Sales and redemption of short-term investments                                                                                        
   
     
4,548
     
323,139
 
Cash paid for property and equipment                                                                                        
   
(48
)
   
(3
)
   
(31,677
)
Proceeds from the sale of property and equipment                                                                                        
   
     
     
11
 
Net cash (used by) provided by investing activities
   
(48
)
   
4,545
     
(33,035
)
Cash flows from financing activities:
                       
Proceeds from sales of redeemable convertible preferred stock and warrants, net
   
     
     
139,960
 
Proceeds from sales of common stock and warrants, net
   
29,092
     
4
     
54,921
 
Repurchase of restricted stock                                                                                        
   
     
     
(94
)
Proceeds from long-term debt, net of issuance costs                                                                                        
   
4,907
     
     
39,517
 
Payments on long-term debt                                                                                        
   
(7,610
)
   
(470
)
   
(31,738
)
Net cash provided by (used in) financing activities
   
26,389
     
(466
)
   
202,566
 
Net increase (decrease) in cash and cash equivalents                                                                                           
   
19,506
     
(1,895
)
   
7,349
 
Cash and cash equivalents, beginning of period                                                                                           
   
11,972
     
9,244
     
 
Cash and cash equivalents, end of period                                                                                           
 
$
31,478
   
$
7,349
   
$
7,349
 
                         

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

 
 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)

(1)
Organization and Nature of Operations
 
Tengion, Inc. (the Company) was incorporated in Delaware on July 10, 2003. The Company is a regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of neo-organs, or products composed of living cells, with or without synthetic or natural materials, implanted or injected into the body to engraft into, regenerate, or replace a damaged tissue or organ.  Using its Organ Regeneration Platform, the Company creates these neo-organs using a patient’s own cells, or autologous cells.  The Company believes its proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate a range of native-like organs and tissues. The Company’s product candidates are intended to delay or eliminate the need for chronic disease therapies, organ transplantation, and the administration of anti-rejection medications.  In addition, the Company’s neo-organs are designed to avoid the need to substitute other tissues of the body for a purpose to which they are poorly suited.
 
Building on its clinical and preclinical experience, the Company is initially leveraging its Organ Regeneration Platform to develop its Neo-Urinary Conduit for bladder cancer patients who are in need of a urinary diversion and its Neo-Kidney Augment for patients with advanced chronic kidney disease. The Company operates as a single business segment. 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.
 
(2)
Management’s Plans to Continue as a Going Concern
 
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and has a deficit accumulated during the development stage of $235.2 million as of March 31, 2012. 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.
 
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 to September 2012. The Company intends to pursue additional sources of capital to continue its business operations as currently conducted and fund deficits in operating cash flows. There is no assurance that such financing will be available when needed or, if available, on terms acceptable to the Company. In the event financing is not obtained, the Company could pursue additional headcount reductions and other cost cutting measures to preserve cash as well as explore the sale of selected assets to generate additional funds.If the Company is required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs, these events could have a material adverse effect on the Company's business, results of operations and financial condition.
 
These factors could significantly limit the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
 


 
- 6 -

 

Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)
 
(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, 2011, 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.
 
(4)
Use of Estimates
 
The preparation of financial statements, in accordance with GAAP, 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 Attributable to Common Stockholders Per Share
 
Basic and diluted net loss attributable to common stockholders per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding. For all periods presented, the outstanding shares of common stock options and restricted stock, 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 dilutive loss per share are the same.

The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive:
                 
   
Three Months Ended
March 31,
   
2011
 
2012
Shares underlying warrants outstanding
   
10,645,888
     
10,645,888
 
Shares underlying options outstanding
   
1,370,263
     
2,407,563
 
Unvested restricted stock                                                                                             
   
     
759,618
 
                 
 
 
 
 
 
- 7 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)

(6)
Supplemental Cash Flow Information
 
The following table contains additional cash flow information for the periods reported (in thousands).

   
Three Months Ended March 31,
     
Period from July 10, 2003
(inception) through
March 31,
 
   
2011
   
2012
   
2012
 
Supplemental cash flow disclosures:
                 
Noncash investing and financing activities:
                 
Conversion of note principal to redeemable convertible preferred stock
  $     $     $ 3,562  
Convertible note issued to initial stockholder for consulting expense
                210  
Fair value of warrants issued with issuance of 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  
Conversion of warrant liability 
                123  

(7)
Short-term Investments and Fair Value of Financial Instruments
 
As of December 31, 2011 and March 31, 2012, 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 Note 12 for a discussion of fair value of the warrants.
 
