NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Description of Business
SIGA Technologies, Inc. (“SIGA” or the “Company”) is a commercial-stage pharmaceutical company focused on the health security market. Health security comprises countermeasures for biological, chemical, radiological and nuclear attacks (biodefense market), vaccines and therapies for emerging infectious diseases, and health preparedness. Our lead product is TPOXX®, an orally administered antiviral drug for the treatment of human smallpox disease caused by variola virus. On July 13, 2018, the United States Food & Drug Administration (“FDA”) approved the Company’s orally-administered drug TPOXX® (“oral TPOXX®”).
2. Summary of Significant Accounting Policies
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. The most significant estimates include the variables used in the calculation of fair value of warrants granted or issued by the Company, reported amounts of revenue, and the valuation of deferred tax assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. Actual results could differ from these estimates.
Basis of Presentation
The consolidated financial statements and related disclosures are presented in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and reflect the consolidated financial position, results of operations and cash flows for all periods presented.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
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 (see Note 4) are restricted and are held in a reserve account. Cash and cash equivalents held in the reserve account are 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 of 2019.
The following table reconciles cash, cash equivalents and restricted cash per the consolidated statements of cash flows to the consolidated balance sheet for each respective period:
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As of December 31,
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2019
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2018
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|
2017
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|
2016
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Cash and cash equivalents
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$
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65,249,072
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|
|
$
|
100,652,809
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|
|
$
|
19,857,833
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|
|
$
|
28,701,824
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|
Restricted cash - short-term
|
95,737,862
|
|
|
11,452,078
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|
|
10,701,305
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|
|
10,138,890
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|
Restricted cash - long-term
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—
|
|
|
68,292,023
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|
|
6,542,448
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|
|
17,333,332
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|
Cash, cash equivalents and restricted cash
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$
|
160,986,934
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|
|
$
|
180,396,910
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|
|
$
|
37,101,586
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|
|
$
|
56,174,046
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Concentration of Credit Risk
The Company has cash in bank accounts that exceeds the Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses on its cash accounts and no allowance has been provided for potential credit losses because management believes the potential for losses is remote.
Accounts Receivable
Accounts receivable are recorded net of provisions for doubtful accounts. At December 31, 2019 and 2018, 100% of accounts receivable represented receivables from the U.S. government. An allowance for doubtful accounts is based on specific analysis of the receivables. At December 31, 2019 and 2018, the Company had no allowance for doubtful accounts.
Inventory
Inventory is stated at the lower of cost or net realizable value. The Company capitalizes inventory costs associated with the Company’s products when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. Inventory is evaluated for impairment periodically to identify inventory that may expire prior to expected sale or has a cost basis in excess of its net realizable value. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to write down such unmarketable inventory to its net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line method over the estimated useful lives of the various asset classes. The estimated useful lives are as follows: five years for laboratory equipment; three years for computer equipment; and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the lease term. Maintenance, repairs and minor replacements are charged to expense as incurred.
Warrant Liability
The Company accounts for warrants in accordance with the authoritative guidance which requires that free-standing derivative financial instruments with certain cash settlement features be classified as assets or liabilities at the time of the transaction, and recorded at their fair value. Fair value is estimated using model-derived valuations. 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.
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”).
Adoption of ASC 606. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605, Revenue Recognition.
The cumulative impact of adopting ASC 606 as of January 1, 2018 was a decrease to deferred revenue of approximately $1.8 million; a decrease to deferred costs of approximately $2.1 million; an increase to receivables of approximately $0.1 million and a net increase to opening accumulated deficit of $0.2 million, net of tax. For the year ended December 31, 2018, the impact to revenues as a result of applying ASC 606 was an increase of approximately $1.0 million.
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. As of December 31, 2019, the Company's active performance obligations, for the contracts outlined in Note 3, consist of the following: five performance obligations relate to research and development services; one relates to manufacture and delivery of product; and one is associated with storage of product.
Contract modifications may occur during the course of performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for services that are not distinct, and, therefore, are accounted for as part of the existing contract.
The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Substantially all of the Company’s revenue related to research and development performance obligations is recognized over time, because control transfers continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, and third-party services.
Revenue connected with the performance obligations related to the delivery of oral TPOXX® to the U.S. Strategic National Stockpile ("Strategic Stockpile") ("Delivery Performance Obligation") is recognized at a point in time. The Delivery Performance Obligation under the 2011 BARDA Contract (Note 3) has been completed. With respect to this performance obligation, revenue was recognized when the U.S. Biomedical Advanced Research and Development Authority ("BARDA") obtained control of the asset, which was upon delivery to and acceptance by the customer and at the point in time when the constraint on the consideration was resolved due to FDA approval of oral TPOXX®. The consideration, which was variable consideration, was constrained until the FDA approved oral TPOXX® for the treatment of smallpox on July 13, 2018. Prior to FDA approval, consideration had been constrained because the FDA Approval Replacement Obligation (as defined in Note 3) had not been quantified or specified. Following FDA approval, the possibility of having to replace product pursuant to the FDA Approval Replacement Obligation was essentially eliminated and deemed to be remote since there was no difference between the approved product and the courses of oral TPOXX® that had been delivered to the Strategic Stockpile.
Contract Estimates. Accounting for long-term contracts and grants involves the use of various techniques to estimate total contract revenue and costs.
