VICAL INC, 10-K filed on 3/15/2012
Annual Report
Document And Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Feb. 15, 2012
Jun. 30, 2011
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
VICAL INC 
 
 
Entity Central Index Key
0000819050 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
85,881,117 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Public Float
 
 
$ 258,750,263 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
ASSETS
 
 
Cash and cash equivalents
$ 38,696 
$ 47,320 
Marketable securities, available-for-sale
8,733 
5,037 
Restricted cash
2,998 
2,911 
Receivables and other assets
3,130 
940 
Total current assets
53,557 
56,208 
Long-term investments
5,928 
5,434 
Property and equipment, net
6,226 
7,560 
Intangible assets, net
2,871 
3,247 
Other assets
191 
458 
Total assets
68,773 
72,907 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Accounts payable and accrued expenses
6,362 
6,334 
Deferred revenue
99 
 
Total current liabilities
6,461 
6,334 
Long-term liabilities:
 
 
Deferred rent
1,964 
2,211 
Commitments and contingencies (Notes 6 and 7)
   
   
Stockholders' equity:
 
 
Preferred stock, $0.01 par value, 5,000 shares authorized, none issued and outstanding
   
   
Common stock, $0.01 par value, 160,000 shares authorized, 71,913 and 71,640 shares issued and outstanding at December 31, 2011 and 2010, respectively
719 
716 
Additional paid-in capital
384,087 
380,929 
Accumulated deficit
(325,038)
(317,755)
Accumulated other comprehensive income
580 
472 
Total stockholders' equity
60,348 
64,362 
Total liabilities and stockholders' equity
$ 68,773 
$ 72,907 
Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Balance Sheets [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000 
5,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
160,000 
160,000 
Common stock, shares issued
71,913 
71,640 
Common stock, shares outstanding
71,913 
71,640 
Statements Of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Revenues:
 
 
 
Contract and grant revenue
$ 4,223 
$ 6,249 
$ 3,692 
License and royalty revenue
25,795 
2,462 
8,994 
Total revenues
30,018 
8,711 
12,686 
Operating expenses:
 
 
 
Research and development
17,975 
19,692 
23,449 
Manufacturing and production
10,267 
11,436 
10,354 
General and administrative
9,598 
8,798 
7,469 
Total operating expenses
37,840 
39,926 
41,272 
Loss from operations
(7,822)
(31,215)
(28,586)
Other income (expense):
 
 
 
Investment and other income, net
539 
830 
30 
Interest expense
 
 
(2)
Net loss
$ (7,283)
$ (30,385)
$ (28,558)
Basic and diluted net loss per share
$ (0.10)
$ (0.51)
$ (0.61)
Weighted average shares used in computing basic and diluted net loss per share
72,031 
60,084 
47,086 
Statements Of Stockholders' Equity (USD $)
In Thousands
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Income/(Loss) [Member]
Total
Balance at Dec. 31, 2008
$ 403 
$ 307,051 
$ (258,812)
$ (28)
$ 48,614 
Balance, shares at Dec. 31, 2008
40,358 
 
 
 
 
Net loss
 
 
(28,558)
 
(28,558)
Unrealized gain (loss) on marketable securities arising during holding period
 
 
 
544 
544 
Reclassification of realized gain included in net loss
 
 
 
(4)
(4)
Comprehensive loss
 
 
 
 
(28,018)
Issuance of common stock, value
115 
28,716 
 
 
28,831 
Issuance of common stock, shares
11,421 
 
 
 
 
Exercise of stock options, warrants and issuance of common stock underlying restricted stock units, value
20 
4,150 
 
 
4,170 
Exercise of stock options, warrants and issuance of common stock underlying restricted stock units, shares
2,002 
 
 
 
 
Non-cash compensation expense related to grant of equity based compensation
 
1,385 
 
 
1,385 
Balance at Dec. 31, 2009
538 
341,302 
(287,370)
512 
54,982 
Balance, shares at Dec. 31, 2009
53,781 
 
 
 
 
Net loss
 
 
(30,385)
 
(30,385)
Unrealized gain (loss) on marketable securities arising during holding period
 
 
 
(35)
(35)
Reclassification of realized gain included in net loss
 
 
 
(5)
(5)
Comprehensive loss
 
 
 
 
(30,425)
Issuance of common stock, value
153 
32,026 
 
 
32,179 
Issuance of common stock, shares
15,368 
 
 
 
 
Exercise of stock options, warrants and issuance of common stock underlying restricted stock units, value
25 
4,965 
 
 
4,990 
Exercise of stock options, warrants and issuance of common stock underlying restricted stock units, shares
2,491 
 
 
 
 
Non-cash compensation expense related to grant of equity based compensation
 
2,636 
 
 
2,636 
Balance at Dec. 31, 2010
716 
380,929 
(317,755)
472 
64,362 
Balance, shares at Dec. 31, 2010
71,640 
 
 
 
71,640 
Net loss
 
 
(7,283)
 
(7,283)
Unrealized gain (loss) on marketable securities arising during holding period
 
 
 
108 
108 
Comprehensive loss
 
 
 
 
(7,175)
Exercise of stock options and issuance of common stock underlying restricted stock units, value
52 
 
 
55 
Exercise of stock options and issuance of common stock underlying restricted stock units, shares
273 
 
 
 
 
Non-cash compensation expense related to grant of equity based compensation
 
3,106 
 
 
3,106 
Balance at Dec. 31, 2011
$ 719 
$ 384,087 
$ (325,038)
$ 580 
$ 60,348 
Balance, shares at Dec. 31, 2011
71,913 
 
 
 
71,913 
Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Cash flows from operating activities:
 
 
 
Net loss
$ (7,283)
$ (30,385)
$ (28,558)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,298 
2,808 
2,629 
Other than temporary loss on marketable securities and other assets
 
 
405 
Write-off of abandoned patents
75 
148 
86 
Gain on sale of property and equipment
 
 
(5)
Compensation expense related to stock options and awards
3,106 
2,636 
1,385 
Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
(2,190)
409 
503 
Other assets
267 
 
 
Accounts payable and accrued expenses
(51)
(1,771)
1,848 
Deferred revenue
99 
(1,990)
281 
Deferred rent
(169)
(83)
(26)
Net cash used in operating activities
(3,848)
(28,228)
(21,452)
Cash flows from investing activities:
 
 
 
Maturities of marketable securities-including restricted
20,429 
31,815 
16,018 
Purchases of marketable securities-including restricted
(24,598)
(18,549)
(24,657)
Purchases of property and equipment
(256)
(347)
(337)
Proceeds from the sale of property and equipment
 
 
10 
Patent and licensed technology expenditures
(406)
(413)
(315)
Net cash (used in) provided by investing activities
(4,831)
12,506 
(9,281)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
214 
37,261 
33,038 
Principal payments under equipment financing obligations
 
 
(156)
Payment of withholding taxes for net settlement of restricted stock units
(159)
(92)
(37)
Net cash provided by financing activities
55 
37,169 
32,845 
Net (decrease) increase in cash and cash equivalents
(8,624)
21,447 
2,112 
Cash and cash equivalents at beginning of year
47,320 
25,873 
23,761 
Cash and cash equivalents at end of year
38,696 
47,320 
25,873 
Supplemental information:
 
 
 
Interest paid
 
 
$ 2 
Organization And Summary Of Significant Accounting Policies
Organization And Summary Of Significant Accounting Policies

1. Organization and Summary of Significant Accounting Policies

Organization and Business Activity

Vical Incorporated, or the Company, a Delaware corporation, was incorporated in April 1987 and has devoted substantially all of its resources since that time to its research and development programs. The Company researches and develops biopharmaceutical products based on its patented DNA delivery technologies for the prevention and treatment of serious or life-threatening diseases.

