Diadexus (VXGN) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2009

OR

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

Commission File Number 0-26483

VaxGen, Inc.

(Exact name of Registrant as Specified in its Charter)

Delaware	94-3236309
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
379 Oyster Point Boulevard, Suite 10
South San Francisco, California	94080
(Address of Principal Executive Offices)	(Zip Code)

(650) 624-1000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its 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). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller Reporting Companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The issuer has one class of common stock with 33,106,523 shares outstanding as of July 31, 2009.

VaxGen, Inc.

Form 10-Q

For the Quarter Ended June 30, 2009

Table of Contents

	Page
Part I Financial Information
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview		11
Critical Accounting Policies and Estimates		12
Results of Operations		12
Financial Condition, Liquidity and Capital Resources		14
Item 3 Quantitative and Qualitative Disclosures About Market Risk		16
Item 4 Controls and Procedures		16
Part II Other Information
Item 1 Legal Proceedings		17
Item 1A Risk Factors		17
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3 Defaults Upon Senior Securities		21
Item 4 Submission of Matters to a Vote of Security Holders		21
Item 5 Other Information		21
Item 6 Exhibits		21
Signatures		22
Exhibit 31.1
Exhibit 32.1

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

VaxGen, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(in thousands)

	June 30,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	31,387		$	34,618
Investment securities		4,176			3,922
Prepaid expenses and other current assets		599			792
Assets held for sale		591			783
Total current assets		36,753			40,115
Restricted cash		1,400			1,556
Other assets		396			426
Total assets	$	38,549		$	42,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	237		$	75
Accrued and other current liabilities		582			706
Total current liabilities		819			781
Deferred rent and other liabilities		4,917			5,097
Total liabilities		5,736			5,878
Contingencies (Note 11)
Stockholders’ equity:
Common stock		331			331
Additional paid-in capital		302,977			302,856
Accumulated deficit		(270,495	)		(267,241	)
Accumulated other comprehensive income		—			273
Total stockholders’ equity		32,813			36,219
Total liabilities and stockholders’ equity	$	38,549		$	42,097

See accompanying notes to condensed consolidated financial statements.

3

VaxGen, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Revenues	$	—		$	15		$	—		$	293
Operating expenses:
Research and development		—			—			—			1,387
General and administrative		1,392			3,545			3,619			8,945
Restructuring		—			985			—			985
Impairment of assets held for sale		159			8,498			159			8,498
Total operating expenses		1,551			13,028			3,778			19,815
Loss from operations		(1,551	)		(13,013	)		(3,778	)		(19,522	)
Other income (expense)
Interest expense		(10	)		(601	)		(21	)		(1,369	)
Interest income		59			534			163			1,249
Realized gain on sale of available for sale investments		—			—			357			—
Valuation adjustments		—			656			—			(955	)
Gain on convertible debt redemption		—			—			—			713
Gain on sale of Anthrax Program		—			2,000			—			2,000
Other		(6	)		—			25			(11	)
Total other income, net		43			2,589			524			1,627
Net loss	$	(1,508	)	$	(10,424	)	$	(3,254	)	$	(17,895	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.31	)	$	(0.10	)	$	(0.54	)
Weighted average shares used in computing basic and diluted net loss per share		33,107			33,107			33,107			33,107

See accompanying notes to condensed consolidated financial statements.

4

VaxGen, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

	Six Months Ended
	June 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(3,254	)	$	(17,895	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		—			587
Impairment of assets held for sale		159			8,498
Valuation adjustments		—			955
Stock-based compensation		121			1,122
Amortization of premiums and discounts on investment securities		—			(161	)
Gain on sale of Celltrion common stock		(357	)		—
Gain on convertible debt repurchase		—			(713	)
Loss on sale of assets held for sale		16			—
Non-cash interest expense		—			381
Non-cash interest income		—			(187	)
Raven merger costs previously capitalized		—			1,932
Changes in operating assets and liabilities
Receivables		—			(33	)
Prepaid expenses and other current assets		193			200
Accounts payable		162			(1,975	)
Accrued and other current liabilities		(124	)		(1,141	)
Other		(150	)		762
Net cash used in operating activities		(3,234	)		(7,668	)
Cash flows from investing activities:
Proceeds from sale of assets held for sale		17			351
Proceeds from sale and maturity of investment securities		6,450			18,242
Purchase of investment securities		(6,977	)		(15,942	)
Proceeds from sale of Celltrion common stock		357			—
Loan to Raven biotechnologies, inc.		—			(4,668	)
Change in restricted cash		156			—
Net cash provided by (used in) investing activities		3			(2,017	)
Cash flows from financing activities:
Repurchase of senior subordinated convertible notes		—			(750	)
Net cash used in financing activities		—			(750	)
Net decrease in cash and cash equivalents		(3,231	)		(10,435	)
Cash and cash equivalents, beginning of period		34,618			64,726
Cash and cash equivalents, end of period	$	31,387		$	54,291

See accompanying notes to condensed consolidated financial statements.

5

VaxGen, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Organization

Nature of Business Activities

VaxGen, Inc., or VaxGen or the Company, is a biopharmaceutical company based in South San Francisco, California. The Company owns a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products. This facility is located within leased premises. The Company has ended all product development activities and sold or otherwise terminated its drug development programs. The Company is seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.

The Company is considering various strategic transactions to return value to its stockholders. If the Company is unable to identify and complete a strategic transaction, the Company will liquidate. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis of Presentation

The unaudited condensed consolidated financial statements of VaxGen and its subsidiaries, collectively referred to as the Company, included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. All intercompany accounts and transactions have been eliminated in consolidation.

Certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the unaudited condensed consolidated financial information included herein. While VaxGen believes that the disclosures are adequate to make the information not misleading, these unaudited condensed consolidated financial statements should be read in conjunction with VaxGen’s audited financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC, on March 18, 2009.