Contract estimates are based on various assumptions to project the outcome of future events that often span multiple years. These assumptions include labor productivity; the complexity of the work to be performed; external factors such as customer behavior and potential regulatory outcomes; and the performance of subcontractors, among other variables.
The nature of the work required to be performed on many of the Company’s performance obligations and the estimation of total revenue and cost at completion are complex, subject to many variables and require significant judgment. The consideration associated with research and development services is variable as the total amount of services to be performed has not been finalized. The Company estimates variable consideration as the most likely amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur and when any uncertainty associated with variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our historical and anticipated performance, external factors, trends and all other information (historical, current and forecasted) that is reasonably available to us.
A significant change in one or more of these estimates could affect the profitability of the Company’s contracts. As such, the Company reviews and updates its contract-related estimates regularly. The Company recognizes adjustments in estimated revenues, research and development expenses and cost of sales and supportive services under the cumulative catch-up method. Under this method, the impact of the adjustment on revenues, research and development expenses and cost of sales and supportive services recorded to date on a contract is recognized in the period the adjustment is identified.
During the year ended December 31, 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 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 year ended December 31, 2019, the Company recognized revenue of $1.0 million that was included in deferred revenue at the beginning of the period.
Remaining Performance Obligations. Remaining performance obligations represent the transaction price for which work has not been performed and excludes unexercised contract options. As of December 31, 2019, the aggregate amount of transaction price allocated to remaining performance obligations was $30.0 million. The Company expects to recognize this amount as revenue over the next five years as the specific timing for satisfying the performance obligations is subjective and outside the Company’s control.
Leases
The Company accounts for leases in accordance with ASC 842, Leases (“ASC 842”)
Adoption of ASC 842. On January 1, 2019, the Company adopted 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 ("ROU") 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.
The Company determines if an arrangement is a lease at inception. Leases with an initial term less than one year are not recorded on the balance sheet and the lease costs for these costs are recorded as an expense on a straight-line basis over the lease term. Operating leases with terms greater than one year result in a lease liability recorded in other liabilities with a corresponding ROU asset recorded in property, plant and equipment.
Operating lease liabilities are recognized at the commencement date based on the present value of future minimum lease payments over the lease term. ROU assets are recognized based on the corresponding lease liabilities adjusted for qualifying initial direct costs, prepaid or accrued lease payments and unamortized lease incentives. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease. Lease terms may include options to extend or terminate the lease which are incorporated into the Company's measurement when it is reasonably certain that the Company will exercise the option.
Research and Development
Research and development expenses include costs directly and indirectly attributable to the conduct of research and development programs, and performance pursuant to the BARDA contracts, including employee related costs, materials, supplies, depreciation on and maintenance of research equipment, the cost of services provided by outside contractors, including services related to the Company’s clinical trials and facility costs, such as rent, utilities, and general support services. All costs associated with research and development are expensed as incurred. Costs related to the acquisition of technology rights, for which development work is still in process, and that have no alternative future uses, are expensed as incurred.
Goodwill
The Company evaluates goodwill for impairment at least annually or as circumstances warrant. The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. The Company operates as one business and one reporting unit. Therefore, the goodwill impairment analysis is performed on the basis of the Company as a whole, using the market capitalization of the Company as an estimate of its fair value.
Share-based Compensation
Stock-based compensation expense for all share-based payment awards made to employees and directors is determined on the grant date; for options awards, fair value was estimated using the Black-Scholes model. These compensation costs are recognized net of an estimated forfeiture rate over the requisite service periods of the awards. Forfeitures are estimated on the date of the respective grant and revised if actual or expected forfeiture activity differs from original estimates.
Income Taxes
The Company recognizes income taxes utilizing the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities at enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established if it is more likely than not that some or the entire deferred tax asset will not be realized. The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about the Company’s future profitability which are inherently uncertain. The Company may recognize tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company re-evaluates uncertain tax positions and considers factors, including, but not limited to, changes in tax law, the measurement of tax
positions taken or expected to be taken on tax returns, and changes in circumstances related to a tax position. The Company recognizes interest and penalties related to income tax matters in income tax expense.
(Loss) Earnings per Share
Basic earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the period, assuming potentially dilutive common shares from option exercises, SSARs, RSUs, warrants and other incentives had been issued and any proceeds received in respect thereof were used to repurchase common stock at the average market price during the period. The assumed proceeds used to repurchase common stock is the sum of the amount to be paid to the Company upon exercise of options and the amount of compensation cost attributed to future services not yet recognized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash and cash equivalents, 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 liabilities 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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•
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Level 1 – Quoted prices for identical instruments in active markets.
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•
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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.
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•
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Level 3 – Instruments where significant value drivers are unobservable to third parties.
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The Company uses model-derived valuations where certain inputs are unobservable to third parties to determine the fair value of common stock warrants on a recurring basis and classifies such liability-classified warrants in Level 3.
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 during 2019 or 2018. As of December 31, 2019, the Company had approximately $5.6 million and $90.0 million of restricted cash and cash equivalents classified as Level 1 and Level 2 financial instruments, respectively. There were no Level 1 or Level 2 financial instruments as of December 31, 2018.