All of the Company's potential products are in research and development phases. No revenues have been generated from the sale of any such products, nor are any such revenues expected for at least the next several years. The Company earns revenue from research and development agreements with pharmaceutical collaborators and grant and contract arrangements with government entities. Most of the Company's product candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing. All product candidates that advance to clinical testing will require regulatory approval prior to commercial use, and will require significant costs for commercialization. There can be no assurance that the Company's research and development efforts, or those of its collaborators, will be successful. The Company expects to continue to incur substantial losses and not generate positive cash flows from operations for at least the next several years. No assurance can be given that the Company can generate sufficient product revenue to become profitable or generate positive cash flows from operations.

Basis of Presentation

These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The Company has evaluated all subsequent events through the date and time its financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes. Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of cash and highly liquid securities with original maturities at the date of acquisition of ninety days or less. Investments with an original maturity of more than ninety days are considered marketable securities and have been classified by management as available-for-sale. Such investments are classified as current assets and carried at fair value, with unrealized gains and losses included as a separate component of stockholders' equity. Realized gains and losses from the sale of available-for-sale securities or the amounts reclassified out of accumulated other comprehensive income, if any, are determined on a specific identification basis.

Restricted Cash and Marketable Securities

The Company is required to maintain a letter of credit securing an amount equal to twelve months of the current monthly installment of base rent for the term of the lease for its facilities, which ends in August 2017. Under certain circumstances the Company may be able to eliminate the need for the letter of credit. At December 31, 2011 and 2010, restricted cash of $3.0 million and $2.9 million, respectively, was pledged as collateral for the letter of credit.

 

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, marketable securities and receivables. The Company invests its excess cash in debt instruments of financial institutions and of corporations with strong credit ratings, in U.S. government obligations, and in money market funds at financial institutions.

Property and Equipment

Property and equipment is recorded at cost and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Assets acquired pursuant to capital lease arrangements and leasehold improvements are amortized using the straight-line method over the shorter of the life of the remaining lease term or the remaining useful life of the asset. Manufacturing equipment has estimated useful lives of ten years. All other property and equipment have estimated useful lives of 3 to 5 years. Maintenance and repairs of property and equipment is expensed as incurred.

Intangible Assets

Intangible assets include licensed technology rights and certain costs related to patent applications. The Company capitalizes license fees paid to acquire access to proprietary technology if the technology is expected to have alternative future use in multiple research and development projects. The cost of licensed technology rights is amortized using the straight-line method over the estimated useful life of the technology. Certain costs related to patent applications are amortized over the estimated economic lives of the patents, which is generally 20 years and typically commences at the time the patent application is filed. Amortization expense for licensed technology and capitalized patent cost is included in research and development expenses.

Impairment of Long-lived Assets

The Company reviews long-lived assets for impairment at least annually, quarterly for intangible assets, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset over the asset's fair value and the loss recognized in current earnings. The Company recognized research and development expense of approximately $0.1 million for each of the years ended December 31, 2011, 2010 and 2009, related to patents for which the value was deemed to be impaired. The Company believes the future cash flows to be received from its remaining long-lived assets will exceed the assets' carrying value, and accordingly has not recognized any additional impairment losses.

Revenue Recognition

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Certain of the Company's revenue is generated through manufacturing contracts and stand-alone license agreements.

The Company has entered into multiple-element arrangements. In order to account for the multiple-element arrangements, the Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation.

 

Multiple-element arrangements prior to January 1, 2011

Prior to adopting the revised multiple element guidance on January 1, 2011, the Company analyzed its multiple element arrangements to determine whether the identified deliverables could be accounted for individually as separate units of accounting. The delivered item(s) were considered a separate unit of accounting if all of the following criteria were met: (1) the delivered item(s) has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control. If these criteria were not met, the deliverable was combined with other deliverables in the arrangement and accounted for as a combined unit of accounting.

Multiple-element arrangements after January 1, 2011

Effective January 1, 2011, the Company follows the provisions of ASU No. 2009-13 for all multiple element agreements, including contract manufacturing, contract services and license agreements. Under the revised guidance, the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control.

A delivered item is considered a separate unit of accounting when the delivered item has value to the partner on a standalone basis based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the partner and the availability of research expertise in this field in the general marketplace. Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement. If facts and circumstances dictate that the license has standalone value from the undelivered items, which generally include research and development services and the manufacture of drug products, the license is identified as a separate unit of accounting and the amounts allocated to the license are recognized upon the delivery of the license, assuming the other revenue recognition criteria have been met. However, if the amounts allocated to the license through the relative selling price allocation exceed the upfront license fee, the amount recognized upon the delivery of the license is limited to the upfront fee received. If facts and circumstances dictate that the license does not have standalone value, the transaction price, including any upfront license fee payments received, are allocated to the identified separate units of accounting and recognized as those items are delivered.

The terms of the Company's partnership agreements provide for milestone payments upon achievement of certain regulatory and commercial events. Effective January 1, 2011, the Company adopted on a prospective basis the Milestone Method of accounting under ASU 2010-17. Under the Milestone Method, the Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) The consideration is commensurate with either the entity's performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone, 2) The consideration relates solely to past performance, and 3) The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.

Contract Services, Grant and Royalty Revenue

The Company recognizes revenues from contract services and federal government research grants during the period in which the related expenditures are incurred and related payments for those services are received or collection is reasonably assured. Royalties to be received based on sales of licensed products by the Company's partners incorporating the Company's licensed technology are recognized when received.

Accruals for Potential Disallowed Costs on Government Contracts

The Company has contracts with U.S. government agencies under which it bills for direct and indirect costs incurred. These billed costs are subject to audit by government agencies. The Company has established accruals of approximately $49,000 and $0.2 million at December 31, 2011 and 2010, respectively, to provide for potential disallowed costs. In the event that the final costs allowed are different from what the Company has estimated, the Company may need to make a change in its estimated accrual, which could also affect its results of operations and cash flow.