The results of operations for the three and six month periods ended June 30, 2009 are not necessarily indicative of the operating results for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. While management believes its estimates, judgments and assumptions are reasonable, the inherent nature of estimates is that actual results will likely be different from the estimates made.

The Company has performed an evaluation of subsequent events through August 3, 2009, the date the Company filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. These accounting policies have not significantly changed.

Recent Accounting Pronouncements

On June 30, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events,” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of SFAS 165 had no impact on the Company’s Consolidated Financial Statements as the Company already followed a similar approach prior to the adoption of this standard.

6

In April 2009, the FASB issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4,“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2,“Recognition and Presentation of Other-Than-Temporary Impairments”, establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1,“Interim Disclosures about Fair Value of Financial Instruments”, expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”,to interim periods. All of these FSPs are effective for interim and annual reporting periods ending after June 15, 2009. The implementation of these FSPs did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification^TMand the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162,” (SFAS 168). SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. The issuance of SFAS 168 and the Codification does not change GAAP. SFAS 168 becomes effective for us for the quarter ending September 30, 2009. We are presently evaluating the impact that the adoption of SFAS 168 will have on the Company’s Consolidated Financial Statements.

3. Net Loss per Share

Basic net loss per share is calculated based on net loss and the weighted-average number of shares of common stock outstanding during the reported period. Diluted net loss per share is calculated by increasing the weighted-average number of common shares outstanding during the period, if not anti-dilutive, by the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued.

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Net loss	$	(1,508	)	$	(10,424	)	$	(3,254	)	$	(17,895	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.31	)	$	(0.10	)	$	(0.54	)
Weighted average shares used in computing basic and diluted net loss per share		33,107			33,107			33,107			33,107

7

The following outstanding stock options, common stock warrants and convertible senior subordinated notes were excluded from the computation of diluted net loss per share, as their effect was antidilutive (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Options to purchase common stock		1,774		5,336		1,774		5,336
Warrants to purchase common stock		2,098		2,317		2,098		2,317
Convertible senior subordinated notes		—		2,033		—		2,033
Total		3,872		9,686		3,872		9,686

4. Comprehensive Loss

Comprehensive loss combines net loss and other comprehensive income (loss). Other comprehensive income (loss) represents certain amounts that are reported as components of stockholders’ equity in the consolidated balance sheet, including foreign currency translation adjustments and unrealized gains or losses on investment securities. The Company’s comprehensive loss consists of the following (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Net loss	$	(1,508	)	$	(10,424	)	$	(3,254	)	$	(17,895	)
Change in unrealized gains on investment securities		—			(12	)		(273	)		(8	)
Comprehensive loss	$	(1,508	)	$	(10,436	)	$	(3,527	)	$	(17,903	)

5. Investments

The following is a summary of available-for-sale investment securities at June 30, 2009 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair Market
June 30, 2009	Cost		Gains		Losses		Value
Certificates of deposit	$	4,176	$	—	$	—	$	4,176
December 31, 2008
Certificates of deposit	$	3,649	$	—	$	—	$	3,649
Common shares		—		273		—		273
	$	3,649	$	273	$	—	$	3,922

During the first quarter of 2009, the Company sold its remaining investment in Celltrion common stock. This transaction resulted in a realized gain of $357,000.

6. Assets Held For Sale

The Company has committed to a plan to sell the equipment related to its California manufacturing facility. These assets have met the criteria for, and have been classified as “held for sale” in accordance with SFAS 144. The Company uses the market approach to determine fair market value of its assets held for sale.

The Company performed an impairment assessment of the facility as of June 30, 2009. At June 30, 2009, the Company estimated that the fair market values of these assets were less than the carrying values of these assets by $0.2 million, which was recorded as an impairment of assets held for sale in the statement of operations for the three and six months ended June 30, 2009.

Based on the lack of success in finding a buyer for its facility and expectation of need to dismantle to sell, the Company performed an impairment assessment of the facility as of June 30, 2008. At June 30, 2008, the Company estimated that the fair market values of these assets were less than the carrying values of these assets by $8.5 million, which was recorded as an impairment of assets held for sale in the statement of operations for the three and six months ended June 30, 2008. The impairment includes all leasehold improvements relating to the facility of approximately $6.5 million, as these items will have no future economic benefit.

8

Total assets held for sale are as follows (in thousands):

			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	Six Months		Identical		Observable		Unobservable		Total
	Ended		Assets		Inputs		Inputs		Gains
Description	June 30, 2009		(Level 1)		(Level 2)		(Level 3)		(Losses)
Assets held for sales	$	591	$	—	$	—	$	591	$	(159	)

The Company’s measurement of the assets held for sale fair value as of June 30, 2009 incorporated significant unobservable inputs as a result of a lack of any available observable market information to determine the fair value. The Company calculated the fair value of assets held for sale using a market value technique that relies on Level 3 inputs, including quoted prices for similar assets. Based on this analysis, the Company estimated that the fair value of the assets held for sale was $591,000. The Company recorded an other-than-temporary impairment of $159,000 in the income statement to reflect assets held for sale at fair values.

7. Accrued and Other Current Liabilities

The Company’s accrued and other current liabilities consist of the following (in thousands):

	June 30,		December 31,
	2009		2008
Employee benefits	$	65	$	154
Legal and professional fees		79		167
Deferred rent		371		318
Other		67		67
Total accrued and other current liabilities	$	582	$	706

8. Income Taxes

Based on the weight of available evidence, including cumulative losses since inception and expected future losses, the Company has determined that it is more likely than not that the deferred tax asset amount will not be realized and, therefore, a valuation allowance has been provided on net deferred tax assets.