The following table presents changes in the liability-classified warrant measured at fair value using Level 3 inputs:
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Fair Value Measurements of Level 3 liability-classified warrant
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Warrant liability at December 31, 2018
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$
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12,380,939
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Decrease in fair value of warrant liability
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(5,091,256
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)
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Exercise of warrants
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(1,172,801
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)
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Warrant liability at December 31, 2019
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$
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6,116,882
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Loss Contingencies
The Company is subject to certain contingencies arising in the ordinary course of business. The Company records accruals for these contingencies to the extent that a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued. The Company expenses legal costs associated with loss contingencies as incurred. We record anticipated recoveries under existing insurance contracts when recovery is assured.
Segment Information
The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer, who is the Chief Operating Decision Maker. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location and has only one reportable segment.
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. The Company believes the adoption of ASU No. 2017-04 will not have a significant impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.
3. Procurement Contract and Research Agreements
19C BARDA Contract (2018 BARDA Contract)
On September 10, 2018, the Company entered into a contract with BARDA pursuant to which SIGA agreed to deliver up to 1,488,000 courses of oral TPOXX® to the 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 procurement activities. As of February 18, 2020, the contract with BARDA (as amended, modified, or supplemented from time to time, the "19C BARDA Contract" or “2018 BARDA Contract”) contemplates up to approximately $602.5 million of payments, of which approximately $51.7 million of payments are included within the base period of performance of five years, approximately $25.8 million of payments are related to exercised options and up to approximately $525.0 million of payments are currently specified 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 19C 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 modified 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 option was exercised simultaneously with the aforementioned modification. Each of the other three options individually specifies the delivery of approximately 121,000 courses of oral TPOXX® for consideration of approximately $33.8 million. In total, the four options under the May 2019 modification provide for the purchase of raw material for and 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 19C 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 specifies 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 December 31, 2019, the Company had received $11.1 million for the successful delivery of approximately 35,700 courses of oral TPOXX® to the Strategic Stockpile, $3.2 million for the manufacture of IV BDS and $4.7 million for other base period activities. IV BDS is expected to be used for the manufacture of 20,000 courses of IV FDP.
The $3.2 million received for the manufacture of IV BDS has been recorded as deferred revenue as of December 31, 2019 and 2018; such amount is expected to be recognized as revenue when IV TPOXX containing the BDS is delivered to the National Stockpile or placed in vendor-managed inventory.
The options that have been exercised to date provide for additional potential payments up to approximately $25.8 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 $14.6 million for funding of post-marketing activities for oral TPOXX®, of which, $2.3 million had been received as of December 31, 2019.
Unexercised options specify potential payments up to approximately $525.0 million in total (if all options are exercised). There are options for the following activities: payments of up to $439.0 million for the delivery of up to approximately 1,452,000 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 19C 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 as to 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.
Revenues in connection with the 19C BARDA Contract are recognized either over time or at a point in time. Performance obligations related to product delivery generate revenue at a point in time. Other performance obligations under the 19C BARDA Contract generate revenue over time. For the years ended December 31, 2019 and 2018, the Company recognized revenues of $7.4 million and $0.4 million, respectively, on an over time basis. In contrast, revenue recognized for product delivery and therefore at a point in time for the year ended December 31, 2019 was $11.1 million. There was no revenue recognized at a point in time during 2018.
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 specifies approximately $508.4 million of payments (including exercised options), of which, as of December 31, 2019, $459.8 million has been received by the Company for the manufacture and delivery of 1.7 million of oral TPOXX® and $44.9 million has been received for certain reimbursements in connection with development and supportive activities. Approximately $3.7 million remains eligible to be received in the future for reimbursements of development and supportive activities.
For courses of oral TPOXX® that have been 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 the aforementioned 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. In 2015, BARDA exercised two options related to extending the indication of the drug to the geriatric and pediatric populations. The stated value of those exercises was immaterial.
The 2011 BARDA Contract expires in September 2020.
As described in Note 2, cash inflows related to delivery of courses under the 2011 BARDA Contract had been recorded as deferred revenue prior to FDA approval of oral TPOXX®, which occurred in the third quarter 2018. The deferral was due to the constraint on the consideration received related to the FDA Approval Replacement Obligation. During the third quarter 2018, the constraint was satisfied with FDA approval of oral TPOXX®. As such, $375.6 million associated with cash consideration received in prior periods under the 2011 BARDA Contract was recognized as revenue for the year ended December 31, 2018. Separately, as discussed above, $90.9 million of revenues were recognized in the third quarter of 2018 in connection with a $40.9 million holdback payment (under the 2011 BARDA Contract) and a $50.0 million payment for achieving 84-month expiry for oral TPOXX® (under the 2011 BARDA Contract). Direct costs incurred by the Company to manufacture and fulfill the delivery of courses had also been deferred. As of December 31, 2017, deferred direct costs under the 2011 BARDA Contract were approximately $96.5 million. In connection with the FDA approval of oral TPOXX®, all related deferred costs were recognized in the consolidated statement of operations during the third quarter of 2018.
Revenues in connection with the 2011 BARDA Contract are recognized either over time or at a point in time. Performance obligations related to product delivery generate revenue at a point in time. Remaining performance obligations under the 2011 BARDA Contract generate revenue over time. For the years ended December 31, 2019 and 2018, the Company recognized revenue of $0.3 million and $1.7 million, respectively, on an over time basis. In contrast, revenue recognized for product delivery and therefore at a point in time for the years ended December 31, 2019 and 2018, were $0.1 million and $468.9 million, respectively.