Accruals for Potential Disallowed Costs on Government Contracts

The Company has contracts with U.S. government agencies under which it bills for direct and indirect costs incurred. These billed costs are subject to audit by government agencies. The Company has established accruals of approximately $49,000 and $0.2 million at December 31, 2011 and 2010, respectively, to provide for potential disallowed costs. In the event that the final costs allowed are different from what the Company has estimated, the Company may need to make a change in its estimated accrual, which could also affect its results of operations and cash flow.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs include salaries and personnel-related costs, supplies and materials, outside services, costs of conducting preclinical and clinical trials, facilities costs and amortization of intangible assets. The Company accounts for its clinical trial costs by estimating the total cost to treat a patient in each clinical trial, and accruing this total cost for the patient over the estimated treatment period, which corresponds with the period over which the services are performed, beginning when the patient enrolls in the clinical trial. This estimated cost includes payments to the site conducting the trial, and patient-related lab and other costs related to the conduct of the trial. Cost per patient varies based on the type of clinical trial, the site of the clinical trial, the method of administration of the treatment, and the number of treatments that a patient receives. Treatment periods vary depending on the clinical trial. The Company makes revisions to the clinical trial cost estimates in the current period, as clinical trials progress.

 

Manufacturing and Production Costs

Manufacturing and production costs include expenses related to manufacturing contracts and expenses related to the production of plasmid DNA for use in the Company's research and development efforts. Manufacturing expenses related to manufacturing contracts are deferred and expensed when the related revenue is recognized. Production expenses related to the Company's research and development efforts are expensed as incurred.

Net Loss Per Share

Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The weighted-average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options, and the assumed issuance of common stock under restricted stock units, or RSUs, as the effect would be antidilutive. Common stock equivalents of 1.4 million, 0.7 million and 1.1 million for the years ended December 31, 2011, 2010 and 2009, respectively, were excluded from the calculation because of their antidilutive effect.

Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents, restricted marketable securities, marketable securities, receivables, accounts payable and accrued expenses at December 31, 2011 and 2010, are considered to reasonably approximate fair value because of the short term nature of those items.

Income Taxes

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and the tax bases of assets and liabilities using enacted tax rates. A valuation allowance is established to reduce a deferred tax asset to the amount that is expected more likely than not to be realized.

Comprehensive Loss

Comprehensive loss consists of net loss and certain changes in equity that are excluded from net loss. Comprehensive loss for the years ended December 31, 2011, 2010 and 2009, has been reflected in the Statements of Stockholders' Equity. Accumulated other comprehensive income (loss), which is included in stockholders' equity, represents unrealized gains and losses on marketable securities.

Business Segments

The Company operates in one business segment, which is within the United States, and is dedicated to research and development of DNA delivery technology.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board, or FASB, issued authoritative guidance regarding comprehensive income. This newly issued accounting standard allows an entity to have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders' equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The guidance is effective for fiscal years and interim periods beginning after December 15, 2011. While the new guidance will require us to change the manner in which we present other comprehensive income and its components on a retrospective basis, we do not believe our adoption of the guidance in the first quarter of 2012 will have a material impact on our financial position, results of operations or cash flows.

In May 2011, the FASB issued authoritative guidance regarding common fair value measurements and disclosure requirements in U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable inputs. This guidance is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. The Company does not expect that the adoption of this standard will have a material impact on its financial position or results of operations.

In March 2010, the FASB ratified the milestone method of revenue recognition. Under this new standard, an entity can recognize contingent consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the entity. This guidance is effective for annual periods beginning after June 15, 2010, but may be adopted earlier as of the beginning of an annual period. The Company adopted these provisions as of January 1, 2011. The adoption did not have a material impact on the Company's financial position or results of operations.

In September 2009, the FASB issued authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. The guidance eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. The Company adopted these provisions as of January 1, 2011. The adoption allowed us to recognize the $25 million upfront license fee included in the Astellas license agreement as further discussed in footnote 6.

Share-Based Compensation

The Company records its compensation expense associated with stock options and other forms of equity compensation based on their fair value at the date of grant using the Black-Scholes-Merton option pricing model. Stock-based compensation includes amortization related to stock option awards based on the estimated grant date fair value. Stock-based compensation expense related to stock options includes an estimate for forfeitures and the portion that is ultimately expected to vest is recognized ratably over the vesting period of the option. In addition, the Company records expense related to RSUs granted based on the fair value of those awards on the grant date. The fair value related to the RSUs is amortized to expense over the vesting term of those awards. Stock-based compensation expense related to RSUs includes an estimate for forfeitures and is recognized over the expected term of the award using the straight-line method. The expected forfeiture rate of all equity based compensation is based on observed historical patterns of the Company's employees and is estimated to be 11.2% annually for each of the years ended December 31, 2011, 2010 and 2009.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton valuation model using the assumptions noted in the following table. The expected life of options is based on the Company's observed historical exercise patterns. The expected volatility of stock options is based upon the historical volatility of the Company's stock. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

 

     Years Ended December 31,
     2011   2010   2009

Assumptions:

      

Assumed risk-free interest rate

   1.90%   2.44%   1.62%

Assumed volatility

   68%   66%   60%

Average expected option life

   4.5 years   4.5 years   4.5 years

Expected dividend yield

   —     —     —  
Short-Term Marketable Securities
Short-Term Marketable Securities

2. Short-Term Marketable Securities

The following is a summary of short-term marketable securities classified as available-for-sale (in thousands):

 

December 31, 2011

   Amortized
Cost
     Unrealized
Gain
     Unrealized
Loss
     Market
Value
 

U.S. treasuries

   $ 1,008       $ 2       $ —         $ 1,010   

Government-sponsored enterprise securities

     7,200         —           2         7,198   

Certificate of deposit

     525         —           —           525   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,733       $ 2       $ 2       $ 8,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

   Amortized
Cost
     Unrealized
Gain
     Unrealized
Loss
     Market
Value
 

U.S. treasuries

   $ 1,002       $ —         $ —         $ 1,002   

Government-sponsored enterprise securities

     2,999         1         —           3,000   

Certificate of deposit

     1,035         —           —           1,035   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,036       $ 1       $ —         $ 5,037   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011, $5.0 million of these securities are scheduled to mature outside of one year and are classified as current assets. There were no net realized gains (losses) on sales of available-for-sale securities for the years ended December 31, 2011, 2010 and 2009. None of these investments have been in a continuous unrealized loss position for more than 12 months as of December 31, 2011 and 2010.

Long-Term Investments
Long-Term Investments

3. Long-Term Investments

As of December 31, 2011, the Company held $6.5 million (at par value) of auction rate securities which were classified as long-term investments. With the liquidity issues experienced in global credit and capital markets, these auction rate securities have experienced multiple failed auctions since 2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders, and as a result, these affected securities are currently not liquid. All of the Company's auction rate securities are secured by either student loans or municipal bonds. The student loans are backed by the full faith and credit of the federal government (up to approximately 98% of the value of the student loan). At December 31, 2011, the auction rate securities held by the Company had Standard and Poor's credit ratings of BBB or AAA. At December 31, 2010, the auction rate securities held by the Company had Standard and Poor's credit ratings of BBB or AAA. All of these securities continue to pay interest according to their stated terms. While it is not the Company's intent to hold these securities until their stated ultimate maturity dates, these investments are scheduled to ultimately mature between 2038 and 2043.

