NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Condensed Consolidated Financial Statements
The financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2018, included in the 2018 Annual Report on Form 10-K. All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2018 Annual Report on Form 10-K filed on March 5, 2019. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of the results of the interim periods have been included. The 2018 year-end condensed consolidated balance sheet data were derived from the audited financial statements but do not include all disclosures required by U.S. GAAP. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for the full year.
2. Summary of Significant Accounting Policies
Adoption of ASC 842
On January 1, 2019, the Company adopted ASC 842,
Leases
(“ASC 842”) using the modified retrospective approach as of the effective date of the standard without revising prior periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward its historical lease classification. In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases. The Company’s election of the hindsight practical expedient resulted in the extension of the Oregon lease term as it was determined that the first renewal option under this lease was expected to be exercised with a reasonable degree of certainty. In the second quarter of 2019, the Company exercised the first renewal option under the Oregon lease.
The Company was required to record an operating lease right-of-use asset and a corresponding operating lease liability, equal to the present value of the lease payments at the adoption date. In the determination of future lease payments, the Company has elected to aggregate lease components such as payments for rent, taxes and insurance costs with non-lease components such as maintenance costs and account for these payments as a single lease component. The present value of the lease payments was determined using the Company's incremental borrowing rate. The impact of adopting ASC 842 as of January 1, 2019 was the recording of operating lease right-of-use assets of approximately
$2.9 million
; the recording of operating lease liabilities of approximately
$3.3 million
; and a decrease to deferred rent of approximately
$0.4 million
.
Revenue Recognition
All of the Company’s revenue is derived from long-term contracts that span multiple years. The Company accounts for revenue in accordance with ASC Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). A contract’s transaction price is allocated to distinct performance obligations and recognized as revenue when, or as, a performance obligation is satisfied. As of June 30, 2019, the Company's active performance obligations, for the contracts outlined in
Note 3
, consist of the following: four performance obligations relate to research and development services; two relate to manufacture and delivery of product; and one is associated with storage of product. The aggregate amount of transaction price allocated to remaining performance obligations for the 2011 BARDA Contract, 2018 BARDA Contract and the IV Formulation R&D Contract was
$59.2 million
as of June 30, 2019. Remaining performance obligations represent the transaction price for which work has not been performed and excludes unexercised contract options.
During the three and six months ended June 30, 2019, the Company recognized a cumulative catch-up adjustment to revenue of approximately
$3.3 million
related to the conclusion of historical rate reconciliations in connection with the IV Formulation R&D Contract (defined in
Note 3
), and changes in the projected amount of contract funding expected to be available under the IV Formulation R&D Contract, which impacts the progress-towards-completion calculation required under ASC 606.
Contract Balances
The timing of revenue recognition, billings and cash collections may result in billed accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) in the condensed consolidated balance sheets. Generally, amounts are billed as work progresses in accordance with agreed-upon contractual terms either at periodic intervals (monthly) or upon achievement of contractual milestones. Under typical payment terms of fixed price arrangements, the customer pays the Company either performance-based payments or progress payments. For the Company’s cost-type arrangements, the customer
generally pays the Company for its actual costs incurred, as well as its allocated overhead and G&A costs. Such payments occur within a short period of time. When the Company receives consideration, or such consideration is unconditionally due, prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. During the six months ended June 30, 2019, the Company recognized revenue of
$0.5 million
that was included in deferred revenue at the beginning of the period.
Restricted Cash and Cash Equivalents
Under the terms of the Loan Agreement (as defined below), net cash proceeds from the Company's Priority Review Voucher ("PRV") sale on October 31, 2018 are restricted and are held in a reserve account. Cash held in the reserve account is available to pay interest, fees and principal related to the Term Loan. See Note 8 for additional information. Prior to the second quarter of 2019, there was also a reserve account for certain proceeds of the Loan Agreement. This account was also restricted. Amounts in this reserve account were primarily used to pay interest on the Loan Agreement. This reserve account was closed in the second quarter 2019.
The following tables reconcile cash, cash equivalents and restricted cash per the condensed consolidated statements of cash flows to the condensed consolidated balance sheet for each respective period:
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As of
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
|
$
|
100,263,915
|
|
|
$
|
100,652,809
|
|
|
Restricted cash-short term
|
|
11,248,400
|
|
|
11,452,078
|
|
|
Restricted cash-long term
|
|
64,480,624
|
|
|
68,292,023
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
175,992,939
|
|
|
$
|
180,396,910
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Cash and cash equivalents
|
|
$
|
10,581,112
|
|
|
$
|
19,857,833
|
|
|
Restricted cash-short term
|
|
11,028,824
|
|
|
10,701,305
|
|
|
Restricted cash-long term
|
|
1,701,843
|
|
|
6,542,448
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
23,311,779
|
|
|
$
|
37,101,586
|
|
Recent Accounting Pronouncements
On January 26, 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company believes the adoption of ASU No. 2017-04 will not have a significant impact on its consolidated financial statements.
