Note 1 – Business and Liquidity

We are a biodefense company engaged in developing a next generation anthrax vaccine. The next generation vaccine is intended to have more rapid time to protection, fewer doses for protection and less stringent requirements for temperature controlled storage and handling than the currently used vaccine.

Since 2006, we have been engaged in legal proceedings with SIGA Technologies, Inc. (“SIGA”). On December 23, 2015, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s judgment against SIGA which provides an estimated total award of approximately $208.7 million plus additional interest. On April 8, 2016, the Bankruptcy Court entered an order confirming SIGA’s third amended Reorganization Plan (the “Plan”) effective April 12, 2016 which provides for SIGA to emerge from bankruptcy and provides various alternatives for the final resolution of our litigation claim against SIGA during 2016. 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. 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 also creditable against final satisfaction of the judgment in our favor and is not refundable).

On July 20, 2016, the Company and SIGA filed a Joint Motion of Reorganized Debtor and PharmAthene, Inc. to Amend Debtor’s Third Amended Chapter 11 Plan to Extend PharmAthene Allowed Claim Treatment Date (the “Joint Motion”). The Joint Motion was filed with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Joint Motion 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.

During the first half of 2015, we narrowed the scope of our product development programs, reduced our employee headcount and executed other cost reductions. These actions have allowed us to have sufficient cash to recognize the benefit of the SIGA award and advance our anthrax vaccine programs without the need to raise additional capital. During the second half of 2015, we focused our efforts on creating alternatives for settling the SIGA litigation claim and developing business plans around possible alternative outcomes.

On September 9, 2014, we signed a contract with the National Institutes of Allergy and Infectious Diseases (“NIAID”) for the development of a next generation lyophilized anthrax vaccine (“SparVax-L”) based on our proprietary technology platform which contributes the recombinant protective antigen (“rPA”) bulk drug substance that is used in the liquid SparVax^® formulation. The contract is incrementally funded. Over the base period of the contract, we were awarded initial funding of approximately $5.2 million, which includes a cost reimbursement component and a fixed fee component payable upon achievement of certain milestones. NIAID exercised the first, second and third options under this agreement in September 2015, December 2015, and July 2016, respectively. The exercised options provide additional funding of approximately $6 million and an extension of the period of performance through April 30, 2017. The contract has a total value of up to approximately $28.1 million, if all technical milestones are met and all eight contract options are exercised by NIAID. If NIAID exercises all options, the contract would last approximately five years. If NIAID does not exercise any additional options, the contract would expire by its terms on April 30, 2017.

On August 5, 2016 the Company filed a formal protest against the Department of Health and Human Services “DHHS” challenging its solicitation for a next-generation Anthrax vaccine provider. According to the protest, filed with the U.S. Government Accountability Office (the “GAO”), the government’s Request for Proposals was written in a way that eliminated competition. The Company spent approximately $1 million in related proposal, legal and professional consulting services. After further discussions with DHHS, the Company withdrew the protest on August 25, 2016. The Company agreed to withdraw the protest when the Biomedical Advanced Research and Development Authority (“BARDA”) agreed to participate in conversations with NIAID and the Company on mechanisms to advance the program. These conversations are planned as part of the annual review meeting under the NIAID contract to occur in November 2016.

As of September 30, 2016, our cash balance was $69.1 million, our short-term investments balance was $66.8 million, our accounts receivable (billed and unbilled) balance was $1.6 million, and our current liabilities were $3.7 million. Our excess cash balances have been placed in low risk money market funds, short-term U.S. Treasury securities and short-term government-sponsored enterprise securities in an effort to preserve capital. In the event SIGA pays us the full value of the judgment in cash, and barring any unexpected material events, we expect that we will distribute at least 90% of the after tax net cash proceeds to our stockholders. The timing and form of any distribution will depend on our analysis of the Company’s current situation, applicable corporate statutes relating to distributions and the economic consequences to our stockholders. We believe, based on the operating cash requirements and capital expenditures expected for 2016, the Company’s cash on hand at September 30, 2016, excluding the SIGA proceeds that we intend to distribute to stockholders, is adequate to fund operations for at least the next twelve months.