The valuation of the Company's auction rate security investment portfolio is subject to uncertainties that are difficult to predict. The fair values of these securities are estimated utilizing a discounted cash flow analysis. The key drivers of the valuation model include the expected term, collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, rates of default of the underlying assets, discount rates, and the expectation of the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable market data for securities with similar characteristics. Based on the valuation of the individual securities, the Company has recognized cumulative losses of $1.5 million as of December 31, 2011, none of which was realized during the year ended December 31, 2011. The losses when incurred are included in investment and other income. The market value of these securities has partially recovered. Included in other comprehensive income are net unrealized (losses)/gains of $0.5 million, $(23,000) and $0.5 million during the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, the Company had recorded cumulative unrealized gains of $0.6 million. The resulting carrying value of the auction rate securities at December 31, 2011 was $5.9 million, which is included in long-term investments. Any future decline in market value may result in additional losses being recognized.

At present, in the event the Company needed to liquidate its auction rate securities that are in an illiquid state, it may not be able to do so without the possible loss of principal until a future auction for these investments is successful, another secondary market evolves for these securities, they are redeemed by the issuer or they mature. If the Company is unable to sell these securities in the market or they are not redeemed, then the Company could be required to hold them to maturity. The Company does not have a need to access these funds for operational purposes in the foreseeable future. The Company will continue to monitor and evaluate these investments on an ongoing basis for impairment.

Fair Value Measurements
Fair Value Measurements

4. Fair Value Measurements

The Company measures fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

   

Level 1: Observable inputs such as quoted prices in active markets;

 

   

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

   

Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Cash equivalents, marketable securities and long-term investments measured at fair value are classified in the table below in one of the three categories described above (in thousands):

 

     Fair Value Measurements  

December 31, 2011

   Level 1      Level 2      Level 3      Total  

Certificates of deposit

   $ 525       $ —         $ —         $ 525   

Money market funds

     12,778         —           —           12,778   

U.S. treasuries

     1,010         —           —           1,010   

Government-sponsored enterprise securities

     —           7,198         —           7,198   

Auction rate securities

     —           —           5,928         5,928   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,313       $ 7,198       $ 5,928       $ 27,439   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements  

December 31, 2010

   Level 1      Level 2      Level 3      Total  

Certificates of deposit

   $ 1,035       $ —         $ —         $ 1,035   

Money market funds

     47,251         —           —           47,251   

U.S. treasuries

     1,002         —           —           1,002   

Government-sponsored enterprise securities

     —           3,000         —           3,000   

Auction rate securities

     —           —           5,434         5,434   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,288       $ 3,000       $ 5,434       $ 57,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company's investments in U.S. treasury securities, certificates of deposit and money market funds are valued based on publicly available quoted market prices for identical securities as of December 31, 2011. The Company determines the fair value of other government-sponsored enterprise related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company validates the valuations received from its primary pricing vendors for its level 2 securities by examining the inputs used in that vendor's pricing process and determines whether they are reasonable and observable. The Company also compares those valuations to recent reported trades for those securities The Company did not adjust any of the valuations received from these third parties with respect to any of its level 2 securities at December 31, 2011. The valuation of the Company's investments in auction rate securities are more fully described in Note 3.

Activity for assets measured at fair value using significant unobservable inputs (Level 3) is presented in the table below (in thousands):

 

Balance at December 31, 2010

   $ 5,434   

Total net unrealized gains included in other comprehensive income

     494   

Net transfers in and/out of Level 3

     —     
  

 

 

 

Balance at December 31, 2011

   $ 5,928   
  

 

 

 

Amount of total losses for the period included in net loss attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2011

   $ —     
  

 

 

 

 

The Company transferred $6.5 million of its long-term investments into the Level 3 category during the year ended December 31, 2008. Total unrealized losses of $1.5 million relate to Level 3 assets still held as of December 31, 2011. Unrealized losses of zero, zero and $0.4 million related to Level 3 assets are included in earnings for the year ended December 31, 2011, 2010 and 2009, respectively, and are included in investment and other income.

Other Balance Sheet Accounts
Other Balance Sheet Accounts

5. Other Balance Sheet Accounts

Property and equipment consisted of the following at December 31 (in thousands):

 

     2011     2010  

Equipment

   $ 19,147      $ 18,959   

Leasehold improvements

     7,992        7,992   
  

 

 

   

 

 

 
     27,139        26,951   

Less accumulated depreciation and amortization

     (20,913     (19,391
  

 

 

   

 

 

 
   $ 6,226      $ 7,560   
  

 

 

   

 

 

 

Depreciation and amortization of equipment and leasehold improvements for the years ended December 31, 2011, 2010 and 2009, was $1.6 million, $2.0 million and $1.8 million, respectively. These amounts include depreciation related to equipment under equipment financing arrangements. See Note 7 for equipment financing arrangements.

Intangible assets consisted of the following at December 31 (in thousands):

 

     2011     2010  

Licensed technology rights

   $ 4,015      $ 4,015   

Patent application costs

     6,093        5,787   
  

 

 

   

 

 

 
     10,108        9,802   

Accumulated amortization licensed technology rights

     (3,906     (3,538

Accumulated amortization patent costs

     (3,331     (3,017
  

 

 

   

 

 

 
   $ 2,871      $ 3,247   
  

 

 

   

 

 

 

Amortization of licensed technology rights and patent application costs for the years ended December 31, 2011, 2010 and 2009, was $0.7 million, $0.8 million and $0.8 million, respectively. Estimated annual amortization for these assets for each of the years in the period from 2012 to 2016 is $0.4 million, $0.4 million, $0.3 million, $0.3 million and $0.2 million, respectively.

Accounts payable and accrued expenses consisted of the following at December 31 (in thousands):

 

     2011      2010  

Employee compensation

   $ 3,653       $ 2,730   

Clinical trial accruals

     1,681         2,338   

Accounts payable

     351         752   

Other accrued liabilities

     677         514   
  

 

 

    

 

 

 
   $ 6,362       $ 6,334   
  

 

 

    

 

 

Significant Contracts, Grants, License And Royalty Agreements
Significant Contracts, Grants, License And Royalty Agreements

6. Significant Contracts, Grants, License and Royalty Agreements

Contract and Grant Agreements

Astellas

In July 2011, the Company entered into license agreements with Astellas Pharma Inc., or Astellas, granting Astellas exclusive, worldwide, royalty-bearing licenses under certain of the Company's know-how and intellectual property to develop and commercialize certain products containing plasmids encoding certain forms of glycoprotein B and/or phosphoprotein 65, including TransVax but excluding CyMVectin. Under the agreements, Astellas is responsible for the worldwide development and commercialization of products in the licensed field, at its expense, and has agreed to use commercially reasonable efforts to develop, obtain regulatory approval for and commercialize at least one licensed product for use in certain immunocompromised patients in the licensed field in the United States and certain other major markets. Under the terms of the license agreements, Astellas paid a nonrefundable upfront license fee of $25.0 million.

