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
June 30, 2016
Note 1 – Business and Liquidity
We are a biodefense company engaged in
developing a next generation anthrax vaccine. The next generation vaccine is 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 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 $8.9 million from SIGA in
the second quarter of 2016, comprised of an initial payment of $5 million (which amount is creditable against final satisfaction
of the judgment in our favor and is not refundable) and $3.9 million of interest payments. We received $20 million from SIGA in
July 2016, as payment to extend by 90 days, until October 19, 2016, the date by which SIGA must satisfy the judgment (this amount
is also creditable against final satisfaction of the judgment in our favor and is not refundable).
On July 20, 2016, the Company and SIGA
filed a Joint Motion of Reorganized Debtor and PharmAthene, Inc. to Amend Debtor’s Third Amended Chapter 11 Plan (the “Plan”)
to Extend PharmAthene Allowed Claim Treatment Date (the “Joint Motion”). The Joint Motion was filed with the United
States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Joint Motion seeks approval
of amendments to the Plan that would extend the deadline for SIGA to satisfy the previously disclosed judgment owed to the Company
from October 19, 2016 to November 30, 2016, conditioned on SIGA’s payment to PharmAthene of $100 million on or prior to October
19, 2016 that will be applied against PharmAthene’s judgment. Interest on any unpaid balance will continue to accrue at 8.75%
per year and be paid monthly to the Company by SIGA. A hearing to consider the Joint Motion is scheduled to be held before the
Bankruptcy Court on August 15, 2016. No assurance can be given that the Joint Motion will be approved by the Bankruptcy Court.
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 continue to develop our
plans to create stockholder 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 (“SparVax-L”) 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, second and third options under this agreement in September 2015, December 2015,
and July 2016, respectively. The exercised options provide additional funding of approximately $6 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 June 30, 2016, our cash balance was $23.2 million, our accounts receivable (billed and unbilled)
balance was $1.8 million, and our current liabilities were $3.3 million. The Company’s cash balance at June 30, 2016 includes
approximately $8.9 million received from SIGA during the three months ended June 30, 2016. In July 2016, we received a $20 million
payment from SIGA to extend by 90 days the date on which SIGA must satisfy the judgment. The proceeds received from SIGA have been
placed in low risk money market funds in an effort to preserve capital. In the event SIGA pays us the full value of the judgment
in cash, and barring any unexpected material events, we expect that we will distribute at least 90% of the after tax net cash proceeds
to our stockholders. The timing and form of any distribution will depend on our analysis of the Company’s current situation,
applicable corporate statutes relating to distributions and the economic consequences to our stockholders. We believe, based on
the operating cash requirements and capital expenditures expected for 2016, the Company’s cash on hand at June 30, 2016,
excluding the SIGA proceeds that we intend to distribute to stockholders, 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 fair value and include investments in money market funds with financial institutions. 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 June
30, 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 June 30, 2016 is as follows:
|
|
Balance as of
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Paid
|
|
|
Amortized
|
|
|
June 30,
|
|
Description
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued severance expense
|
|
$
|
131,822
|
|
|
$
|
131,822
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accrued sublease expense
|
|
|
358,769
|
|
|
|
-
|
|
|
|
121,644
|
|
|
|
237,125
|
|
Total accrued restructuring expense
|
|
$
|
490,591
|
|
|
$
|
131,822
|
|
|
$
|
121,644
|
|
|
$
|
237,125
|
|
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 and six months ended June 30, 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 June 30, 2016 and 2015 was:
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
23,181
|
|
|
$
|
12,490
|
|
General and administrative
|
|
|
143,614
|
|
|
|
121,114
|
|
Total share-based compensation expense
|
|
$
|
166,795
|
|
|
$
|
133,604
|
|
Share-based compensation expense for the
six months ended June 30, 2016 and 2015 was:
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
52,474
|
|
|
$
|
73,225
|
|
General and administrative
|
|
|
296,246
|
|
|
|
313,747
|
|
Restructuring benefit
|
|
|
-
|
|
|
|
(53,741
|
)
|
Total share-based compensation expense
|
|
$
|
348,720
|
|
|
$
|
333,231
|
|
During the three and six months ended
June 30, 2016, we granted options to purchase 200,000 shares of common stock to employees and non-employee directors and made
no restricted stock grants. During the three months ended June 30, 2015, we made no stock option or restricted stock grants. During
the six months ended June 30, 2015, we granted options to purchase 12,000 shares of common stock to employees and made 117,500
shares of restricted stock grants to employees. At June 30, 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 1.8 years.
As a result of the restructuring and termination
of employees, during the six months ended June 30, 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.
