The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes
are an integral part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2016
Note 1 - Business and Liquidity
We are a biodefense company engaged in developing two next generation
anthrax vaccines. The next generation vaccines are intended to have more rapid time to protection, fewer doses for protection and
less stringent requirements for temperature controlled storage and handling than the currently used vaccine.
Since 2006, we have been engaged in legal proceedings
with SIGA Technologies, Inc. (“SIGA”). On December 23, 2015, the Delaware Supreme Court affirmed the Delaware
Court of Chancery's judgment against SIGA which provides an estimated total award of approximately $208 million as of March
31, 2016 plus additional interest. On April 8, 2016, the Bankruptcy Court entered an order confirming SIGA’s third
amended Reorganization Plan (the “Plan”) effective April 12, 2016 which provides for SIGA to emerge from
bankruptcy and provides various alternatives for the final resolution of our litigation claim against SIGA
during 2016. Under the Plan, we received an initial payment of $5 million from SIGA during April 2016 and during May 2016, received approximately
$0.9 million, calculated by SIGA as interest on the judgment for the period of April 12, 2016 through April 30, 2016.
During the first half of 2015, we narrowed the scope of
our product development programs, reduced our employee headcount and executed other cost reductions. These actions have
allowed us to have sufficient cash to recognize the benefit of the SIGA award and advance our Anthrax vaccine programs
without the need to raise additional capital. During the second half of 2015, we focused our efforts on creating alternatives
for settling the SIGA litigation claim and developing business plans around possible outcomes.
During 2016, we will continue to develop our plans to create
shareholder value from the alternative SIGA litigation outcomes and will commence execution of those plans.
On September 9, 2014, we signed a contract with the
National Institutes of Allergy and Infectious Diseases (“NIAID") for the development of a next generation
lyophilized anthrax vaccine based on our proprietary technology platform which contributes the recombinant protective antigen
(“rPA”) bulk drug substance that is used in the liquid SparVax
®
formulation. The contract is
incrementally funded. Over the base period of the contract, we were awarded initial funding of approximately $5.2 million,
which includes a cost reimbursement component and a fixed fee component payable upon achievement of certain milestones. NIAID
exercised the first and second options under this agreement in September 2015 and December 2015, respectively. The exercised
options provide additional funding of approximately $4.9 million and an extension of the period of performance through April
30, 2017. The contract has a total value of up to approximately $28.1 million, if all technical milestones are met and all
eight contract options are exercised by NIAID. If NIAID exercises all options, the contract would last approximately five
years. If NIAID does not exercise any additional options, the contract would expire by its terms on April 30, 2017.
As of March 31, 2016, our cash balance was $14.2 million, our
accounts receivable (billed and unbilled) balance was $1.4 million, and our current liabilities were $2.6 million. We believe,
based on the operating cash requirements and capital expenditures expected for 2016, the Company’s cash on hand at March
31, 2016 plus the $5 million initial payment received from SIGA during April 2016 and approximately $0.9 million, calculated by SIGA
as interest, and received from SIGA during May 2016, is adequate to fund operations for at least the next twelve months.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
Our unaudited condensed consolidated financial
statements include the accounts of PharmAthene, Inc. and its wholly-owned subsidiary. All significant intercompany
transactions and balances have been eliminated in consolidation. Our unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.
GAAP”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial
position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 2015 has been
derived from audited consolidated financial statements at that date. The interim results of operations are not
necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (the “SEC”). We
believe that the disclosures provided herein are adequate to make the information presented not misleading when these
unaudited condensed consolidated financial statements are read in conjunction with the Consolidated Financial Statements and
Notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC. We currently operate in one business segment.
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Our unaudited condensed consolidated financial statements include significant estimates for our
share-based compensation and the value of our financial instruments, among other things. Because of the use of estimates inherent
in the financial reporting process, actual results could differ significantly from those estimates.
Foreign Currency Translation
The functional currency of our wholly owned foreign subsidiary,
PharmAthene UK Limited, is its local currency. Assets and liabilities of our foreign subsidiary are translated into United
States dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the
weighted average exchange rates prevailing during the reporting period. Translation adjustments for subsidiaries that have
not been sold, substantially liquidated or otherwise disposed of, are accumulated in other comprehensive loss, a component of stockholders’
equity. Transaction gains or losses are included in the determination of net loss.
In June 2015, we substantially liquidated PharmAthene UK Limited,
which we had acquired in 2008. Prior to substantially liquidating the UK subsidiary, currency fluctuations were recorded as foreign
currency translation adjustments, a component of other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents are stated at market value which approximates
market value and include investments in money market funds with financial institutions which are stated at market value. The Company
maintains cash balances with financial institutions in excess of insured limits. The Company does not anticipate any losses on
such cash balances.