3. Procurement Contracts and Research Agreements
2018 BARDA Contract
On September 10, 2018, the Company entered into a contract with the U.S. Biomedical Advanced Research and Development Authority (“BARDA”) pursuant to which SIGA agreed to deliver up to
1,488,000
courses of oral TPOXX® to the U.S. Strategic National Stockpile ("Strategic Stockpile"), and to manufacture and deliver to the Strategic Stockpile, or store as vendor-managed inventory, up to
212,000
courses of the intravenous (IV) formulation of TPOXX® ("IV TPOXX®"). Additionally, the contract includes funding from BARDA for advanced development of IV TPOXX®, post-marketing activities for oral and IV TPOXX®, and supportive procurement activities. The contract with BARDA (as amended, modified, or supplemented from time to time, the “2018 BARDA Contract”) contemplates, as of June 30, 2019, up to approximately
$600.1 million
of payments, of which approximately
$51.7 million
of payments are included within the base period of performance of five years, approximately
$23.4 million
of payments are related to exercised options and up to approximately
$525.0 million
of payments are currently classified as unexercised options. BARDA may choose in its sole discretion when, or whether, to exercise any of the unexercised options.
The period of performance for options is up to ten years from the date of entry into the 2018 BARDA Contract and such options could be exercised at any time during the contract term, including during the base period of performance. On May 20, 2019, an option for the manufacture and delivery of
363,070
courses of oral TPOXX® was modified to divide it into four procurement-related options. One of the four new procurement-related options provides for the payment of
$11.2 million
for the procurement of raw materials to be used in the manufacture of at least
363,070
courses of oral TPOXX®. This new option was exercised simultaneously with the aforementioned modification. Each of the other three new options individually specifies the delivery of approximately
121,000
courses of oral TPOXX® for consideration of approximately
$34.0 million
. In total, the four new options provide for the manufacture and delivery of
363,070
courses of oral TPOXX® for consideration of approximately
$112.5 million
. The option modification did not change the overall total potential value of the 2018 BARDA Contract, nor did it change the total amount to be paid in connection with the manufacture and delivery of oral TPOXX® courses.
The base period of performance provides for potential payments of approximately
$51.7 million
for the following activities: payments of approximately
$11.1 million
for the delivery of approximately
35,700
courses of oral TPOXX® to the Strategic Stockpile; payments of
$8.0 million
for the manufacture of
20,000
courses of final drug product of IV TPOXX® ("IV FDP"), of which
$3.2 million
of payments are related to the manufacture of bulk drug substance ("IV BDS") to be used in the manufacture of IV FDP; payments of approximately
$32.0 million
to fund advanced development of IV TPOXX®; and payments of approximately
$0.6 million
for supportive procurement activities. As of June 30, 2019, the Company had received
$7.1 million
for the first quarter 2019 delivery of approximately
23,000
courses of oral TPOXX® to the Strategic Stockpile and
$3.2 million
for the manufacture of IV BDS. IV BDS is expected to be used for the manufacture of
20,000
courses of IV FDP. The
$3.2 million
received in 2018 for the manufacture of IV BDS has been recorded as deferred revenue as of December 31, 2018 and June 30, 2019.
The options that have been exercised to date provide for potential payments up to approximately
$23.4 million
. There are exercised options for the following activities: payments up to
$11.2 million
for the procurement of raw materials to be used in the manufacture of at least
363,070
courses of oral TPOXX®; and, payments of up to
$12.2 million
for funding of post-marketing activities for oral TPOXX®.
Unexercised options provide for potential payments up to approximately
$525.0 million
in total (if all such options are exercised). There are options for the following activities: payments of up to
$439.0 million
for the delivery of up to approximately
1,452,300
courses of oral TPOXX® to the Strategic Stockpile; payments of up to
$76.8 million
for the manufacture of up to
192,000
courses of IV FDP, of which up to
$30.7 million
of payments would be paid upon the manufacture of IV BDS to be used in the manufacture of IV FDP; payments of up to approximately
$3.6 million
to fund post-marketing activities for IV TPOXX®; and payments of up to approximately
$5.6 million
for supportive procurement activities.
The options related to IV TPOXX® are divided into
two
primary manufacturing steps. There are options related to the manufacture of bulk drug substance (“IV BDS Options”), and there are corresponding options (for the same number of IV courses) for the manufacture of final drug product (“IV FDP Options”). BARDA may choose to exercise any, all, or none of these options in its sole discretion. The 2018 BARDA Contract includes: three separate IV BDS Options, each providing for the bulk drug substance equivalent of
64,000
courses of IV TPOXX®; and three separate IV FDP Options, each providing for
64,000
courses of final drug product of IV TPOXX®. BARDA has the sole discretion on whether to simultaneously exercise IV BDS Options and IV FDP Options, or whether to make independent exercise decisions. If BARDA decides to only exercise IV BDS Options, then the Company would receive payments up to
$30.7 million
; alternatively, if BARDA decides to exercise both IV BDS Options and IV FDP Options, then the Company would receive payments up to
$76.8 million
. For each set of options relating to a specific group of courses (for instance, the IV BDS and IV FDP options that reference the same
64,000
courses), BARDA has the option to independently purchase IV BDS or IV FDP.
2011 BARDA Contract
On May 13, 2011, the Company signed a contract with BARDA pursuant to which BARDA agreed to buy from the Company
1.7 million
courses of oral TPOXX®. Additionally, the Company agreed to contribute to BARDA
300,000
courses at no additional cost to BARDA.
The contract with BARDA (as amended, modified, or supplemented from time to time, the “2011 BARDA Contract”) includes a base contract, as modified, (“2011 Base Contract”) as well as options. The 2011 Base Contract provides for approximately
$508.7 million
of payments, of which as of June 30, 2019,
$459.8 million
had been received by the Company for the manufacture and delivery of
1.7 million
courses of oral TPOXX® and
$44.5 million
had been received for certain reimbursements in connection with development and supportive activities. Approximately
$4.2 million
remains eligible to be received in the future for reimbursements of development and supportive activities.
