You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. You should review the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this quarterly report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
February 21, 2014, we acquired Cangene Corporation, or Cangene, for approximately $222 million. As part of the acquisition, we received the following revenue-generating products: BATTM (Botulism Antitoxin Heptavalent (A, B, C, D, E, F, G)-Equine) , AIGIV (Anthrax Immune Globulin Intravenous (Human)) and VIGIV (Vaccinia Immune Globulin Intravenous (Human)) in the Biodefense segment; and WinRho® SDF (Rho(D) Immune Globulin Intravenous (Human)), HepaGam B® (Hepatitis B Immune Globulin Intravenous (Human)), VARIZIG® (Varicella Zoster Immune Globulin (Human)) and episil® in the Biosciences segment. Our Biodefense division is a specialty pharmaceutical business focused on countermeasures that address Chemical, Biological, Radiological and Nuclear, or CBRN, threats. The U. S. government is the primary purchaser of our Biodefense products, and often provides us with substantial funding for the development of our Biodefense product candidates. Our Biodefense portfolio consists of five revenue-generating products, including BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine approved by the U.S. Food and Drug Administration, or the FDA, for the prevention of anthrax disease, RSDL® (decontamination lotion), BAT, AIGIV and VIGIV, and various investigational stage product candidates. Operations that support this division include manufacturing, regulatory affairs, quality assurance, quality control, international sales and marketing, and domestic government affairs in support of our marketed products, as well as product development and manufacturing infrastructure in support of our investigational stage product candidates. Our Biosciences division is a specialty pharmaceutical business focused on therapeutics and vaccines in hematology/oncology, transplantation and infectious disease. Our Biosciences portfolio consists of four revenue generating products, including WinRho, HepaGam B, VARIZIG, and episil, as well as various investigational stage product candidates and a contract manufacturing services business, which we acquired in our recent acquisition of Cangene. Operations that support this division include manufacturing, quality, regulatory, medical affairs, and sales and marketing in support of our marketed products, as well as additional product development capabilities in support of our investigational stage product candidates. Our Biodefense segment has generated net income for each of the last five fiscal years. Over this same time frame, our Biosciences segment has generated revenue through development contracts and collaborative funding, but has not generated any product sales revenues. As a result, our Biosciences segment has incurred a net loss for each of the last five fiscal years.
We have derived substantially all of our historical product sales revenues from BioThrax sales to the U.S. government. We are currently a party to a contract with the
Centers for Disease Control and Prevention, or CDC, an operating division of the U.S. Department of Health and Human Services, or HHS, to supply up to 44.75 million doses of BioThrax for placement into the Strategic National Stockpile, or SNS, over a five-year period ending September 30, 2016. We expect that we will continue to derive substantial product sales revenues from our sales of BioThrax to the U.S. government. Our total revenues from BioThrax sales were $24.5 millionand $30.4 millionfor three months ended March 31, 2014and 2013, respectively. We are focused on increasing sales of BioThrax and RSDL to U.S. government customers, expanding the market for BioThrax and RSDL to other customers domestically and internationally and pursuing label expansions and improvements and increasing sales of the products acquired in our acquisition of Cangene. Contract Manufacturing We provide contract manufacturing services, including biopharmaceutical product development and filling services for injectable and other sterile products, as well as process design, technical transfer, manufacturing validations, laboratory support, aseptic filling, lyophilization and accelerated and ongoing stability studies. We produce finished units of commercial drugs for a variety of customers ranging from small biopharmaceutical companies to major multinationals. We are focused on increasing services to third party biopharmecutical companies, both domestically and internationally.
Contracts and Grants
We seek to advance development of our product candidates through external funding arrangements. We may slow down development programs or place them on hold during periods that are not covered by external funding. In addition, we performed certain ongoing product-related services for which we receive funding. We have received funding from the U.S. government for the following programs:
§ BioThrax as a post-exposure prophylaxis, or PEP;
§ Large-scale manufacturing for BioThrax;
§ PreviThrax; § BAT; § AIGIV; and § VIGIV.