Significant Customers and Accounts Receivable
Our primary customer is NIAID. As of March 31, 2016 and December
31, 2015, the Company’s receivable balances (both billed and unbilled) were comprised solely of receivables from NIAID.
Goodwill
Goodwill represents the excess of purchase price over the fair
value of net identifiable assets associated with acquisitions. We review the recoverability of goodwill annually at the end of
our fiscal year and whenever events or changes in circumstances indicate that it is more likely than not that impairment exists.
Recoverability of goodwill is reviewed by comparing our market value (as measured by our stock price multiplied by the number of
outstanding shares as of the end of the year) to the net book value of our equity. If our market value exceeds our net book value,
no further analysis is required. We completed our annual impairment assessment of goodwill on December 31, 2015 and determined
that there was no impairment as of that date. Changes in our business strategy or adverse changes in market conditions could impact
the impairment analyses and require the recognition of an impairment charge equal to the excess of the carrying value over its
estimated fair value.
Accrued Restructuring Expense
Accrued restructuring expense as of March 31, 2016 is as follows:
|
|
Balance as of
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Paid
|
|
|
Amortized
|
|
|
March 31,
|
|
Description
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued severance expense
|
|
$
|
131,822
|
|
|
$
|
131,822
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accrued sublease expense
|
|
|
358,769
|
|
|
|
-
|
|
|
|
59,409
|
|
|
|
299,360
|
|
Total accrued restructuring expense
|
|
$
|
490,591
|
|
|
$
|
131,822
|
|
|
$
|
59,409
|
|
|
$
|
299,360
|
|
Fair Value of Financial Instruments
Our financial instruments, and/or embedded features contained
in those instruments, often are classified as derivative liabilities and are recorded at their fair values. The determination of
fair value of these instruments and features requires estimates and judgments. Some of our stock purchase warrants are considered
to be derivative liabilities due to the presence of net settlement features and/or non-standard anti-dilution provisions; the fair
value of our warrants is determined based on the Black-Scholes option pricing model. Use of the Black-Scholes option pricing
model requires the use of unobservable inputs such as the expected term, anticipated volatility and expected dividends. See Note
3-
Fair Value Measurements
for further details.
Revenue Recognition
We generate our revenue from cost-plus-fee contracts and
in the past, have generated revenue from fixed price contracts.
Revenues on cost-plus-fee contracts are recognized in an amount
equal to the costs incurred during the period plus an estimate of the applicable fee earned. The estimate of the applicable fee
earned is determined by reference to the contract: if the contract defines the fee in terms of risk-based milestones and specifies
the fees to be earned upon the completion of each milestone, then the fee is recognized when the related milestones are earned,
as further described below; otherwise, we estimate the fee earned in a given period by using a proportional performance method
based on costs incurred during the period as compared to total estimated project costs and application of the resulting fraction
to the total project fee specified in the contract.
Under the milestone method of revenue recognition, milestone
payments (including milestone payments for fees) contained in research and development arrangements are recognized as revenue when:
(i) the milestones are achieved; (ii) no further performance obligations with respect to the milestone exist; (iii) collection
is reasonably assured; and (iv) substantive effort was necessary to achieve the milestone.
Milestones are considered substantive if all of the following
conditions are met:
|
•
|
it is commensurate with either
our performance to meet the milestone or the enhancement of the value of the delivered item or items as a result of a specific
outcome resulting from our performance to achieve the milestone,
|
|
•
|
it relates solely to past performance, and
|
|
•
|
the value of the milestone is reasonable relative to all the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
|
If a milestone is deemed not to be substantive, the Company
recognizes the portion of the milestone payment as revenue that correlates to work already performed using the proportional performance
method; the remaining portion of the milestone payment is deferred and recognized as revenue as the Company completes its performance
obligations.
Revenue on fixed price contracts (without substantive milestones
as described above) is recognized on the percentage-of-completion method. The percentage-of-completion method recognizes income
as the contract progresses (generally related to the costs incurred in providing the services required under the contract). The
use of the percentage-of-completion method depends on the ability to make reasonable dependable estimates and the fact that circumstances
may necessitate frequent revision of estimates does not indicate that the estimates are unreliable for the purpose for which they
are used.
As a result of our revenue recognition policies and the billing
provisions contained in our contracts, the timing of customer billings may differ from the timing of recognizing revenue. Amounts
invoiced to customers in excess of revenue recognized are reflected on the balance sheet as deferred revenue. Amounts recognized
as revenue in excess of amounts billed to customers are reflected on the balance sheet as unbilled accounts receivable.