Research Agreements and Grants
The Company has an R&D program for IV TPOXX®. This program is funded by the 19C 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 December 31, 2019, the IV Formulation R&D Contract provides for future aggregate research and development funding of approximately $3.1 million.
Revenues in connection with the IV Formulation R&D Contract are recognized over time. For the years ended December 31, 2019 and 2018, the Company recognized revenue of $7.5 million and $6.0 million, respectively, under this contract. During the year ended December 31, 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 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.
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 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. As of December 31, 2019 the PEP Label Expansion R&D Contract provides for future aggregate research and development funding under the initial award of approximately $12.2 million. For the year ended December 31, 2019, the Company, under the PEP Label Expansion R&D Contract, recognized revenue of $0.3 million on an over time basis.
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, the Company may not be eligible to receive all available funds.
4. Sale of Priority Review Voucher
Concurrent with the approval of oral TPOXX®, the FDA granted the Company's request for a Priority Review Voucher (“PRV”). A PRV is a voucher that may be used to obtain an accelerated FDA review of a product candidate. On October 31, 2018 the Company sold its PRV for cash consideration of $80 million which was recognized as other income.
5. Inventory
Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2019
|
|
December 31, 2018
|
Work in-process
|
$
|
8,693,457
|
|
|
$
|
1,950,445
|
|
Finished goods
|
959,398
|
|
|
957,765
|
|
Inventory
|
$
|
9,652,855
|
|
|
$
|
2,908,210
|
|
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2019
|
|
December 31, 2018
|
Leasehold improvements
|
$
|
2,420,028
|
|
|
$
|
2,420,028
|
|
Computer equipment
|
601,797
|
|
|
618,248
|
|
Furniture and fixtures
|
377,859
|
|
|
377,859
|
|
Operating lease right-of-use-asset
|
2,944,932
|
|
|
—
|
|
|
6,344,616
|
|
|
3,416,135
|
|
Less-accumulated depreciation
|
(3,726,313
|
)
|
|
(3,244,861
|
)
|
Property, plant and equipment, net
|
$
|
2,618,303
|
|
|
$
|
171,274
|
|
Depreciation and amortization expense on property, plant, and equipment was $526,997, $69,630, and $132,189 for the years ended December 31, 2019, 2018, and 2017, respectively. In connection with the lease termination discussed in Note 15, the Company wrote off $129,000 of leasehold improvements and furniture and fixtures during the year ended December 31, 2017.
7. Accrued Expenses
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2019
|
|
December 31, 2018
|
Compensation
|
$
|
2,966,139
|
|
|
$
|
2,600,839
|
|
Deferred revenue
|
2,298,341
|
|
|
4,159,946
|
|
Interest payable
|
977,724
|
|
|
35,567
|
|
Research and development vendor costs
|
707,685
|
|
|
1,446,410
|
|
Lease liability, current portion
|
419,709
|
|
|
—
|
|
Professional fees
|
288,707
|
|
|
242,043
|
|
Vacation
|
256,402
|
|
|
294,794
|
|
Other
|
722,204
|
|
|
869,318
|
|
Accrued expenses and other current liabilities
|
$
|
8,636,911
|
|
|
$
|
9,648,917
|
|
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 11) on November 16, 2016. As part of the satisfaction of a litigation 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 was required to fund any interest to the extent any interest in excess of the aforementioned $25.0 million was due and owing and any of such $5.0 million remained 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 December 31, 2019, the effective interest rate on the Term Loan, which includes interest payments and accretion of unamortized costs and fees, was 19.1%. The Company incurred $15.8 million of interest expense during the year-ended December 31, 2019, of which $4.5 million accreted to the Term Loan balance. For the year ended December 31, 2018, the Company incurred $15.5 million of interest expense, of which $4.5 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 to be used only for interest, fees and principal payments (other than those in connection with an event of default) on the Term Loan. The cash and cash equivalents 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, 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 (May 17, 2020) of the Escrow Release Date, 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 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 (including share repurchases and dividends) and enter into certain merger or consolidation transactions. The minimum cash requirement was $5.0 million until August 27, 2018 (45 days after FDA approval of oral TPOXX®), at which point the minimum 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 December 31, 2019, the Company is in compliance with the Loan Agreement covenants.
At December 31, 2019, the fair value of the debt was $85.7 million and the carrying value of the debt was $80.0 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.
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 10) 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. 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) earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net (loss) income for basic earnings per share
|
$
|
(7,241,147
|
)
|
|
$
|
421,807,828
|
|
|
$
|
(36,235,484
|
)
|
Less: Change in fair value of warrants
|
5,091,256
|
|
|
(6,922,624
|
)
|
|
—
|
|
Net (loss) income, adjusted for change in fair value of warrants for diluted earnings per share
|
$
|
(12,332,403
|
)
|
|
$
|
428,730,452
|
|
|
$
|
(36,235,484
|
)
|
Weighted-average shares
|
81,031,254
|
|
|
79,923,295
|
|
|
78,874,494
|
|
Effect of potential common shares
|
1,143,769
|
|
|
2,785,177
|
|
|
—
|
|
Weighted-average shares: diluted
|
82,175,023
|
|
|
82,708,472
|
|
|
78,874,494
|
|
(Loss) earnings per share: basic
|
$
|
(0.09
|
)
|
|
$
|
5.28
|
|
|
$
|
(0.46
|
)
|
(Loss) earnings per share: diluted
|
$
|
(0.15
|
)
|
|
$
|
5.18
|
|
|
$
|
(0.46
|
)
|
For the year ended December 31, 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. When applicable, weighted-average diluted shares include the dilutive effect of in-the-money options and warrants, unvested restricted stock and unreleased restricted stock units. The dilutive effect of warrants and options is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee or director must pay for exercising stock options, the average amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible, are collectively assumed to be used to repurchase shares.
