NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017, included in the 2017 Annual Report on Form 10-K. All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2017 Annual Report on Form 10-K filed on March 6, 2018. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results of the interim periods presented have been included. The 2017 year-end condensed consolidated balance sheet data were derived from the audited financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the full year.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. On July 13, 2018, the United States Food & Drug Administration ( “ FDA ” ) approved the Company’s orally-administered drug TPOXX® ( “oral TPOXX® ” ) for the treatment of smallpox. There is no difference between the approved product and courses of oral TPOXX® that had been delivered to the U.S. Strategic National Stockpile ( “ Strategic Stockpile ” ). As such, in July 2018, the Company received $41 million that previously had been held back under the 2011 U.S. Biomedical Advanced Research and Development Authority ( “ BARDA ” ) Contract (see Note 3 ). Additionally, since July 2018, the Company has received: a $50 million payment from BARDA in August 2018 as a result of the exercise of an option (through modification of the 2011 BARDA Contract (defined in Note 3)) relating to FDA approval of 84-month expiry for oral TPOXX®; and $80 million of cash proceeds from the sale of its PRV (defined below). Furthermore, the 2018 BARDA Contract (defined in Note 3), awarded in September 2018, could provide payments of up to $629 million to the Company over the next series of years. Accordingly, management believes, based on currently forecasted operating costs that the Company will continue as a going concern.

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, the Company sold its PRV for cash consideration of $80.0 million (see Note 14 ).

2. Summary of Significant Accounting Policies

Revenue

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  three and nine months ended September 30, 2018 , the impact to revenues as a result of applying ASC 606 was an increase of approximately $1.0 million and $1.3 million , respectively. 

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. The Company’s research and development contract for the intravenous (IV) formulation of TPOXX® (“IV TPOXX®”) (see “IV Formulation R&D Contract” in Note 3 ) has a single performance obligation (research and development); individual services within the contract are not separately identifiable

from other promises in the contract and, therefore, are not distinct from each other. The Company’s 2011 BARDA Contract has three performance obligations: one relates to the manufacture and delivery of product (and performance of services in connection with the manufacture and delivery of product), and the other two performance obligations relate to research and development in connection with oral TPOXX®.

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, overhead, and third-party services.

Revenue connected with courses of oral TPOXX® delivered to the Strategic Stockpile and related services, milestones and advance payments (activities in combination that constitute one performance obligation) under the 2011 BARDA Contract has been recognized at a point in time. Revenue associated with this performance obligation was recognized when 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. The consideration, which is 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 Replacement Obligation (as defined in Note 3) had not been quantified or specified. Following FDA approval, the Replacement Obligation was quantified and deemed to be immaterial since there was no difference between the approved product and the courses of oral TPOXX® that had already 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 is complex, subject to many variables and requires 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. 

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 sheet. 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.

Remaining Performance Obligations . Remaining performance obligations represent the transaction price for which work has not been performed and excludes unexercised contract options. As of September 30, 2018 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 is $60.2 million . The Company expects to recognize revenue over the next five years as the specific timing for satisfying the performance obligations is subjective and outside the Company’s control.

Deferred Revenue  

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. The Company recognizes deferred revenue as net revenues once control of goods and/or services has been transferred to the customer and all revenue recognition criteria have been met and any constraints have been resolved.

Historically, the Company deferred revenue in connection with the manufacture and delivery of oral TPOXX® under the 2011 BARDA Contract. Revenue recognition as of June 30, 2018 was constrained by the possibility of product replacement pursuant to the Replacement Obligation. On July 13, 2018, the FDA approved oral TPOXX® for the treatment of smallpox. As a result of FDA approval, the replacement obligation was quantified and deemed to be immaterial since there was no difference between the approved product and the courses of oral TPOXX® that had already been delivered to the Strategic Stockpile. As such, deferred revenue as of June 30, 2018 associated with the 2011 BARDA Contract was recorded as product sales and supportive services during the three months ended September 30, 2018 .

The following table presents changes in the Company's deferred revenue:

As of December 31, 2017, approximately $1.3 million of deferred revenue was included in Accrued expenses and other current liabilities on the condensed consolidated balance sheet.

Restricted Cash and Cash Equivalents

On January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force . The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. Adoption of this guidance impacts the cash flow disclosure for the nine months ended September 30, 2017; cash flows from operating activities, as disclosed herein, is $7.6 million less than the amount disclosed in the 2017 third quarter 10-Q.