On January 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, or FIN 48, which requires that the Company recognize the financial statement effects of a tax position when it becomes more likely than not, based upon the technical merits, that the position will be sustained upon examination. The gross amount of unrecognized tax benefits as of December 31, 2008 was $1.9 million, which if realized, $0.7 million will affect the effective tax rate and $1.2 million will not, due to the valuation allowance provided on deferred tax aseets.

9

The Company recognizes interest and/or penalties related to uncertain tax positions. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected in the period that such determination is made. The amount of interest and penalties accrued for FIN 48 and included in other long-term liabilities as of June 30, 2009 and June 30, 2008 was approximately $0.5 million and $0.2 million, respectively, which is consistent with the Company’s policy.

Under the provisions of Section 382 and 383 of the Internal Revenue Code, substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards and research and development credits that can be utilized in the future to offset taxable income.

The Company files U.S. Federal and California state tax returns. The Company is currently not subject to any income tax examinations. All prior years remain open for examination.

9. Stock-Based Compensation

The impact on consolidated results of operations of recording stock-based compensation was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Research and development	$	—	$	—	$	—	$	42
General and administrative		59		951		121		1,080
	$	59	$	951	$	121	$	1,122

10. Celltrion

VaxGen provided services to assist Celltrion with its operations under a Technical Support and Services Sub-Agreement. VaxGen was paid for out-of-pocket expenses and services rendered. VaxGen recognized $0.3 million of revenue from Celltrion during the six months ended June 30, 2008. VaxGen no longer provides services to Celltrion. No revenue was recognized during the six months ended June 30, 2009.

11. Contingencies

Litigation

In February 2009, a lawsuit was filed against us in the Superior Court of California for the County of San Mateo by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that we defaulted on our lease for our facility located at 349 Oyster Point, South San Francisco, California. The complaint seeks possession of the premises and the balance of the lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. Our biopharmaceutical manufacturing facility is located in the leased premises that are the subject of the dispute. At a February hearing, the court denied the writ and the temporary protective order sought by landlord. In May 2009, the lawsuit was dismissed.

Contingencies

If VaxGen’s President’s employment with VaxGen is terminated without cause, or the President resigns for good reason, as defined in his employment agreement, the President would be entitled to receive as severance a lump sum payment equal to 99% of 12 months of his base salary ($0.2 million) and all of his outstanding unvested stock options would be accelerated and become immediately exercisable.

12. Fair Value Measurements

SFAS No. 157,Fair Value Measurement, orSFAS 157, specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:

• Level 1 —Inputs are quoted prices in active markets for identical assets or liabilities.

• Level 2— Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

• Level 3— Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

10

As of June 30, 2009, the fair value hierarchy of the Company’s marketable securities at fair value is summarized below (in thousands):

	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	89	$	—	$	—	$	89
Certificates of deposit		—		465		—		465
Investment securities:
Certificates of deposit		—		4,176		—		4,176
Total Financial Assets	$	89	$	4,641	$	—	$	4,730

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008, and our unaudited condensed consolidated financial statements and related notes thereto appearing in Item 1 of this Quarterly Report on Form 10-Q. In addition to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors described in Part II – Item 1A herein when evaluating an investment in our common stock. This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any statements of the plans and objectives of management for future operations, any statements regarding future operations, any statements concerning proposed new products or services, any statements regarding pending or future mergers or acquisitions, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “potential” or “continue” or the negative thereof or other comparable terminology.

There can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our forward-looking statements are subject to inherent risks and uncertainties including, but not limited to, the risk factors set forth in this Quarterly Report. Factors that could cause or contribute to such differences include, but are not limited to, our limited cash resources, our significant corporate and Securities and Exchange Commission, or SEC, related expenses and limited revenue to offset these expenses, availability of appropriate prospective acquisitions or investment opportunities, litigation and the risks discussed in our other SEC filings. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results might differ. When used in the report, unless otherwise indicated, “we,” “our” and “us” refers to VaxGen, Inc.

OVERVIEW

We are a biopharmaceutical company based in South San Francisco, California. We own a state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products. This facility is located within leased premises. We have ended all product development activities and sold or otherwise terminated our drug development programs. We are seeking to maximize the value of our remaining assets through a strategic transaction or series of strategic transactions.

We are considering various strategic transactions to return value to our stockholders. If we are unable to identify and complete a strategic transaction, we will liquidate. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Recent Developments

In July 2009, our board of directors disbanded its Strategic Transactions Committee, effective September 1, 2009. The board of directors as a whole will assume the remaining responsibilities formerly delegated to the Strategic Transactions Committee, and, following its disbandment, the members of that committee will cease to receive additional compensation for service on it.

11

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Reference should be made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the SEC on March 18, 2009, for a description of our critical accounting policies. There have been no significant changes to our policies since we filed that report.

RESULTS OF OPERATIONS

Comparison of Fiscal Quarters and Six Months Ended June 30, 2009 and 2008

Revenues

	Three Months Ended				Percent			Six Months Ended				Percent
	June 30,				Change			June 30,				Change
	2009		2008		2009/2008			2009		2008		2009/2008
	(in thousands)
Revenues	$	—	$	15		-100	%	$	—	$	293		-100	%

Revenues for the six months ended June 30, 2008 were primarily from service revenues earned as part of a consulting services agreement with Celltrion to provide technical assistance related to the design, engineering and start-up of Celltrion’s manufacturing facility. No services were provided to Celltrion for the six months ended June 30, 2009.

Revenues earned in one period are not indicative of revenues to be earned in future periods. We do not expect any revenues for the remainder of 2009.

