Emergent BioSolutions Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes and other financial information included elsewhere in this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q includes information with respect to our plans and strategy for our business and financing, as well as forward-looking statements that involve risks and uncertainties. You should carefully review the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in 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.

BUSINESS OVERVIEW

Emergent BioSolutions Inc. (“Emergent,” the “Company,” “we,” “us,” and “our”) is a global life sciences company focused on providing innovative preparedness and response solutions addressing accidental, deliberate, and naturally occurring Public Health Threats (“PHTs”). The Company's solutions include a product portfolio, a product development portfolio, and a contract development and manufacturing services ("CDMO") portfolio.

We are currently focused on the following four PHT categories: chemical, biological, radiological, nuclear and explosives (“CBRNE”); emerging infectious diseases (“EID”); public health crises; and acute, emergency and community care. As of June 30, 2024, we have a product portfolio of 11 products that contribute a substantial portion of our revenue and are sold to government and commercial customers. Additionally, we have a development pipeline consisting of a diversified mix of both pre-clinical and clinical stage product candidates. Finally, we have a fully integrated portfolio of CDMO services which cover development services, drug substance manufacturing and drug product manufacturing and packaging.

The Company structures the business with a focus on markets and customers. As such, the key components of the business structure include the following four product and service categories: Anthrax - Medical Countermeasures (“MCM”) Products, NARCAN®, Smallpox - MCM products, and Emergent Bioservices (CDMO) services ("Bioservices"). In the fourth quarter of 2023, we realigned our reportable operating segments to reflect recent changes in our internal operating and reporting process. The revised reporting structure reflects the internal reporting and review process used by our Chief Operating Decision Maker, for making decisions and assessing performance, and is consistent with how we currently manage the business. We now manage our business with a focus on three reportable segments: (1) a Commercial Products segment consisting of our NARCAN® and Other Commercial Products; (2) a MCM Products segment consisting of the Anthrax - MCM, Smallpox - MCM and Other Products; and (3) a Services segment consisting of our Bioservices offerings.

Commercial Products Segment:

The majority of our Commercial product revenue comes from the following products:

NARCAN®

• NARCAN® (naloxone HCl) Nasal Spray, an intranasal formulation of naloxone approved by the FDA (including in over-the-counter form) and Health Canada for the emergency treatment of known or suspected opioid overdose as manifested by respiratory and/or central nervous system depression.

Sale of Travel Health Business

On May 15, 2023, the Company completed the sale of its Commercial Products segment's travel health business, including rights to Vivotif®, the licensed typhoid vaccine; Vaxchora®, the licensed cholera vaccine; the development-stage chikungunya vaccine candidate CHIKV VLP; the Company’s manufacturing site in Bern, Switzerland; and certain of its development facilities in San Diego, California.

MCM Products Segment:

The majority of our MCM product revenue comes from the following products and procured product candidates:

Anthrax - MCM Products

• Anthrasil® (Anthrax Immune Globulin Intravenous (human)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada for the treatment of inhalational anthrax in combination with appropriate antibacterial drugs;
• BioThrax® (Anthrax Vaccine Adsorbed), the only vaccine licensed by the United States Food and Drug Administration (“FDA”) for the general use prophylaxis and post-exposure prophylaxis of anthrax disease;
• CYFENDUS® (Anthrax vaccine adsorbed (AVA), adjuvanted), previously known as AV7909, which was recently approved by the FDA for post-exposure prophylaxis of disease following suspected or confirmed exposure to Bacillus anthracis in persons 18 through 65 years of age when administered in conjunction with recommended antibacterial drugs. CYFENDUS® is procured by certain authorized government buyers for their use; and
• Raxibacumab injection, the first fully human monoclonal antibody therapeutic licensed by the FDA for the treatment and prophylaxis of inhalational anthrax.

Smallpox - MCM Products

• ACAM2000®, (Smallpox (Vaccinia) Vaccine, Live), the only single-dose smallpox vaccine licensed by the FDA for active immunization against smallpox disease for persons determined to be at high risk for smallpox infection;
• CNJ-016® (Vaccinia Immune Globulin Intravenous (Human) (VIGIV)), the only polyclonal antibody therapeutic licensed by the FDA and Health Canada to address certain complications from smallpox vaccination; and
• TEMBEXA®, an oral antiviral formulated as 100 mg tablets and 10 mg/mL oral suspension dosed once weekly for two weeks which has been approved by the FDA for the treatment of smallpox disease caused by variola virus in adult and pediatric patients, including neonates.