We continue to actively pursue additional government sponsored development contracts and grants and commercial collaborative relationships. We also encourage both governmental and non-governmental agencies and philanthropic organizations to provide funding or to conduct clinical studies of our product candidates.
Financial Operations Overview Revenues We entered into a contract with the CDC effective as of
September 30, 2011to supply up to 44.75 million doses of BioThrax to the CDC over a five-year period. The period of performance under the award is from September 30, 2011through September 30, 2016. The maximum amount that could be paid to us under the contract is up to $1.25 billion, subject to availability of funding by the U.S. government. To date, the U.S. government has committed approximately $704 millionfor the procurement of BioThrax doses under this contract. Through March 31, 2014, we have delivered and, upon CDC acceptance, recognized revenue on approximately 19 million doses, representing approximately $504 millionin revenue under this contract.
We have received contract and grant funding from the
Development Programs Funding Source Award Date Performance Period Post-Exposure Prophylaxis indication for BioThrax BARDA 9/2007 9/2007 - 3/2016 Large-scale manufacturing for BioThrax BARDA 7/2010
7/2010 - 7/2015 NuThrax NIAID 7/2010 8/2010 - 8/2014 PreviThrax BARDA 9/2010 9/2010 - 9/2015 CIADM BARDA 6/2012 6/2012 - 6/2037 BAT BARDA 1/2003 1/2003 - 1/2015 BAT BARDA 5/2006 5/2006 - 5/2018 AIGIV BARDA 9/2005 9/2005 - 4/2021 AIGIV BARDA 9/2002 9/2002 - 12/2015 AIGIV BARDA 9/2013 9/2013 - 9/2018 VIGIV BARDA 8/2012 8/2012 - 2/2015
Our revenue, operating results and profitability have varied, and we expect they will continue to vary on a quarterly basis, primarily due to the timing of sales of our products and timing of reimbursement under our contracts and grants.
Cost of Product Sales
The primary expense that we incur to deliver our vaccines and therapeutics to our customers is manufacturing cost, consisting of fixed and variable costs. Variable manufacturing costs consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing and filling operations, and sales-based royalties. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. We determine the cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity. The primary expense that we incur to deliver our medical device, RSDL, to our customers is the cost per unit of production from our third-party contract manufacturer. Other associated expenses include sales-based royalties, amortization of intangible assets, shipping, logistics and the cost of support functions.
Research and Development Expenses
We expense research and development costs as incurred. Our research and development expenses consist primarily of:
§ personnel-related expenses;
§ fees to professional service providers for, among other things, analytical
testing, independent monitoring or other administration of our clinical trials
and obtaining and evaluating data from our clinical trials and non-clinical
§ costs of contract manufacturing services for clinical trial material;
§ costs of materials used in clinical trials and research and development;
§ depreciation of capital assets used to develop our products; and
§ operating costs, such as the operating costs of facilities and the legal costs
of pursuing patent protection of our intellectual property.
We intend to focus our product development efforts on promising late-stage candidates that we believe satisfy well-defined criteria and seek to utilize collaborations or non-dilutive funding. We plan to seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations. We expect that our research and development spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of research and development spending, the number of product candidates under development, the size, structure and duration of any follow-on clinical programs that we may initiate, the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials, and our ability to use or rely on data generated by government agencies, such as studies involving BioThrax conducted by the CDC.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executive, sales and marketing, business development, government affairs, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in cost of product sales and contract manufacturing or research and development expense.
Intangible assets associated with in-process research and development, or IPR&D, acquired from
Cangenerelated to the IXinity product candidate. As part of the preliminary purchase price allocation with respect to the Cangeneacquisition, management determined that the estimated acquisition-date fair value related to IPR&D was $8.5 million. The estimated fair value was determined using the income approach, which discounts expected future cash flows to present value. We estimated the fair value using a present value discount rate of 16%, which is based on the estimated weighted-average cost of capital for companies with profiles substantially similar to that of Cangene. This is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value the IPR&D. The projected cash flows from the IPR&D projects were based on key assumptions including: estimates of revenues and operating profits related to each project considering its stage of development on the acquisition date; the time and resources needed to complete the development and approval of the product candidate; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining marketing approval from the FDAand other regulatory agencies; and risks related to the viability of and potential alternative treatments in any future target markets. IPR&D assets will be considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts.