Research and development expenses

	Three Months Ended				Percent		Six Months Ended				Percent
	June 30,				Change		June 30,				Change
	2009		2008		2009/2008		2009		2008		2009/2008
	(in thousands)						(in thousands)
Research and development expenses	$	—	$	—		—	$	—	$	1,387		-100	%

Research and development expenses include the costs of internal personnel, outside contractors, allocated overhead and laboratory supplies. We ceased research and development activities during the first quarter of 2008 and therefore no research and development expenses were incurred during the second quarter of 2008 and the first six months of 2009. We expect no research and development expenses to be incurred during the remainder of 2009.

General and administrative expenses

	Three Months Ended				Percent			Six Months Ended				Percent
	June 30,				Change			June 30,				Change
	2009		2008		2009/2008			2009		2008		2009/2008
	(in thousands)							(in thousands)
General and administrative expenses	$	1,392	$	3,545		-61	%	$	3,619	$	8,945		-60	%

General and administrative expenses consist primarily of compensation costs, occupancy costs including depreciation expense, fees for accounting, legal and other professional services and other general corporate expenses.

The decrease in general and administrative expenses of $2.2 million in the three months ended June 30, 2009 over the comparable period of 2008 was primarily due to lower labor and benefit costs of $1 million resulting from reductions in force.

The decrease in general and administrative expenses in the six months ended June 30, 2009 over the comparable period of 2008 was primarily due to:

• Labor and benefits, which decreased by $1.8 million primarily associated with the 2008 reductions in force;

• Consultant and outside labor costs, which decreased by $3.0 million in 2009, following the termination of the proposed merger, or the Merger, with Raven biotechnologies, inc., or Raven, pursuant to which we incurred $2.3 million in consultant and outside labor costs during the first six months of 2008; and

• Facilities costs, which decreased by $1.0 million due to the cessation of operations during the first six months of 2008.

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Restructuring expenses

	Three Months Ended				Percent			Six Months Ended				Percent
	June 30,				Change			June 30,				Change
	2009		2008		2009/2008			2009		2008		2009/2008
	(in thousands)							(in thousands)
Restructuring expenses	$	—	$	985		-100	%	$	—	$	985		-100	%

During the three months ended June 30, 2008 we reduced our workforce to reduce operating costs. Restructuring costs included employee termination and benefit costs.

Impairment of assets held for sale

	Three Months Ended				Percent			Six Months Ended				Percent
	June 30,				Change			June 30,				Change
	2009		2008		2009/2008			2009		2008		2009/2008
	(in thousands)							(in thousands)
Impairment of assets held for sale	$	159	$	8,498		-98	%	$	159	$	8,498		-98	%

We performed an impairment assessment of the facility as of June 30, 2009. At June 30, 2009, we estimated that the fair market values of these assets were less than the carrying values of these assets by $0.2 million, which was recorded as an impairment of assets held for sale in the statement of operations for the three and six months ended June 30, 2009.

Based on the lack of success in finding a buyer for our facility and expectation of need to dismantle to sell, we performed an impairment assessment of the facility as of June 30, 2008. At June 30, 2008, we estimated that the fair market values of these assets were less than the carrying values of these assets by $8.5 million, which was recorded as an impairment of assets held for sale in the statement of operations for the three and six months ended June 30, 2008. The impairment includes all leasehold improvements relating to the facility of approximately $6.5 million, as these items will have no future economic benefit.

Other income (expense)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(in thousands)						(in thousands)
Interest expense	$	(10	)	$	(601	)	$	(21	)	$	(1,369	)
Interest income		59			534			163			1,249
Realized gain on sale of available for sale investments		—			—			357			—
Valuation adjustments		—			656			—			(955	)
Gain on convertible debt repurchase		—			—			—			713
Gain on sale of Anthrax Program		—			2,000			—			2,000
Other		(6	)		—			25			(11	)
Total other income (expense), net	$	43		$	2,589		$	524		$	1,627

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The decrease in other income, net, for the three months ended June 30, 2009 from the comparable period in 2008 was primarily due to:

• Gain on the sale of our Anthrax Program of $2.0 million in the second quarter of 2008;

• A valuation gain of $0.7 million for mark-to-market adjustments following the valuation of the derivatives on our Convertible Notes during the second quarter of 2008;

• Decreased interest income due to lower interest rates and lower overall cash, cash equivalents and investment balances primarily due to our repurchase of Convertible Notes during 2008; and

• A partial offset of decrease in interest expense in 2009, following the repurchase of our 5¹/2% Convertible Senior Subordinated Notes due April 2010, or Convertible Notes, during 2008.

The decrease in other income, net, for the six months ended June 30, 2009 from the comparable period in 2008 was primarily due to:

• Gain on the sale of our Anthrax Program of $2.0 million in the first six months of 2008;

• A gain of $0.7 million on the repurchase of $1.5 million principal amount of our Notes at a purchase price of $0.8 million plus accrued interest;

• Decreased interest income due to lower overall cash, cash equivalents and investment balances primarily due to our repurchase of Convertible Notes during 2008; and

• A partial offset of decrease in interest expense in 2009, following the repurchase of our 5¹/2% Convertible Senior Subordinated Notes due April 2010, or Convertible Notes, during 2008 and a valuation expense of $1.0 million for mark-to-market adjustments following the valuation of the derivatives on our Convertible Notes during the first six months of 2008.

We anticipate future investment income will fluctuate and will be primarily driven by our future cash, cash equivalent and investment balances.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

	2009			2008
	(in thousands)
As of June 30:
Cash, cash equivalents and investment securities	$	35,563		$	59,033
Working capital		35,934			61,786
Six Months ended June 30:
Cash provided by (used in)
Operating activities	$	(3,234	)	$	(7,668	)
Investing activities		3			(2,017	)
Financing activities		—			(750	)

Our primary capital requirements for the six months ended June 30, 2009 were operating costs. Through June 30, 2009, we financed our operations primarily through sales of our common stock, the issuance of Series A Preferred Stock, the issuance of convertible debt, sales of our Celltrion common stock as well as through revenues from research contracts and grants. Our future capital requirements will depend upon our ability to identify and exploit business development opportunities including actively pursuing avenues to enhance stockholder value through a strategic transaction.