The Company incurred losses for the twelve months ended December 31, 2019 and 2017 and as a result, for such years the equity instruments listed below are 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:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2017
|
Stock Options
|
|
340,284
|
|
|
1,386,176
|
|
Stock-Settled Stock Appreciation Rights
|
|
1,666
|
|
|
333,252
|
|
Restricted Stock Units
|
|
525,741
|
|
|
1,396,730
|
|
Warrants
|
|
—
|
|
|
2,690,950
|
|
As discussed in Note 12, 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.
10. 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 (as defined in Note 11). The 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. During the year ended December 31, 2019, approximately 0.2 million shares on the warrant were exercised. Subsequent to partial exercises of the Warrant, there are approximately 1.5 million shares underlying the Warrant as of December 31, 2019. 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 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 its change in fair value in the consolidated statement of operations.
On September 2, 2016, the issuance date of the Warrant, the fair value of the liability-classified Warrant was $5.8 million. The Company applied a Monte Carlo Simulation-model to calculate the fair value of the Warrant and compared the Monte Carlo simulation model calculation to a Black-Scholes model calculation as of December 31, 2016. These models generated substantially equivalent fair values for the Warrant. As such, the Company utilized a Black-Scholes model at December 31, 2019 and 2018 to determine the fair value of the Warrant.
As of December 31, 2019, the fair value of the Warrant was $6.1 million. A Black Scholes model was applied to calculate the fair value of the Warrant using the following assumptions: risk free interest rate of 1.81%; no dividend yield; an expected life of 6.7 years; and a volatility factor of 70%.
As of December 31, 2018, the fair value of the Warrant was $12.4 million. A Black Scholes model was applied to calculate the fair value of the Warrant using the following assumptions: risk free interest rate of 2.6%; no dividend yield; an expected life of 7.7 years; and a volatility factor of 70%.
At December 31, 2019, pursuant to the Warrant agreement, there were no conditions under which current assets would have been required to satisfy the Warrant obligation.
11. Stockholders’ Equity
On December 31, 2019, the Company’s authorized share capital consisted of 620,000,000 shares, of which 600,000,000 are designated common shares and 20,000,000 are designated preferred shares. The Company’s Board of Directors is authorized to issue preferred shares in series with rights, privileges and qualifications of each series determined by the Board. As of December 31, 2019 and 2018, no preferred shares were outstanding or issued.
12. Stock Compensation Plans
The Company’s 2010 Stock Incentive Plan (the “2010 Plan”) was initially adopted in May 2010. The 2010 Plan provided for the issuance of stock options, restricted stock and unrestricted stock with respect to an aggregate of 2,000,000 shares of the Company’s common stock to employees, consultants and outside directors of the Company. On May 17, 2011, the 2010 Plan was amended to provide for the issuance of restricted stock units (“RSUs”) and on February 2, 2012, the 2010 Plan was amended to provide for the issuance of SSARs. Effective April 25, 2012 and May 23, 2017, the 2010 Plan was amended to increase the maximum number of shares of common stock available for issuance to an aggregate of 4,500,000 shares and 8,500,000 shares, respectively. The vesting period for awards granted under the 2010 Plan, is determined by the Compensation Committee of the Board of Directors. The Compensation Committee also determines the expiration date of each equity award, however, stock options and SSARs may not be exercisable more than ten years after the date of grant as the maximum term of equity awards issued under the 2010 Plan is ten years.
For the years ended December 31, 2019, 2018 and 2017, the Company recorded stock-based compensation expense, including stock options, SSARs, RSUs and certain warrant amortization, of approximately $2.1 million, $2.3 million and $1.1 million, respectively.
Stock Options
Stock option awards provide holders the right to purchase shares of Common Stock at prices determined by the Compensation Committee, at the time of grant, and must have an exercise price equal to or in excess of the fair market value of the Company’s common stock at the date of grant.
The fair value of options granted is estimated at the date of grant. Expected volatility has been estimated using a combination of the historical volatility of the Company's common stock and the historical volatility of a group of comparable companies’ common stock, both using historical periods equivalent to the options’ expected lives. The expected dividend yield assumption is based on the Company’s intent not to issue a dividend in the foreseeable future. The risk-free interest rate assumption is based upon observed interest rates for securities with maturities approximating the options’ expected lives. The expected life was estimated based on historical experience and expectation of employee exercise behavior in the future giving consideration to the contractual terms of the award.