For courses of oral TPOXX® that were physically delivered to the Strategic Stockpile under the 2011 BARDA Contract, there are product replacement obligations, including: (i) a product replacement obligation in the event that the final version of oral TPOXX® approved by the FDA was different from any courses of oral TPOXX® that had been delivered to the Strategic Stockpile (the “FDA Approval Replacement Obligation”); (ii) a product replacement obligation, at no cost to BARDA, in the event that oral TPOXX® is recalled or deemed to be recalled for any reason; and (iii) a product replacement obligation in the event that oral TPOXX® does not meet any specified label claims. On July 13, 2018, the FDA approved oral TPOXX® for the treatment of smallpox and there is no difference between the approved product and courses in the Strategic Stockpile. As such, the possibility of the FDA Approval Replacement Obligation resulting in any future replacements of product within the Strategic Stockpile is remote.
The 2011 BARDA Contract includes options. On July 30, 2018, the 2011 BARDA Contract was modified and BARDA exercised its option relating to FDA approval of 84-month expiry for oral TPOXX® for which the Company was paid
$50.0 million
in August 2018. With the option exercise, the 2011 BARDA Contract was modified so that the 2011 Base Contract increased by
$50.0 million
. Remaining options, if all were exercised by BARDA, would result in aggregate payments to the Company of
$72.7 million
, including up to
$58.3 million
of funding for development and supportive activities such as work on a post-exposure prophylaxis ("PEP") indication for TPOXX® and/or
$14.4 million
of funding for production-related activities related to warm-base manufacturing. BARDA may choose, in its sole discretion not to exercise any or all of the unexercised options.
The 2011 BARDA Contract expires in September 2020.
Research Agreements and Grants
The Company has an R&D program for IV TPOXX®. This program is funded by the 2018 BARDA Contract and a development contract with BARDA (“IV Formulation R&D Contract”). The IV Formulation R&D Contract has a period of performance that terminates on December 30, 2020. As of June 30, 2019, the IV Formulation R&D Contract provides for future aggregate research and development funding of approximately
$4.4 million
.
In July 2019, the Company was awarded a multi-year research contract valued at a total of
$19.5 million
, with an initial award of
$12.4 million
, from the United States Department of Defense ("DoD") to support work in pursuit of a potential label expansion for oral TPOXX® that would include post-exposure prophylaxis ("PEP") of smallpox (such work known as the "PEP Label Expansion Program" and the contract referred to as the "PEP Label Expansion R&D Contract"). The term of the initial award is five years.
Contracts and grants include, among other things, options that may or may not be exercised at the U.S. Government’s discretion. Moreover, contracts and grants contain customary terms and conditions including the U.S. Government’s right to terminate or restructure a contract or grant for convenience at any time. As such, we may not be eligible to receive all available funds.
4.
Inventory
Inventory includes costs related to the manufacture of TPOXX®. Inventory consisted of the following:
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As of
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June 30, 2019
|
|
December 31, 2018
|
|
Work in-process
|
$
|
2,322,266
|
|
|
$
|
1,950,445
|
|
|
Finished goods
|
68,221
|
|
|
957,765
|
|
|
Inventory
|
$
|
2,390,487
|
|
|
$
|
2,908,210
|
|
5.
Property, Plant and Equipment
Property, plant and equipment consisted of the following:
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|
|
As of
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|
|
June 30, 2019
|
|
December 31, 2018
|
|
Leasehold improvements
|
$
|
2,420,028
|
|
|
$
|
2,420,028
|
|
|
Computer equipment
|
581,653
|
|
|
618,248
|
|
|
Furniture and fixtures
|
377,859
|
|
|
377,859
|
|
|
Operating lease right-of-use assets
|
2,944,932
|
|
|
—
|
|
|
|
6,324,472
|
|
|
3,416,135
|
|
|
Less - accumulated depreciation and amortization
|
(3,464,607
|
)
|
|
(3,244,861
|
)
|
|
Property, plant and equipment, net
|
$
|
2,859,865
|
|
|
$
|
171,274
|
|
Depreciation and amortization expense on property, plant, and equipment was
$127,566
and
$4,139
for the
three months ended June 30, 2019
and
2018
, respectively, and
$265,289
and
$33,929
for the six months ended June 30, 2019 and 2018, respectively.
6.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
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As of
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Bonus
|
$
|
1,414,720
|
|
|
$
|
2,600,839
|
|
|
Deferred revenue
|
5,364,080
|
|
|
4,159,946
|
|
|
Interest payable
|
965,133
|
|
|
35,567
|
|
|
Lease liability, current portion
|
405,244
|
|
|
—
|
|
|
Research and development vendor costs
|
260,276
|
|
|
1,446,410
|
|
|
Professional fees
|
535,944
|
|
|
242,043
|
|
|
Vacation
|
354,206
|
|
|
294,794
|
|
|
Other
|
752,680
|
|
|
869,318
|
|
|
Accrued expenses and other current liabilities
|
$
|
10,052,283
|
|
|
$
|
9,648,917
|
|
7.