Upon notice of termination of a contract from the government,
all related termination costs are expensed. If there is assurance that collection is reasonably assured, then revenue is taken
as if the contract was a cost-plus-fee contract.
Collaborative Arrangements
Even
though most of our products are being developed in conjunction with support by the U.S. Government, we are an active
participant in that development, with exposure to significant risks and rewards of commercialization relating to the
development of these pipeline products. In collaborations where we are deemed to be the principal participant of
the collaboration, we recognize costs and revenues generated from third parties using the gross basis of accounting;
otherwise, we use the net basis of accounting. Cost paid to us by other collaborative arrangement members are recognized
pursuant to their terms.
Research and Development
Research and development costs are expensed as incurred; up-front payments are deferred and expensed
as performance occurs. Research and development costs include salaries, facilities expense, overhead expenses, material and
supplies, preclinical expense, clinical trials and related clinical manufacturing expenses, share-based compensation expense,
contract services and other outside services.
Share-Based Compensation
We expense the estimated fair value of share-based awards granted
to employees, non-employee directors and consultants under our stock compensation plans.
The fair value of stock options granted to employees and non-employee
directors is determined at the grant date using the Black-Scholes option pricing model, which considers, among other factors, the
expected life of the award and the expected volatility of our stock price. The value of the award that is ultimately expected to
vest is recognized as expense on a straight line basis over the requisite service period.
The fair value of stock options granted to consultants is determined
at the grant date using the Black-Scholes option pricing model and remeasured at each quarterly reporting date over their requisite
service period. The value of the award that is ultimately expected to vest is recognized as expense on a straight line basis over
the requisite service period.
The fair value of restricted stock grants granted to employees
and non-employee directors is determined based on the closing price of our common stock on the award date and is recognized as
expense ratably over the requisite service period.
The fair value of restricted stock grants granted to consultants
is determined based on the closing price of our common stock on the award date, is remeasured at each quarterly reporting date
and is recognized as expense ratably over the requisite service period.
Employee share-based compensation expense recognized in the
three months ended March 31, 2016 and 2015 was calculated based on awards ultimately expected to vest and has been reduced for
estimated forfeitures at a rate of approximately 12%, based on historical forfeitures.
Share-based compensation expense for the three months ended
March 31, 2016 and 2015 was as follows:
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
29,293
|
|
|
$
|
60,735
|
|
General and administrative
|
|
|
152,633
|
|
|
|
192,633
|
|
Restructuring benefit
|
|
|
-
|
|
|
|
(53,741
|
)
|
Total share-based compensation expense
|
|
$
|
181,926
|
|
|
$
|
199,627
|
|
As a result of the restructuring and termination of employees,
during the three months ended March 31, 2015, we recognized approximately $75,000 of share-based compensation expense resulting
from our agreement to extend the exercise period of the vested stock options for several of the executives who were terminated.
In addition, approximately $129,000 of previously recognized share-based compensation expense was reversed for unvested stock options
forfeited as a result of the restructuring and termination of employees. The $53,741 net reversal of share-based compensation expense
is reflected in restructuring benefit in the above table.
During the three months ended March 31, 2016, we made no stock
option or restricted stock grants. During the three months ended March 31, 2015, we granted 12,000 options and made 117,500
shares of restricted stock grants to employees. At March 31, 2016, we had total unrecognized share-based compensation expense
related to unvested awards of approximately $1.0 million net of estimated forfeitures, which we expect to recognize as expense
over a weighted-average period of 1.9 years.
Income Taxes
We account for income taxes using the asset and liability approach,
which requires the recognition of future tax benefits or liabilities on the temporary differences between the financial reporting
and tax bases of our assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if it is “more
likely than not” that the position is sustainable based on its technical merits. Our policy is to recognize interest and
penalties on uncertain tax positions as a component of income tax expense. As of March 31, 2016, we had recognized a full valuation allowance since the likelihood of realization of our tax deferred
assets does not meet the more likely than not threshold.
Income tax expense was $0.02 million during each of the three
months ended March 31, 2016 and 2015, relating exclusively to the generation of a deferred tax liability associated with the tax
amortization of goodwill, which is included as a component of other long-term liabilities on our consolidated balance sheets.
Basic and Diluted Net Loss Per Share
Income (loss) per share:
Basic income (loss) per
share is computed by dividing consolidated net income (loss) by the weighted average number of common shares outstanding during
the period, excluding unvested restricted stock.
For periods of net income when the effects are not
anti-dilutive, diluted earnings per share is computed by dividing our net income by the weighted average number of shares
outstanding and the impact of all potentially dilutive common shares, consisting primarily of stock options,
unvested restricted stock and stock purchase warrants. The dilutive impact of our potentially dilutive common shares
resulting from stock options and stock purchase warrants is determined by applying the treasury stock method.