A summary of the Company’s stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average
Remaining Life
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at January 1, 2019
|
402,400
|
|
|
$
|
9.03
|
|
|
|
|
|
Granted
|
25,000
|
|
|
5.90
|
|
|
|
|
|
Exercised
|
(25,000
|
)
|
|
4.74
|
|
|
|
|
|
Canceled/Expired
|
(121,400
|
)
|
|
7.75
|
|
|
|
|
|
Outstanding at December 31, 2019
|
281,000
|
|
|
$
|
9.68
|
|
|
2.51
|
|
$
|
53,750
|
|
Vested at December 31, 2019
|
281,000
|
|
|
$
|
9.68
|
|
|
2.51
|
|
$
|
53,750
|
|
Exercisable at December 31, 2019
|
281,000
|
|
|
$
|
9.68
|
|
|
2.51
|
|
$
|
53,750
|
|
As of December 31, 2019, there is no remaining unrecognized stock-based compensation cost related to stock options expected to be recognized. The total fair value of stock options which vested during the years ended December 31, 2019 and 2017 was approximately $120,000 and $73,000, respectively. For the year ended December 31, 2018 there were no stock options that vested.
The total intrinsic value of stock options exercised was approximately $76,000, $2,900,000 and $65,000 for the years ended December 31, 2019, 2018 and 2017, respectively. The intrinsic value represents the amount by which the market price of the underlying stock exceeds the exercise price of an option.
Stock Appreciation Rights
SSARs provided holders the right to purchase shares of Common Stock at prices determined by the Compensation Committee, at the time of grant, and had to have an exercise price equal to or in excess of the fair market value of the Company’s common stock at the date of grant. Upon exercise, the gain, or intrinsic value, was settled by the delivery of SIGA stock to the employee.
There were no SSARs granted during the years ended December 31, 2019 or 2018. During the year ended December 31, 2012, the Company granted 1.4 million shares of SSARs at a weighted average grant-date fair value of $0.68 per share. The exercise price of a SSAR was equal to the closing market price on the date of grant. The granted SSARs vested in equal annual installments over a period of three years and expired no later than seven years from the date of grant. Moreover, the appreciation of each SSAR was capped at a determined maximum value.
The fair value of granted SSARs was estimated utilizing a Monte Carlo method. The Monte Carlo method is a statistical simulation technique used to provide the grant-date fair value of an award. As the issued SSARs were capped at maximum values, such attribute was considered in the simulation.
The Company calculated the expected volatility using a combination of historical volatility of SIGA's common stock and the volatility of a group of comparable companies' common stock. The expected life from grant date was estimated based on the expectation of exercise behavior in consideration of the maximum value and contractual term of the SSARs. The dividend yield assumption was based on the Company’s intent not to issue a dividend in the foreseeable future. The risk-free interest rate assumption was based upon observed interest rates appropriate for the expected life of the SSARs.
A summary of the Company’s SSAR activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
SSARs
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average
Remaining Life
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at January 1, 2019
|
34,100
|
|
|
$
|
3.53
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(34,100
|
)
|
|
3.53
|
|
|
|
|
|
Canceled/Expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2019
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested at December 31, 2019
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercisable at December 31, 2019
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The total intrinsic value of SSARs exercised was approximately $0.1 million, $0.7 million and $0.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Restricted Stock Awards/Restricted Stock Units
RSUs awarded to employees vest in equal annual installments over a two or three-year period and RSUs awarded to directors of the Company vest over a one-year period. A summary of the Company’s RSU activity is as follows:
|
|
|
|
|
|
|
|
|
Number of
RSUs
|
|
Weighted
Average Grant-Date Fair Value
|
Outstanding at January 1, 2019
|
499,116
|
|
|
$
|
3.26
|
|
Granted
|
255,292
|
|
|
5.84
|
|
Vested and released
|
(499,116
|
)
|
|
3.26
|
|
Canceled/Expired
|
(15,000
|
)
|
|
5.90
|
|
Outstanding at December 31, 2019
|
240,292
|
|
|
$
|
5.83
|
|
As of December 31, 2019, $0.8 million of total remaining unrecognized stock-based compensation cost related to RSUs is expected to be recognized over the weighted-average remaining requisite service period of 1.4 years. The weighted average fair value at the date of grant for restricted stock awards granted during the years ended December 31, 2019, 2018 and 2017 was $5.84, $6.53 and $3.51 per share, respectively. Based on the grant date, the total fair value of restricted stock and restricted stock units vested and released during the years ended December 31, 2019, 2018 and 2017 was approximately $1.6 million, $2.9 million and $0.6 million, respectively.