Financial Instruments
2016 Warrant
On September 2, 2016, in connection with the entry into the Loan Agreement (see
Note 8
for additional information), the
Company issued a warrant (the
“
Warrant
”
) to the Lender to purchase a number of shares of the Company’s common stock equal to
$4.0 million
divided by the lower of (i)
$2.29
per share and (ii) the subscription price paid in connection with the Rights Offering. The Warrant provides for weighted average anti-dilution protection and is exercisable in whole or in part for ten (
10
) years from the date of issuance. The per share subscription price paid was
$1.50
in connection with the Rights Offering; accordingly, the exercise price of the Warrant was set at
$1.50
per share, and there were
2.7 million
shares underlying the Warrant. Subsequent to partial exercises of the Warrant, there are approximately
1.5 million
shares underlying the Warrant as of June 30, 2019.
The Company accounted for the Warrant in accordance with the authoritative guidance which requires that free-standing derivative financial instruments with certain anti-dilution and cash settlement features be classified as assets or liabilities at the time of the transaction, and recorded at their fair value. Any changes in the fair value of the derivative instruments are reported in earnings or loss as long as the derivative contracts are classified as assets or liabilities. Accordingly, the Company classified the Warrant as a liability and reports the change in fair value in the statement of operations.
As of
June 30, 2019
, the fair value of the Warrant was
$7.4 million
. The fair value of the liability-classified Warrant was calculated using the following assumptions: risk free interest rate of
1.88%
;
no
dividend yield; an expected life of
7.17
years; and a volatility factor of
65%
.
8. Debt
On September 2, 2016, the Company entered into a loan and security agreement (as amended from time to time, the “Loan Agreement”) with OCM Strategic Credit SIGTEC Holdings, LLC (“Lender”), pursuant to which the Company received
$80.0 million
(less fees and other items) on November 16, 2016 having satisfied certain pre-conditions. Such
$80.0 million
had been placed in an escrow account on September 30, 2016 (the “Escrow Funding Date”). Prior to the Escrow Release Date (November 16, 2016), the Company did not have access to, or any ownership interest in, the escrow account. Until the Escrow Release Date occurred, the Company did not have an obligation to make any payments under the Loan Agreement, no security was granted under the Loan Agreement and no affirmative or negative covenants or events of default were effective under the Loan Agreement. Amounts were held in the escrow account until the satisfaction of certain conditions including the closing of the Rights Offering (see
Note 7
) on November 16, 2016. As part of the satisfaction of the PharmAthene claim, funds were released from the escrow account (the date on which such transfer occurred, the “Escrow Release Date”).
The Loan Agreement provides for a first-priority senior secured term loan facility in the aggregate principal amount of
$80.0 million
(the “Term Loan”), of which (i)
$25.0 million
was placed in a reserve account (the “Reserve Account”) only to be utilized to pay interest on the Term Loan as it becomes due; (ii) an additional
$5.0 million
was also placed in the Reserve Account and up to the full amount of such
$5.0 million
was eligible to be withdrawn after June 30, 2018 upon the satisfaction of certain conditions, provided that any of such amount is required to fund any interest to the extent any interest in excess of the aforementioned
$25.0 million
is due and owing and any of such
$5.0 million
remains in the Reserve Account; and (iii)
$50.0 million
(net of fees and expenses then due and owing to the Lender) was paid as part of the final payment to satisfy a litigation claim. Interest on the Term Loan is at a per annum rate equal to the Adjusted LIBOR rate plus
11.5%
, subject to adjustments as set forth in the Loan Agreement. At
June 30, 2019
, the effective interest rate on the Term Loan, which includes interest payments and accretion of unamortized costs and fees, was
19.3%
. The Company incurred approximately
$4.0 million
of interest expense during the three months ended June 30, 2019, of which
$1.1 million
accreted to the Term Loan balance. On July 12, 2018, upon confirmation that there had been no events of default,
$5 million
was withdrawn by the Company from the Reserve Account and was placed in the Company's cash operating account. On October 31, 2018, the Loan Agreement was amended to expand the definition of permitted dispositions to include a sale of the PRV. In connection with the amendment, net cash proceeds from the sale of the PRV (
$78.3 million
) were placed in a restricted cash account; such restricted account is to be used only for interest, fees and principal payments (other than those in connection with an event of default) related to the Term Loan. The cash balance in the restricted account was increased to
$100.5 million
as of July 24, 2019, in connection with an amendment to the Term Loan that allows the Company to diversify the financial institutions at which its remaining unrestricted cash and cash equivalents can be held. The balance in the restricted account represents an approximation of total payments that would be required pursuant to the Term Loan if it were to remain outstanding until its maturity.
The Term Loan matures on the earliest to occur of (i) the four-year anniversary of the Escrow Release Date, which will be November 16, 2020, and (ii) the acceleration of certain obligations pursuant to the Loan Agreement. At maturity,
$80.0 million
of principal will be repaid, and an additional
$4.0 million
will be paid (see below). Prior to maturity, there are no scheduled principal payments.
Through the three and one-half year anniversary of the Escrow Release Date, which will be May 16, 2020, any prepayment of the Term Loan is subject to a make-whole provision in which interest payments related to the prepaid amount are due (subject to a discount of treasury rate plus
0.50%
).
In connection with the Term Loan, the Company has granted the Lender a lien on and security interest in all of the Company’s right, title and interest in substantially all of the Company’s tangible and intangible assets, including all intellectual property.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants. These covenants, among other things, require a minimum unrestricted cash balance throughout the term of the Term Loan and the achievement of regulatory milestones by certain dates, and contain certain limitations on the ability of the Company to incur unreimbursed research and development expenditures over a certain threshold, make capital expenditures over a certain threshold, incur indebtedness, dispose of assets outside of the ordinary course of business, make cash distributions and enter into certain merger or consolidation transactions. The minimum unrestricted cash requirement was
$5.0 million
until August 27, 2018 (
45
days after FDA approval of oral TPOXX®), at which point the minimum unrestricted cash requirement became
$20.0 million
.
