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, 2017
Note 1 - Business and Liquidity
We have been engaged
in the biodefense business since our inception in 2001.
On January 18, 2017,
PharmAthene, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to
which its wholly owned subsidiary, Mustang Merger Sub, Inc., will be merged with and into Altimmune, Inc., a Delaware corporation
(“Altimmune”), with Altimmune as the surviving subsidiary (“Merger 1”), and immediately thereafter, Altimmune
will be merged with and into Mustang Merger Sub LLC, with Mustang Merger Sub LLC as the surviving entity in such merger (“Merger
2”, and together with Merger 1, the “Mergers”). Following the consummation of the Mergers, PharmAthene will change
its name to “Altimmune, Inc.”.
On May 4, 2017,
in connection with the Merger Agreement, PharmAthene will be holding a special meeting of stockholders to consider and vote
upon the following proposals: (i) to approve the issuance of shares of PharmAthene common stock in the Mergers; (ii) to
approve and adopt the Merger Agreement; (iii) to approve an amendment of PharmAthene's Certificate of Incorporation, to
effect a reverse stock split prior to the effective time of the Mergers at a ratio (the “Reverse Ratio”) of not
less than 1-for-10 and not more than 1-for-75, with the exact Reverse Ratio to be finally determined and mutually agreed to
by the PharmAthene and Altimmune Boards of Directors; (iv) to approve the 2017 Omnibus Incentive Plan; and (v) to adjourn the
special meeting, if necessary or advisable, to solicit additional proxies if there are not sufficient votes in favor of any
of the proposals. For additional details regarding the Mergers and Merger Agreement, please refer to PharmAthene's Registration Statement on
Form S-4 (File No. 333-215891) and related proxy statement/prospectus/consent solicitation (the "Proxy/Prospectus") filed
with the U.S. Securities and Exchange Commission (the "SEC"), which PharmAthene also mailed to its stockholders.
Pursuant to the terms
and conditions of the Merger Agreement, at the effective time of Merger 1 (the “Effective Time”), each of Altimmune’s
outstanding shares of common stock and preferred stock (excluding Altimmune treasury shares, shares of Altimmune owned by PharmAthene
or its subsidiaries or dissenting shares) will be converted into the right to receive a number of shares of PharmAthene common
stock such that the holders of outstanding equity of Altimmune immediately prior to the Effective Time will own 58.2% of the outstanding
equity of PharmAthene immediately following the Effective Time and holders of outstanding equity of PharmAthene immediately prior
to the Effective Time will own 41.8% of the outstanding equity of PharmAthene immediately following the Effective Time (the “Exchange
Ratio”), in each case, on an as converted and fully diluted basis. No fractional shares of PharmAthene common stock will
be issued in connection with the Mergers as a result of the conversion described above, and any fractional share of PharmAthene
common stock that would thereby be issuable will be rounded up to the next whole share. In addition, all outstanding Altimmune
options, as well as Altimmune’s 2001 Employee Stock Option Plan and its Non-Employee Stock Option Plan, each as amended from
time to time, will be assumed by PharmAthene. Each option or warrant to purchase one share of Altimmune common stock will be converted
into an option or warrant, as the case may be, to purchase a number of shares of PharmAthene common stock representing the number
of Altimmune shares for which the exchanged option or warrant was exercisable multiplied by the Exchange Ratio. The exercise price
will be proportionately adjusted.
The Merger Agreement
provides that at, and immediately after, the Effective Time the size of PharmAthene’s Board of Directors will initially consist of seven directors. This board will be comprised of four directors designated by Altimmune and three directors
designated by PharmAthene. Altimmune’s current Chief Executive Officer, Bill Enright, is expected to serve as the Chief Executive
Officer of the combined company, and Altimmune’s current Chief Financial Officer, Elizabeth Czerepak, is expected to serve
as its Chief Financial Officer.
On September 9, 2014,
PharmAthene 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 the Company's 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, PharmAthene was 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 four options under this agreement to provide additional funding of approximately $8.8 million
and an extension of the period of performance through December 31, 2017. The contract could have had a total value of up to approximately
$28.1 million, if all technical milestones were met and all eight contract options were exercised by NIAID. PharmAthene has been
informed by NIAID that it will exercise only one of the additional remaining options under the contract to provide funding for
a non-human primate challenge study which PharmAthene believes may be used to support an advanced development funding proposal
to the Biomedical Advanced Research and Development Authority (“BARDA”). Work under all exercised options will continue
bringing total committed and final funding under the NIAID contract to $15.1 million.