The Company will be entitled to receive a $10.0 million milestone payment upon finalization of the trial design for a Phase 3 registration trial of TransVax in hematopoietic stem cell transplant recipients. Subsequent to the achievement of the trial design milestone, the Company is also entitled to receive additional cash payments potentially totaling $95.0 million for achievement of certain milestones through commercial launch and to receive double-digit royalties on net sales of products. In addition, the Company has an option to co-promote TransVax in the United States. Under the terms of a supply and services agreement entered into by the Company and Astellas on the same date, the Company agreed to perform certain development and regulatory activities, at Astellas' expense, and to supply licensed products to Astellas, at Astellas' expense, for use in development and initial commercialization activities in the licensed field.

The Company identified the deliverables at the inception of the agreements. The Company has determined that the license and related know-how, the development and regulatory services and the drug product supply individually represent separate units of accounting, because each deliverable has standalone value. The best estimated selling prices for these units of accounting was determined based on market conditions, the terms of comparable collaborative arrangements for similar technology in the pharmaceutical and biotechnology industry and entity-specific factors, such as the terms of the Company's previous collaborative agreements, the Company's pricing practices and pricing objectives and the nature of the research and development services to be performed for the partner. The arrangement consideration was allocated to the deliverables based on the relative selling price method.

However, the amount of allocable arrangement consideration is limited to amounts that are fixed or determinable; therefore, the amount allocated to the licenses at December 31, 2011 was limited to the extent of cash received. As a result, during the year ended December 31, 2011, the Company recognized $25.3 million related to the license fee and know-how. The Company will recognize the amounts allocated to research and development services as revenues under the agreements as the related services are delivered and as reimbursements are received. During the year ended December 31, 2011, the Company recognized $2.7 million of revenue related to contract services delivered. The Company will recognize as revenue the amounts allocated to the sales of drug product when the sale of that drug product has met all required specifications and the related title and risk of loss and damages have passed to Astellas. The Company is eligible to receive additional cash payments upon the achievement of specified regulatory and commercial milestones. The Company has determined that each of the regulatory and commercial milestones meets the definition of a milestone and that each milestone is substantive in accordance with the milestone method of revenue recognition. Accordingly, the Company expects to recognize such regulatory and commercial milestone payments as revenues under the agreements upon achievement of each milestone.

 

AnGes Research and Development Agreement

On May 25, 2006, the Company entered into a research and development agreement, or R&D Agreement, with AnGes MG, Inc., or AnGes, whereby AnGes agreed to fund the Company's Allovectin® Phase 3 clinical trial. The funding consisted of purchases by AnGes of $10.85 million of restricted shares of the Company's common stock and additional non-refundable cash payments by AnGes of up to $11.8 million. The Company and AnGes have agreed to share project costs, up to certain limits, that are in excess of $22.6 million. All of the funding provided by AnGes, including those funds used to purchase the Company's common stock, must be used for actual and documented costs related to the conduct of the Allovectin® Phase 3 trial.

Under the R&D Agreement, the Company has granted to AnGes exclusive marketing rights for Allovectin® in specified countries in Asia and AnGes has agreed to pursue regulatory approvals in those countries, subject to receipt by the Company of regulatory approval in the United States. The Company has also granted AnGes certain royalty-bearing licenses to its technology and know-how. AnGes is obligated to pay royalties to the Company on sales of Allovectin® in specified countries in Asia. AnGes also obtained the right to receive royalties from the Company on any commercial sales of Allovectin® in the United States outside specified Asian countries. AnGes may also purchase supplies of Allovectin® from the Company for resale by AnGes in Asia.

The first equity installment of $6.9 million was received by the Company upon execution of the R&D Agreement and a related stock purchase agreement. In accordance with the terms of the stock purchase agreement AnGes was issued 1,061,538 shares of the Company's restricted common stock at $6.50 per share in exchange for the first installment. The second equity installment of $3.95 million was received by the Company during 2008. In accordance with the terms of the stock purchase agreement AnGes was issued 1,109,550 shares of the Company's restricted common stock at $3.56 per share in exchange for the second installment.

Under the stock purchase agreement, the Company has also granted AnGes limited rights to require the Company to register the shares of common stock under the Securities Act of 1933, as amended, upon the occurrence of certain events. AnGes has also agreed to certain transfer restrictions with respect to the shares of common stock sold under the stock purchase agreement and has further agreed to certain standstill provisions whereby AnGes will refrain from acquiring or taking certain other actions with respect to the Company's common stock, subject to certain exceptions.

The Company has received total cash installments of $11.8 million from AnGes under the agreement. Revenue of $0.0 million, $2.0 million and $6.7 million has been recognized during the years ended December 31, 2011, 2010 and 2009, respectively, based on the ratio of actual costs incurred to total estimated costs expected to be incurred.

U.S. Navy

In 2008, the Company entered into a $1.3 million contract with the Naval Medical Research Center, or NMRC, to manufacture a dengue DNA vaccine formulated with the Company's Vaxfectin® adjuvant. The Company manufactured the vaccine and the adjuvant and provided regulatory and clinical expertise. The NMRC utilized the vaccine in preclinical and Phase 1 clinical trials. The vaccine was delivered and $1.3 million of revenue was recognized in 2009.

In 2009, the Company entered into a Cooperative Research and Development Agreement, or CRADA, with the NMRC, to develop an H1N1 DNA vaccine formulated with the Company's Vaxfectin® adjuvant. Under the agreement, the Company was obligated to manufacture the vaccine and adjuvant, perform preclinical studies, file an IND with the FDA, and develop a clinical immunoassay. These activities were being funded under a $1.3 million contract with the U.S. government. NMRC plans to utilize the vaccine in a Phase 1 clinical trial which began in 2010. The Company recognized $0.7 million and $0.6 million in revenue related to this contract in 2010 and 2009, respectively.

In 2010, the Company entered into a $0.8 million contract with the U.S. Navy, through the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc., to conduct a Phase 1 clinical trial of the company's Vaxfectin®-formulated DNA vaccine against A/H1N1 pandemic influenza utilizing the vaccine the Company manufactured under the 2009 CRADA with the NMRC. The Company recognized $0.8 million in revenue related to this contract in 2010.

IPPOX Foundation

In 2010, the Company entered into an agreement to manufacture bulk plasmid DNA vaccines against HIV under a $2.4 million contract with the IPPOX Foundation, a collaborating institution for the Poxvirus Vaccine Regimen Design led by the Centre Hospitalier Universitaire Vaudois under the auspices of the Collaboration for AIDS Vaccine Discovery. The Company recognized $2.4 million in revenue related to this contract in 2010.

Government Grants

In 2008, the Company was awarded a two-year, $2.0 million Phase II Small Business Technology Transfer grant from National Institute of Allergy and Infectious Diseases, or NIAID, of the NIH. The grant period was extended to allow preclinical development to continue for a third year. The grant will fund the ongoing development of the Company's immunotherapeutic plasmid DNA vaccine against herpes simplex virus type 2, or HSV-2. The Company recognized $0.2 million, $0.7 million and $0.6 million in revenue under this grant in 2011, 2010 and 2009, respectively.