Other Products

• BAT® (Botulism Antitoxin Heptavalent (A,B,C,D,E,F,G)-(Equine)), the only heptavalent antitoxin licensed by the FDA and Health Canada for the treatment of symptomatic botulism;
• Ebanga™ (ansuvimab-zykl), a monoclonal antibody with antiviral activity provided through a single IV infusion for the treatment of Ebola. Under the terms of a collaboration with Ridgeback Biotherapeutics ("Ridgeback"), Emergent will be responsible for the manufacturing, sale, and distribution of Ebanga™ in the U.S. and Canada, and Ridgeback will serve as the global access partner for Ebanga™;
• RSDL® (Reactive Skin Decontamination Lotion Kit), the only medical device cleared by the FDA that is intended to remove or neutralize chemical warfare agents from the skin, including: tabun, sarin, soman, cyclohexyl sarin, VR, VX, mustard gas and T-2 toxin. On July 31, 2024, the Company entered into the Stock and Asset Purchase Agreement (“RSDL® Agreement”) with SERB Pharmaceuticals, through its wholly owned subsidiary BTG International Inc. (collectively, “SERB”), pursuant to which, among other things, the Company sold its worldwide rights to RSDL®, to SERB (the “RSDL® Transaction”). See Note 18, Subsequent events for more information about the RSDL® Transaction; and
• Trobigard® atropine sulfate, obidoxime chloride auto-injector, a combination drug-device auto-injector procured product candidate that contains atropine sulfate and obidoxime chloride. On April 2, 2024, the Belgium Federal Agency for Medicines and Health Products (“FAMHP”) acknowledged and confirmed Emergent’s request to revoke the Market Authorization for the Trobigard Auto-Injector.

Services Segment:

Bioservices - contract development and manufacturing

Our services revenue consists of distinct but interrelated Bioservices: drug substance manufacturing; drug product manufacturing (also referred to as “fill/finish” services) and packaging; development services including technology transfer, process and analytical development services; and, when necessary, suite reservation obligations. These services, which we refer to as “molecule-to-market” offerings, employ diverse technology platforms (mammalian, microbial, viral and plasma) across a network of seven geographically distinct development and manufacturing sites operated by us for our internal products and pipeline candidates and third-party Bioservices. We service both clinical-stage and commercial-stage projects for a variety of third-party customers, including government agencies, innovative pharmaceutical companies, and non-government organizations. In August 2023, we initiated an organizational restructuring plan (the “August 2023 Plan”) which included actions to reduce investment in and de-emphasize focus on our Bioservices business. In May 2024, the Company initiated an organizational restructuring plan (the “May 2024 Plan”) announcing the closure of the Company’s Baltimore-Bayview Drug Substance manufacturing facility and Rockville, Maryland Drug Product facility. Additionally, on June 20, 2024 the Company announced entry into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Bora Pharmaceuticals Injectibles Inc., a subsidiary of Bora Pharmaceuticals Co., Ltd. (“Bora”), under which the Company will sell its drug product facility in Baltimore-Camden (the “Camden Transaction”).

Other Strategic Activities

January 2023 Organizational Restructuring Plan

In January 2023, the Company initiated an organizational restructuring plan (the “January 2023 Plan”) intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. As part of the January 2023 Plan, the Company reduced its workforce by approximately 125 employees. The charges related to the January 2023 plan consist primarily of employee transition, severance payment and employee benefit charges. The cumulative amount of restructuring charge related to the January 2023 Plan since inception is $9.3 million. All activities related to the January 2023 Plan were substantially completed during the first quarter of 2023. Restructuring costs are recognized as an operating expense within the Condensed Consolidated Statement of Operations and are classified based on the Company's classification policy for each category of operating expense.

August 2023 Organizational Restructuring Plan

In August 2023, the Company initiated the August 2023 Plan intended to strengthen its core business and financial position by reducing investment in and de-emphasizing focus on its CDMO services business for future growth. As part of the August 2023 Plan, the Company reduced its workforce by approximately 400 employees. The charges related to the August 2023 Plan consist primarily of employee transition, severance payment and employee benefit charges. The cumulative amount of restructuring charge related to the August 2023 Plan since inception is $19.4 million. All activities related to the August 2023 Plan were substantially completed during the third quarter of 2023. Restructuring costs are recognized as an operating expense within the Condensed Consolidated Statement of Operations and are classified based on the Company's classification policy for each category of operating expense.

