Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  This information may involve known and unknown risks, uncertainties and other factors that are difficult to predict and may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.  These risks, uncertainties and other factors include, but are not limited to, risk associated with the reliability of the results of the studies relating to human safety and possible adverse effects resulting from the administration of the Company’s product candidates, unexpected funding delays and/or reductions or elimination of U.S. government funding for one or more of the Company’s development programs, the award of government contracts to our competitors, unforeseen safety issues, challenges related to the development, technology transfer, scale-up, and/or process validation of manufacturing processes for our product candidates, unexpected determinations that these product candidates prove not to be effective and/or capable of being marketed as products, challenges related to the submission or implementation of our NYSE Amex compliance plan, as well as risks detailed from time to time in PharmAthene’s Forms 10-K and 10-Q under the caption “Risk Factors” and in its other reports filed with the U.S. Securities and Exchange Commission (the “SEC”).  Forward-looking statements describe management’s current expectations regarding our future plans, strategies and objectives and are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,”  “project,” “potential” or “plan” or the negative of these words or other variations on these words or comparable terminology.  Such statements include, but are not limited to, statements about potential future government contract or grant awards, potential payments under government contracts or grants, potential regulatory approvals, future product advancements, anticipated financial or operational results and expected benefits from our acquisition of Avecia’s biodefense vaccines business.  Forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in the forward-looking statements will come to pass.

 

We have based the forward-looking statements included in this Quarterly Report on Form 10-Q on information available to us on the date of this Quarterly Report, and we assume no obligation to update any such forward-looking statements, other than as required by law.  Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we, in the future, may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

The following discussion should be read in conjunction with our condensed consolidated financial statements which present our results of operations for the three and six months ended June 30, 2010 and 2009 as well as our financial positions at June 30, 2010 and December 31, 2009, contained elsewhere in this Quarterly Report on Form 10-Q.  The following discussion should also be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 26, 2010 and as amended on April 30, 2010, including the consolidated financial statements contained therein.

 

Overview

 

We are a biodefense company engaged in the development and commercialization of medical countermeasures against biological and chemical weapons.  Our current lead product candidates are:

 

·

SparVax™, a second generation recombinant protective antigen (“rPA”) anthrax vaccine,

 

·

Valortim®, a fully human monoclonal antibody (an identical population of highly specific antibodies produced from a single clone) for the prevention and treatment of anthrax infection, and

 

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·

Protexia®, a recombinant enzyme (butyrylcholinesterase), which mimics a natural bioscavenger for the prevention or treatment of nerve agent poisoning by organophosphate compounds, including nerve gases and pesticides.

Recent Events

In July 2010, we completed a public sale of 2,785,714 shares of our common stock at $1.40 per share and warrants to purchase an aggregate of 1,323,214 shares of our common stock at an exercise price of $1.63 per share, generating gross proceeds of approximately $3.9 million. The warrants become exercisable on January 23, 2011 and expire on January 23, 2017. Placement fees of approximately $256,000 and legal and other fees of approximately $100,000 were incurred in connection with this transaction.

In July 2010, the NYSE Amex LLC (the “Exchange”) sent a letter to us advising that we were not in compliance with continued listing standards, specifically Sections 1003(a)(i), (ii) and (iii) of the Exchange’s Company Guide, because  we did not meet the following criteria: stockholders’ equity of at least (i) $2.0 million, (ii) $4.0 million or (iii) $6.0 million, with corresponding losses from continuing operations and/or net losses in (i) two of our three most recent fiscal years, (ii) three of our four most recent fiscal years, or (iii) our five most recent fiscal years, respectively.

We will shortly submit a plan to the Exchange, stating how we intend to regain compliance with the continued listing standards by January 26, 2012.  If the Exchange accepts the plan, we will be able to continue our listing during such time, subject to continued periodic review by Exchange staff.  If the Exchange does not accept the plan, it accepts the plan but we do not make progress consistent with the plan during the plan period, or we do not meet the plan by the end of the plan period, the Exchange could initiate delisting proceedings.  We may appeal any delisting determination before a listing qualifications panel of the Exchange and in turn request a review of the decision of such panel by the Exchange’s Committee on Securities.