In 2007, the Company was awarded funding for a three-year, $6.0 million grant from the NIAID for development of a DNA vaccine manufacturing process with the potential to produce several million doses of vaccines in a matter of days. The grant period was extended to allow preclinical development to continue for a fourth year. The Company recognized $0.9 million, $1.5 million and $1.0 million in revenue under this grant in 2011, 2010 and 2009, respectively.

License and Royalty Agreements

Merck

In 1991, the Company entered into an agreement with Merck, which was subsequently amended, providing Merck with certain exclusive rights to develop and commercialize vaccines using the Company's core DNA delivery technology for specified human diseases. Under the agreement, as amended, Merck licensed the Company's core DNA delivery technology for use in preventive and therapeutic human infectious disease vaccines.

In June 2005, Merck exercised an option related to three cancer targets that were granted under an amendment to the agreement. Merck initiated a Phase 1 clinical trial of a candidate vaccine based on our DNA gene delivery technology and encodes human telomerase reverse transcriptase, or hTERT.

Merck is obligated to pay fees if certain research milestones are achieved, and royalties on net sales if any products covered by the Company's agreement with Merck are commercialized. Merck has the right to terminate this agreement without cause upon 90 days prior written notice. Total revenue recognized under this agreement was $1.5 million in 2009. No revenues were recognized under this agreement in 2011 or 2010. Further development of these vaccines may lead to additional milestone and royalty payments.

In-licensing Agreements

City of Hope

In 2003, the Company licensed from the City of Hope on an exclusive basis various U.S. patents that provide protection for CMV related polynucleotide based vaccines, including the TransVaxTM and CyMVectinTM vaccine candidates. The agreement expires upon the last to expire of the patent rights licensed by the Company under the agreement, unless earlier terminated as set forth in the agreement. The City of Hope may terminate the agreement early, in accordance with notice provisions set forth in the agreement, if the Company ceases to operate, fails to make payments when due or materially breaches the agreement. Subject to certain conditions, the Company may terminate the agreement early at any time upon prior written notice to the City of Hope. The Company is also obligated to pay a low double-digit percentage of any payments it receives from the sub-license of products that incorporate the licensed technology. The Company paid the City of Hope $1.9 million, $0.1 million and $0.1 million under the agreement for the years ended December 31, 2011, 2010 and 2009, respectively.

CytRx

In 2001, the Company entered into an exclusive agreement with CytRx which grants to the Company the rights to use or sublicense CytRx's poloxamer technology to enhance viral or non-viral delivery of polynucleotides in all preventive and therapeutic human and animal health applications, including CMV. The agreement excludes applications for four infectious disease vaccine targets that had been licensed to Merck and prostate-specific membrane antigen. In addition, the agreement permits the Company's use of CytRx's technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. As part of the agreement, the Company made a $3.8 million up-front payment and agreed to make potential future milestone and royalty payments. The license fee is fully amortized.

Wisconsin Alumni Research Foundation and University of Michigan License Agreements

The Company has research and exclusive license agreements with the Wisconsin Alumni Research Foundation, or WARF, and the University of Michigan for continuing research and license rights to technology related to DNA delivery. The agreements grant the Company the right to commercialize any product derived from specified technology. The fees paid by the Company under these agreements are expensed as incurred.

Under the Merck, Sanofi, AnGes, Merial and Aqua Health agreements, the Company is required to pay up to 10% of certain initial upfront monetary payments, and a small percentage of some royalty payments, to the WARF. The CytRx, University of Michigan, and other license agreements require the Company to make payments if the Company or its sublicensees advance products through clinical development. For programs developed with the support of U.S. government funding, the U.S. government may have rights to resulting products without payment of royalties.

Milestone Payments

The Company may be required to make future payments to its licensors based on the achievement of milestones set forth in various in-licensing agreements. In most cases, these milestone payments are based on the achievement of development or regulatory milestones, including the exercise of options to obtain licenses related to specific disease targets, commencement of various phases of clinical trials, filing of product license applications, approval of product licenses from the FDA or a foreign regulatory agency, and the first commercial sale of a related product. Payment for the achievement of milestones under the Company's in-license agreements is highly speculative and subject to a number of contingencies.

The aggregate amount of additional milestone payments that the Company could be required to pay under all of its in-license agreements in place at December 31, 2011, is approximately $23.4 million, of which approximately $15.5 million is related to the Company's independent programs and corporate and government collaborations which are currently in clinical trials. These amounts assume that all remaining milestones associated with the milestone payments are met. In the event that product license approval for any of the related products is obtained, the Company may be required to make royalty payments in addition to these milestone payments. Although the Company believes that some of the milestones contained in its in-license agreements may be achieved, it is highly unlikely that a significant number of them will be achieved. Because the milestones are highly contingent and the Company has limited control over whether the development and regulatory milestones will be achieved, the Company is not in a position to reasonably estimate how much, if any, of the potential milestone payments will ultimately be paid. Additionally, under the in-license agreements, many of the milestone events are related to progress in clinical trials which will take several years to achieve.

Commitments And Contingencies
Commitments And Contingencies

7. Commitments and Contingencies

Facility Leases

The Company is currently leasing its facility which has approximately 68,400 square feet of manufacturing, research laboratory and office space. The lease expires in August 2017. The Company has the option to renew the lease for three additional five-year periods beyond its expiration.

The lease related to the facility is treated as an operating lease. The minimum annual rent on the facility is subject to increases specified in the lease. The Company is also required to pay taxes, insurance and operating costs under the facility lease. The Company recognizes level monthly rent for its facility lease over the entire lease period. The monthly rent is calculated by adding the total rent payments over the entire lease period and then dividing the result by the total term of the lease. The $2.2 million difference between the base rent paid and the rent expensed through December 31, 2011, is recorded as deferred rent in the balance sheet. Rent expense for the years ended December 31, 2011, 2010 and 2009, was $2.9 million, $2.9 million and $3.3 million, respectively.

At December 31, 2011, future minimum rental payments due under the Company's facilities lease were as follows (in thousands):

 

Year ending December 31,

  

2012

   $ 3,306   

2013

     3,372   

2014

     3,440   

2015

     3,509   

2016

     3,579   

Thereafter

     2,417   
  

 

 

 

Total lease payments

   $ 19,623   
  

 

 

 

Other Contingencies

The Company prosecutes its intellectual property estate vigorously to obtain the broadest valid scope for its patents. Due to uncertainty of the ultimate outcome of these matters, the impact on future operating results or the Company's financial condition is not subject to reasonable estimates.

 

In the ordinary course of business, the Company may become a party to lawsuits involving various matters. The Company is unaware of any such lawsuits presently pending against it which, individually or in the aggregate, are deemed to be material to the Company's financial condition or results of operations.

Stockholders' Equity
Stockholders' Equity

8. Stockholders' Equity

As of the date of this filing the Company has on file a shelf registration statement that allows it to raise up to an additional $53.4 million from the sale of common stock, preferred stock, debt securities and/or warrants. Specific terms of any offering under the shelf registration statements and the securities involved would be established at the time of sale.