Net cash used in operating activities decreased to $3.2 million for the six months ended June 30, 2009 from $7.7 million for the six months ended June 30, 2008 and was primarily attributable to our reduced operating losses. The effect of non-cash items upon operating activities was significant in both the six months ended June 30, 2009 and 2008 and included:

• Depreciation expense of zero in 2009 and $0.6 million in 2008, reflecting the reclassification of equipment, furniture and fixtures to assets held for sale during the first six months of 2008;

• Impairment of assets held for sale of $0.2 million in 2009 and $8.5 million in 2008;

• Valuation loss of $1.0 million in 2008 reflecting changes in the fair value of outstanding derivatives from the Convertible Notes;

• Stock based compensation expense of $0.1 million in 2009 and $1.1 million in 2008.

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• Gain on redemption of the Convertible Notes of $0.7 million in 2008;

• Gain on sale of Celltrion common stock of $0.4 million in 2009; and

• $1.9 million of Raven merger costs capitalized at December 31, 2007 that were expensed as general and administrative expense during the six months ended June 30, 2008.

The decrease in cash used in operating activities was also affected by the following:

• Accounts payable, which increased by $0.2 million in 2009 and decreased by $2.0 million in 2008 primarily due to the timing of payments and the reduced level of operating activities; and

• Accrued and other liabilities, which decreased by $0.1 million in 2009 and increased by $1.1 million in 2008 primarily due to $1.9 million of the Merger costs capitalized at December 31, 2007 that were expensed as general and administrative expense during the six months ended June 30, 2008.

Net cash provided by investing activities of $3,000 in six months ended June 30, 2009 was primarily attributable to activities relating to the purchase and sale of investment securities of $0.5 million, partially offset by proceeds from the sale of our Celltrion common stock of $0.4 million. Net cash used in investing activities of $2.0 million in the six months ended June 30, 2008 was primarily attributable to the $4.7 million bridge loan to Raven in connection with the proposed merger partially offset by net proceeds of $2.3 million from investment activity.

Net cash used in financing activities in the six months ended June 30, 2008 was attributable to the repurchase of $1.5 million principal amount of Convertible Notes at a purchase price of $0.8 million.

At June 30, 2009, $35.6 million, or 92%, of our total assets consisted of cash, cash equivalents and investment securities. We had working capital of $35.9 million at June 30, 2009, compared to $61.8 million at June 30, 2008. This decrease in working capital is primarily due to the following:

• Cash, cash equivalents and investments decreased by $23.5 million primarily due to our repurchase of Convertible Notes in 2008 and operating losses;

• Loan to Raven decreased by $6.0 million due to repayment;

• Assets held for sale decreased by $0.8 million primarily due to impairment charges; and

• A partial offset by the elimination of the derivative liability of $4.5 million resulting from the repurchase of our Convertible Notes in 2008.

We believe that our existing cash, cash equivalents and investment securities will be sufficient to cover our working capital needs and commitments through at least June 30, 2010. Our future capital requirements will depend on our ability to identify and complete additional business opportunities. We are considering various strategic transactions to return value to our stockholders. If we are unable to identify and complete an alternate strategic transaction, we will liquidate.

Off-Balance Sheet Arrangements

As of June 30, 2009, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation 
S-K.

Recent Accounting Pronouncements

On June 30, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events,” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of SFAS 165 had no impact on the Company’s Consolidated Financial Statements as the Company already followed a similar approach prior to the adoption of this standard.

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In April 2009, the FASB issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4,“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2,“Recognition and Presentation of Other-Than-Temporary Impairments”, establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1,“Interim Disclosures about Fair Value of Financial Instruments”, expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”,to interim periods. All of these FSPs are effective for interim and annual reporting periods ending after June 15, 2009. The implementation of these FSPs did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification^TMand the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162,” (SFAS 168). SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. The issuance of SFAS 168 and the Codification does not change GAAP. SFAS 168 becomes effective for us for the quarter ending September 30, 2009. We are presently evaluating the impact that the adoption of SFAS 168 will have on the Company’s Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable because we are a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management evaluated, with the participation of our principal executive and financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities and Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive and financial officer has concluded our disclosure controls and procedures were effective as of June 30, 2009 to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, VaxGen’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls.

Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In February 2009, a lawsuit was filed against us in the Superior Court of California for the County of San Mateo by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that we defaulted on our lease for our facility located at 349 Oyster Point, South San Francisco, California. The complaint seeks possession of the premises and the balance of the lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. Our biopharmaceutical manufacturing facility is located in the leased premises that are the subject of the dispute. At a February hearing, the court denied the writ and the temporary protective order sought by landlord. In May 2009, the lawsuit was dismissed.

ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors as well as other information in our filings under the Exchange Act before making any investment decisions regarding our common stock. The risks and uncertainties described herein are not the only ones we face. Additional risks and uncertainties that we do not know or that we currently deem immaterial may also impair our business, financial condition, operating results and prospects. If events corresponding to any of these risks actually occur, they could materially adversely affect our business, financial condition, operating results or prospects. In that case, the trading price of our common stock could decline. When used in this report, unless otherwise indicated, “we,” “our” and “us” refers to VaxGen, Inc. We have marked with an “*” those risk factors that reflect material changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 18, 2009.

We do not currently have capabilities to develop products or offer any services; the continuation of our business as a going concern is wholly dependent on our ability to identify and successfully complete a strategic transaction, and/or sell our assets, which we may be unable to accomplish.