Critical Accounting Policies

 

The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  We base our estimates and assumptions on historical experience and various other factors that are believed to be reasonable under the circumstances.  Actual results could differ from our estimates and assumptions.  We believe the following are our critical accounting policies, i.e., they affect our more significant estimates and assumptions and require the use of difficult, subjective and complex judgment in their application.

Revenue Recognition

 

We generate our revenue from two different types of contractual arrangements: cost-plus-fee contracts and cost reimbursable grants.  Costs consist primarily of actual internal labor charges and external sub-contractor costs incurred plus an allocation of applied fringe benefits, overhead and general and administrative expenses as defined in the contract.

Revenues on cost-plus-fee contracts are recognized in an amount equal to the costs incurred during the period plus an estimate of the applicable fee earned.  The estimate of the applicable fee earned is determined by reference to the contract:  if the contract defines the fee in terms of risk-based milestones and specifies the fees to be earned upon the completion of each milestone, then the fee is recognized when the related milestones are earned.  Otherwise, we compute fee income earned in a given period by using a proportional performance method based on costs incurred during the period as compared to total estimated project costs and application of the resulting fraction to the total project fee specified in the contract.

 

We analyze each cost reimbursable grant to determine whether we should report such reimbursements as revenue or as an offset to our expenses incurred.  For the three months ended June 30, 2010 and 2009, we recorded approximately $0.9 million and $0.8 million, respectively, of costs reimbursed by the government as an offset to research and development expenses.  For the six months ended June 30, 2010 and 2009, we recorded approximately $1.7 million and $1.2 million, respectively, of costs reimbursed by the government as an offset to research and development expenses.

 

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Our revenue-generating contracts may include multiple elements, including one or more of up-front license fees, research payments, and milestone payments.  In these situations, we allocate the total contract price to the multiple elements based on their relative fair values and recognize revenue for each element according to its characteristics.  As revenue is recognized in accordance with the terms of the contracts, related amounts are recorded as unbilled accounts receivable, the primary component of “Other receivables (including unbilled receivables)” in our consolidated balance sheets.  As specific contract invoices are generated and sent to our customers, invoiced amounts are transferred out of unbilled accounts receivable and into billed accounts receivable.  Invoicing frequency and payment terms for cost-plus-fee contracts with our customers are defined within each contract, but are typically monthly invoicing with 30-60 day payment cycles. 

At June 30, 2010, “Other receivables (including unbilled receivables)” were approximately $ 4.3 million, of which approximately $3.8 million were unbilled accounts receivables.

Research and Development Expenses

 

Research and development costs are expensed as incurred; pre-payments are deferred and expensed as performance occurs.  Research and development costs include salaries, facilities expense, overhead expenses, material and supplies, pre-clinical expense, clinical trials and related clinical manufacturing expenses, stock-based compensation expense, contract services and other outside services.

 

Share-Based Payments

 

We expense all share-based awards to employees, including grants of employee stock options, based on their estimated fair value at date of grant.  Costs of all share-based payments are recognized over the requisite service period that an employee must provide to earn the award (i.e. usually the vesting period) and charged to the functional operating expense associated with that employee.

 

Intangible Assets

 

Because of the nature of pharmaceutical research, and particularly because of the difficulties associated with efficacy studies in humans related to the bioterrorist products with which we work and the government’s related funding provisions, factors that affect the estimate of the life of an asset are often more uncertain than with respect to other non-bioterrorist pharmaceutical research.  We review the carrying value of our intangible assets for impairment annually during the fourth quarter of every year, or more frequently if impairment indicators exist, in accordance with ASC Section 360-10-35, "Impairment or Disposal of Long-Lived Assets."  Evaluating for impairment requires judgment, including the estimation of future cash flows, future growth rates and profitability and the expected life over which cash flows will occur.  Changes in the Company’s business strategy or adverse changes in market conditions could impact impairment analyses and require the recognition of an impairment charge equal to the excess of the carrying value of the intangible asset over its estimated fair value.   If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the assets to the present value of the expected future cash flows associated with the use of the asset.