In September 2010, the Company sold 15.0 million shares of its common stock in a public offering at a price to the public of $2.25 per share. Net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled $31.5 million. In October 2010, the Company sold an additional 368,662 shares pursuant to the exercise of the underwriters' overallotment option at a price to the public of $2.25 per share. Net proceeds from the overallotment option exercise, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled $0.8 million. All of the shares of common stock were offered pursuant to an effective shelf registration statement.

In the fourth quarter of 2009 and again in the first quarter of 2010, certain of the Company's investors exercised warrants to purchase an aggregate of 1,967,689 and 2,365,644 shares of common stock, respectively. The Company received net proceeds of $4.2 million and $5.0 million as a result of these exercises in 2009 and 2010, respectively. The warrants were issued in connection with the Company's May 2009 registered direct offering.

In July 2009, the Company completed a $10.0 million registered direct offering of its common stock to the Federated Kaufmann Funds. Under the terms of the Common Stock Purchase Agreement for the offering, the Company sold an aggregate of 2,754,821 shares of its common stock for a purchase price of $3.63 per share. Net proceeds from the offering, after deducting related expenses, totaled $9.9 million. All of the shares of common stock were offered pursuant to an effective shelf registration statement.

In May 2009, the Company completed a $20.0 million registered direct offering of its securities to three institutional investors. Under the terms of the Securities Purchase Agreements for the offering, the Company sold an aggregate of 8,666,667 shares of its common stock and warrants to purchase up to an aggregate of 4,333,333 additional shares of its common stock. Each unit, consisting of one share of common stock and a warrant to purchase approximately one-half of a share of common stock, was sold for a purchase price of $2.3125. Net proceeds from the offering, after deducting related expenses, totaled $18.9 million. The warrants to purchase additional shares became exercisable six months after issuance at $2.25 per share and have all been exercised. The estimated fair value of the warrants is included in additional paid in capital. All of the securities were offered pursuant to an effective shelf registration statement.

In June 2008, the Company received approximately $4.0 million in gross proceeds from the sale of approximately 1.1 million shares of its common stock at $3.56 per share in a private placement to AnGes. In June 2006, the Company received approximately $6.9 million in gross proceeds from the sale of approximately 1.1 million shares of its common stock at $6.50 per share in a private placement to AnGes. Both of the equity issuances to AnGes were pursuant to a research and development agreement and a stock purchase agreement as described in Note 6.

Stock Based Compensation
Stock Based Compensation

9. Stock Based Compensation

On December 31, 2011, the Company had two stock-based compensation plans, which are described below. Total stock-based compensation expense of $3.1 million, $2.6 million and $1.4 million was recognized for the years ended December 31, 2011, 2010 and 2009, respectively.

Total stock-based compensation expense was allocated to research and development, manufacturing and production and general and administrative expense as follows (in thousands):

 

     Years ended December 31,  
     2011      2010      2009  

Research and development

   $ 947       $ 727       $ 379   

Manufacturing and production

     165         281         154   

General and administrative

     1,994         1,628         852   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,106       $ 2,636       $ 1,385   
  

 

 

    

 

 

    

 

 

 

Cash received from options exercised

   $ 212       $ 35       $ 6   
  

 

 

    

 

 

    

 

 

 

Stock Plan and Directors' Stock Option Plan

The Company has a stock incentive plan, under which 12,700,000 shares of common stock, subject to adjustment as provided in the plan, are reserved for issuance to employees, non-employee directors and consultants of the Company. As of December 31, 2011 there were 11,016,619 shares reserved for future issuance under the plan. The plan provides for the grant of incentive and nonstatutory stock options and the direct award or sale of shares, including restricted stock. The exercise price of stock options must equal at least the fair market value of the underlying common stock on the date of grant. The maximum term of options granted under the plan is ten years. Except for annual grants to non-employee directors which vest at the next annual meeting, options generally vest 25% on the first anniversary of the date of grant, with the balance vesting quarterly over the remaining three years. The plan also limits the number of options that may be granted to any plan participant in a single calendar year to 1,300,000 shares.

The Company has granted RSUs to executive officers, other executives, and employees under the stock incentive plan. In 2011, 2010, and 2009 the Company granted RSUs covering an aggregate of 545,780, 438,329, and 330,000 shares of common stock, respectively. These RSUs vest 25% on the first anniversary date of the grant, with the remaining rights vesting quarterly over the remaining three years and, once vested, allow the participants to acquire the underlying shares of common stock at par value. The participants are not entitled to sell or transfer any unvested RSUs and are not entitled to vote or receive dividends on any shares of common stock covered by the RSUs prior to the acquisition of such shares. Granted but unvested RSUs are forfeited at termination of employment. Compensation expense related to the RSUs for the years ended December 31, 2011, 2010, and 2009 was approximately $1.1 million, $0.9 million and $0.5 million, respectively.

 

The following table summarizes stock option transactions under the Company's stock incentive plans for the years ended December 31, 2011, 2010 and 2009:

 

     Shares     Weighted Average
Exercise Price
 

Outstanding December 31, 2008

     3,757,720      $ 7.40   

Granted

     1,276,051      $ 1.88   

Exercised

     (1,677   $ 3.72   

Forfeited

     (731,742   $ 7.97   
  

 

 

   

Outstanding December 31, 2009

     4,300,352      $ 5.67   

Granted

     1,722,204      $ 3.35   

Exercised

     (20,123   $ 1.75   

Forfeited

     (816,328   $ 11.10   
  

 

 

   

Outstanding December 31, 2010

     5,186,105      $ 4.06   

Granted

     2,052,000      $ 2.34   

Exercised

     (74,386   $ 2.85   

Forfeited

     (208,619   $ 5.77   
  

 

 

   

Outstanding December 31, 2011

     6,955,100      $ 3.51   
  

 

 

   

Vested and unvested options expected to vest as of December 31, 2011

     6,599,697      $ 3.57   

The number of underlying shares and weighted average exercise price of options exercisable at December 31, 2011, 2010 and 2009, were 3,895,520 shares at $4.26, 2,899,922 shares at $4.84, and 2,756,826 shares at $7.40, respectively. The weighted average remaining contractual term of options outstanding and options exercisable at December 31, 2011, was 6.6 years and 5.0 years, respectively. The weighted average remaining contractual term of vested and unvested options expected to vest at December 31, 2011, was 6.5 years. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2011, was $9.0 million and $3.3 million, respectively. As of December 31, 2011, the total unrecognized compensation cost related to unvested options was $1.8 million, which is expected to be recognized over a weighted-average period of 1.38 years.

The weighted average grant-date fair value of options granted during the years ended December 31, 2011, 2010 and 2009, was $1.21, $1.73 and $0.87 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009, was $124,000, $9,000 and $2,000, respectively. At December 31, 2011, there were 3,020,650 shares available for grant under the Company's stock incentive plans.