The Loan Agreement includes customary events of default, including, among others: (i) non-payment of amounts due thereunder, (ii) the material inaccuracy of representations or warranties made thereunder, (iii) non-compliance with covenants thereunder, (iv) non-payment of amounts due under, or the acceleration of, other material indebtedness of the Company and (v) bankruptcy or insolvency events. Upon the occurrence and during the continuance of an event of default under the Loan Agreement, the interest
rate may increase by
2.00%
per annum above the rate of interest otherwise in effect, and the Lenders would be entitled to accelerate the maturity of the Company’s outstanding obligations thereunder.
As of
June 30, 2019
, the Company was in compliance with the Loan Agreement covenants.
In connection with the Loan Agreement, the Company incurred
$8.2 million
of costs (including interest on amounts held in the escrow account between September 30, 2016 and November 15, 2016). Furthermore, an additional
$4.0 million
will become payable when principal of the Term Loan is repaid. As part of the Company's entry into the Loan Agreement, the Company issued the Warrant (see
Note 7
) with a fair market value of
$5.8 million
. The fair value of the Warrant, as well as costs related to the Term Loan issuance, were recorded as deductions to the Term Loan balance on the Balance Sheet. These amounts are being amortized on a straight-line basis over the life of the related Term Loan. The Company compared the amortization under the effective interest method with the straight-line basis and determined the results were not materially different. The
$4.0 million
that will be paid when principal is repaid is being accreted to the Term Loan balance.
9.
Fair Value of Financial Instruments
The carrying value of cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other current liabilities approximates fair value due to the relatively short maturity of these instruments. Common stock warrants which are classified as a liability are recorded at their fair market value as of each reporting period.
The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The inputs create the following fair value hierarchy:
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|
•
|
Level 1 – Quoted prices for identical instruments in active markets.
|
|
|
|
|
•
|
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.
|
|
|
|
|
•
|
Level 3 – Instruments where significant value drivers are unobservable to third parties.
|
The Company uses model-derived valuations where certain inputs are unobservable to third parties to determine the fair value of certain common stock warrants on a recurring basis and classifies such liability-classified warrants in Level 3. As described in
Note 7
, the fair value of the liability classified warrant was
$7.4 million
at
June 30, 2019
.
At
June 30, 2019
, the fair value of the debt was
$86.6 million
and the carrying value of the debt was
$77.8 million
. The Company used a discounted cash flow model to estimate the fair value of the debt by applying a discount rate to future payments expected to be made as set forth in the Loan Agreement. The fair value of the loan was measured using Level 3 inputs. The discount rate was determined using market participant assumptions.
There were no transfers between levels of the fair value hierarchy for the six months ended
June 30, 2019
. In addition, there were no Level 1 or Level 2 financial instruments as of
June 30, 2019
and December 31, 2018.
The following table presents changes in the liability-classified warrant measured at fair value using Level 3 inputs:
|
|
|
|
|
|
|
|
|
Fair Value Measurements of Level 3 liability-classified warrant
|
|
Warrant liability at December 31, 2018
|
$
|
12,380,939
|
|
|
Decrease in fair value of warrant liability
|
(3,792,788
|
)
|
|
Exercise of warrants
|
(1,172,801
|
)
|
|
Warrant liability at June 30, 2019
|
$
|
7,415,350
|
|
10.
Per Share Data
The Company computes, presents and discloses earnings per share in accordance with the authoritative guidance which specifies the computation, presentation and disclosure requirements for earnings per share of entities with publicly held common stock or potential common stock. The objective of basic EPS is to measure the performance of an entity over the reporting period by dividing income (loss) by the weighted average shares outstanding. The objective of diluted EPS is consistent with that of basic EPS, except that it also gives effect to all potentially dilutive common shares outstanding during the period.
The following is a reconciliation of the basic and diluted loss per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net loss for basic earnings per share
|
$
|
(3,162,492
|
)
|
|
$
|
(7,051,264
|
)
|
|
$
|
(1,532,715
|
)
|
|
$
|
(18,633,520
|
)
|
|
Less: Change in fair value of warrants
|
656,523
|
|
|
360,285
|
|
|
3,792,788
|
|
|
—
|
|
|
Net loss, adjusted for change in fair value of warrants for diluted earnings per share
|
$
|
(3,819,015
|
)
|
|
$
|
(7,411,549
|
)
|
|
$
|
(5,325,503
|
)
|
|
$
|
(18,633,520
|
)
|
|
Weighted-average shares
|
80,986,524
|
|
|
79,094,320
|
|
|
80,950,124
|
|
|
79,066,768
|
|
|
Effect of potential common shares
|
1,128,137
|
|
|
2,069,066
|
|
|
1,179,477
|
|
|
—
|
|
|
Weighted-average shares: diluted
|
82,114,661
|
|
|
81,163,386
|
|
|
82,129,601
|
|
|
79,066,768
|
|
|
Loss per share: basic
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.24
|
)
|
|
Loss per share: diluted
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.24
|
)
|
For the three and six months ended June 30, 2019, the diluted earnings per share calculation reflects the effect of the assumed exercise of outstanding warrants and any corresponding elimination of the impact included in operating results from the change in fair value of the warrants. Weighted-average diluted shares include the dilutive effect of warrants. The dilutive effect of warrants is calculated based on the average share price for each fiscal period using the treasury stock method.