We discontinued clinical development of our anthrax vaccine candidate, rPA102, after HHS terminated our SNS Contract in December 2006. In addition, in June 2007 we terminated our contract with the Chemo-Sero-Therapeutic Research Institute of Japan, or Kaketsuken, to develop a smallpox vaccine. We had previously devoted substantially all of our research, development and clinical efforts and financial resources toward the development of rPA102, and we have no product candidates in clinical or preclinical development. In connection with the termination of our clinical development of rPA102, we announced restructuring activities, including significant workforce reductions, and as a result have no remaining internal capability to discover or develop product candidates. Following the termination of our SNS Contract, we evaluated strategic alternatives and retained a financial advisor. As a result of this process, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Raven on November 12, 2007, which was subsequently terminated by mutual agreement on March 28, 2008 due to a lack of stockholder support.

We cannot predict whether we will be able to identify alternate strategic transactions which will either provide us with a product pipeline or return value to our stockholders on a timely basis or at all. We also cannot predict whether any such transaction would be consummated on favorable terms, and anticipate that such transaction may require us to incur significant additional costs. We are unable to predict if we will be able to sell our remaining assets (principally, our manufacturing facility) or if such a sale can be consummated on favorable terms. We are also unable to predict if we will be able to assign, sub-lease or terminate the lease on the property containing our manufacturing facility, or if such actions can be consummated on favorable terms. If we are unable to identify and complete an alternate strategic transaction, our business will be liquidated.

We may use some or all of our remaining resources, including available cash, while we seek to identify a strategic transaction; we may fail to identify an appropriate transaction; our stockholders may vote against a proposed transaction; and even if a strategic transaction is completed, it may be unsuccessful in creating value for stockholders.

As a result of the termination of our SNS Contract, we have been evaluating strategic alternatives since January 2007. In November 2007 we entered into the Merger Agreement with Raven, which was terminated in March 2008 due to a lack of stockholder support. The process of identifying, negotiating and seeking stockholder approval to the proposed Raven merger was time consuming and expensive. For example, we recorded $2.3 million of costs, primarily professional fees, related to the proposed merger with Raven, during the year ended December 31, 2008.

17

We expect the process of identifying potential alternate strategic transactions will similarly be time-consuming and expensive, regardless of whether we are successful. We cannot predict whether we will be able to identify alternate strategic transactions which will either provide us with a pipeline or return value to our stockholders on a timely basis or at all. We also cannot predict whether any such transaction, once identified, would be approved by our stockholders or consummated on favorable terms. Significant ownership of our common stock is concentrated among several large stockholders and those stockholders may vote against a transaction, even if our board of directors and management view the transaction as beneficial. We may use a portion or all of our remaining resources seeking to identify and complete a strategic transaction, but ultimately be unable to do so. Even if completed, such a transaction may not provide us with a pipeline or return value to our stockholders, and either outcome could cause our stockholders to lose some or all of their investment in our common stock.

If we fail to identify and manage successfully any company or product acquisitions, joint ventures or in-licensed product candidates, we will be unable to rebuild our product candidate pipeline. *

Our prior product development programs were initiated through in-licensing or collaborative arrangements. These collaborations include licensing proprietary technology from, and other relationships with, biotechnology companies and government research institutes and organizations. As of the date of this quarterly report, we do not have any product candidates under development. As part of our business strategy, we intend to expand our product pipeline and capabilities through company or product acquisitions, merging or in-licensing.

Any such activities will be accompanied by certain risks including:

• exposure to unknown liabilities of acquired companies;

• higher than anticipated acquisition costs and expenses;

• the difficulty and expense of integrating operations and personnel of acquired companies;

• possible dilution to stockholders; and

• potential competition against any products or product candidates we may acquire rights to.

If we are unable to reach agreement on license or partnering agreements on terms acceptable to us, we may then be precluded from pursuing those specific opportunities. Since each of these opportunities is unique, we may not be able to find a substitute. If we are unable to identify and manage successfully any acquisitions, joint ventures, in-licenses or other collaboration opportunities, we will be unable to develop new products and rebuild our product pipeline.

We may need to raise additional capital to support our operations and in order to continue as a going concern if we successfully complete a strategic transaction. *

We believe that our existing cash, cash equivalents and investment securities as of June 30, 2009 will be sufficient to meet our projected operating requirements through at least June 30, 2010. In addition to our workforce reductions, the termination of our rPA102 and smallpox development activities and the sale of our assets related to rPA102, we are exploring strategic alternatives. Our restructuring measures implemented to date and any future transactions may disappoint investors and further depress the price of our common stock and the value of an investment in our common stock, thereby limiting our ability to raise additional funds or consummate a strategic transaction.

We will require substantial funds to conduct development activities if we acquire additional products or companies or consummate a strategic transaction. Our ability to conduct the required development activities related to any new product candidates will be significantly limited if we are unable to obtain the necessary capital. We may seek to raise additional funds through the sale of equity or debt to meet our working capital and capital expenditure needs. We do not know, however, whether additional financing will be available when needed, or whether it will be available on favorable terms or at all. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern.

18

As a result of the reductions in our workforce that we announced throughout 2007 and 2008, we may not be successful in retaining key employees and in attracting qualified new employees as required in the future. If we are unable to retain our management or to attract additional qualified personnel, our ability to rebuild our business will be seriously jeopardized.

Several times during 2007 and 2008 we implemented restructurings resulting in the reduction of our workforce. As of June 30, 2009, we had only three employees. Competition among biotechnology companies for qualified employees is intense, and the ability to retain and attract qualified individuals will be critical to our success if we rebuild our business. Our ability to recruit new employees may be diminished as a result of the restructurings we have implemented. If we rebuild our business and need to recruit qualified personnel, including scientific staff and scientific advisors, we may be unable to attract or retain key personnel on acceptable terms, if at all.