Between 2006 and 2016,
we were 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 provided an estimated total award of approximately
$208.7 million plus additional interest. We received approximately $217.1 million from SIGA during the year ended December 31,
2016, comprised of principal payments of approximately $208.7 million as final satisfaction of the judgment and $8.4 million of
payments calculated by SIGA as interest on the judgment.
On February 3, 2017,
the Company paid a one-time special cash dividend of $2.91 per share. The special dividend, totaling an aggregate payment of approximately $200.3 million, represents approximately 98% of the
after tax net cash proceeds, received from SIGA.
As of March 31,
2017, our cash and cash equivalents balance was $15.8 million, our accounts receivable (billed and unbilled) balance was $1.0
million and our current liabilities were $2.2 million. We believe, based on the operating cash requirements and capital
expenditures expected for 2017, the Company’s cash on hand at March 31, 2017, is adequate to fund operations for at
least the next twelve months from the date of this report.
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, 2016 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 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, 2016, 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, deferred tax assets,
liabilities and valuation allowances, income tax receivable from the carryback of net operating losses, the expected economic
life and value of our tangible assets and value of our indefinite lived intangible asset, 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.
Comprehensive Loss and Accumulated Other Comprehensive Loss
Comprehensive
loss includes the total of our net loss and all other changes in equity, other than transactions with owners, which for the
periods presented includes changes in equity for unrealized losses on available-for-sale securities.
Cash and Cash Equivalents
Cash and cash
equivalents are stated at cost which approximates fair value and include investments in U.S. Government money market. We
consider all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents. The
Company maintains cash balances with financial institutions in excess of insured limits. The Company does not anticipate any
losses on such cash balances.
Short-Term Investments
Investments are classified
as available-for-sale pursuant to the accounting standards for investments in debt and equity securities. Investments with maturities
of less than one year are classified as short-term and consist of investment grade U.S. Treasury debt securities and government-sponsored
enterprise debt securities, all of which were fully matured at March 31, 2017. Investments are carried at fair value with unrealized
gains and losses included as a component of other comprehensive income (loss), until such gains and losses are realized. If a decline
in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is transferred from other
comprehensive income to the statement of operations. Management reviews investments for other-than-temporary impairment whenever
the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount
is not recoverable within a reasonable period of time. We assess the risk of impairment related to securities held in our investment
portfolio on a regular basis. We had no remaining short-term investments at March 31, 2017.
Concentration of Credit Risk
Financial instruments
that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents, short-term investments, and
billed and unbilled accounts receivable. We maintain our cash and cash equivalents in the form of U.S. Government money market
accounts. Because our billed and unbilled accounts receivable consist of amounts due from the U.S. Government, there is minimal
credit risk.
Significant Customers and Accounts Receivable
Our primary customer is NIAID. As of March 31, 2017 and December
31, 2016, the Company’s billed and unbilled receivables balances were comprised primarily of receivables from NIAID. The receivable
balances are reported at amounts expected to be collected in future periods. The Company has determined that no allowance for doubtful accounts for the receivables from NIAID is necessary given the circumstances.
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 assessments date) to the net book value of our equity. If our market
value exceeds our net book value, no further analysis is required. 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
The remaining accrued
liability relating to our restructuring expense as of March 31, 2017 is as follows:
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Amortized
|
|
|
March 31,
|
|
Description
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Accrued sublease expense
|
|
$
|
109,126
|
|
|
$
|
65,217
|
|
|
$
|
43,909
|
|
Total accrued restructuring expense
|
|
$
|
109,126
|
|
|
$
|
65,217
|
|
|
$
|
43,909
|
|
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 prior to exercise 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. 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:
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·
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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,
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·
|
it relates solely to past performance, and
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·
|
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.
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 is remeasured at
each quarterly reporting date over the 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, 2017 and 2016 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, 2017 and 2016 was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
8,070
|
|
|
$
|
29,293
|
|
General and administrative
|
|
|
58,110
|
|
|
|
152,633
|
|
Total share-based compensation expense
|
|
$
|
66,180
|
|
|
$
|
181,926
|
|
During the three
months ended March 31, 2017 and 2016, we made no stock option or restricted stock grants. At March 31, 2017, we had total unrecognized
share-based compensation expense related to unvested awards of approximately $0.3 million net of estimated forfeitures, which we
expect to recognize as expense over a weighted-average period of 1.5 years.
The 2007
Long-Term Incentive Compensation Plan (the “2007 Plan”) terminated in January 2017. In connection with the
proposed Merger with Altimmune, the Board of Directors has adopted a new omnibus plan, subject to approval of our
stockholders.