A summary of the outstanding RSUs as of December 31, 2011, and changes during the year then ended is presented below:

 

     Shares     Weighted Average
Grant-Date Fair
Value per Share
 

Unvested at December 31, 2010

     572,705      $ 3.06   

Granted

     545,780      $ 2.41   

Vested

     (307,594   $ 3.12   

Cancelled

     (6,667   $ 2.60   
  

 

 

   

Unvested at December 31, 2011

     804,224      $ 2.59   
  

 

 

   

The aggregate grant-date fair value of RSUs granted during the years ended December 31, 2011, 2010 and 2009, was $1.3 million, $1.5 million and $0.6 million, respectively. As of December 31, 2011, the total unrecognized compensation cost related to unvested RSUs was $0.8 million, which is expected to be recognized over a weighted average period of 1.37 years. The aggregate grant-date fair value of shares subject to RSUs vested during the years ended December 31, 2011, 2010 and 2009, was $1.0 million, $0.5 million and $0.3 million, respectively. As of December 31, 2011, there were 236,645 shares of common stock underlying RSUs that were fully vested but the issuance of such shares has been deferred.

Income Taxes
Income Taxes

10. Income Taxes

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. There were no unrecognized tax benefits recorded by the Company as of the date of adoption in 2007. There are no unrecognized tax benefits included in the balance sheets that would, if recognized, affect the effective tax rate.

At December 31, 2011, the Company had net deferred tax assets of $6.2 million. Due to uncertainties surrounding the Company's ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company's net operating loss and research and development credit carryforwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not completed its analysis to determine if an ownership change has occurred and what, if any, impact the ownership change would have on the Company's ability to utilize its net operating losses. The Company has decided to wait until the ownership change analysis is complete and then update its Section 382 analysis regarding the limitation of the net operating loss and research and development credit carryforwards. Until this analysis has been completed the Company has removed the deferred tax assets for net operating losses of $108.7 million and tax credits of $29.0 million generated through 2011 from its deferred tax asset schedule and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits. Due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact the Company's effective tax rate.

The Company's practice is to recognize interest and/or penalties related to income tax matters as income tax expense. The Company had no accrual for interest or penalties on its balance sheets at December 31, 2011 and 2010, and has not recognized interest and/or penalties in its statement of operations for any of the years ended December 31, 2011, 2010 or 2009.

The Company is subject to taxation in the United States and California. The Company's tax years for 1992 and forward are subject to examination by the United States and California tax authorities due to the carryforward of unutilized net operating losses and R&D credits.

 

Significant components of the Company's deferred tax assets as of December 31, 2011 and 2010 are listed below. A valuation allowance of $6.2 million and $6.6 million at December 31, 2011 and 2010, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. Amounts for the years ended December 31 were as follows (in thousands):

 

Deferred Tax Assets

   2011     2010  

Capital loss carryover

   $ 45      $ 45   

Depreciation and amortization

     2,604        3,235   

Other

     3,182        2,916   

Accruals and reserves

     366        432   
  

 

 

   

 

 

 

Total deferred tax assets

     6,197        6,628   

Less valuation allowance

     (6,197     (6,628
  

 

 

   

 

 

 

Net deferred tax assets (1)

   $ —        $ —     
  

 

 

   

 

 

 

The reconciliation between the provision for income taxes and income taxes computed using the U.S. federal statutory corporate tax rate were as follows for the years ended December 31(in thousands):

 

     2011     2010     2009  

Computed "expected" tax benefit

   $ (2,606   $ (10,331   $ (9,709

State income taxes, net of federal benefit

     (545     (2,117     (1,687

Tax effect of:

      

Change in valuation allowance (1)

     2,185        12,987        9,887   

Expiration of prior year credits and net operating losses

     1,880        1,838        3,095   

Research and development and other tax credits carryovers

     (1,468     (2,519     (1,791

Stock compensation

     297        294        188   

Other

     257        (152     17   
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

(1) The removal of the valuation allowance related to the net operating loss carryforwards and tax credits are not included in the increase in the valuation allowance. See above explanation.

As of December 31, 2011 and 2010, the Company had available federal net operating loss carryforwards of approximately $277.6 million and $279.4 million, respectively, which expire from 2012 through 2031. In addition, the Company had federal research and development credit and orphan drug credit carryforwards of $23.7 million and $21.8 million as of December 31, 2011 and 2010, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2012 through 2031 and are subject to review and possible adjustment by the Internal Revenue Service. The Company also has available California state net operating loss carryforwards of approximately $251.4 million and $230.1 million as of December 31, 2011 and 2010, respectively, which expire from 2012 to 2031. In addition, the Company had California research and development credits and manufacturers' investment credits of approximately $8.1 million and $7.8 million as of December 31, 2011 and 2010, respectively, to reduce future California income tax, if any. The manufacturers' investment credits expire from 2012 through 2014. The California research and development credits do not expire.

The Company generated windfall tax benefits from the settlement of certain stock awards. The tax benefit will be recorded as a credit to additional paid-in capital in the year the deduction reduces income taxes payable. The net operating loss carryforwards related to these windfall tax benefits of approximately $1.0 million are included in the net operating loss carryforwards disclosed above.

Employee Benefit Plan
Employee Benefit Plan

11. Employee Benefit Plan

The Company has a defined contribution savings plan under section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. The Company matches employee contributions made to the plan according to a specified formula. The Company's matching contributions totaled approximately $0.2 million for each the years ended 2011, 2010 and 2009.

Summary Of Quarterly Financial Information
Summary Of Quarterly Financial Information

12. Summary of Unaudited Quarterly Financial Information

The following is a summary of the Company's unaudited quarterly results of operations for the years ended December 31 (in thousands, except per share amounts):

 

2011:

   March 31,     June 30,     Sept. 30,      Dec. 31,  

Total revenues

   $ 649      $ 818      $ 26,619       $ 1,932   

Total operating expenses

     9,366        9,269        10,227         8,978   

Net income (loss)

     (8,694     (8,406     16,431         (6,614

Basic net income (loss) per share (1)

     (0.12     (0.12     0.23         (0.09

Diluted net income (loss) per share (1)

     (0.12     (0.12     0.22         (0.09

 

2010:

   March 31,     June 30,     Sept. 30,     Dec. 31,  

Total revenues

   $ 1,463      $ 2,075      $ 2,257      $ 2,916   

Total operating expenses

     10,092        10,580        9,067        10,187   

Net loss

     (8,478     (8,380     (6,767     (6,760

Basic and diluted net loss per share (1)

     (0.15     (0.15     (0.12     (0.09

(1) Net income (loss) per share is computed independently for each quarter and the full year based upon respective shares outstanding. Therefore, the sum of the quarterly loss per share amounts may not equal the annual amounts reported.
Subsequent Event
Subsequent Event

13. Subsequent Event

In January 2012, the Company sold 13,333,334 shares of its common stock in a public offering at a price to the public of $3.75 per share. Net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled $46.6 million. In February 2012, the Company sold an additional 576,358 shares pursuant to a partial exercise of the underwriters' overallotment option at a price to the public of $3.75 per share. Net proceeds from the overallotment option exercise, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, totaled approximately $2.0 million. All of the shares of common stock were offered pursuant to two effective shelf registration statements.