For periods of net loss, diluted loss per share is
calculated similarly to basic loss per share because the impact of all potentially dilutive common shares is anti-dilutive due
to the net losses. A total of approximately 6.2 million and 4.9 million potentially dilutive securities have been excluded in
the calculation of diluted net loss per share in the three months ended March 31, 2016 and 2015, respectively, because their
inclusion would be anti-dilutive.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 supersedes
the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires
an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the
transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures
regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the
FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December
15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB
issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross
rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the identification
of performance obligations and licensing arrangements. The Company has not determined the impact of adopting ASU No. 2014-09
on our consolidated financial statements and currently plan to complete our evaluation by late 2017.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements, Going Concern (Subtopic 205-40) which
requires management to evaluate on a regular basis whether any conditions or events have arisen that could raise substantial
doubt about the entity's ability to continue as a going concern. The guidance 1) provides a definition for the term “substantial
doubt,” 2) requires an evaluation every reporting period, interim periods included, 3) provides principles for considering
the mitigating effect of management's plans to alleviate the substantial doubt, 4) requires certain disclosures if the substantial
doubt is alleviated as a result of management's plans, 5) requires an express statement, as well as other disclosures, if
the substantial doubt is not alleviated, and 6) requires an assessment period of one year from the date the financial statements
are issued. The standard is effective for the annual reporting period beginning after December 31, 2016. Early adoption is
permitted. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its
financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles, Goodwill and Other Internal-Use Software which includes guidance
as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service,
and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such
arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. The guidance is
effective for reporting periods beginning after December 15, 2015, and can be adopted on either a prospective or retrospective
basis. The Company adopted this guidance for the year ended December 31, 2016, on a prospective basis. The adoption of this
new guidance did not have a material impact on the Company's financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes,
or ASU No. 2015-17. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this
Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax
liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the
amendments in this Update. The amendments in this Update are effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted. The amendments in this
Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.
We are currently evaluating the impact of adopting ASU No. 2015-17 on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a
lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle of Topic
842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement
of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right
to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact
of adopting ASU No. 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation
– Stock Compensation, or ASU No. 2016-09. The areas for simplification in this Update involve several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. For public entities, the amendments in this Update are effective for annual
periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any
interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as
of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the
amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding
requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a
cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to
the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory
withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies
in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may
elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a
prospective transition method or a retrospective transition method. We are currently evaluating the impact of adopting ASU No.
2016-09 on our consolidated financial statements.
Note 3 - Fair Value Measurements
The carrying amounts of our short-term financial instruments,
which primarily include cash and cash equivalents, accounts receivable (billed and unbilled), and accounts payable, approximate
their fair values due to their short-term maturities. We define fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. We report assets and liabilities that are measured at fair
value using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes
the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair
value are as follows:
|
•
|
Level 1 — Quoted
prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 — Observable
inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
|
|
•
|
Level 3 — Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
An asset’s or liability’s level within the fair
value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting
period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities
for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore
have little or no price transparency are classified as Level 3.
We have segregated our financial assets and liabilities that
are measured at fair value into the most appropriate level within the fair value hierarchy based on the inputs used to determine
the fair value at the measurement date in the table below. We have no non-financial assets and liabilities that are measured
at fair value on a recurring basis.
Assets and Liabilities Measured at Fair Value on a Recurring
Basis
The following table represents the Company’s fair value
hierarchy for its financial assets and liabilities measured at fair value on a recurring basis:
|
|
As of March 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in money market funds
(1)
|
|
$
|
6,434,907
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,434,907
|
|
Total investment in money market funds
|
|
$
|
6,434,907
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,434,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
468,304
|
|
|
$
|
468,304
|
|
Non-current portion of derivative instruments related to stock purchase warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
468,304
|
|
|
$
|
468,304
|
|
|
|
As of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in money market funds
(1)
|
|
$
|
6,430,561
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,430,561
|
|
Total investment in money market funds
|
|
$
|
6,430,561
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,430,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,411
|
|
|
$
|
16,411
|
|
Non-current portion of derivative instruments related to stock purchase warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
491,791
|
|
|
|
491,791
|
|
Total derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
508,202
|
|
|
$
|
508,202
|
|
|
(1)
|
Included in cash and
cash equivalents on the accompanying condensed consolidated balance sheets.
|
As of March 31, 2016, the Company did
not have any transfers between Level 1 and Level 2 assets.