As part of the preliminary purchase price allocation with respect to the
Cangeneacquisition, management determined that acquired inventory includes a $6.2 millionadjustment to record inventory at fair value, referred to as a step-up adjustment. The $6.2 millionstep-up was estimated to be amortized through cost of product sales and contract manufacturing over the next five years based on estimated inventory turnover, which will increase costs of product sales and contract manufacturing during such period.
Provisions for Rebates, Chargebacks, Administrative Fees and Other
The table below includes a reconciliation of the accounts associated with estimated rebates, chargebacks and other fees:
Distributor fees, Commissions, Sales returns (in thousands) Rebates and Discounts Chargebacks Total
Balance January 1, 2014 $ - $ - $ - $ - Liabilities assumed from Cangene 246 373 3,321 3,940 Provisions attributed to sales in: Current period 26 543 835 1,404 Prior periods - - - - Payments or credits attributed to sales in: Current period - - - - Prior periods (26 ) (194 ) (1,025 ) (1,245 ) Balance, March 31, 2014
$ 246$ 722 $ 3,131 $ 4,099
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no significant changes to our summary of significant accounting policies, contained in the our Annual Report on Form 10-K for the year ended
December 31, 2013, as filed with the Securities and Exchange Commission, or SEC, during the three months ended March 31, 2014, except for additions to our accounting policy for revenue recognition related to the Cangeneacquisition.
We recognize revenues from product sales if four basic criteria have been met:
§ there is persuasive evidence of an arrangement;
§ delivery has occurred or title has passed to our customer;
§ the fee is fixed or determinable; and
§ collectibility is reasonably assured.
All revenues from product sales are recorded net of applicable allowances for sales returns, rebates, special promotional programs, and discounts. We estimate allowances for deductions from revenue using a combination of information received from third parties including market data, inventory reports from major wholesalers, historical information and analysis. These estimates are subject to the inherent limitations of estimates that rely on third-party data, as certain third-party information may itself rely on estimates and reflect other limitations. Provisions for estimated rebates and other allowances, such as discounts and promotional and other credits, are estimated based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and contract terms, and actual discounts offered. Management believes that such provisions are determinable because of the limited number of assumptions involved and the consistency of historical experience. We market and sell our Biosciences products through commercial wholesalers (direct customers) who purchase the products at a price referred to as the wholesale acquisition cost, or WAC. Additionally, we enter into agreements with indirect customers for a contracted price that is less than the WAC. The indirect customers, such as group-purchasing organizations, physician practice-management groups and hospitals, purchase the Company's products from the wholesalers. Under these agreements with the wholesalers, we guarantee that it will credit them for the difference between the WAC and the indirect customers' contracted price. This credit is referred to as a chargeback. Wholesalers provide detailed information regarding indirect customer purchases as part of the justification for their credit request. Once received by us, these requests are standardized and tracked within a software system that adjudicates and reconciles all indirect claims coming from wholesalers. The database with these claims is used for historical trending and estimating future indirect sales, which are used to estimate accruals. Adjustments to these provisions are made periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We make subjective judgments primarily based on its evaluation of current market conditions and trade inventory levels related to the products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or as an adjustment to past sales, or both. We estimate allowances for revenue- reducing obligations such as rebates, special promotional programs, and discounts, using a combination of historical trends, contractual obligations and information received from third parties. The accuracy of these estimates is dependent upon the inherent limitations of extrapolating estimates from historical trends and upon the quality of the third-party information.