The Company incurred losses for the three and six months ended June 30, 2019 and 2018 and as a result, the equity instruments listed below were excluded from the calculation of diluted earnings (loss) per share as the effect of the exercise, conversion or vesting of such instruments would be anti-dilutive. The weighted average number of equity instruments excluded consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Stock Options
|
352,015
|
|
|
1,038,071
|
|
|
364,444
|
|
|
1,050,202
|
|
|
Stock-Settled Stock Appreciation Rights
|
—
|
|
|
160,939
|
|
|
3,359
|
|
|
161,662
|
|
|
Restricted Stock Units (1)
|
527,082
|
|
|
1,473,155
|
|
|
518,295
|
|
|
1,472,581
|
|
|
Warrant
|
—
|
|
|
—
|
|
|
—
|
|
|
2,690,950
|
|
(1) Includes as of June 30, 2018,
294,118
restricted stock units that had vested but not converted into common stock. As of June 30, 2019, all equity instruments, other than shares related to the Warrant, are unvested.
The appreciation of each stock-settled stock appreciation right was capped at a determined maximum value. As a result, the weighted average number shown in the table above for stock-settled stock appreciation rights reflects the weighted average maximum number of shares that could be issued.
11. Commitments and Contingencies
From time to time, we may be involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, collections claims, breach of contract claims, labor and employment claims, tax and other matters. Although such claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of such current pending matters, if any, will not have a material adverse effect on our business, consolidated
financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management resources and other factors.
Purchase Commitments
In the course of our business, the Company regularly enters into agreements with third party organizations to provide contract manufacturing services and research and development services. Under these agreements, the Company issues purchase orders which obligate the Company to pay a specified price when agreed-upon services are performed. Commitments under the purchase orders do not exceed our planned commercial and research and development needs.
12.
Related Party Transactions
Board of Directors and Outside Counsel
A member of the Company’s Board of Directors is a member of the Company’s outside counsel. During the
three months ended June 30, 2019
and
2018
, the Company incurred expenses of
$122,309
and
$112,500
, respectively, related to services provided by the outside counsel. During the six months ended June 30, 2019 and 2018, the Company incurred expenses of
$235,353
and
$220,000
, respectively, related to services provided by the outside counsel. On
June 30, 2019
the Company’s outstanding payables and accrued expenses included an approximate
$83,664
liability to the outside counsel.
Board of Directors-Consulting Agreement
On October 13, 2018, the Company, entered into a consulting agreement with Dr. Eric A. Rose, a member, and former Executive Chairman, of the Company’s Board of Directors. Under the agreement, the consulting services will include assisting the Company on expanded indications for TPOXX® and other business development opportunities as requested by the Company. The term of the agreement is for two years, with compensation for such services at an annual rate of
$200,000
. During the three months ended June 30, 2019, the Company incurred
$50,000
related to services under this agreement. During the six months ended June 30, 2019, the Company incurred
$100,000
related to services under this agreement. As of June 30, 2019, the Company’s outstanding payables and accrued expenses included a
$50,000
liability associated with this agreement.
Real Estate Leases
On May 26, 2017 the Company and MacAndrews & Forbes Incorporated (“M&F”) entered into a
ten
-year Office Lease agreement (the “New HQ Lease”), pursuant to which the Company agreed to lease
3,200
square feet at 31 East 62
nd
Street, New York, New York. The Company is utilizing premises leased under the New HQ Lease as its new corporate headquarters. The Company's rental obligations consist of a fixed rent of
$25,333
per month in the first sixty-three months of the term, subject to a rent abatement for the first six months of the term. From the first day of the sixty-fourth month of the term through the expiration or earlier termination of the lease, the Company's rental obligations consist of a fixed rent of
$29,333
per month. In addition to the fixed rent, the Company will pay a facility fee in consideration of the landlord making available certain ancillary services, commencing on the first anniversary of entry into the lease. The facility fee will be
$3,333
per month for the second year of the term and increasing by
five
percent each year thereafter, to
$4,925
per month in the final year of the term.
On July 31, 2017, the Company and M&F entered into a Termination of Sublease Agreement (the “Old HQ Sublease Termination Agreement”), pursuant to which the Company and M&F agreed to terminate the sublease dated January 9, 2013 for
6,676
square feet of rental square footage located at 660 Madison Avenue, Suite 1700, New York, New York (such sublease being the “Old HQ Sublease” and the location being the “Old HQ”).
Effectiveness of the Old HQ Sublease Termination Agreement was conditioned upon the commencement of a sublease for the Old HQ between M&F and a new subtenant (the “Replacement M&F Sublease”), which occurred on August 2, 2017. The Old HQ Sublease Termination Agreement obligates the Company to pay, on a monthly basis, an amount equal to the discrepancy (the “Rent Discrepancy”) between the sum of certain operating expenses and taxes (“Additional Rent”) and fixed rent under the overlease between M&F and the landlord at 660 Madison Avenue and the sum of Additional Rent and fixed rent under the Replacement M&F Sublease. Under the Old HQ Sublease Termination Agreement, the Company and M&F release each other from any liability under the Old HQ Sublease.