The following table sets forth a summary of changes in the fair
value of the Company’s Level 3 liabilities for the three months ended March 31, 2016 and 2015:
|
|
Balance as of
|
|
|
Unrealized
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
(Gains)
|
|
|
March 31,
|
|
Description
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
Derivative liabilities related to stock purchase warrants
|
|
$
|
508,202
|
|
|
$
|
(39,898
|
)
|
|
$
|
468,304
|
|
|
|
Balance as of
|
|
|
Unrealized
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
(Gains)
|
|
|
March 31,
|
|
Description
|
|
2014
|
|
|
2015
|
|
|
2015
|
|
Derivative liabilities related to stock purchase warrants
|
|
$
|
807,679
|
|
|
$
|
(338,245
|
)
|
|
$
|
469,434
|
|
At March 31, 2016 and 2015, derivative liabilities are comprised
of warrants to purchase 1,275,419 and 1,775,419 shares of common stock, respectively. The warrants are considered to be derivative
liabilities due to the presence of net settlement features and/or non-standard anti-dilution provisions, and as a result, are recorded
at fair value at each balance sheet date. The fair value of our warrants is determined based on the Black-Scholes option pricing
model. Use of the Black-Scholes option pricing model requires the use of unobservable inputs such as the expected term, anticipated
volatility and expected dividends. Changes in any of the assumptions related to the unobservable inputs identified above may change
the stock purchase warrants’ fair value; increases in expected term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. Unrealized
gains and losses on the fair value adjustments for these derivative instruments are classified in other income (expense) as the
change in fair value of derivative instruments in our unaudited condensed consolidated statements of operations.
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value at March 31, 2016
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
$
|
468,304
|
|
|
Black-Scholes option pricing model
|
|
Expected term
|
|
|
|
|
|
|
Expected dividends
|
|
|
|
|
|
|
Anticipated volatility
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring
Basis
The Company measures its long-lived assets, including, property
and equipment and goodwill, at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed
to be other-than-temporarily impaired. (See Note 2-
Summary of Significant
Accounting Policies
). As of March 31,
2016, the Company had no other assets or liabilities that were measured at fair value on a non-recurring basis.
Note 4 - Commitments and Contingencies
SIGA Litigation
In December 2006, we filed a complaint against SIGA in
the Delaware Court of Chancery. The complaint alleged, among other things, that we have the right to license exclusively the development
and marketing rights for SIGA’s drug candidate, Tecovirimat, also known as ST-246
®
, pursuant to a merger
agreement between the parties that was terminated in 2006. The complaint also alleged that SIGA failed to negotiate in good faith
the terms of such a license pursuant to the terminated merger agreement with us.
In September 2014, SIGA filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy
Court”). SIGA’s petition for bankruptcy initiated a process whereby its assets were protected from creditors, including
PharmAthene.
In January 2015, after years of litigation, the Delaware Court
of Chancery issued a Final Order and Judgment, finding that we are entitled to receive a lump sum award of $194.6 million,
or the Total Judgment, comprised of (1) expectation damages of $113.1 million for the value of the Company’s lost profits
for Tecovirimat, plus (2) pre-judgment interest on that amount from 2006 and varying percentages of the Company’s reasonable
attorneys’ and expert witness fees, totaling $81.5 million. Under the Final Order and Judgment, PharmAthene is also
entitled to post-judgment simple interest.
On December 23, 2015, the Delaware Supreme Court affirmed the
Delaware Court of Chancery's decision as a result of which, with additional post-judgment interest, if calculated based on the
original decision, would provide for an estimated total award of approximately $205 million.
On April 8, 2016, the Bankruptcy Court entered an
order confirming SIGA’s Plan effective April 12, 2016 which provides for among other things, the process by which SIGA
may emerge from bankruptcy, which includes the process by which our Judgment may be satisfied. The Plan provides generally
that we will receive, in full settlement and satisfaction of our claim, no later than 120 days plus another potential 90
days after March 23, 2016 (generally considered to be no later than October 19, 2016), one of the following, determined in
SIGA’s sole discretion:
|
(i)
|
payment in full in cash of the unpaid balance of our claim plus interest;
|
|
(ii)
|
delivery to us of 100% of SIGA’s common stock; or
|
|
(iii)
|
such other treatment as may be mutually agreed upon in writing by SIGA and PharmAthene and approved by the Bankruptcy Court.
|
If SIGA does not make its choice or satisfy the judgment in the manner in which it has chosen by October 19, 2016, we will
receive 100% of SIGA by October 24, 2016.
From and after the Effective date (April 12, 2016), SIGA will compute interest on the outstanding balance of the judgment
and pay us in arrears monthly. The interest will be computed at a rate of 8.75%. If SIGA decides to extend the 120 day period
by an additional 90 days, the interest will be computed at the Delaware judgment interest rate which is currently 6%.