Results of Operations
Product sales revenues increased by
$5.4 million, or 18%, to $35.8 millionfor the three months ended March 31, 2014from $30.4 millionfor the three months ended March 31, 2013. Product revenue is as follows: § BioThrax - $24.5 millionfor 2014 as compared to $30.4 millionfor 2013;
§ RSDL (acquired in
§ WinRho (acquired in
§ HepaGam (acquired in
§ BAT (acquired in
§ other products (acquired in
The decrease in BioThrax sales was primarily due to a 20% decrease in the number of doses of BioThrax delivered, attributable to the timing of deliveries to the SNS. Contract manufacturing revenue was
$2.7 millionfor the three months ended March 31, 2014. Contract manufacturing (which we acquired in February 2014) revenues primarily consists of contract services to third parties and the U.S. government. Contracts and grants revenues increased by $2.7 million, or 21%, to $15.4 millionfor the three months ended March 31, 2014from $12.7 millionfor the three months ended March 31, 2013. The increase in contracts and grants revenues was primarily due to the following:
§ a payment of
related to the progress of development activities;
§ development funding of
§ increased revenue related to the establishment of our CIADM, an increase of
§ decreased revenue of
and PreviThrax, due to the timing of development efforts.
Cost of Product Sales and Contract Manufacturing
Cost of product sales and contract manufacturing increased by
$13.3 millionto $19.0 millionfor the three months ended March 31, 2014from $5.7 millionfor the three months ended March 31, 2013. The increase was primarily attributable to the following:
§ increase of
§ RSDL (acquired in
§ product and contract manufacturing costs associated with
The increase in cost of sales associated with BioThrax was attributable to an increase in the costs per dose associated with lower production yields in the period in which the doses sold during the three months ended
March 31, 2014were produced, along with a lower cost per dose in the three months ended March 31, 2013associated with an adjustment to certain BioThrax testing specifications that allowed us to sell doses for which the related costs were previously expensed.
Research and Development Expenses
Research and development expenses decreased by
$468,000, or 2%, to $30.3 millionfor the three months ended March 31, 2014from $30.7 millionfor the three months ended March 31, 2013. This decrease primarily reflects lower contract service costs, and includes decreased expenses of $38,000for product candidates and manufacturing development categorized in the Biodefense segment, decreased expenses of $275,000for product candidates and technology platform development activities categorized in the Biosciences segment and decreased expenses of $155,000in other research and development, which are in support of central research and development activities. Net of development contract and grant reimbursements along with the net loss attributable to noncontrolling interests, we incurred research and development expenses of $14.9 millionand $17.2 million, respectively, during three months ended March 31, 2014and 2013.
Our principal research and development expenses for the three months ended
Three Months ended March 31, (in thousands) 2014 2013
Large-scale manufacturing for BioThrax
$ 3,484 $ 4,726BioThrax related programs 2,327 2,793 PreviThrax 2,530 4,238 NuThrax 2,407 2,248 Botulinum Antitoxin 646 - Anthrax Immune Globulin 700 - Other Biodefense 3,561 1,688 Total biodefense 15,655 15,693 Biosciences: Tuberculosis vaccine - 3,906 otlertuzumab (formerly TRU-016) 3,245 4,627 ES414 (formerly T-Scorp) 4,499 2,032 IXinity 1,247 - Other biosciences 3,837 2,538 Total biosciences 12,828 13,103 Other 1,773 1,928 Total $ 30,256 $ 30,724
The decrease in spending for our large-scale manufacturing for BioThrax was primarily due to the timing of manufacturing development activities. The decrease in spending for BioThrax related programs was primarily related to the timing of clinical studies to support applications for label expansion for BioThrax. The decrease in spending for PreviThrax was primarily due to the timing of model optimization and non-clinical studies. The increase in spending for NuThrax was primarily due to the timing of clinical trial activities. The spending for our Botulinum Antitoxin program (which we acquired from
Cangene) was primarily due to stability testing. The spending for our Anthrax Immune Globulin program (which we acquired from Cangene) was due to stability testing. The increase in spending for our other Biodefense activities was primarily due to increased spending related to manufacturing development. The spending for our tuberculosis vaccine product candidate during 2013 was for manufacturing development activities. The decrease in spending for our otlertuzumab (formerly TRU-016) product candidate was primarily related to the timing of clinical trial activities. The increase in spending for our ES414 (formerly T-Scorp) product candidate was primarily due to manufacturing development. The spending for our IXinity product candidate in 2014 was primarily for clinical trial activities. The increase in spending for our other Biosciences activities was primarily due to increased costs associated with the development of platform technologies and for programs acquired in our acquisition of Cangene.
