Summary of Significant Accounting Policies

Revenue

All of the Company’s revenue is derived from long-term contracts that span multiple years. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Adoption of ASC 606. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605, Revenue Recognition.

The cumulative impact of adopting ASC 606 as of January 1, 2018 was a decrease to deferred revenue of approximately $1.8 million; a decrease to deferred costs of approximately $2.1 million; an increase to receivables of approximately $0.1 million and a net increase to opening accumulated deficit of $0.2 million, net of tax. For the three and six months ended June 30, 2018, the impact to revenues as a result of applying ASC 606 was an increase of approximately $0.1 million and $0.3 million, respectively.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s research and development contract for the intravenous (IV) formulation of TPOXX® (“IV TPOXX®”) (see “IV Formulation R&D Contract” in Note 3) has a single performance obligation (research and development); individual services within the contract are not separately identifiable from other promises in the contract and, therefore, are not distinct from each other. The Company’s BARDA Contract has three performance obligations: one relates to the manufacture and delivery of product (and performance of services in connection with the manufacture and delivery of product), and the other two performance obligations relate to research and development in connection with oral TPOXX®. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.

Contract modifications may occur during the course of performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for services that are not distinct, and, therefore, are accounted for as part of the existing contract.

The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Substantially all of the Company’s revenue related to research and development performance obligations is recognized over time, because control transfers continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead, and third-party services.

Revenue connected with courses of oral TPOXX® delivered to the strategic stockpile and related services, milestones and advance payments (activities in combination that constitute one performance obligation) will be recognized at a point in time. Revenue associated with this performance obligation will be recognized when BARDA obtains control of the asset, which is upon delivery to and acceptance by the customer and at the point in time when the constraint on the consideration is resolved. The consideration, which is variable consideration, was constrained until the FDA approved oral TPOXX® for the treatment of smallpox on July 13, 2018. Prior to FDA approval, consideration had been constrained because the Replacement Obligation (as defined herein) had not been quantified or specified. With FDA approval, the replacement obligation has been quantified and specified as immaterial since there is no difference between the approved product and the courses of oral TPOXX® that have already been delivered to the strategic stockpile.

Contract Estimates. Accounting for long-term contracts and grants involves the use of various techniques to estimate total contract revenue and costs.

Contract estimates are based on various assumptions to project the outcome of future events that often span multiple years. These assumptions include labor productivity; the complexity of the work to be performed; external factors such as customer behavior and potential regulatory outcomes; and the performance of subcontractors, among other variables.

The nature of the work required to be performed on many of the Company’s performance obligations and the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. The consideration associated with manufacture and delivery of product as well as research and development services is variable as the consideration is either constrained or the total amount of services to be performed has not been finalized. The Company estimates variable consideration at the most likely amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur and when any uncertainty associated with variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our historical and anticipated performance, external factors, trends and all other information (historical, current and forecasted) that is reasonably available to us.

A significant change in one or more of these estimates could affect the profitability of the Company’s contracts. As such, the Company reviews and updates its contract-related estimates regularly. The Company recognizes adjustments in estimated revenues, research and development expenses and cost of sales under the cumulative catch-up method. Under this method, the impact of the adjustment on revenues, research and development expenses and cost of sales recorded to date on a contract is recognized in the period the adjustment is identified.

Contract Balances. The timing of revenue recognition, billings and cash collections may result in billed accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) in the condensed consolidated balance sheet. Generally, amounts are billed as work progresses in accordance with agreed-upon contractual terms either at periodic intervals (monthly) or upon achievement of contractual milestones. Under typical payment terms of fixed price arrangements, the customer pays the Company either performance-based payments or progress payments. For the Company’s cost type arrangements, the customer generally pays the Company for its actual costs incurred. Such payments occur within a short period of time.

Remaining Performance Obligations. Remaining performance obligations represents the transaction price for which work has not been performed and excludes unexercised contract options. As of June 30, 2018 the aggregate amount of transaction price allocated to remaining performance obligations for the BARDA Contract and the IV Formulation R&D Contract was $11.5 million. The Company expects to recognize revenue over the next three to five years as the specific timing for satisfying the performance obligations is subjective and outside the Company’s control.

Deferred Revenue

When the Company receives consideration, or such consideration is unconditionally due, prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as net sales once control of goods and/or services has been transferred to the customer and all revenue recognition criteria have been met and any constraints have been resolved.

The Company has deferred revenue in connection with the manufacture and delivery of oral TPOXX® under the BARDA contract. Revenue recognition as of June 30, 2018 was constrained by the possibility of product replacement pursuant to the Replacement Obligation. On July 13, 2018, the FDA approved oral TPOXX® for the treatment of smallpox. With FDA approval, the replacement obligation has been quantified and specified as immaterial since there is no difference between the approved product and the courses of oral TPOXX® that have already been delivered to the Strategic Stockpile. As such, deferred revenue associated with the BARDA contract will be recorded as net sales during the three months ended September 30, 2018. Therefore, as of June 30, 2018, in light of this expectation, deferred revenue and deferred costs related to the BARDA contract (see amounts in Note 3) have been classified as current in the condensed consolidated balance sheet.

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



	As of June 30, 2018
Balance at December 31, 2017	$	378,896,803
Cumulative effect of accounting change	(1,780,050		)
Billings in advance of revenue recognized	186,526
Revenue recognized	(740,281		)
Balance at June 30, 2018	$	376,562,998

Restricted Cash and Cash Equivalents

On January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force. The new standard required that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. Adoption of this guidance impacts the cash flow disclosure for the six months ended June 30, 2017; cash flows from operating activities, as disclosed herein, is $5.1 million less than the amount disclosed in the 2017 second quarter 10-Q.

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

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



	As of
	June 30, 2018		December 31, 2017
Cash and cash equivalents	$	10,581,112	$	19,857,833
Restricted cash - short-term	11,028,824		10,701,305
Restricted cash - long-term	1,701,843		6,542,448
Cash, cash equivalents and restricted cash	$	23,311,779	$	37,101,586

	June 30, 2017		December 31, 2016
Cash and cash equivalents	$	30,865,937	$	28,701,824
Restricted cash - short-term	10,322,289		10,138,890
Restricted cash - long-term	12,091,399		17,333,332
Cash, cash equivalents and restricted cash	$	53,279,625	$	56,174,046

Recent Accounting Pronouncements

On January 26, 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective for fiscal years beginning after December 15, 2019. The Company believes the adoption of ASU No. 2017-04 will not have a significant impact on its consolidated financial statements.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which relates to the accounting for leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements. The Company expects its real estate leases to be capitalized on its balance sheet.

Reclassification

In connection with the FDA's approval of oral TPOXX® on July 13, 2018, the Company has classified all deferred revenue as of June 30, 2018 as current. The prior period presentation of $1.3 million of deferred revenue as accrued expenses and other current liabilities as of December 31, 2017 was reclassed to conform with the current year presentation.