 

Results of Operations

 

Revenue

 

We recognized revenue of $4.8 million and $8.1 million during the three months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010 and 2009, we recognized revenue of $7.9 million and $13.6 million, respectively.

 

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Our revenue consisted primarily of contract funding from the U.S. government for the development of Protexia®, SparVax™ and Valortim®.  Our revenue in the three and six months ended June 30, 2010 changed from the comparable periods of 2009 primarily due to the following:

·

Under the September 2006 contract with the DoD for the advanced development of Protexia®, we recognized $1.9 million and $3.0 million of revenue for the three months ended June 30, 2010 and 2009, respectively, and $1.8 million and $5.3 million for the six months ended June 30, 2010 and 2009, respectively.  The significant decline in revenue in the 2010 periods as compared to 2009 is primarily attributable to the completion in the third quarter of 2009 of the first phase of this contract.  The Company is awaiting the decision of the DoD regarding the funding for the next phase of the program. It remains unclear at this point when the DoD will make a decision regarding funding for the next phase.  In May 2010, the DoD approved a contract modification to provide PharmAthene with limited incremental funding to support certain on-going costs of this program.  Until a longer-term funding decision is made on the next phase of the program, we do not expect to recognize significant additional revenues under this contract.

 

·

Under our contract for the development of SparVax™, we recognized approximately $2.1 million and $2.9 million of revenue for the three months ended June 30, 2010 and 2009, respectively, and approximately $4.1 million and $4.9 million for the six months ended June 30, 2010 and 2009, respectively. The decrease in revenue in 2010 as compared to 2009 was primarily attributable to one-time costs (and thus corresponding revenue) related to our settlement agreement with Avecia recognized in the three months ended June 30, 2009, partially offset by revenues in the 2010 periods related to increased development and technology transfer efforts under the program.

 

·

Under the September 2007 contract for the advanced development of Valortim®, we recognized $0.8 million and $1.6 million of revenue for the three months ended June 30, 2010 and 2009, respectively.  We recognized $1.6 million and $2.2 million of revenue for the six months ended June 30, 2010 and 2009, respectively.   Revenue in all periods was largely attributable to reimbursement of costs related to non-clinical studies.  In addition, work in the three and six months ended June 30, 2009 included other development work as we prepared for additional human clinical trials, while work in the three and six months ended June 30, 2010 included work in connection with the on-going investigation related to adverse reactions seen in the Valortim®/ciprofloxacin clinical trial and certain manufacturing-related activities.

Research and Development Expenses

Our research and development expenses were $5.9 million and $10.2 million for the three months ended June 30, 2010 and 2009, respectively. Our research and development expenses were $10.9 million and $16.0 million for the six months ended June 30, 2010 and 2009, respectively.  These expenses resulted from research and development activities related to our Valortim® and Protexia® programs as well as from activities related to the SparVax™, RypVax™ and third generation anthrax vaccine programs.  We incurred both direct expenses, which included salaries and other costs of personnel, raw materials and supplies, and an allocation of indirect expenses.  We also incurred third-party costs, such as contract research, consulting and clinical development costs for individual projects.  In the second quarter 2010 we completed the wind down of all activities for our RypVax™ plague vaccine program and entered into a modification to our existing contract with the National Institute of Allergy and Infectious Diseases (“NIAID”) for development work on the Company’s third-generation anthrax vaccine candidate.  The modification closed out this contract as part of a no-cost settlement between the Company and NIAID.   Research and development expenses for the three months ended June 30, 2010 and 2009 were net of cost reimbursements under certain of our government grants of $0.9 million and $0.8 million, respectively.  Research and development expenses for the six month period ended June 30, 2010 and 2009 were net of cost reimbursements under certain of our government grants of $1.7 million and $1.2 million, respectively.