A portion of the Company’s cash received under the Loan Agreement is restricted. In accordance with the Loan Agreement, cash placed in a specified reserve account is restricted. Except for $5 million , cash in the reserve account could only be utilized to pay interest on the Term Loan. The aforementioned $5 million was withdrawn from the reserve account on July 12, 2018 upon confirmation that there had been no events of default, and was placed in the Company's cash operating account. See Note 7 for additional information.

The following table reconciles cash, cash equivalents and restricted cash per the condensed consolidated statements of cash flows to the condensed consolidated balance sheet for each respective period:

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.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which relates to the accounting for leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. The Company has elected to adopt the standard using the modified retrospective transition approach with a January 1, 2019 effective date of initial application. Under the modified retrospective transition method, the Company will recognize a cumulative effect adjustment to retained earnings as of the effective date in the period of adoption. Consequently, comparative financial information and disclosures provided for dates and periods before January 1, 2019 will not be updated in the Company’s future filings. While the Company is continuing to evaluate the impact that ASU No. 2016-02 will have on its consolidated financial statements, the Company expects its real estate leases to be capitalized and have a material impact on its consolidated balance sheet.

 

3. Procurement Contracts and Research Agreements

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 IV TPOXX®. Additionally, the contract also includes funding from BARDA for advanced development of the IV formulation of TPOXX®; post-marketing activities for oral TPOXX®; and supportive procurement activities. The contract with BARDA (as amended, modified, or supplemented from time to time, the “2018 BARDA Contract”) contemplates up to approximately $628.7 million of payments, of which approximately $51.7 million of payments are included within the base period of performance of five years and up to approximately $577.0 million of payments are specified as options. BARDA may choose in its sole discretion when, or whether, to exercise any of the options. The period of performance for options is up to ten years and such options could be exercised at any time during the contract term, including during the base period of performance. For the three and nine months ended September 30, 2018, the revenue and expense recognized under the 2018 BARDA Contract was immaterial.

The base period of performance includes 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®, of which $3.2 million of payments are to be paid upon the manufacture of bulk drug substance to be used in the manufacture of the final drug product courses of IV TPOXX®; payments of approximately $32.0 million to fund advanced development of IV TPOXX®; and payments of approximately $0.6 million for supportive procurement activities.

Options, in total, provide for payments up to approximately $577.0 million (if all options are exercised). There are options for the following activities: payments of up to $450.2 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 final drug product of IV TPOXX®, of which up to $30.7 million of payments would be paid upon the manufacture of bulk drug substance to be used in the manufacture of the final drug product courses of IV TPOXX®; payments of up to approximately $44.4 million to fund post-marketing activities for oral and 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 .

2011 BARDA Contract

On May 13, 2011, the Company signed a contract with BARDA pursuant to which SIGA agreed to deliver two million courses of oral TPOXX® to the Strategic Stockpile. 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 (described below). The 2011 Base Contract specifies approximately $508.7 million of payments, of which $459.8 million has been received by the Company for the manufacture and delivery of 1.7 million courses of oral TPOXX® and up to $48.9 million in total is available for certain development and supportive activities, of which $43.8 million has been received as of September 30, 2018 .

Prior to FDA approval of oral TPOXX®, the Company had a product replacement obligation (the “Replacement Obligation”) in the event that the final version of TPOXX® approved by the FDA was different from any courses of TPOXX® that had been delivered to the Strategic Stockpile. 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. For courses of oral TPOXX® that have been physically delivered to the Strategic Stockpile, the Company has 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.

As of September 30, 2018 , the Company had cumulatively delivered 2.0 million courses of oral TPOXX® to the Strategic Stockpile and received $459.8 million under the 2011 Base Contract in connection with the manufacture and delivery of courses of oral TPOXX®. Such receipts were received in the following manner; a $41.0 million advance payment in 2011 for the completion of certain planning and preparatory activities related to the 2011 Base Contract; a $12.3 million milestone payment in 2012 for the completion of the product labeling strategy for oral TPOXX®; an $8.2 million milestone payment in 2013 for the completion of the commercial validation campaign for oral TPOXX®; a $20.5 million payment in 2016 for submission of documentation to BARDA indicating that data covering the first 100 subjects enrolled in the phase III pivotal safety study had been submitted to and reviewed by a Data Safety and Monitoring Board (“DSMB”) and that such DSMB had recommended continuation of the safety study, as well as submission of the final pivotal rabbit efficacy study report to the FDA; $286.9 million of payments for physical deliveries of oral TPOXX® to the Strategic Stockpile beginning in 2013; a $40.9 million holdback payment in 2018 for the FDA-approved version of oral TPOXX® not being any different from courses of oral TPOXX® that had been delivered to the Strategic Stockpile; and a $50.0 million payment (following an option exercise) for FDA approval of 84-month expiry for oral TPOXX®.