We have only a limited operating history and we expect to continue to generate operating losses.

To date, we have engaged primarily in research, development and clinical testing. Since our inception in 1995, our operations have not been profitable, and we cannot be certain that we will ever achieve or sustain operating profitability. At June 30, 2009, we had an accumulated deficit of $270.5 million. Developing any future product candidates will require significant additional research and development, including non-clinical testing and clinical trials, as well as regulatory approval. If implemented, we expect these activities, together with our general and administrative expenses, to result in operating losses for the foreseeable future.

Natural disasters, including earthquakes, may damage our facilities.

Our corporate and manufacturing facilities are primarily located in California. Our facilities in California are in close proximity to known earthquake fault zones. As a result, our corporate, research and manufacturing facilities are susceptible to damage from earthquakes and other natural disasters, such as fires, floods and similar events. Although we maintain general business insurance against fires and some general business interruptions, there can be no assurance that the scope or amount of coverage will be adequate in any particular case.

Our use of hazardous materials and chemicals require us to comply with regulatory requirements and exposes us to potential liabilities.

We currently have at our facilities hazardous materials and chemicals acquired as the result of our past research and development activities. We are subject to federal, state, local and foreign laws governing the use, manufacture, storage, handling and disposal of such materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for significant damages or fines. These damages could exceed our resources and any applicable insurance coverage. In addition, we may be required to incur significant costs to comply with regulatory requirements in the future.

We may become subject to product liability claims, which could result in damages that exceed our insurance coverage.

We face an inherent risk of exposure to product liability suits in connection with product candidates previously tested in human clinical trials. We may become subject to a product liability suit if any product candidate we tested causes injury, or if individuals subsequently become infected or otherwise suffer adverse effects from our product candidates. If a product liability claim is brought against us, the cost of defending the claim could be significant and any adverse determination could result in liabilities in excess of our insurance coverage. We maintained product liability insurance, including clinical trial liability, in the amount of $10.0 million for our programs up until March 2007, when our programs were suspended. We have an extended reporting period for claims that may arise under this coverage. We cannot be certain that additional insurance coverage, if required, could be obtained on acceptable terms, if at all.

We may be subject to claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.

As is commonplace in the biotechnology industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

We are not currently listed on a national exchange and there can be no assurance we will ever be listed.

As a result of our failure to make timely filings of financial statements, we were delisted from Nasdaq, and our common stock is not currently listed on any national stock exchange. We have completed all delinquent filings with the SEC pursuant to Sections 13 and 15(d) of the Exchange Act, but we have not yet applied for our common stock to be listed on a national exchange. We do not know when, if ever, this will be completed, and thus, whether our common stock will ever be listed. In addition, we cannot be certain that Nasdaq will approve our stock for relisting or that any other exchange will approve our stock for listing. In order to be eligible for relisting or listing, we must meet Nasdaq’s or another exchange’s initial listing criteria, including a minimum per share price. Our common stock is quoted on the OTC Bulletin Board, or OTCBB, under the symbol VXGN.OB.

19

Our stockholders could experience substantial dilution as a result of the issuance of additional shares of common or preferred stock.

Our board of directors has the authority to establish the designation of almost 20,000,000 shares of preferred stock that are convertible into common stock without any action by our stockholders, and to fix the rights, preferences, privileges and restrictions, including voting rights, of such shares. In February 2006, we raised net proceeds of $25.2 million through a private placement of 3.5 million shares of common stock at $7.70 per share to a group of accredited institutional investors. We also issued to the investors five-year warrants initially exercisable to purchase 698,637 shares of common stock at an exercise price of $9.24 per share. Because we did not file all of our delinquent periodic reports with the SEC by January 31, 2007, the warrants became exercisable for an additional 698,630 shares of common stock, at a price of $9.24 per share. We may raise additional funds through public or private offerings of our preferred stock or our common stock, or through issuance of debt securities that are convertible into shares of our common stock. The issuance of additional shares of our common stock, or conversion of preferred stock or debt securities into shares of common stock, would further dilute the percentage ownership of our stockholders.

Shares of our common stock eligible for future sale may adversely affect the market for our common stock.

Pursuant to Rule 144, generally, a non-affiliated stockholder who has satisfied a six-month holding period may, under certain circumstances, sell restricted securities without any limitation. Certain of those stockholders who purchased shares of our common stock in our November 2004 and February 2006 private placements are eligible to conduct sales under Rule 144. Any substantial sale of our common stock under effective resale registration statement or pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.

Our stock price is likely to be volatile.

Currently, our common stock is quoted on the OTCBB. Stocks traded on the OTCBB typically are subject to greater volatility than stocks traded on stock exchanges, such as the Nasdaq Global Market or the Nasdaq Capital Market, due to the fact that OTCBB trading volumes are generally significantly less than those on stock exchanges. This lower volume may allow a relatively few number of stock trades to greatly affect the stock price. The trading price of our common stock has been and is likely to continue to be extremely volatile. For example, between August 9, 2004 and June 30, 2009, the closing price of our common stock has ranged from a high of $18.55 per share to a low of $0.33 per share.

Our stock price could continue to be subject to wide fluctuations in response to a variety of factors, including:

• timing and consistency of filing financial statements;

• announcements or speculation about any strategic transactions we may enter into;

• changes in financial estimates by securities analysts and our failure to meet or exceed such estimates;

• rumors about our business prospects, product development efforts or the progress, timing and completion of our clinical trials;

• issuances of debt or equity securities;

• issuances of securities or the expectation of the issuance of securities as part of a merger or other strategic transaction;

• actual or expected sales by our stockholders of substantial amounts of our common stock, including shares issued upon exercise of outstanding options and warrants;

• developments in or the outcome of litigation against us, including an ongoing dispute regarding our leased premises at 349 Oyster Point Boulevard, South San Francisco, California; and

• other events or factors, many of which are beyond our control.

