Note 4 - Commitments and Contingencies

SIGA Litigation

In December 2006, we filed a complaint against SIGA in the Delaware Court of Chancery. The complaint alleged, among other things, that we have the right to license exclusively the development and marketing rights for SIGA’s drug candidate, Tecovirimat, also known as ST-246^®, pursuant to a merger agreement between the parties that was terminated in 2006. The complaint also alleged that SIGA failed to negotiate in good faith the terms of such a license pursuant to the terminated merger agreement with us.

In September 2014, SIGA filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). SIGA’s petition for bankruptcy initiated a process whereby its assets were protected from creditors, including PharmAthene.

In January 2015, after years of litigation, the Delaware Court of Chancery issued a Final Order and Judgment, finding that we are entitled to receive a lump sum award of $194.6 million, or the Total Judgment, comprised of (1) expectation damages of $113.1 million for the value of the Company’s lost profits for Tecovirimat, plus (2) pre-judgment interest on that amount from 2006 and varying percentages of the Company’s reasonable attorneys’ and expert witness fees, totaling $81.5 million. Under the Final Order and Judgment, PharmAthene is also entitled to post-judgment simple interest.

On December 23, 2015, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision as a result of which, with additional post-judgment interest, if calculated based on the original decision, we are entitled to an estimated total award of approximately $205 million.

As discussed in Note 1 – Business and Liquidity, on April 8, 2016, the Bankruptcy Court entered an order confirming SIGA’s Plan effective April 12, 2016 which provides for among other things, the process by which SIGA may emerge from bankruptcy, which includes the process by which our Judgment may be satisfied. The Plan originally provided generally that we will receive, in full settlement and satisfaction of our claim, no later than 120 days plus another potential 90 days after March 23, 2016 (generally considered to be no later than October 19, 2016) one of the following, determined in SIGA’s sole discretion:

payment in full in cash of the unpaid balance of our claim plus interest;

ii.

delivery to us of 100% of SIGA’s common stock; or

iii.

such other treatment as may be mutually agreed upon in writing by SIGA and PharmAthene and approved by the Bankruptcy Court.

On July 20, 2016, the Company and SIGA filed a Joint Motion which sought approval of amendments to the Plan to extend the deadline for SIGA to satisfy the judgment from October 19, 2016 to November 30, 2016, conditioned on SIGA’s payment to PharmAthene of $100 million in the aggregate (including prior payments of principle and interest) on or prior to October 19, 2016. Interest on any unpaid balance will continue to accrue at 8.75% per year and be paid monthly to the Company by SIGA. The Joint Motion was approved by the Bankruptcy Court on August 18, 2016, and in connection therewith, on October 6, 2016, SIGA paid the Company $10 million, representing the balance of the $100 million due on or before October 19, 2016. Following this payment, $83.7 million remains due, under the total award amount of approximately $208.7 million.

Under the Plan, we received $122.5 million from SIGA during the nine months ended September 30, 2016, comprised of principle payments of $115 million (which amount is creditable against final satisfaction of the judgment in our favor and is not refundable) and $7.5 million of payments calculated by SIGA as interest on the judgment, all of which has been recorded in other income - litigation on the unaudited condensed consolidated statement of operations. Of the $115 million in principle payments, $20 million was to initially extend the deadline by which SIGA must satisfy the judgment by 90 days to October 19, 2016 (which amount is creditable against final satisfaction of the judgment in our favor and is not refundable). Subsequent to the end of our quarter, we received $10 million from SIGA on October 6, 2016, representing the balance of the $100 million due on or before October 19, 2016 (which amount is also creditable against final satisfaction of the judgement in our favor and is not refundable).

From and after the Effective date (April 12, 2016), SIGA computed interest on the outstanding balance of the judgment and has paid us in arrears monthly. The interest was computed at a rate of 8.75% from April 12, 2016 through September 30, 2016.