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.
The Company recorded an income tax benefit (provision) of $1.0 million and $(0.02) million for the three month periods ended
March 31, 2017 and 2016, respectively. The 2016 receipt of the award from SIGA generated substantial 2016 taxable income to
the Company, a portion of which was offset by the Company's domestic net operating loss carryforwards (“NOLs”).
For the tax year ending December 31, 2016, the Company paid approximately $8.7 million in federal income tax and $2.5 million
in state income tax.
Pursuant to federal and state tax regulations with respect to carryback periods of NOLs, in 2017 the Company anticipates being
able to carryback NOLs to 2016, which the Company expects will allow it to recover previously paid federal and state income
taxes. These anticipated refunds generated through March 31, 2017 are reflected as an income tax benefit during the quarter
ended March 31, 2017. The Company recognized as income tax expense during the quarter ended March 31, 2016 tax amortization
of goodwill.
Basic and Diluted Net Loss Per Share
Loss per share:
Basic loss per share is computed by dividing consolidated net 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 potential dilutive common shares, consisting primarily of stock options, unvested
restricted stock and stock purchase warrants. The dilutive impact of our potential 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 potential 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. There were no
unvested restricted shares outstanding as of March 31, 2017.
Approximately 1.6 million
and 6.2 million potential dilutive securities have been excluded in the calculation of diluted net loss per share in the three
months ended March 31, 2017 and 2016, respectively, because their inclusion would be anti-dilutive.
Recent Accounting Pronouncements Adopted
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-17, Income Taxes. 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 have adopted ASU No. 2015-17 on January 1, 2017 on a retrospective basis; the adoption did not have a material effect on our consolidated financial statements.
In March 2016, the
FASB issued ASU No. 2016-09, Compensation – Stock Compensation simplifying the accounting for and financial statement disclosure
of stock-based compensation awards. Under the guidance, all excess tax benefits and tax deficiencies related to stock-based compensation
awards are to be recognized as income tax expenses or benefits in the income statement and excess tax benefits should be classified
along with other income tax cash flows in the operating activities section of the statement of cash flows. Under the guidance,
companies can also elect to either estimate the number of awards that are expected to vest or account for forfeitures as they occur.
In addition, the guidance amends some of the other stock-based compensation awards guidance to more clearly articulate the requirements
and cash flow presentation for withholding shares for tax-withholding purposes. The guidance is effective for reporting periods
beginning after December 15, 2016 and early adoption is permitted. We adopted this standard on January 1, 2017. The adoption of the standard did not have a material impact on
our financial statements. We elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing
with our cash flow statement for the three months ended March 31, 2017. We have elected to continue to estimate the number
of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount
of compensation cost to be recognized in each period. There was no impact to our computation of dilutive EPS as all securities
were considered anti-dilutive.
Recent Accounting Pronouncements Pending Adoption
In May 2014, the FASB
issued 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 collectability 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. In January
2017, the FASB issued amendments to the FASB Accounting Standards Codification which impacts the disclosure that recently issued
ASUs will have on the financial statements when the standards are adopted in a future period. In February 2017, the FASB issued
guidance to clarify other income – gains and losses from the derecognition of nonfinancial assets, and to add guidance for
partial sales of nonfinancial assets. In preparation for the adoption of the new standard, we have begun to evaluate our existing
arrangement; however, have not yet determined the impact of the new standard on our consolidated financial statements or whether
we will adopt on a prospective or retrospective basis.
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 June 2016, the FASB
issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through
net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit
exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right
to receive cash. The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized
cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities
should be recorded through an allowance for credit losses. For public companies that are SEC filers, the amendments in this Update
are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities
may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. We are currently evaluating the impact of adopting ASU No. 2016-13 on our consolidated financial statements.
In August 2016,
the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The amendments in this Update address the
classification of certain cash receipts and cash payments in the statement of cash flows, including related to debt
prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from
the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions
received from equity method investees. The guidance is effective for reporting periods beginning after December 15, 2017 and
early adoption is permitted. The guidance must be adopted on retrospective basis and must be applied to all periods
presented, but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating
the impact, if any, that this guidance will have on our consolidated financial statements.