The spending for other research and development activities was primarily due to centralized research and development activities not attributable to product candidates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
$10.1 million, or 50%, to $30.1 millionfor the three months ended March 31, 2014from $20.0 millionfor the three months ended March 31, 2013. This increase included increased spending for transaction costs of $4.2 millionassociated with the acquisition and integration of Cangene, which we acquired in February 2014, along with additional post-acquisiton selling, general and administrative costs of $4.0 millionassociated with the operations of Cangeneand in support of RSDL. Selling, general and administrative expenses attributable to the Biodefense segment increased by $2.9 million, or 21%, to $16.9 millionduring the three months ended March 31, 2014from $14.0 millionduring the three months ended March 31, 2013. Selling, general and administrative expenses related to our Biosciences segment increased by $7.1 million, or 118%, to $13.2 millionfor the three months ended March 31, 2014from $6.1 millionfor the three months ended March 31, 2014. The increase in the Biosciences selling, general and administrative expense was due to professional services to support due diligence along with other acquisition-related activities and post-acquisition operations associated with our acquisition of Cangene.
Total Other Income (Expense)
Total net other income (expense) decreased by
$3.0 millionto a net other expense of $3.0 millionfor the three months ended March 31, 2014, from a net other income of $29,000for the three months ended March 31, 2013. The decrease was primarily due to interest expense from our 2.875% Convertible Senior Notes due 2021, or the Notes, of $1.3 millionthat was not capitalized in 2014 and $1.8 millionof costs associated with the termination of our $125 millionterm loan facility. Income Taxes Benefit from income taxes increased by $3.7 million, or 82%, to $8.2 millionfor the three months ended March 31, 2014from $4.5 millionfor the three months ended March 31, 2013. The increase in the benefit from income taxes is primarily due to the $15.9 millionincrease in our loss before benefit from income taxes and the loss attributable to noncontrolling interests.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest decreased to
$0in 2014 from $743,000for 2013. The decrease resulted from the liquidation of our noncontrolling interest in the Oxford Emergent Tuberculosis Consortiumduring the three months ended March 31, 2014.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our cash requirements from inception through
March 31, 2014principally with a combination of revenues from BioThrax product sales, debt financings, development funding from government entities and non-government and philanthropic organizations and collaborative partners, and the net proceeds from our initial public offering and the sale of our common stock upon exercise of stock options. We have operated profitably for each of the five years ended December 31, 2013.
The following table provides information regarding our cash flows for the three months ended
Three Months ended March 31, (in thousands) 2014 2013 Net cash provided by (used in): Operating activities(1)
$ (29,240 ) $ (4,744 )Investing activities (182,757 ) (7,679 ) Financing activities 192,874 995 Net increase (decrease) in cash and cash equivalents $
(1) Includes the effect of exchange rates on cash and cash equivalents.