The description of the Plan provided above is a brief summary of the Plan, which includes numerous other covenants, conditions and substantive provisions relating to the operation of the business of SIGA. Copies of the Plan are available from the Bankruptcy Court. For a description of risks related to our ability to recognize value relating to this litigation, see the “Risk Factors” section of our annual report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 11, 2016.

Other than the cash payments received to date, the Company has not recognized any potential proceeds from these actions in its unaudited condensed consolidated financial statements.

Government Contracting

Payments to the Company on cost-plus-fee contracts are provisional. The accuracy and appropriateness of costs charged to U.S. Government contracts are subject to regulation, audit and possible disallowance by the Defense Contract Audit Agency (“DCAA”) and other government agencies such as BARDA. Accordingly, costs billed or billable to U.S. Government customers are subject to potential adjustment upon audit by such agencies. We have finalized incurred cost audits with DCAA for 2006 through 2011. BARDA audited indirect costs or rates charged by us on the SparVax^® contract for the years 2008 through 2014. As a result of the BARDA audits, we recorded additional revenue of $5.8 million in 2015, and additional revenue of $0.8 million in the second quarter of 2016.

Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect the Company’s financial condition or results of operations. Furthermore, contracts with the U.S. Government may be terminated or suspended by the U.S. Government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect the Company’s financial condition and/or results of operations.

Registration Rights Agreements

We entered into a Registration Rights Agreement with the investors who participated in the July 2009 private placement of convertible notes and related warrants. We subsequently filed two registration statements on Form S-3 with the Securities and Exchange Commission to register the resale of the shares issuable upon conversion of the convertible notes and exercise of the related warrants, which have been declared effective. We are obligated to maintain the registration statements effective until the date when such shares (and any other securities issued or issuable with respect to or in exchange for such shares) have been sold or are eligible for resale without restrictions under Rule 144. The convertible notes were converted or extinguished in 2010. The warrants expired on January 28, 2015.

We have separate registration rights agreements with investors, under which we have obligations to keep the corresponding registration statements effective until the registrable securities (as defined in each agreement) have been sold, and under which we may have separate obligations to file registration statements in the future on either a demand or “piggy-back” basis or both.

Under the terms of the convertible notes, which were converted or extinguished in 2010, if after the 2nd consecutive business day (other than during an allowable blackout period) on which sales of all of the securities required to be included on the registration statement cannot be made pursuant to the registration statement (a “Maintenance Failure”), we will be required to pay to each selling stockholder a one-time payment of 1.0% of the aggregate principal amount of the convertible notes relating to the affected shares on the initial day of a Maintenance Failure. Our total maximum obligation under this provision at September 30, 2016, which is not probable of payment, would be approximately $0.2 million.

Following a Maintenance Failure, we will also be required to make to each selling stockholder monthly payments of 1.0% of the aggregate principal amount of the convertible notes relating to the affected shares on every 30th day after the initial day of a Maintenance Failure, in each case prorated for shorter periods and until the failure is cured. Our total maximum obligation under this provision, which is not probable of payment, would be approximately $0.2 million for each month until the failure, if it occurs, is cured.

Leases

We lease our office in Maryland under a 10 year operating lease, which ends on May 31, 2017. Remaining annual minimum payments are as follows:

Year	Lease Payments⁽¹⁾

2016	$	214,147
2017		356,911
	$	571,058

⁽¹⁾

Minimum payments have not been reduced by the minimum sublease rentals of $0.1 million due in the future under noncancellable subleases.

On September 2, 2015, the Company entered into a sublease agreement with a third party with respect to a portion of its leased office space at an amount less than the Company’s leased amount.

The present value of the Company’s remaining net lease liability for the subleased office space (net of the sublease rental income) at September 30, 2016 was $0.2 million, and is reflected on the balance sheet as accrued restructuring expenses - current.

License Agreements

On July 6, 2015, we signed a license agreement with ImmunoVaccine Technologies (“IMV”) for the exclusive use of the DepoVax^TM vaccine platform (“DPX”), to develop an anthrax vaccine utilizing PharmAthene’s rPA. On June 23, 2016, we terminated this license agreement.