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 aforementioned 84-month expiry for oral TOPXX® 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 smallpox prophylaxis 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 a constraint on the consideration received. 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 has been recognized as revenue for the three and nine months ended September 30, 2018 . Separately, as discussed above, $91 million of revenues have been recognized in the third quarter in connection with a $41 million holdback payment (under the 2011 BARDA Contract) and a $50 million payment for achieving 84-month expiry for oral TPOXX ® (under the 2011 BARDA Contract). Direct costs incurred by the Company to 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 have been recognized in the condensed consolidated statement of operations during the third quarter of 2018.

Research Agreements and Grants

The Company has an R&D program for IV TPOXX®. This program is funded by a development contract with BARDA (“IV Formulation R&D Contract”). This contract has a period of performance that terminates on December 30, 2020.

Contracts and grants include, among other things, options that may or may not be exercised at BARDA’s discretion. Moreover, contracts and grants contain customary terms and conditions including BARDA’s right to terminate or restructure a contract or grant for convenience at any time. As such, we may not be able to utilize all available funds.

4. Inventory

Due to the deferral of revenue under the 2011 BARDA Contract (see Note 2 for additional information), amounts that would be otherwise recorded as cost of sales for delivered courses had been recorded as deferred costs on the condensed consolidated balance sheet. In the third quarter of 2018, such deferred costs were expensed. Inventory includes costs related to the manufacture of TPOXX®.

Inventory consisted of the following:

For the nine months ended September 30, 2017 , research and development expenses included net inventory-related losses of approximately $536,000 related to a $686,000 inventory write-down, partially offset by credits received from contract manufacturing organizations ( “ CMOs ”) in connection with the inventory write-down. No such losses were incurred in 2018.

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following: 

Depreciation and amortization expense on property, plant, and equipment was $14,710 and $29,375 for the three months ended September 30, 2018 and 2017 , respectively, and $48,639 a nd $105,212 for the nine months ended September 30, 2018 and 2017 , respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

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 2016 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 2016 rights offering; accordingly, the exercise price of the Warrant was set at $1.50 per share.

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.

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 liability-classified Warrant using the following assumptions: risk free interest rate of 1.60% ; no dividend yield; an expected life of 10 years; and a volatility factor of 80% . The Company compared the Monte Carlo simulation model calculation to a Black-Scholes model calculation as of December 31, 2016. These models generated substantially equal fair values for the Warrant. As such, the Company continued to utilize a Black-Scholes model for September 30, 2018 to determine the fair value of the Warrant.

As of September 30, 2018 , the fair value of the Warrant was $10.7 million . The fair value of the liability-classified Warrant was calculated using the following assumptions: risk free interest rate of 3.03% ; no dividend yield; an expected life of 7.9 years; and a volatility factor of 70% .

For the three months ended September 30, 2018 and 2017 , the Company recorded a loss of $2.3 million , and $0.3 million , respectively, as a result of the change in fair value of the liability-classified Warrant. For the nine months ended September 30, 2018 and 2017 , the Company recorded a loss of $5.3 million and $0.6 million , respectively, as a result of the change in fair value of the liability-classified Warrant. In addition, during the three months ended September 30, 2018 approximately $6.0 million of warrants were exercised resulting in the net issuance of approximately 760,000 shares of common stock. As of September 30, 2018 there are approximately 1.7 million shares underlying the Warrants.

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 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 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 , subject to adjustments as set forth in the Loan Agreement. At September 30, 2018 , the effective interest rate on the Term Loan, which includes interest payments and accretion of unamortized costs and fees, was 19.21% . The Company incurred approximately $3.9 million of interest expense during the three months ended September 30, 2018 , of which $2.8 million was paid from restricted cash and the remaining $1.1 million accreted to the Term Loan balance. For the nine months ended September 30, 2018 , the Company incurred approximately $11.5 million of interest expense, of which $8.1 million was paid from restricted cash and the remaining $3.4 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, proceeds from the sale of the PRV ( $80 million ) have been placed in a restricted cash account; such restricted account is to be used only for interest and principal payments (other than those in connection with an event of default) on the Term Loan, and the payment of certain fees and expenses related to the PRV sale.