Under the Old HQ Sublease, the Company was obligated to pay fixed rent of approximately
$60,000
per month until August 2018 and approximately
$63,400
per month thereafter until the Old HQ Sublease expiration date of August 31, 2020. Additionally, the Company was obligated to pay certain operating expenses and taxes ("Additional Rent"), such Additional Rent being specified in the overlease between M&F and the landlord at 660 Madison Avenue (the "Old HQ Overlease").
Under the Replacement M&F Sublease, the subtenant’s rental obligations were excused for the first two (
2
) months of the lease term (“Rent Concession Period”). Thereafter, the subtenant was obligated to pay fixed rent of
$36,996
per month for the first
twelve (
12
) months, and is obligated to pay
$37,831
per month for the next 12 months, and
$38,665
per month until the scheduled expiration of the Replacement M&F Sublease on August 24, 2020. In addition to fixed rent, the subtenant is also obligated to pay, pursuant to the Replacement M&F Sublease, a portion of the Additional Rent specified in the Old HQ Overlease.
For the time period between August 2, 2017 and August 31, 2020 (the expiration date of the Old HQ Sublease), the Company estimates that it will pay a total of approximately
$0.9 million
combined in fixed rent and additional amounts payable under the New HQ Lease and a total of approximately
$1.1 million
in Rent Discrepancy under the Old HQ Sublease Termination Agreement, for a cumulative total of
$2.0 million
. In contrast, fixed rent and estimated Additional Rent under the Old HQ Sublease, for the aforementioned time period, would have been a total of approximately
$2.4 million
if each of the New HQ Lease, Replacement M&F Sublease and Old HQ Sublease Termination Agreement had not been entered into by each of the parties thereto. Because amounts such as operating expenses and taxes may vary, the foregoing totals can only be estimated at this time and are subject to change.
As a result of the above-mentioned transactions, the Company discontinued usage of Old HQ in the third quarter of 2017. As such, during the year ended December 31, 2017 the Company recorded a loss of approximately
$1.1 million
in accordance with Accounting Standards Codification (
“
ASC
”
) 420,
Exit or Disposal Obligations
. This loss primarily represented the discounted value of estimated Rent Discrepancy payments to occur in the future, and included costs related to the termination of the old HQ Sublease. The Company also wrote-off approximately
$0.1 million
of leasehold improvements and furniture and fixtures related to the Old HQ.
The following table summarizes activity relating to the liability that was recorded as a result of the lease termination:
|
|
|
|
|
|
|
|
|
Lease Termination liability
|
|
Balance at December 31, 2018
|
$
|
509,937
|
|
|
Charges (included in selling, general and administrative expenses)
|
19,208
|
|
|
Cash payments, net of sublease income
|
(175,749
|
)
|
|
Balance at June 30, 2019
|
$
|
353,396
|
|
As of
June 30, 2019
, approximately
$0.1 million
of the lease termination liability is included in Other liabilities on the condensed consolidated balance sheet with the remainder included in Accrued expenses and other current liabilities.
13.
Income Taxes
The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary.
The effective tax rate for the three months ended June 30, 2019 was
26.15%
compared to
(0.04)%
in the comparable prior period. The effective tax rate for the three months ended June 30, 2019 differs from the U.S. statutory rate of
21%
primarily as a result of non-deductible executive compensation under IRC Section 162(m) and a non-taxable adjustment for the fair market value of the Warrant.
The effective tax rate for the six months ended June 30, 2019 was
28.59%
compared to
0%
in the comparable prior period. The effective tax rate for the six months ended June 30, 2019 differs from the U.S. statutory rate of
21%
primarily as a result of non-deductible executive compensation under IRC Section 162(m) and a non-taxable adjustment for the fair market value of the Warrant.
14. Equity
The tables below present changes in stockholder's equity for the three and six months ended June 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Other Comprehensive Income
|
|
Total Stockholders' Equity
|
|
|
Shares
|
|
Amount
|
|
|
Balances at March 31, 2019
|
80,941,524
|
|
|
$
|
8,094
|
|
|
$
|
220,222,959
|
|
|
$
|
(114,161,484
|
)
|
|
$
|
—
|
|
|
$
|
106,069,569
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,162,492
|
)
|
|
—
|
|
|
(3,162,492
|
)
|
|
Issuance of common stock upon vesting of RSUs
|
105,000
|
|
|
11
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
547,390
|
|
|
|
|
|
|
547,390
|
|
|
Balances at June 30, 2019
|
81,046,524
|
|
|
$
|
8,105
|
|
|
$
|
220,770,338
|
|
|
$
|
(117,323,976
|
)
|
|
$
|
—
|
|
|
$
|
103,454,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Other Comprehensive Income
|
|
Total Stockholders' Equity
|
|
|
Shares
|
|
Amount
|
|
|
Balances at December 31, 2018
|
80,763,350
|
|
|
$
|
8,076
|
|
|
$
|
218,697,872
|
|
|
$
|
(115,791,261
|
)
|
|
$
|
—
|
|
|
$
|
102,914,687
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,532,715
|
)
|
|
—
|
|
|
(1,532,715
|
)
|
|
Issuance of common stock upon exercise of stock options
|
9,769