13. Income Taxes
The Company's (benefit) provision for income taxes comprises the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(663,114
|
)
|
|
$
|
(1,326,022
|
)
|
|
$
|
623,060
|
|
State and local
|
143,455
|
|
|
459,172
|
|
|
1,179
|
|
Total current (benefit) provision
|
(519,659
|
)
|
|
(866,850
|
)
|
|
624,239
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(2,092,585
|
)
|
|
(9,256,661
|
)
|
|
(2,724,371
|
)
|
State and local
|
(325,032
|
)
|
|
(44,761
|
)
|
|
6,342
|
|
Total deferred (benefit)
|
(2,417,617
|
)
|
|
(9,301,422
|
)
|
|
(2,718,029
|
)
|
Total (benefit)
|
$
|
(2,937,276
|
)
|
|
$
|
(10,168,272
|
)
|
|
$
|
(2,093,790
|
)
|
The Company’s deferred tax assets and liabilities comprise the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
Net operating losses
|
9,353,603
|
|
|
$
|
9,798,319
|
|
Deferred research and development costs
|
—
|
|
|
60,535
|
|
Amortization of intangible assets
|
113,910
|
|
|
171,044
|
|
Share-based compensation
|
451,818
|
|
|
508,089
|
|
Property, plant and equipment
|
—
|
|
|
371,804
|
|
Deferred revenue
|
719,304
|
|
|
—
|
|
Interest expense carryforward
|
2,617,951
|
|
|
—
|
|
Lease liability
|
678,993
|
|
|
—
|
|
Alternative minimum tax credits
|
663,114
|
|
|
1,326,228
|
|
Other
|
1,338,046
|
|
|
1,028,083
|
|
Deferred income tax assets
|
15,936,739
|
|
|
13,264,102
|
|
Less: valuation allowance
|
(1,047,008
|
)
|
|
(1,051,307
|
)
|
Deferred income tax assets, net of valuation allowance
|
$
|
14,889,731
|
|
|
$
|
12,212,795
|
|
Deferred income tax liabilities:
|
|
|
|
Amortization of goodwill
|
(201,930
|
)
|
|
(192,146
|
)
|
Property, plant and equipment
|
(175,581
|
)
|
|
—
|
|
Other
|
(361,218
|
)
|
|
(287,264
|
)
|
Deferred income tax asset (liability), net
|
$
|
14,151,002
|
|
|
$
|
11,733,385
|
|
The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about the Company’s future profitability which is inherently uncertain. The Company assesses all available positive and negative evidence to determine if its existing deferred tax assets are realizable on a more-likely-than-not basis. In making such assessment, the Company considered the reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of a deferred tax asset is ultimately dependent on the Company's generation of sufficient taxable income within the available net operating loss carryback and/or carryforward periods to utilize the deductible temporary differences. As of December 31, 2019 and 2018, the Company has a valuation allowance on certain state and local net operating losses which the Company determined were not realizable on a more-likely-than-not basis.
During the year ended December 31, 2018, the Company received FDA approval and recorded revenue related to the delivery of our oral TPOXX® product. The Company also received payments for the FDA holdback, the expiry option under the 2011 Base Contract, and for the sale of its PRV. In addition, the Company entered into a new contract with BARDA for the sale of up to 1.7 million courses of (oral and IV) TPOXX®. Based on these factors, management determined that sufficient positive evidence existed to conclude that substantially all of our deferred tax assets were realizable on a more-likely-than-not basis and reversed our valuation allowance. During 2018, the valuation allowance decreased by $101.5 million which relates to the reversal of substantially all of the Company's valuation allowance against its deferred tax assets with the exception of those related to certain state net operating losses.
As of December 31, 2019, the Company had $38.2 million of federal net operating loss carryforwards, which expire in 2036, to offset future taxable income.
The benefit for income taxes differs from the expected amount calculated by applying the Company's statutory rate to the income or loss before benefit for income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
2017
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State taxes
|
1.3
|
%
|
|
0.8
|
%
|
|
3.9
|
%
|
Change in fair value of common stock warrant
|
10.5
|
%
|
|
0.4
|
%
|
|
(4.3
|
)%
|
Section 162(m) limitation
|
(6.0
|
)%
|
|
0.3
|
%
|
|
—
|
%
|
Other
|
2.1
|
%
|
|
(0.3
|
)%
|
|
1.8
|
%
|
U.S. federal tax law change
|
—
|
%
|
|
—
|
%
|
|
5.1
|
%
|
Valuation allowance on deferred tax assets
|
—
|
%
|
|
(24.7
|
)%
|
|
(36.0
|
)%
|
Effective tax rate
|
28.9
|
%
|
|
(2.5
|
)%
|
|
5.5
|
%
|
For the year ended December 31, 2019, the Company’s effective tax rate differs from the 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. For the year ended December 31, 2018, the Company's effective tax rate differs from the statutory rate of 21% due to the reversal of the Company's valuation allowance as substantially all of the Company's deferred tax assets became realizable on a more-likely-than-not basis.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
2018
|
Balance at beginning of year
|
$
|
5,738,964
|
|
$
|
—
|
|
Tax positions related to the current and prior years:
|
—
|
|
—
|
|
Additions
|
—
|
|
5,738,964
|
|
Reductions
|
(89,776
|
)
|
—
|
|
Settlements
|
—
|
|
—
|
|
Lapses in applicable statutes of limitation
|
—
|
|
—
|
|
Balance at the end of the year
|
$
|
5,649,188
|
|
$
|
5,738,964
|
|
Included in the balance of unrecognized tax benefits as of December 31, 2019, are potential benefits of $5.6 million that, if recognized, would affect the effective tax rate. There are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized benefits will significantly increase or decrease within twelve months from December 31, 2019.
The Company files federal income tax returns and income tax returns in various state and local tax jurisdictions. The federal tax years open to examination are 2017 to 2019. The Company's state and local tax years open to examination are 2015-2019.
14. Commitments and Contingencies
Operating lease commitments
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. This lease expires December 31, 2021. The Company had a lease for the same location prior to this lease. On May 26, 2017 the Company and M&F Incorporated 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 62nd Street, 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 $0.6 million and $0.7 million for the year ended December 31, 2019 and 2018, respectively. Cash paid for amounts included in the measurement of lease liabilities from operating cash flows was $0.6 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the weighted-average remaining lease term of the Company’s operating leases was 6.3 years while the weighted-average discount rate was 4.53%.