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 June 30, 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 and $0.01
million during the three months ended June 30, 2016 and 2015, respectively, and $0.03 million during the six months ended June
30, 2016 and 2015, respectively, 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. The Company’s
effective tax rate for the three and six months ended June 30, 2016 includes the reduction of the Company’s net deferred
tax asset to offset net income before taxes for the periods presented.
Basic and Diluted Net Income
(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.
Our unvested restricted shares contain
non-forfeitable rights to dividends, and therefore are considered to be participating securities; the calculation of basic and
diluted earnings per share for the three and six months ended June 30, 2016 excludes from the numerator net income attributable
to the unvested restricted shares, and excludes the impact of those shares from the denominator which is consistent with the two-class
method in accordance with GAAP.
A reconciliation of the numerators and
denominators of the basic and diluted per share computations for the three and six months ended June 30, 2016 is as follows (a
reconciliation is not required for the three and six months ended June 30, 2015 quarter since the Company recorded a net loss
for those periods):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,044,474
|
|
|
$
|
6,817,568
|
|
Net income allocated to participating securities
|
|
|
(24,004
|
)
|
|
|
(22,288
|
)
|
Numerator for basic income per share
|
|
|
8,020,470
|
|
|
|
6,795,280
|
|
Incremental allocation of net income to participating securities
|
|
|
172
|
|
|
|
118
|
|
Numerator for diluted income per share
|
|
$
|
8,020,642
|
|
|
$
|
6,795,398
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding common shares for basic income per share
|
|
|
64,737,820
|
|
|
|
64,571,108
|
|
Dilutive effect of stock options
|
|
|
468,256
|
|
|
|
346,159
|
|
Denominator for diluted income per share
|
|
|
65,206,076
|
|
|
|
64,917,267
|
|
For the three months ended June 30, 2016,
outstanding stock options to purchase approximately 1.5 million shares of common stock, warrants to purchase approximately 1.4
million shares of common stock and approximately 0.8 million of unvested restricted shares were excluded from the calculation of
basic and diluted net income per share, because their inclusion would be anti-dilutive.
For the six months ended June 30, 2016,
outstanding stock options to purchase approximately 1.9 million shares of common stock, warrants to purchase approximately 1.4
million shares of common stock and approximately 0.8 million of unvested restricted shares were excluded from the calculation of
basic and diluted net income per share, because their inclusion would be anti-dilutive.
A total of approximately 7.2 million potentially
dilutive securities were excluded from the calculation of diluted net loss per share in the three and six months ended June 30,
2015, 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. In May 2016, the FASB issued guidance to clarify
the collectibility criterion, the presentation of sales taxes and other similar taxes collected from customers, noncash consideration,
contract modifications at transition, completed contracts at transition, and required disclosures for entities that retrospectively
apply Topic 606 to each prior reporting period. The Company is currently evaluating; however, has not yet 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 amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and
interim periods thereafter. Early application 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.
However, we will adopt the standard as of December 31, 2016.
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. The following amendments in this Update apply
to all entities:
|
•
|
An entity should recognize all excess tax benefits (“windfalls”) and tax deficiencies
(“shortfalls”), including tax benefits of dividends on share-based payment awards, as income tax expense or benefit
in the income statement. As a result of including income tax effects from windfalls and shortfalls in income tax expense, the calculation
of both basic and diluted EPS will be affected. Under the new guidance, windfalls are recognized in net income and thus no longer
included in assumed proceeds under the treasury stock method.
|
|
•
|
An entity should classify excess tax benefits along with other income tax cash flows as an operating
activity in the statement of cash flows.
|
|
•
|
This Update provides an accounting policy election, to be applied on an entity-wide basis, to either
estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they
occur.
|
|
•
|
This Update increases the allowable statutory tax withholding threshold to qualify for equity classification
from the minimum statutory withholding requirements up to the maximum statutory tax rate in the applicable jurisdiction(s).
|
|
•
|
This Update clarifies that cash paid to a taxing authority by an employer when directly withholding
equivalent shares for tax withholding purposes should be considered similar to a share repurchase, and thus classified as a financing
activity. All other employer withholding taxes on compensation transactions and other events that enter into the determination
of net income continue to be presented within operating activities.
|
|
•
|
The FASB removed the indefinite deferral in paragraph 718-10-65-1 on the need to apply another
Topic when the rights conveyed by a freestanding financial instrument are no longer dependent on the holder being an employee.