As of December 31, 2011 and March 31, 2012, short-term investments consisted of investments in commercial paper and U.S. government agency and corporate securities of $6.1 million and $1.5 million, respectively. The Company has the ability and intent to hold these investments until maturity and, therefore, has classified the investments as held-to-maturity, which we carry at amortized cost. 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.
 
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 Financial Statements
(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, 2011 and March 31, 2012 (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, 2011:
                       
Assets:
                       
Cash and cash equivalents
  $ 9,244     $     $     $ 9,244  
Short-term investments
    6,066                   6,066  
    $ 15,310     $     $     $ 15,310  
Liabilities:
                               
Warrant liability 
  $     $     $ 2,511     $ 2,511  
                                 
At March 31, 2012:
                               
Assets:
                               
Cash and cash equivalents
  $ 7,349     $     $     $ 7,349  
Short-term investments
    1,517                   1,517  
    $ 8,866     $     $     $ 8,866  
Liabilities:
                               
Warrant liability 
  $     $     $ 3,034     $ 3,034  
                                 

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, 2011 
 
$
2,511
 
Change in fair value of warrant liability   
  
 
523
 
Balance at March 31, 2012    
  
$
3,034
 
         
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 12 for further discussion of the warrant liability.
 
(8)
Restructuring Expenses
 
In November 2011, the Company’s Board of Directors approved a restructuring plan designed to fund the Company’s lead development programs through key milestones in 2012, eliminate plans to use its facility in East Norriton, Pennsylvania as a manufacturing center, and centralize its research and development operations in its leased facility in Winston-Salem, North Carolina. The Company has retained a few administrative employees in its facility in East Norriton, Pennsylvania, and is exploring options to significantly reduce the amount of space it currently rents.

The Company offered severance benefits to the terminated employees, and recorded a $1.7 million charge for personnel-related termination costs in the fourth quarter of 2011, of which $0.8 million was included in research and development expense and $0.9 million was included in general and administrative expense in the accompanying statements of operations. The Company expects to complete payment of these severance benefits by September 2012.
 
 
 
 
 
- 9 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)

 
The following table summarizes the activity related to accrued severance benefits for the quarter ended March 31, 2012 (in thousands).
 
   
Accrued Severance Benefits
         
Balance at December 31, 2011   
 
$
1,544
 
Net Charges paid 
  
 
(1,056
)
Balance at March 31, 2012   
  
$
488
 

(9)
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 lease liability are the potential sublease revenues and the credit-adjusted risk-free rate utilized to discount the estimated future cash flows.
 
In connection with the restructuring described in Note 8, the Company determined it was not likely to utilize substantially all of the leased office and manufacturing space in its East Norriton, Pennsylvania facility during the remainder of the lease term. Therefore, the Company recorded a liability as November 30, 2011, the cease-use date, for the fair value of its obligations under the lease.
 
The following table summarizes the activity related to the lease liability for the quarter ended March 31, 2012 (in thousands).
 
   
Warehouse
space
 
Office and manufacturing
space
 
Total
Balance at December 31, 2011
 
$
828
   
$
854
   
$
1,682
 
Charges utilized
   
(59
)
   
(137
)
   
(196
)
Additional charges to operations
   
23
     
25
     
48
 
Balance at March 31, 2012
   
792
     
742
     
1,534
 
Less current portion
   
(227
)
   
(494
)
   
(721
)
   
$
565
   
$
248
   
$
813
 
 
(10)
Debt
 
Total debt outstanding consists of the following (in thousands):
             
   
December 31,
2011
 
March 31,
 2012
Working Capital Note                                                                               
  
$
5,000
 
  
$
4,627
 
Equipment and Supplemental Working Capital Notes
  
 
126
 
  
 
30
 
Unamortized debt discount                                                                               
  
 
(139
)
  
 
(122
)
 
  
 
4,987
 
  
 
4,535
 
Less current portion                                                                               
  
 
(2,205
)
  
 
(2,363
)
 
  
$
2,782
 
  
$
2,172
 
 
  
             
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 was 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 12 for further discussion on warrants.
 