Net cash used in operating activities of
$29.2 millionfor the three months ended March 31, 2014was primarily due to our net loss attributable to Emergent BioSolutions Inc.of $20.2 million, a decrease in income taxes of $11.8 millionrelated to timing differences, a decrease in accrued compensation of $8.7 millionprimarily related to the payment of 2013 bonuses and a decrease in accounts payable of $10.7 million, primarily due to acquisition related activities, partially offset by a decrease in accounts receivable of $17.6 millionrelated to the timing of collection of amounts billed primarily to the CDC. Net cash used in operating activities of $4.7 millionfor the three months ended March 31, 2013was principally due to our net loss attributable to Emergent BioSolutions Inc.of $8.1 million, a decrease in income taxes of $12.4 millionrelated to timing differences, a decrease in accrued compensation of $11.0 millionprimarily related to the payment of 2012 bonuses and a decrease in inventory of $7.0 millionprimarily related to the timing of deliveries to the SNS, partially offset by a decrease in accounts receivable of $33.1 milliondue to the timing of collection of amounts billed primarily to CDC and non-cash charges of $3.0 millionfor stock-based compensation and $4.2 millionfor depreciation and amortization. Net cash used in investing activities of $182.8 millionfor the three months ended March 31, 2014was primarily due to the acquisition of Cangenefor $178.2 million, which is net of $43.6 millionof acquired cash, and capital expenditures of $4.6 millionfor infrastructure and equipment investments. Net cash used in investing activities of $7.7 millionfor the three months ended March 31, 2013was primarily due to capital expenditures, and includes construction and renovation of facilities at our Lansing, Michigancampus, and costs of other infrastructure and equipment investments. Net cash provided by financing activities of $192.9 millionfor the three months ended March 31, 2014was primarily due to proceeds from long-term indebtedness of $251 million, of which $241.7 million(net of $8.3 millionof transaction costs) was from our Notes, $8.1 millionin proceeds from the issuance of common stock pursuant to employee equity plans and $4.6 millionin excess tax benefits from the exercise of stock options, partially offset by a principal payment on indebtedness of $62.0 millionunder our revolving credit facility. Net cash provided by financing activities of $995,000for the three months ended March 31, 2013was primarily due to $1.6 millionin excess tax benefits from the exercise of stock options and $504,000in proceeds from stock option exercises, partially offset by principal payments on indebtedness of $1.1 million.
The following table summarizes our contractual obligations at
March 31, 2014: Payments due by period (in thousands) Total 2014 2015 2017 2018 After 2018
$ 250,000$ - $ - $ - $ - $ 250,000Long-term indebtedness including current portion 1,000 - - - - 1,000 Operating lease obligations 3,816 2,880 866 70 - - Total contractual
$ 254,816 $ 2,880 $ 866 $ 70$ - $ 251,000
There are a number of uncertainties that we face in the development of new product candidates that prevent us from making a reasonable estimate of the cash obligations under our license agreements. Because of these uncertainties, the preceding table excludes contingent contractual payments that we may become obligated to make under such agreements. These agreements typically provide for the payment of milestone fees upon achievement of specified research, development and commercialization milestones, such as the commencement of clinical trials, the receipt of funding awards, the receipt of regulatory approvals, and the achievement of sales milestones. The amount of contingent contractual milestone payments that we may become obligated to make is variable based on the actual achievement and timing of the applicable milestones and the characteristics of any products or product candidates that are developed, including factors such as number of products or product candidates developed, type and number of components of each product or product candidate, ownership of the various components and the specific markets affected, and the aggregate payments could be as much as approximately
$118 million. The success of our efforts to commercialize our product candidates depends on many factors, including those set forth in "Risk Factors-Our business depends on our success in developing and commercializing our product candidates. If we are unable to commercialize these product candidates, or experience significant delays or unanticipated costs in doing so, our business would be materially affected." and is highly uncertain. Even if these efforts are successful, the timing of success is highly unpredictable and variable. The same is true for any contingent contractual royalty payments that we may be obligated to make upon successful commercialization of these product candidates. We do not expect that any such payments would have an adverse effect on our financial position, operations and capital resources because, if payable, we expect that the benefits associated with the achievement of the relevant milestones or the achievement of revenue would offset the burden of making these payments. We are not obligated to pay any minimum royalties under our existing contracts. Deferred income taxes and liabilities for unrecognized income tax benefits are excluded from the above table since they are not contractually fixed as to timing and amount