The following is a maturity analysis of the Company's lease liabilities as of December 31, 2019:
|
|
|
|
|
2020
|
$
|
542,340
|
|
2021
|
600,362
|
|
2022
|
368,467
|
|
2023
|
402,078
|
|
2024
|
404,258
|
|
Thereafter
|
982,881
|
|
Total undiscounted cash flows under operating leases
|
3,300,386
|
|
Less: Imputed interest
|
(482,097
|
)
|
Present value of lease liabilities
|
$
|
2,818,289
|
|
As of December 31, 2019, approximately $2.4 million of the lease liability is included in Other liabilities on the 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 were 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
|
|
Legal Proceedings
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. As of December 31, 2019 the Company has approximately $26.8 million of purchase commitments.
15. 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 years ended December 31, 2019, 2018 and 2017, the Company incurred expenses of approximately $468,000, $450,000 and $400,000, respectively, related to services provided by the outside counsel. On December 31, 2019 the Company’s outstanding payables and accrued expenses included a $40,000 liability to the outside counsel.
Board of Directors-Consulting Agreement
On October 13, 2018, the Company, entered into a consulting agreement with a member 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 year ended December 31, 2019, the Company incurred $200,000 related to services under this agreement. As of December 31, 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 M&F Incorporated entered into the New HQ Lease, pursuant to which the Company agreed to lease 3,200 square feet at 31 East 62nd Street, New York, New York. The Company is utilizing premises leased under the New HQ Lease as its 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 increase 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 fixed rent and Additional Rent (as defined below) under the Old HQ Overlease (as defined below) and the sum of fixed rent and Additional 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, for the year ended December 31, 2017 the Company recorded a loss of approximately $1.1 million in accordance with 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:
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2019
|
|
2018
|
Beginning Balance
|
$
|
509,937
|
|
|
$
|
814,622
|
|
Charges
|
45,374
|
|
|
35,861
|
|
Cash Payments
|
(352,935
|
)
|
|
(340,546
|
)
|
Lease Termination Liability
|
$
|
202,376
|
|
|
$
|
509,937
|
|
For the year ended December 31, 2019, the entire lease termination liability is included in accrued expenses on the consolidated balance sheet. For the year ended December 31, 2018, approximately $0.2 million of the lease termination liability is included in Other liabilities on the consolidated balance sheet with the remainder in accrued expenses.
16. Financial Information By Quarter (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2019
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(in thousands, except for per share data)
|
|
Revenues
|
$
|
10,459
|
|
|
$
|
3,908
|
|
|
$
|
8,111
|
|
|
$
|
4,264
|
|
|
Cost of sales and supportive services
|
915
|
|
|
—
|
|
|
737
|
|
|
130
|
|
|
Selling, general & administrative
|
3,167
|
|
|
3,392
|
|
|
3,196
|
|
|
3,497
|
|
|
Research and development
|
3,997
|
|
|
2,038
|
|
|
3,344
|
|
|
3,924
|
|
|
Patent preparation fees
|
188
|
|
|
182
|
|
|
174
|
|
|
182
|
|
|
Operating income (loss)
|
2,192
|
|
|
(1,705
|
)
|
|
661
|
|
|
(3,470
|
)
|
|
Net income (loss)
|
1,630
|
|
|
(3,162
|
)
|
|
(1,206
|
)
|
|
(4,503
|
)
|
|
Net loss per share: basic
|
$
|
0.02
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
Net loss per share: diluted
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2018
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(in thousands, except for per share data)
|
|
Revenues
|
$
|
1,748
|
|
|
$
|
2,661
|
|
|
$
|
471,075
|
|
|
$
|
1,569
|
|
|
Cost of sales and supportive services
|
—
|
|
|
—
|
|
|
95,166
|
|
|
103
|
|
|
Selling, general and administrative
|
3,057
|
|
|
2,880
|
|
|
3,115
|
|
|
3,828
|
|
|
Research and development
|
3,008
|
|
|
3,312
|
|
|
3,723
|
|
|
2,973
|
|
|
Patent expenses
|
218
|
|
|
178
|
|
|
186
|
|
|
207
|
|
|
Operating income (loss)
|
(4,535
|
)
|
|
(3,710
|
)
|
|
368,885
|
|
|
(5,541
|
)
|
|
Net income (loss)
|
(11,582
|
)
|
|
(7,051
|
)
|
|
388,050
|
|
|
52,391
|
|
A
|
Net loss per share: basic
|
$
|
(0.15
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
4.85
|
|
|
$
|
0.65
|
|
|
Net loss per share: diluted
|
$
|
(0.15
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
4.71
|
|
|
$
|
0.65
|
|
|
A- Includes sale of PRV in October 2018. See Note 4 for additional information
17. Subsequent Event
On March 5, 2020, the Company's Board of Directors authorized a share repurchase program under which the Company may repurchase up to $50 million of the Company's common stock through December 31, 2021. Repurchases under the program may be made from time to time at the Company's discretion in open market transactions, through block trades, in privately negotiated transactions and pursuant to any trading plan that may be adopted by the Company's management in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or otherwise. Prior to executing any repurchase under this program, the Company's Term Loan would need to be amended or fully repaid.