 
 
 
- 10 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)
 
The Company recorded interest expense related to the Working Capital Note of $0.2 million and $0.1 million for the three months ended March 31, 2011 and 2012, 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 $55,000 and $17,000 for the three months ended March 31, 2011 and 2012, 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, 2012, the Equipment Note and the Supplemental Working Capital Note bear interest at an average rate of 11.99% 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 $26,000 and $2,000 for the three months ended March 31, 2011 and 2012, respectively.
 
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 $3,000 and $1,000 for the three months ended March 31, 2011 and 2012, respectively, for the amortization of OID.
 
(11)
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 12 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 March 31, 2012, 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 Financial Statements
(unaudited)

 
(12)
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 December 31, 2011 and March 31, 2012:
             
 
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 10 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.
 
 
 
- 12 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)
 
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.
 
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 11). 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 months ended March 31, 2011 and 2012, the Company recorded non-operating income of $0.4 million and non-operating expense of $0.5 million, respectively, due to changes 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 March 31, 2012, the fair value of $3.0 million exceeded the calculated cash settlement value of $2.3 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 Financial Statements
(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.
                       
   
Fair value as of:
   
Net cash settlement value as of
March 31, 2012
     
   
December 31, 2011
   
March 31,
2012
     
                       
Calculated aggregate value   
  $ 2,511     $ 3,034     $ 2,301  (1)    
Exercise price per share of warrant   
  $ 2.88     $ 2.88     $ 2.88      
Closing price per share of common stock
  $ 0.47     $ 0.56     $ 0.56      
Volatility   
    93.8 %     94.5 %     100.0 %(2)    
Probability of Fundamental Transaction or Delisting
    28.9 %     28.8 %  
Not applicable
     
Expected term (years)  
 
Not applicable
   
Not applicable
      3.9      
Risk-free interest rate 
    0.7 %     0.8 %     0.8 %    
Dividend yield 
 
None
   
None
   
None
     
                             

 
(1)
Represents the net cash settlement value of the warrant as of March 31, 2012, 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, 2012.
 
(13)
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 awards 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, 2012, 344,792 shares of common stock were available for future grants under the Plan.
 
 
 
 
- 14 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)
 
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 (in thousands)
 
Outstanding at December 31, 2011
    1,746,970     $ 1.68       8.9     $ 63  
Granted
    734,751     $ 0.60                  
Exercised
    (19,187 )   $ 0.44                  
Forfeited
    (54,971 )   $ 2.67                  
Outstanding at March 31, 2012
    2,407,563     $ 1.34       9.0     $ 151  
                                 
Vested and expected to vest at March 31, 2012
    2,209,632     $ 1.37       9.0     $ 138  
                                 
Exercisable at March 31, 2012
    474,135     $ 2.81       7.3     $ 23  
                                 
Total stock-based compensation expense recognized for stock options to employees and non-employee directors for the three months ended March 31, 2011 and 2012 was $0.3 million and $86,000, respectively. As of March 31, 2012, there was $1.0 million of unrecognized compensation expense, net of forfeitures, related to unvested employee stock options and $2,000 of unrecognized compensation expense related to unvested non-employee director stock options. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 3.5 years.

Total stock-based compensation expense recognized for stock options to non-employees for the three months ended March 31, 2011 and 2012 was immaterial.

The following table summarizes restricted stock activity under the Plans:
 
 
Number of shares
 
Weighted-average grant date fair value
 
Nonvested at December 31, 2011     
139,779
   
$
2.42
 
Granted   
678,584
   
$
0.51
 
Vested  
(51,087
)
 
$
2.42
 
Forfeited                    
(7,658
)
 
$
2.34
 
Nonvested at March 31, 2012              
759,618
   
$
0.71
 
             
Total stock-based compensation expense recognized for restricted stock to employees for the three months ended March 31, 2012 was $49,000. As of March 31, 2012, there was $0.5 million of unrecognized compensation expense, net of forfeitures, related to unvested employee restricted stock. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 3.7 years.
 
 
 
 
- 15 -

 
 
Tengion, Inc.
(A Development-Stage Company)

Notes to Financial Statements
(unaudited)

 
(14)