 

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Research and development expenses for the three and six months ended June 30, 2010 and 2009 were attributable to research programs as follows:

		Three Months ended
($ in millions)		June 30, 2010				June 30, 2009
Anthrax therapeutic and vaccines		$	3.9			$	7.6
Chemical nerve agent protectants			1.8				2.0
Recombinant dual antigen plague vaccine			0.0				0.6
Internal research and development			0.2				0.0
Total research and development expenses		$	5.9			$	10.2

 

		Six Months ended
($ in millions)		June 30, 2010				June 30, 2009
Anthrax therapeutic and vaccines		$	7.2			$	10.3
Chemical nerve agent protectants			3.3				4.5
Recombinant dual antigen plague vaccine			0.0				1.0
Internal research and development			0.4				0.2
Total research and development expenses		$	10.9			$	16.0

For the three and six months ended June 30, 2010, research and development expenses decreased $4.3 million and $5.1 million, respectively, from the prior year periods.  This was primarily due to the $3.0 million one-time termination fee to Avecia incurred in the second quarter of 2009.

The decrease in development expenses related to the clinical nerve agents protectant program resulted from reduced process development and manufacturing activities as the program completed the development stage by the end of 2009.  While certain limited costs in 2010 will be covered under the interim funding approved by the DoD, until such time as the DoD decides to fund the next phase of work over the longer term, costs incurred under our chemical nerve agents protectant program in future periods may not be covered, either in whole or in part, by corresponding revenues under our contract with the DoD.  If the DoD does consent to further work under this program, we anticipate that costs under our chemical nerve agents protectant program will increase in future periods as that program progresses through additional human clinical trials. We and the U.S. government agreed to a reduction to the scope of work related to the development of our plague vaccine, and costs (and related revenue) under that contract have declined during the wind down period that ended in the second quarter 2010.  

General and Administrative Expenses 

 

General and administrative functions include executive management, finance and administration, government affairs and regulations, corporate development, human resources, legal, and compliance.  For each function, we may incur expenses such as salaries, supplies and third-party consulting and other external costs and non-cash expenditures such as expense related to stock option and restricted share awards.  An allocation of indirect costs such as facilities, utilities and other administrative overhead is also included in general and administrative expenses.

 

Expenses associated with general and administrative functions were $4.1 and $4.4 million for both the three months ended June 30, 2010 and 2009, respectively.  Expenses associated with general and administrative functions were $9.4 million and $9.6 million for the six months ended June 30, 2010 and 2009, respectively.

 

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General and administrative expenses decreased $0.3 million for the three months ended June 30, 2010, as compared to the prior year period. During the three months ended June 30, 2010, we recorded bad debt expense of approximately $1.1 million, primarily associated with an invoice to our government customer related to rPA anthrax vaccine development work performed at Avecia prior to the transfer of development activities to a U.S.-based manufacturer and the novation of the Company’s government contract for the advanced development of its rPA anthrax vaccine candidate from NIH to BARDA. These expenses were more than offset by reduced accruals for bonuses, salaries, stock compensation, recruiting, relocation, and travel expenses.

General and administrative expenses decreased $0.1 million for the six months ended June 30, 2010, as compared to the prior year period, largely due to the recording of bad debt expense of approximately $1.6 million which again was primarily associated with the invoice to our government customer for the Avecia work and the novation referenced above as well as with the wind down of the third-generation anthrax vaccine program. These expenses were more than offset by reduced bonuses, salaries, stock compensation, recruiting and relocation and travel expenses.

Depreciation and Intangible Amortization

 

Depreciation and amortization expenses were $0.3 million and $0.2 million for the three months ended June 30, 2010 and 2009, respectively.  Depreciation and amortization expenses were $0.5 million and $0.4 million for the six months ended June 30, 2010 and 2009, respectively.  These expenses relate primarily to the depreciation and amortization of farm building improvements, leasehold improvements and laboratory equipment, and patents acquired as part of a 2005 business combination.

 

Other Income and Expenses

 

Other income and expenses primarily consists of income on our investments, interest expense on our debt and other financial obligations, changes in market value of our derivative financial instruments, and foreign currency transaction gains or losses. 