Under the Plan, we received an initial payment of $5 million from SIGA during April 2016 and during May 2016, received a first
monthly payment calculated by SIGA as interest of approximately $0.9 million for the period April 12, 2016 through April 30,
2016. SIGA is required to pay us $20 million if it decides to extend the 120 day period by an additional 90 days. The payments
are creditable against the final judgment and are not refundable.
The description of the Plan provided above is a brief summary
of the Plan, which includes numerous other conditions and substantive provisions relating to the operation of the business of SIGA.
Copies of the Plan are available from the Bankruptcy Court. For a description of risks related to our ability to recognize value
relating to this litigation, see the “
Risk Factors
” section of our annual report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 11, 2016.
There can be no assurances if and when the Company will receive
any additional payments from SIGA as a result of the Judgment. SIGA has indicated in filings with the Bankruptcy Court that it
does not currently have cash sufficient to satisfy the award. It is also uncertain whether SIGA will have such cash in the future.
Our ability to collect the Judgment depends upon a number of factors, including SIGA’s financial and operational success,
which is subject to a number of significant risks and uncertainties (certain of which are outlined in SIGA’s filings with
the SEC), as to which we have limited knowledge and which we have no ability to control, mitigate or fully evaluate. The Company
has not recognized any potential proceeds from these actions in the financial statements to date.
Government Contracting
Payments to the Company on cost-plus-fee contracts are
provisional. The accuracy and appropriateness of costs charged to U.S. Government contracts are subject to regulation, audit
and possible disallowance by the Defense Contract Audit Agency (“DCAA”) and other government agencies such as the
Biomedical Advanced Research and Development Authority ("BARDA"). Accordingly, costs billed or billable to U.S. Government
customers are subject to potential adjustment upon audit by such agencies. We have agreed to rate provisions with DCAA for
2006, 2007 and 2008. In 2014, BARDA audited indirect costs or rates charged by us on the SparVax
®
contract for
the years 2008 through 2013. As a result of the audit, we were able to record incremental revenue of
$5.8 million in the first quarter of 2015 and payment in the second quarter of 2015.
BARDA has audited our 2014 costs related to the partial termination
for convenience of the SparVax
®
contract and forwarded the results to the pertinent U.S. Government Contracting
Officer. While we do not currently believe the results of this audit will have an adverse effect on the Company, we cannot provide
assurances that it will not have such an effect. The Company has billed and recognized revenue using the provisional rates as defined
in the contract. While the actual rates for 2014, which reflect the actual costs incurred by us, have been higher than the provisional
rates, we have no assurance on either the amount of additional funds we may receive as a result of these higher rates or the amount
of time it may take to recover these funds.
Changes in government policies, priorities or funding levels
through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect the Company’s
financial condition or results of operations. Furthermore, contracts with the U.S. Government may be terminated or suspended by
the U.S. Government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable
expenses or charges or otherwise adversely affect the Company’s financial condition and/or results of operations.
Registration Rights Agreements
We entered into a Registration Rights Agreement with the investors
who participated in the July 2009 private placement of convertible notes and related warrants. We subsequently filed two registration
statements on Form S-3 with the Securities and Exchange Commission to register the resale of the shares issuable upon conversion
of the convertible notes and exercise of the related warrants, which have been declared effective. We are obligated to maintain
the registration statements effective until the date when such shares (and any other securities issued or issuable with respect
to or in exchange for such shares) have been sold or are eligible for resale without restrictions under Rule 144. The convertible
notes were converted or extinguished in 2010. The warrants expired on January 28, 2015.
We have separate registration rights agreements with investors,
under which we have obligations to keep the corresponding registration statements effective until the registrable securities (as
defined in each agreement) have been sold, and under which we may have separate obligations to file registration statements in
the future on either a demand or “piggy-back” basis or both.
Under the terms of the convertible notes, which were converted
or extinguished in 2010, if after the 2nd consecutive business day (other than during an allowable blackout period) on which sales
of all of the securities required to be included on the registration statement cannot be made pursuant to the registration statement
(a “Maintenance Failure”), we will be required to pay to each selling stockholder a one-time payment of 1.0% of the
aggregate principal amount of the convertible notes relating to the affected shares on the initial day of a Maintenance Failure.
Our total maximum obligation under this provision at March 31, 2016, which is not probable of payment, would be approximately $0.2
million.
Following a Maintenance Failure, we will also be required to
make to each selling stockholder monthly payments of 1.0% of the aggregate principal amount of the convertible notes relating to
the affected shares on every 30th day after the initial day of a Maintenance Failure, in each case prorated for shorter periods
and until the failure is cured. Our total maximum obligation under this provision, which is not probable of payment, would be approximately
$0.2 million for each month until the failure, if it occurs, is cured.