In January 2017, the
FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other. The amendments in this Update provide guidance on the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds
its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity
no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a
reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The
guidance is effective for reporting periods beginning after December 15, 2020 and early adoption is permitted. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating
the impact, if any, that this guidance will have 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:
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·
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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, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
16,160,498
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,160,498
|
|
Total financial assets measured at fair value
|
|
$
|
16,160,498
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,160,498
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
11,972,733
|
|
|
$
|
141,869,024
|
|
|
$
|
-
|
|
|
$
|
153,841,757
|
|
Short-term investments
|
|
|
-
|
|
|
|
66,810,962
|
|
|
|
-
|
|
|
|
66,810,962
|
|
Total financial assets measured at fair value
|
|
$
|
11,972,733
|
|
|
$
|
208,679,986
|
|
|
$
|
-
|
|
|
$
|
220,652,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative instruments related to stock purchase warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,465,272
|
|
|
$
|
1,465,272
|
|
Total financial liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,465,272
|
|
|
$
|
1,465,272
|
|
The Company’s
cash equivalents are comprised of U.S. Treasury money market funds and government-sponsored enterprise debt securities with original
maturities of three months or less when purchased. The Company’s short-term investments are comprised of U.S. Treasury securities
and government sponsored enterprise securities, which at the time of purchase, had a maturity of greater than three months. These
investments have been initially valued at the transaction price and subsequently valued at the end of each reporting period, utilizing
other market observable data.
During the
three months ended March 31, 2017, derivative instruments related to stock purchase warrants exercisable for 903,996 shares
of common stock were exercised. The fair value of the exercised stock purchase warrants at the time of exercise was
approximately $1.6 million.
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,
2017 and 2016:
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
Balance as of
|
|
|
Unrealized
|
|
|
Stock Purchase
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Losses
|
|
|
Warrants
|
|
|
March 31,
|
|
Description
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
Derivative liabilities related to stock purchase warrants
|
|
$
|
1,465,272
|
|
|
$
|
90,191
|
|
|
$
|
(1,555,463
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
Balance as of
|
|
|
Unrealized
|
|
|
Stock Purchase
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
(Gains)
|
|
|
Warrants
|
|
|
March 31,
|
|
Description
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Derivative liabilities related to stock purchase warrants
|
|
$
|
508,202
|
|
|
$
|
(39,898
|
)
|
|
$
|
-
|
|
|
$
|
468,304
|
|
At March 31,
2017, the Company did not have any remaining derivative liabilities. At March 31, 2016, derivative liabilities were comprised
of warrants to purchase 1,275,419 shares of common stock. 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.
Assets and Liabilities Measured at Fair Value on a Non-Recurring
Basis
The Company measures
its long-lived assets, including, property and equipment, intangible assets 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, 2017, the Company had no other assets or liabilities that were measured at
fair value on a non-recurring basis.
Note 4 - Commitments and Contingencies
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 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.
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, 2017, 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 and was originally scheduled to end on May 31, 2017.
On April 3, 2017, an amendment was made to extend the term of the lease to July 31, 2017. Remaining annual minimum payments are
$0.2 million.
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 through May 31, 2017.
The present value at
March 31, 2017 of the Company’s remaining net lease liability for the subleased office space (net of the sublease rental
income) is $43,909 and is reflected on the balance sheet as accrued restructuring expenses.
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
Special Dividend
On February 3,
2017, the Company paid a special one-time dividend of $2.91 per share of common stock, totaling approximately $200.3 million,
which represents approximately 98% of the after tax net cash proceeds, received from SIGA.
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 NOLs under Section 382 of the Code.
The Rights Plan was terminated by the Board on March 10, 2017.
Long-Term Incentive Compensation
Plan
In 2007, the Company’s
stockholders approved 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.
The 2007 Plan terminated
in January 2017. In connection with the proposed Merger with Altimmune, the Board of Directors has adopted a new omnibus incentive
plan, subject to approval of our stockholders.
During the three months ended March 31, 2017, stock options were exercised for 184,741 shares of common stock, and stock options
exercisable for 8,557 shares of common stock expired. Prior to the expiration of the 2007 Plan, there were approximately 10.3
million shares approved for issuance under the 2007 Plan, of which approximately 3.4 million shares were 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, 2017 and
2016 there were warrants outstanding to purchase 46,584 and 1,422,781 shares of our common stock, respectively. The warrants outstanding
as of March 31, 2017, all of which are exercisable, were as follows:
Number of Common Shares
Underlying Warrants
|
|
|
Issue Date/Exercisable Date
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
46,584
|
(1)
|
|
March 2012/March 2012
|
|
$
|
1.61
|
|
|
March 2022
|
|
46,584
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These warrants to purchase common stock are classified as equity.
|
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, 2017,
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, 2017, 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.