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock upon vesting of RSUs and exercise of stock-settled appreciation rights
|
121,771
|
|
|
13
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock upon exercise of warrants
|
159,782
|
|
|
16
|
|
|
1,172,785
|
|
|
—
|
|
|
—
|
|
|
1,172,801
|
|
|
Payment of common stock tendered for employee stock-based compensation tax obligations
|
(8,148
|
)
|
|
(1
|
)
|
|
(56,589
|
)
|
|
—
|
|
|
—
|
|
|
(56,590
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
956,284
|
|
|
—
|
|
|
—
|
|
|
956,284
|
|
|
Balances at June 30, 2019
|
81,046,524
|
|
|
$
|
8,105
|
|
|
$
|
220,770,338
|
|
|
$
|
(117,323,976
|
)
|
|
$
|
—
|
|
|
$
|
103,454,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Other Comprehensive Income
|
|
Total Stockholders' Deficiency
|
|
|
Shares
|
|
Amount
|
|
|
Balances at March 31, 2018
|
79,039,000
|
|
|
$
|
7,904
|
|
|
$
|
214,556,941
|
|
|
$
|
(549,181,345
|
)
|
|
$
|
—
|
|
|
$
|
(334,616,500
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,051,264
|
)
|
|
—
|
|
|
(7,051,264
|
)
|
|
Issuance of common stock upon exercise of stock options
|
13,037
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock upon vesting of RSUs and exercise of stock-settled appreciation rights
|
109,795
|
|
|
11
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Payment of common stock tendered for employee stock-based compensation tax obligations
|
(1,774
|
)
|
|
—
|
|
|
(12,328
|
)
|
|
—
|
|
|
—
|
|
|
(12,328
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
362,361
|
|
|
—
|
|
|
—
|
|
|
362,361
|
|
|
Balances at June 30, 2018
|
79,160,058
|
|
|
$
|
7,916
|
|
|
$
|
214,906,962
|
|
|
$
|
(556,232,609
|
)
|
|
$
|
—
|
|
|
$
|
(341,317,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Other Comprehensive Income
|
|
Total Stockholders' Deficiency
|
|
|
Shares
|
|
Amount
|
|
|
Balances at December 31, 2017
|
79,039,000
|
|
|
$
|
7,904
|
|
|
$
|
214,229,581
|
|
|
$
|
(537,375,776
|
)
|
|
$
|
—
|
|
|
$
|
(323,138,291
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,633,520
|
)
|
|
—
|
|
|
(18,633,520
|
)
|
|
Issuance of common stock upon exercise of stock options
|
13,037
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock upon vesting of RSUs and exercise of stock-settled appreciation rights
|
109,795
|
|
|
11
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Payment of common stock tendered for employee stock-based compensation tax obligations
|
(1,774
|
)
|
|
—
|
|
|
(12,328
|
)
|
|
—
|
|
|
—
|
|
|
(12,328
|
)
|
|
Cumulative effect of accounting change
|
—
|
|
|
—
|
|
|
—
|
|
|
(223,313
|
)
|
|
—
|
|
|
(223,313
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
689,721
|
|
|
—
|
|
|
—
|
|
|
689,721
|
|
|
Balances at June 30, 2018
|
79,160,058
|
|
|
$
|
7,916
|
|
|
$
|
214,906,962
|
|
|
$
|
(556,232,609
|
)
|
|
$
|
—
|
|
|
$
|
(341,317,731
|
)
|
15. Leases
The Company leases its Corvallis, Oregon, facilities and office space under an operating lease which was signed on November 3, 2017 and commenced on January 1, 2018. The initial term of this lease was to expire on December 31, 2019 after which the Company has
two
successive renewal options; one for
two
years and the other for
three
years. In the second quarter of 2019, the Company exercised the first renewal option, which extended the lease expiration date to December 31, 2021.
On May 26, 2017 the Company and M&F entered into a
ten
-year office lease agreement (the “New HQ Lease”), pursuant to which the Company agreed to lease
3,200
square feet in New York, New York. The Company is utilizing premises leased under the New HQ Lease as its corporate headquarters. The Company has no leases that qualify as finance leases.
Operating lease costs totaled
$0.1 million
and
$0.1 million
for the three months ended June 30, 2019 and 2018, respectively, and
$0.3 million
and
$0.3 million
for the six months ended June 30, 2019 and 2018, respectively. Cash paid for amounts included in the measurement of lease liabilities from operating cash flows were
$0.1 million
and
$0.1 million
for the three months ended June 30, 2019 and 2018, respectively, and
$0.3 million
and
$0.3 million
for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, the weighted-average remaining lease term of the Company’s operating leases was
6.62
years while the weighted-average discount rate was
4.53%
.
Future undiscounted cash flows under operating leases as of June 30, 2019 are expected to be as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
292,613
|
|
|
2020
|
|
591,108
|
|
|
2021
|
|
600,362
|
|
|
2022
|
|
368,467
|
|
|
2023
|
|
402,078
|
|
|
Thereafter
|
|
1,387,139
|
|
|
Total undiscounted cash flows under leases
|
|
3,641,767
|
|
|
Less: Imputed interest
|
|
(551,116
|
)
|
|
Present value of lease liabilities
|
|
$
|
3,090,651
|
|
As of June 30, 2019, approximately
$2.7 million
of the lease liability is included in Other liabilities on the condensed consolidated balance sheet with the current portion included in accrued expenses.
As previously disclosed in the Company's 2018 Annual Report on Form 10-K and pursuant to ASC 840,
Leases
, the predecessor to ASC 842, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year as of December 31, 2018 was as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
541,376
|
|
|
2020
|
|
304,000
|
|
|
2021
|
|
304,000
|
|
|
2022
|
|
320,774
|
|
|
2023
|
|
352,000
|
|
|
Thereafter
|
|
1,197,778
|
|
|
Total
|
|
$
|
3,019,928
|
|