 

We incurred interest expense of $0.9 million and $0.6 million for the three months ended June 30, 2010 and 2009, respectively. We incurred interest expense of $1.9 million and $1.2 million for the six months ended June 30, 2010 and 2009, respectively.  Interest expense for all periods relates primarily to interest on our outstanding convertible notes.  For the three and six months ended June 30, 2010, interest expense includes the amortization of the debt discount arising from the allocation of fair value to the stock purchase warrants issued in connection with the July 2009 convertible debt.  Interest expense for the three and six months ended June 30, 2009 relates primarily to our old notes and  our then outstanding secured credit facility, which was repaid in full during the third quarter 2009.

 

The change in the fair value of our derivative instruments (Common Stock Purchase Warrants) were approximately $0.0 million for the three months ended June 30, 2010 compared to $0.6 million for the three months ended June 30, 2009.  The change in the fair value of our derivative instruments was $0.3 million for the six months ended June 30, 2010 compared to $0.8 million for the three months ended June 30, 2009.  The fair value of these derivative instruments is estimated using the Black-Scholes option pricing model.

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Liquidity and Capital Resources

 

Overview

 

Our primary cash requirements through the end of 2010 are to fund our operations (including our research and development programs) and support our general and administrative activities.  Our future capital requirements will depend on many factors, including, but not limited to, the progress of our research and development programs; the progress of pre-clinical and clinical testing; the time and cost involved in obtaining regulatory approval; the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; changes in our existing research relationships, competing technological and marketing developments; our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others; and any future change in our business strategy.  These cash requirements could change materially as a result of shifts in our business and strategy.

 

Since our inception, we have not generated positive cash flows from operations.  To bridge the gap between payments made to us under our government contracts and grants and our operating and capital needs, we have had to rely on a variety of financing sources, including the issuance of equity securities and convertible notes, proceeds from loans and other borrowings, and the trust funds obtained in the Merger.  For the foreseeable future, we will continue to need these types of financing vehicles and potentially others to help fund our future operating and capital requirements. 

At June 30, 2010, accounts receivables and other receivables (including unbilled receivables) totaled approximately $12.9 million primarily due to delays in billing for services related to the SparVax™ second generation anthrax vaccine program.  Although we are now current with our billing of our second generation anthrax vaccine program, a significant portion of these submitted invoices are still undergoing the review and approval process prior to being paid.  In addition, the bid protest filed by a third party with the GAO in March 2010, challenging the decision by the HHS to enter into the modification to our research and development contract with BARDA for the development of SparVax™, and resulting “stop-work” order, caused delays in our work under that modification. The bid protest was ultimately denied, and the related stop work-order canceled in June 2010.  Nevertheless, the protest, along with the accumulated billing and collection delays, have reduced revenues and our available cash and cash equivalents during the first six months of 2010.   The combination of these two developments reduced our operating cash flows, which resulted in a need for additional financing to fund our working capital needs.

In July 2010, we generated net proceeds of approximately $3.5 million from a registered direct public offering.  We currently believe that, based on the operating cash requirements and capital expenditures expected through the end of 2010, and expected receipts from our government contracts and grants, we will not require additional funding to continue our current level of operations through the end of 2010.  We may elect to raise additional capital in 2010 or beyond to expand our business and/or strengthen our financial position or, if our current expectations and estimates about future operating costs prove to be incorrect, we may need to raise additional capital in 2010 or beyond.

In April 2010, we completed a public sale of 1,666,668 shares of common stock at $1.50 per share and warrants to purchase an aggregate of 500,000 shares of our common stock at an exercise price of $1.89 per share, generating gross proceeds of $2.5 million.  The warrants become exercisable on October 13, 2010 and expire on October 13, 2015. Placement fees of approximately $175,000 and legal and other fees of approximately $100,000 were incurred in connection with this transaction. These warrants are a derivative liability and as such reflect the liability at fair value in the consolidated balance sheets.   The fair value of this derivative liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the consolidated statement of operations as other income (expense).