The Term Loan shall mature 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 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 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 September 30, 2018 , the Company is 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 each quarter on a per diem basis. As of September 30, 2018 , the Term Loan balance is $74.4 million .

9. Fair Value of Financial Instruments

The carrying value of cash equivalents, restricted cash, 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:

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 $10.7 million at September 30, 2018 .

At September 30, 2018 , the fair value of the debt was $88.6 million and the carrying value of the debt was $74.4 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 nine months ended September 30, 2018 . In addition, there were no Level 1 or Level 2 financial instruments as of September 30, 2018 and December 31, 2017.

The following table presents changes in the liability-classified warrant measured at fair value using Level 3 inputs:

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 earning (loss) per share computation: 

For the three and nine months ended September 30, 2018, 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. Diluted shares outstanding 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 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 three and nine months ended September 30, 2017 and as a result, 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 consists of:

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.

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 September 30, 2018 and 2017 , the Company incurred expenses of $115,600 and $82,000 , respectively, related to services provided

by the outside counsel. During the nine months ended September 30, 2018 and 2017 , the Company incurred expenses of $335,349 and $298,000 , respectively, related to services provided by the outside counsel. On September 30, 2018 the Company’s outstanding payables and accrued expenses included an approximate $77,800 liability to the outside counsel.

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 27 East 62 ^nd  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 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. 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 $1.1 million in Rent Discrepancy under the Old HQ Sublease Termination Agreement.

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:

As of September 30, 2018 , approximately $0.3 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.

Pre-Clinical Development Program

On May 17, 2018, the Company and vTv Therapeutics LLC (“vTv”) entered into an asset purchase agreement, pursuant to which the Company acquired data related to certain pre-clinical development activities. Such data contain information that could be used to potentially develop clinical drug candidates. A de minimis amount ($10) was paid by the Company to vTv in order to execute the asset purchase agreement. vTv, which is majority owned by M&F, will receive a royalty of 1-4% of sales in the event that SIGA is able to (i) successfully develop a drug from the acquired data and (ii) there are drug sales. Additionally, vTv will receive up to 10% of development revenues in the event that SIGA receives revenues in connection with any development activities.

13. Income Taxes

ASC 740, Income Taxes requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. At each reporting date, the Company considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. During the quarter ended September 30, 2018, the Company received FDA approval and recorded revenue related to the delivery of its TPOXX® product. The Company also recorded revenue related to the FDA holdback payment and the payment for 84-month expiry. In addition, the Company entered into a new contract with BARDA for the purchase of up to 1.7 million courses of TPOXX®. Based on these factors, the Company determined during the quarter ended September 30, 2018 that sufficient positive evidence exists to conclude that substantially all of its deferred tax assets are realizable on a more-likely-than-not basis.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the 2017 Tax Cuts and Jobs Act (“TCJA”). The purpose of SAB No. 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes  in the reporting period in which the TCJA was enacted. SAB No. 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period that includes the enactment date. SAB No. 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB No. 118 allows for a measurement period to finalize the effects of the TCJA, not to extend beyond one year from the date of enactment. The Company's accounting for the TCJA is complete as of September 30, 2018 with no significant differences from our provisional estimates.

 

For the three and nine months ended September 30, 2018, we incurred pre-tax income of $362.6 million and $344.0 million and a corresponding income tax benefit of $25.4 million and $25.4 million , respectively, which includes a discrete benefit of $25.8 million for both periods. For the three and nine month period, the $25.8 million benefit primarily relates to the Company’s assessment that its deferred tax assets are realizable on a more-likely-than-not basis as a result of the award of the 2018 BARDA Contract and current forecasts of future pre-tax earnings.

14. Subsequent Events

On October 31, 2018, the Company sold its PRV for cash consideration of $80 million . In connection with the PRV sale, the Loan Agreement was amended to expand the definition of permitted dispositions to include a sale of the PRV. Proceeds from the sale of the PRV ( $80 million ) were placed in a restricted cash account. The restricted account is to be used only for interest and principal payments (other than those in connection with an event of default) on the Term Loan, and the payment of certain fees and expenses related to the PRV sale.