Leases
We lease our office in Maryland under a 10 year operating lease,
which commenced on May 1, 2007. Remaining annual minimum payments are as follows:
Year
|
|
Lease Payments
(1)
|
|
|
|
|
|
2016
|
|
$
|
640,362
|
|
2017
|
|
|
356,911
|
|
|
|
$
|
997,273
|
|
|
(1)
|
Minimum payments have not been reduced by the minimum sublease rentals of $0.2 million due in the future under noncancellable subleases.
|
On September 2, 2015, the Company entered into a sublease agreement
with a third party with respect to a portion of its leased office space at an amount less than the Company’s leased amount.
The present value of the Company’s remaining net lease
liability for the subleased office space (net of the sublease rental income), is included on the balance sheet as a component of
accrued restructuring expenses as follows:
Description
|
|
Present Value at March 31, 2016
|
|
Accrued restructuring expenses - current
|
|
$
|
255,551
|
|
Accrued restructuring expenses - long term
|
|
$
|
43,809
|
|
License Agreements
On July 6, 2015, we signed a license agreement with
ImmunoVaccine Technologies (“IMV”) for the exclusive use of the DepoVax
TM
vaccine platform
(“DPX”), to develop an anthrax vaccine utilizing PharmAthene’s rPA. PharmAthene will reimburse up to
$210,000 to IMV for their efforts in developing this vaccine and, in addition, PharmAthene will pay to IMV an annual
payment of $200,000, additional payments for the achievement of certain milestones relating to contracting with the U.S.
Government as well as achieving certain clinical/regulatory and commercial milestones, and achievement of sales targets, and
royalties on sales related to the use of DPX.
Note 5 - Stockholders’ Equity
Stockholder Rights Plan
On November 25, 2015, the Company’s Board of Directors
adopted a stockholder rights plan (“Rights Plan”) in an effort to preserve the value of its net operating loss carryforwards
(“NOLs”) under Section 382 of the Internal Revenue Code (the “Code”). The description and terms of the
rights are set forth in a Section 382 Rights Agreement, dated as of November 25, 2015 (the “Section 382 Rights Agreement”),
by and between the Company and Continental Stock Transfer & Trust Company, as Rights Agent.
In connection with the adoption of the Rights Plan, on November
25, 2015 (the “Rights Dividend Declaration Date”), the Board declared a non-taxable dividend distribution of one share
purchase right (“Right”) for each outstanding share of common stock to the Company's stockholders of record as of the
close of business on December 9, 2015. The Section 382 Rights Plan is intended to act as a deterrent to any person (an “Acquiring
Person”) acquiring (together with all affiliates and associates of such person) beneficial ownership of 4.99% or more of
the Company’s outstanding common stock within the meaning of Section 382 of the Code, without the approval of the Board of
Directors. Stockholders who beneficially owned 4.99% or more of the Company’s outstanding common stock as of the Rights Dividend
Declaration Date are not be deemed to be an Acquiring Person, but such person will be deemed an Acquiring Person if such person
(together with all affiliates and associates of such person) becomes the beneficial owner of securities representing a percentage
of the Company’s common stock that exceeds by 0.5% or more the lowest percentage of beneficial ownership of the Company’s
common stock that such person had at any time since the Rights Dividend Declaration Date. In its discretion, the Board may exempt
certain persons whose acquisition of securities is determined by the Board not to jeopardize the availability to the Company's
NOLs or other tax benefits and may also exempt certain transactions.
Long-Term Incentive Plan
In 2007, the Company’s stockholders approved the 2007
Long-Term Incentive Compensation Plan (the “2007 Plan”) which provides for the granting of incentive and non-qualified
stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses (collectively “awards”)
to Company officers and employees. Additionally, the 2007 Plan authorizes the granting of non-qualified stock options and restricted
stock awards to Company directors and to independent consultants.
In 2008, our stockholders approved amendments to the
2007 Plan, increasing from 3.5 million shares to 4.6 million shares the maximum number of shares authorized for
issuance under the plan and adding an evergreen provision pursuant to which the number of shares authorized for issuance
under the plan would increase automatically in each year, beginning in 2009, in accordance with certain limits set forth in
the 2007 Plan. Under the terms of the evergreen provision, the annual increases were to continue through 2015, subject,
however, to an aggregate limitation on the number of shares that could be authorized for issuance pursuant to such increases.
This aggregate limitation was reached on January 1, 2014, so that the number of shares authorized for issuance under the plan
did not automatically increase on January 1, 2015, or thereafter.