Furthermore, under the terms of the sale and purchase agreement, as amended (the “Avecia Purchase Agreement”) we entered into in connection with the Avecia Acquisition, we are required to pay Avecia $5 million within 90 days of entering into a multi-year funded development contract that was to be issued by BARDA under solicitation number RFP-BARDA-08-15 (or any substitution or replacement thereof) for the further development of SparVax™.  RFP-BARDA-08-15 was cancelled by BARDA in December 2009.  Accordingly, our obligation to pay Avecia the $5 million payment would mature only upon our receipt of a substitution or replacement thereof.  We have received funds from BARDA and other U.S. government agencies under various development agreements between us and BARDA.  Any development contract deemed to be a substitute or replacement of RFP-BARDA-08-15 could trigger our obligation to make the $5 million payment under the Avecia Purchase Agreement. 

 

Under the terms of our New Convertible Notes, unless earlier converted, redeemed or accelerated, the outstanding principal amount of $19.3 million plus accrued interest is payable at maturity on July 28, 2011.  Prior to maturity, the note holders may convert their principal and related accrued interest into shares of our common stock at a conversion price, subject to adjustment, of $2.54 per share.  Beginning on July 28, 2010, we have the right to redeem all or a portion of the New Convertible Notes.  Upon a change in control or default, as defined in the note, the note holders may require us to redeem their notes.

 

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The turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or cease operations has resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets.  As a result, there can be no assurance that future funding will be available to us on reasonably acceptable terms, or at all.  In addition, due to the U.S. government’s substantial efforts to stabilize the economy, the U.S. government may be forced or choose to reduce or delay spending in the biodefense field, which could decrease the likelihood of future government contract awards, the likelihood that the government will exercise its right to extend any of its existing contracts with us and/or the likelihood that the government would procure products from us.  Finally, the note and warrant purchase agreement entered into in connection with the July 2009 Private Placement prevents us from incurring senior indebtedness (other than trade payables) in excess of $10 million without the prior written approval of no less than a majority of the aggregate principal amount of the debt then outstanding.

 

We have incurred cumulative net losses and expect to incur additional losses in conducting further research and development activities.  We do not have commercial products and, given the substantial costs relating to the development of pharmaceutical products, have relatively limited existing capital resources.  Our plans with regard to these matters include continued development of our products as well as seeking additional funds to support our research and development efforts.  Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient future financing on commercially reasonable terms or at all or that we will be able to secure additional funding through government contracts and grants.  Our consolidated financial statements have been prepared on a basis which assumes that we will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments that might result if the carrying amount of recorded assets and liabilities are not realized.

Sources and Uses of Cash

Cash, cash equivalents, restricted cash and short-term available-for-sale investments were $0.8 million and $5.8 million at June 30, 2010 and December 31, 2009, respectively.  The $5.0 million decrease at June 30, 2010 was primarily attributable to the net impact of cash used to fund operations and the timing of collections on our U.S. Government accounts receivable.  As of June 30, 2010 and December 31, 2009, total accounts receivables and other receivables (including unbilled receivables) were $12.9 million and $17.4 million, respectively.  

The relatively high level of accounts receivables at June 30, 2010 and the relatively high level of accounts receivables and other receivables (including unbilled receivables) at December 31, 2009 was primarily due to delays in billing for services related to the SparVax™ second generation anthrax vaccine program.  Although we are now current with the billing of our second generation anthrax vaccine program, a significant portion of these submitted invoices are still undergoing the review and approval process prior to being paid.  In addition, the bid protest (which was denied in June 2010) with respect to the modification to our research and development contract with BARDA for the development of SparVax™, and resulting “stop-work” order, along with the accumulated billing and collection delays, have reduced revenues and our available cash and cash equivalents during the first six months of 2010.

In April 2010, we completed a public sale of 1,666,668 shares of common stock at $1.50 per share and warrants to purchase an aggregate of 500,000 shares of our common stock at an exercise price of $1.89 per share, generating gross proceeds of $2.5 million.  The warrants become exercisable on October 13, 2010 and expire on October 13, 2015. Placement fees of $175,000 and legal and other fees of approximately $100,000 were incurred in connection with this transaction.