In addition, the stock market in general and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies. If we face securities litigation in the future, even if it is without merit or unsuccessful, it would result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on our business.

20

We have no history of paying dividends on our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We plan to retain any future earnings to finance our growth. If we decide to pay dividends to the holders of our common stock, such dividends may not be paid on a timely basis.

Our charter documents and Delaware law may discourage an acquisition of us.

Provisions of our certificate of incorporation, by-laws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock. Our by-laws also provides that special stockholders meetings may be called only by our Chairman of the board of directors, by our Chief Executive Officer or by our board of directors, with the result that any third-party takeover not supported by the board of directors or our then-serving Chief Executive Officer could be subject to significant delays and difficulties.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K:

The following exhibits are filed as part of this report:

				Incorporated by Reference
Exhibit						Exhibit		Filed
No.		Exhibit	Form	File No.	Filing Date	No.		Herewith
	2.1	Agreement and Plan of Merger, dated November 12, 2007, by and among VaxGen, Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven biotechnologies, inc.	8-K	000-26483	11-13-07		2.1
	2.2	Amendment No. 1 to Agreement and Plan of Merger, dated December 20, 2007, by and among VaxGen, Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven biotechnologies, inc.	S-4	333-148312	12-24-07		2.2
	2.3	Amendment No. 2 to Agreement and Plan of Merger, dated February 6, 2008, by and among VaxGen, Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven biotechnologies, inc.	S-4/A	333-148312	02-06-08		2.3
	3.1	Amended and Restated Certificate of Incorporation.	S-8	333-84922	3-26-02		4.1
	3.2	Amendment to the Amended and Restated Certificate of Incorporation.	S-8	333-84922	3-26-02		4.3
	3.4	Amended and Restated Bylaws, dated as of May 18, 2007.	8-K	000-26483	05-23-07		3.1

21

				Incorporated by Reference
Exhibit						Exhibit		Filed
No.		Exhibit	Form	File No.	Filing Date	No.		Herewith
	3.5	Amendment to the Amended and Restated Certificate of Incorporation, dated as of August 10, 2005.	10-Q	0-26483	05-31-07		3.4
	4.1	Reference is made to Exhibits 3.1, 3.2, 3.4 and 3.5
	4.2	Certificate of Designations, Rights and Preferences of Series A 6% Cumulative Convertible Preferred Stock.	S-8	333-84922	3-26-02		4.2
	4.3	Securities Purchase Agreement by and among Registrant and Certain Stockholders.	8-K	000-26483	5-24-01		10.1
	4.4	Registrant Rights Agreement by and among Registrant and Certain Stockholders.	8-K	000-26483	5-24-01		10.2
	4.5	Form of Common Stock Purchase Warrant.	8-K	000-26483	5-24-01		4.1
	4.6	Specimen Stock Certificate for Common Stock of Registrant.	S-1	333-78065	6-11-99		4.1
	31.1	Rule 13a-14(a)/15d-14(a) Certification.	10-Q					X
	32.1	Section 1350 Certification.	10-Q					X

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VaxGen, Inc.
Dated: August 3, 2009	By:	/s/ James P. Panek
		James P. Panek
		President (Principal Executive, Financial and Accounting Officer)

EXHIBIT INDEX

				Incorporated by Reference
Exhibit						Exhibit		Filed
No.		Exhibit	Form	File No.	Filing Date	No.		Herewith
	2.1	Agreement and Plan of Merger, dated November 12, 2007, by and among VaxGen, Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven biotechnologies, inc.	8-K	000-26483	11-13-07		2.1
	2.2	Amendment No. 1 to Agreement and Plan of Merger, dated December 20, 2007, by and among VaxGen, Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven biotechnologies, inc.	S-4	333-148312	12-24-07		2.2
	2.3	Amendment No. 2 to Agreement and Plan of Merger, dated February 6, 2008, by and among VaxGen, Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven biotechnologies, inc.	S-4/A	333-148312	02-06-08		2.3

22

				Incorporated by Reference
Exhibit						Exhibit		Filed
No.		Exhibit	Form	File No.	Filing Date	No.		Herewith
	3.1	Amended and Restated Certificate of Incorporation.	S-8	333-84922	3-26-02		4.1
	3.2	Amendment to the Amended and Restated Certificate of Incorporation.	S-8	333-84922	3-26-02		4.3
	3.4	Amended and Restated Bylaws, dated as of May 18, 2007.	8-K	000-26483	05-23-07		3.1
	3.5	Amendment to the Amended and Restated Certificate of Incorporation, dated as of August 10, 2005.	10-Q	0-26483	05-31-07		3.4
	4.1	Reference is made to Exhibits 3.1, 3.2, 3.4 and 3.5
	4.2	Certificate of Designations, Rights and Preferences of Series A 6% Cumulative Convertible Preferred Stock.	S-8	333-84922	3-26-02		4.2
	4.3	Securities Purchase Agreement by and among Registrant and Certain Stockholders.	8-K	000-26483	5-24-01		10.1
	4.4	Registrant Rights Agreement by and among Registrant and Certain Stockholders.	8-K	000-26483	5-24-01		10.2
	4.5	Form of Common Stock Purchase Warrant.	8-K	000-26483	5-24-01		4.1
	4.6	Specimen Stock Certificate for Common Stock of Registrant.	S-1	333-78065	6-11-99		4.1
	31.1	Rule 13a-14(a)/15d-14(a) Certification.	10-Q					X
	32.1	Section 1350 Certification.	10-Q					X

23