During the three months ended March 31, 2016, 16,900 stock options were exercised, 186,957 stock options were forfeited or
expired, and 46,250 restricted stock awards were released. At March 31, 2016, there are approximately
10.3 million shares approved for issuance under the 2007 Plan, of which approximately 3.6 million shares are
available for grant. The Board of Directors in conjunction with management determines who receives awards, the vesting
conditions and the exercise price. Options may have a maximum term of ten years.
Warrants
At March 31, 2016 and 2015 there were warrants outstanding to
purchase 1,422,781 and 1,922,781 shares of our common stock, respectively. The warrants outstanding as of March 31, 2016, all of
which are exercisable, were as follows:
Number of Common Shares
Underlying Warrants As of
March 31, 2016
|
|
|
Issue Date
|
|
Exercise Price
|
|
|
Expiration Date
|
|
100,778
|
(1)
|
|
March 2007
|
|
$
|
3.97
|
|
|
March 2017
|
|
903,996
|
(2)
|
|
July 2010
|
|
$
|
1.63
|
|
|
January 2017
|
|
371,423
|
(2)
|
|
June 2011
|
|
$
|
3.50
|
|
|
June 2016
|
|
46,584
|
(1)
|
|
March 2012
|
|
$
|
1.61
|
|
|
March 2022
|
|
1,422,781
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These warrants to purchase common stock are classified as equity.
|
|
(2)
|
These warrants to purchase common stock are classified as derivative liabilities. The fair value of these liabilities (See Note 3 –
Fair Value Measurements
) is remeasured at the end of every reporting period and the change in fair value is reported in the unaudited condensed consolidated statements of operations as other income (expense).
|
Note 6 – Financing Transactions
Controlled Equity Offering
On March 25, 2013, we entered into a controlled equity offering
sales agreement with a sales agent, and filed with the SEC a prospectus supplement, dated March 25, 2013 to our prospectus dated
July 27, 2011, or the 2011 Prospectus, pursuant to which we could offer and sell, from time to time, through the agent shares of
our common stock having an aggregate offering price of up to $15.0 million.
On May 23, 2014, we entered into an amendment, or the
2014 Amendment, to the controlled equity offering sales agreement with the sales agent, pursuant to which we may offer and
sell, from time to time, through the agent shares of our common stock having an aggregate offering price of up to an
additional $15.0 million. On that day, we filed a prospectus supplement to the 2011 Prospectus for use in any sales of
these additional shares of common stock through July 26, 2014, the date the underlying registration statement (File No.
333-175394) expired. As a result of this expiration, the 2011 Prospectus, as supplemented on March 25, 2013 and May 23, 2014,
may no longer be used for the sale of shares of common stock under the controlled equity offering sales agreement, as
amended. On May 23, 2014, we also filed a new universal shelf registration statement (File No. 333-196265) containing, among
other things, a prospectus, or the 2014 Prospectus, for use in sales of the common stock under the 2014 Amendment.
This registration statement was declared effective on May 30, 2014 and will expire on May 30, 2017, three years from its
effective date. Since the expiration of the 2011 Prospectus, all sales under the controlled equity offering sales agreement, as
amended, are being effected under the 2014 Prospectus.
Under the controlled equity offering sales agreement, as amended,
the agent may sell shares by any method permitted by law and deemed to be an “at-the-market” offering as defined in
Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on NYSE MKT, or any other existing
trading market for our common stock or to or through a market maker. Subject to the terms and conditions of that agreement, the
agent will use commercially reasonable efforts, consistent with its normal trading and sales practices and applicable state and
federal law, rules and regulations and the rules of NYSE MKT, to sell shares from time to time based upon our instructions. We
are not obligated to sell any shares under the arrangement. We are obligated to pay the agent a commission of 3.0% of the aggregate
gross proceeds from each sale of shares under the arrangement.
As of March 31, 2016, shares having an aggregate
offering price of $3.0 million remained available under the controlled equity offering sales agreement, as amended.
During the three months ended March 31, 2016, we did not sell any shares of our common stock under this arrangement. We have
no current plans to sell any shares under the controlled equity agreement.
Note 7 – Subsequent Events
On April 8, 2016, the U.S. Bankruptcy Court for the Southern District of New York approved the Plan that lays out the terms
and conditions under which SIGA will exit from bankruptcy, effective April 12, 2016. The Plan was negotiated between SIGA
and the Statutory Creditor's Committee of which PharmAthene is a member. We received a $5 million initial payment from SIGA
during April 2016 and during May 2016, received approximately $0.9 million, calculated by SIGA as interest on the judgment
for the period April 12, 2016 through April 30, 2016. The payments are creditable against final satisfaction of our claim
of approximately $208 million as of March 31, 2016 plus additional interest and are not refundable.