 

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In July 2010, we completed a public sale of 2,785,714 shares of common stock at $1.40 per share and warrants to purchase an aggregate of 1,323,214 shares of our common stock at an exercise price of $1.63 per share, generating gross proceeds of $3.9 million. The warrants become exercisable on January 23, 2011 and expire on January 23, 2017. Placement fees of $273,000 and legal and other fees of approximately $100,000 were incurred in connection with this transaction.

 

Operating Activities

  

Cash used in operating activities was $ 6.6 million and $ 13.4 million for the six months ended June 30, 2010 and 2009, respectively. Cash used in operations during the six months ended June 30, 2010 reflects a net loss, after the effect of non-cash adjustments of $9.3 million, a decrease in accrued expenses and other liabilities of $ 7.2 million due to reduced development activities and an increase in accounts receivable of $1.4 million, partially offset by a $ 6.6 million increase in accounts payable due to enhanced cash management activities and a $ 4.7 million decrease in prepaid expenses and other current assets.

 

Cash used in operations during the six months ended June 30, 2009 reflects a net loss, after the effect of non-cash adjustments, of $10.1 million, a decrease in accounts receivable of $6.5 million, an increase in other assets (primarily in unbilled accounts receivable associated with our government contracts) of $11.9 million, and an increase in accrued expenses and accounts payable of $2.2 million (primarily in accrued expenses associated with our settlement agreement with Avecia).  Non-cash adjustments for the six months ended June 30, 2009 included non-cash stock compensation expense of $1.7 million and the change in the fair value of our derivative liabilities of $0.8 million.  

Investing Activities

 

Net cash provided by investing activities was $2.8 million for the six months ended June 30, 2010, compared to $11.0 million used in investing activities for the six months ended June 30, 2009.  Investing activities for the 2010 period related primarily to liquidating investments to meet working capital requirements.

 

Investing activities for the first six months of 2009 related primarily to the payment in June 2010 of $7.0 million of deferred purchase consideration to Avecia, purchases, net of sales, of available for sale securities of $3.0 million and approximately $1.0 million of capital expenditures.

Financing Activities

 

 Net cash provided by financing activities was $2.1 million for the six months ended June 30, 2010 as compared to $14.7 million provided by financing activities for the six months ended June 30, 2009.  Net cash provided from financing activities for the six months ended June 30, 2010 was the result of the proceeds from the issuance of common stock and warrants.

In March 2009, we raised net proceeds of approximately $4.9 million as a result of the public sale of shares of our common stock and warrants.  Additionally, pursuant to the payment to Avecia of the deferred purchase consideration and the modification of our senior secured credit facility, we reduced our restricted cash obligations by $11.8 million.  We made principal repayments of $2.0 million under the credit facility for the six months ended June 30, 2009. 

In April 2010, we completed a public sale of 1,666,668 shares of common stock at $1.50 per share and warrants to purchase an aggregate of 500,000 shares of our common stock at an exercise price of $1.89 per share, generating gross proceeds of $2.5 million.  The warrants become exercisable on October 13, 2010 and expire on October 13, 2015. Placement fees of $175,000 and legal and other fees of approximately $100,000 were incurred in connection with this transaction.

 

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Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Contractual Obligations

 

The following are contractual commitments at June 30, 2010 associated with leases, research and development arrangements, collaborative development obligations and long term debt:

						Less than												More than
		Total				1 Year				1-3 Years				3-5 Years				5 Years
Operating lease obligations		$	5,623,570			$	905,538			$	1,503,715			$	1,595,390			$	1,618,927
Research and development collaboration agreements			15,119,201				13,134,201				1,985,000				-				-
Current and long term debt			23,208,562				-				23,208,562				-				-
Total		$	43,951,332			$	14,039,739			$	26,697,276			$	1,595,390			$	1,618,927

 

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(1)	This table does not include any royalty payments of future sales of products subject to license agreements the Company has entered into in relation to its in-licensed technology, as the timing and likelihood of such payments are not known.