January 29, 2014, we issued $250.0 millionaggregate principal amount of Notes. The Notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears on January 15and July 15of each year, commencing July 15, 2014. The Notes mature on January 15, 2021, unless earlier purchased by us, redeemed or converted. The conversion rate will initially equal 30.8821 shares of common stock per $1,000principal amount of notes, which is equivalent to an initial conversion price of approximately $32.38per share of common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. On December 11, 2013, we entered into a senior secured credit agreement, or the Credit Agreement, with three lending financial institutions, or the Lenders, led by Bank of America, N.A., as administrative agent. The Credit Agreement originally provided for a revolving credit facility of up to $100.0 millionthrough December 11, 2018, or such earlier date required by the terms of the Credit Agreement, and a term loan facility of up to $125.0 millionthat was to be drawn in full, if at all, on or prior to March 31, 2014. On January 29, 2014, in connection with our issuance of the Notes, the unused $125 millionterm loan portion of our Credit Agreement terminated automatically in accordance with its terms. As of March 31, 2014, there is no outstanding balance under the revolving credit facility. Our payment obligations under the Credit Agreement are secured by a lien on substantially all of our assets, including the stock of all of our subsidiaries, and the assets of the subsidiary guarantors, including mortgages over certain of their real properties, including our large-scale vaccine manufacturing facility in Lansing, Michiganand our biodefense facility in Baltimore, Maryland. The Credit Agreement, as amended, contains affirmative and negative covenants customary for financing of this type. Negative covenants in the Credit Agreement, among other things: limit our ability to incur indebtedness and liens; dispose of assets; make investments including loans, advances or guarantees; and enter into certain mergers or similar transactions. The Credit Agreement also contains financial covenants, tested quarterly and in connection with any triggering events under the Credit Agreement that include the maintenance of: (1) a minimum consolidated debt service coverage ratio of 2.50 to 1.00, (2) a maximum consolidated leverage ratio for the measurements period ending on or prior to September 30, 2014of 4.00 to 1.00, for the measurement period ending December 31, 2014of 3.75 to 1.00, and thereafter of 3.50 to 1.00, (3) a maximum consolidated senior leverage ratio of 2.00 to 1.00 (when no term loan is outstanding) and (4) a minimum liquidity requirement of $50.0 million. Upon the occurrence and continuance of an event of default under the Credit Agreement, the commitments of the lenders to make loans under the Credit Agreement may be terminated (other than commitments to make the term loan, which may only be terminated upon the occurrence and continuance of certain specified defaults) and our payment obligations under the Credit Agreement may be accelerated. The events of default under the Credit Agreement include, among others, subject in some cases to specified cure periods: payment defaults; inaccuracy of representations and warranties in any material respect; defaults in the observance or performance of covenants; bankruptcy and insolvency related defaults; the entry of a final judgment in excess of a threshold amount; change of control; and the invalidity of loan documents relating to the Credit Agreement. In January 2014, we entered into forgiveable loan agreements with the State of Marylandand Montgomery County, Maryland, for which we received $1.0 million. The proceeds of the forgiveable loans were used to reimburse us for eligible costs incurred to relocate and expand our headquarters operations and improve our research and development facility in Maryland, collectively the ("Montgomery County Site"). The principal and accrued interest may be forgiven if specified employment levels are achieved and maintained and at least $15.0 millionin project costs are expended at the Montgomery County Site prior to December 2018. If the we fail to meet the criteria above, we will have to repay all
or a portion of the loan. Funding Requirements We expect to continue to fund our anticipated operating expenses, capital expenditures and debt service requirements from existing cash and cash equivalents, revenues from product sales, development contract and grant funding, and our revolving credit facility and any other lines of credit we may establish from time to time. There are numerous risks and uncertainties associated with product sales and with the development and commercialization of our product candidates. We may seek additional external financing to provide additional financial flexibility. Our future capital requirements will depend on many factors, including:
§ the level, timing and cost of product sales;
§ the extent to which we acquire or invest in and integrate companies, business,
products or technologies;
§ the acquisition of new facilities and capital improvements to new or existing
§ the payment obligations under our indebtedness;
§ the scope, progress, results and costs of our development activities;
§ our ability to obtain funding from collaborative partners, government entities
and non-governmental organizations for our development programs;
§ the costs of commercialization activities, including product marketing, sales
and distribution; and
§ the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other patent-related costs.
If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity or debt offerings, bank loans or collaboration and licensing arrangements. We have an effective shelf registration statement on file with the
SECthat allows us to issue up to an aggregate of $180 millionof equity, debt and certain other types of securities through one or more future offerings. If we raise funds by issuing equity securities, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities or declaring dividends. If we raise funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing our notes that could have the effect of diminishing our ability to make payments on our indebtedness.