Because this guidance was never implemented, the elimination will not impact current practice.
|
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 June 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in money market funds
(1)
|
|
$
|
6,440,774
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,440,774
|
|
Total investment in money market funds
|
|
$
|
6,440,774
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,440,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
798,788
|
|
|
$
|
798,788
|
|
Total derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
798,788
|
|
|
$
|
798,788
|
|
|
|
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.
|
The following table sets forth a summary
of changes in the fair value of the Company’s Level 3 liabilities for the six months ended June 30, 2016 and 2015:
|
|
Balance as of
|
|
|
Unrealized
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Losses (Gains)
|
|
|
June 30,
|
|
Description
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
Derivative liabilities related to stock purchase warrants
|
|
$
|
508,202
|
|
|
$
|
290,586
|
|
|
$
|
798,788
|
|
|
|
Balance as of
|
|
|
Unrealized
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Losses (Gains)
|
|
|
June 30,
|
|
Description
|
|
2014
|
|
|
2015
|
|
|
2015
|
|
Derivative liabilities related to stock purchase warrants
|
|
$
|
807,679
|
|
|
$
|
(217,630
|
)
|
|
$
|
590,049
|
|
At June 30, 2016 and 2015, derivative liabilities
are comprised of warrants to purchase 903,996 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 June 30, 2016
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
$
|
798,788
|
|
|
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 June 30, 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.
As discussed in Note 1 –
Business
and Liquidity
, 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.
|
On
July 20, 2016, The Company and SIGA filed a Joint Motion which seeks approval of amendments to the Plan that would extend the deadline
for SIGA to satisfy the previously disclosed judgment owed to the Company from October 19, 2016 to November 30, 2016, conditioned
on SIGA’s payment to PharmAthene of $100 million on or prior to October 19, 2016 that will be applied against PharmAthene’s
judgment. Interest on any unpaid balance will continue to accrue at 8.75% per year and be paid monthly to the Company by SIGA.
A hearing to consider the Joint Motion is scheduled to be held before the Bankruptcy Court on August 15, 2016. No assurance can
be given that the Joint Motion will be approved by the Bankruptcy Court.
If
the Joint Motion is not approved, under the original terms of the Plan, 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 was computed at a rate of 8.75% from April 12, 2016 through June 30, 2016.
Under
the Plan, we received $8.9 million from SIGA in the second quarter of 2016, comprised of an initial payment of $5 million (which
amount is creditable against final satisfaction of the judgment in our favor and is not refundable) and $3.9 million of interest
payments, which has been recorded in other income – litigation on the unaudited condensed consolidated statement of operations.
We received $20 million from SIGA in July 2016, as payment to extend by 90 days, until October 19, 2016, the date by which SIGA
must satisfy the judgment (this amount is also creditable against final satisfaction of the judgment in our favor and is 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. Other than the cash payments received to date, the Company has not recognized any potential
proceeds from these actions in the financial statements.
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 finalized incurred cost audits with
DCAA for 2006 through 2011. BARDA audited indirect costs or rates charged by us on the SparVax
®
contract for the years 2008 through 2014. As a result of the BARDA audits, we recorded additional revenue of $5.8
million in 2015, and additional revenue of $0.8 million in the second quarter of 2016.
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 June 30, 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
|
|
$
|
428,294
|
|
2017
|
|
|
356,911
|
|
|
|
$
|
785,205
|
|
|
(1)
|
Minimum payments have not been reduced by the minimum sublease rentals of $0.1 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) at June 30, 2016 was $0.2 million, and is reflected
on the balance sheet as accrued restructuring expenses - current.
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. On June 23, 2016, we terminated
this license agreement.
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 2007 Plan and adding an evergreen provision pursuant to which the number of shares authorized for issuance under the
2007 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 2007 Plan did not automatically
increase on January 1, 2015, or thereafter.
During the three months ended June 30,
2016, 200,000 stock options were granted, and 341,121 stock options were exercised. During the six months ended June 30, 2016,
200,000 stock options were granted, 404,271 stock options were exercised, and 186,957 stock options were forfeited or expired.
At June 30, 2016, there are approximately 10.3 million shares approved for issuance under the 2007 Plan, of which approximately
3.4 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 June 30, 2016 and 2015 there were warrants
outstanding to purchase 1,051,358 and 1,922,781 shares of our common stock, respectively. Warrants to purchase 371,423 shares of
common stock expired during the three months ended June 30, 2016, all of which were classified as derivative liabilities.
The warrants outstanding as of June 30,
2016, all of which are exercisable, were as follows:
Number of Common Shares
Underlying Warrants As of
June 30, 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
|
|
46,584
|
(1)
|
|
March 2012
|
|
$
|
1.61
|
|
|
March 2022
|
|
1,051,358
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These warrants to purchase common stock are classified as equity.
|
|
(2)
|
Because of the presence of net settlement provisions, 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 accompanying 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 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 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 June 30, 2016, shares having an aggregate
offering price of $3 million remained available under the controlled equity offering sales agreement, as amended. During the three
and six months ended June 30, 2016 and 2015, 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
In July 2016, NIAID exercised the third
option under the September 2014 agreement. The exercised option provides additional funding of approximately $1.1 million.