Trobigard Revocation

On April 2, 2024, Emergent submitted its revocation of the Market Authorization for the Trobigard Auto-Injector to the Belgium FAMHP. The FAMHP subsequently acknowledged and confirmed the revocation date as being April 2, 2024.

May 2024 Organizational Restructuring Plan

In May 2024, the Company initiated the May 2024 Plan. These strategic actions will lead to a reduction of the Company’s current workforce by approximately 300 employees across all areas of the Company and the elimination of approximately 85 positions that are currently vacant, as well as the closure of the Company’s Baltimore-Bayview Drug Substance manufacturing facility and Rockville, Maryland Drug Product facility. Decisions regarding the elimination of positions and the closure of manufacturing facilities are subject to local law and consultation requirements in certain countries, as well as the Company’s business needs. The cumulative amount of restructuring charge related to the May 2024 Plan since inception is $17.2 million. All activities related to the May 2024 Plan were substantially completed during the second quarter of 2024. Restructuring costs are recognized as an operating expense within the Condensed Consolidated Statement of Operations and are classified based on the Company's classification policy for each category of operating expense.

Sale of Baltimore-Camden Facility

On June 20, 2024, Cangene bioPharma LLC, a subsidiary of the Company, entered into the Asset Purchase Agreement with Bora, under which the Company will sell its drug product facility in Baltimore-Camden for a total value of approximately $30.0 million. Approximately 350 of the Company’s employees are expected to join Bora as part of the transaction.

The transaction is expected to close in the third quarter of 2024, subject to the satisfaction or waiver of customary closing conditions.

As a result of the Asset Purchase Agreement, the assets and liabilities of our Baltimore-Camden facility are classified as held for sale. The Company has recognized a pre-tax loss of $40.0 million during the quarter, including transaction costs of $3.9 million, in “Gain (loss) on sale of business and assets held for sale” within non-operating activities.

Confidential arbitration settlement with Janssen

On July 3, 2024, the Company, its wholly owned subsidiary, Emergent Manufacturing Operations Baltimore, LLC (“EMOB”), and Janssen executed the Settlement Agreement to resolve all claims among the Parties arising from the Janssen Agreement. The Settlement Agreement also resolves the Parties’ related and previously disclosed arbitration.

Pursuant to the terms of the Settlement Agreement, Janssen paid the Company $50.0 million on July 31, 2024. In addition, the Settlement Agreement contains broad releases of the parties, their affiliates and subsidiaries, representatives, officers, directors and shareholders, including releases of all claims related to the manufacture of the Product by EMOB, the Janssen Agreement, or any agreement or understanding between the parties concerning the Product, and the matters at issue in the arbitration. The Company concluded this is a recognized subsequent event.

Development milestone payments for CHIKV VLP

On July 18, 2024, Bavarian Nordic announced that the European Medicines Agency has validated the marketing authorization application for CHIKV VLP, which was submitted in June 2024. This approval triggered a milestone payment under the Purchase and Sale Agreement to the Company in the amount of $10.0 million, which is expected to be received in the third quarter of 2024.

2024 Sale of RSDL® to SERB Pharmaceuticals

On July 31, 2024, the Company entered into the RSDL® Agreement with SERB, pursuant to which, among other things, the Company sold its worldwide rights to RSDL® to SERB. The RSDL® Transaction also included the sale of all the outstanding capital stock of Emergent Protective Products USA Inc. (“EPPU”), a wholly owned subsidiary of the Company, which leases a manufacturing facility in Hattiesburg, Mississippi, as well as certain assets related to RSDL®, including intellectual property rights, contract rights, inventory and marketing authorizations. In addition, the employees of EPPU are expected to join SERB in connection with the RSDL® Transaction.

Pursuant to the RSDL® Transaction, SERB will assume certain government contracts related to RSDL® decontamination lotion, including the Company’s existing contract to supply RSDL® to the U.S. Department of Defense, through a new contract award to the Canadian Commercial Corporation.

The RSDL® Agreement provided for a cash purchase price of $75.0 million at the closing of the RSDL® Transaction, which is subject to customary adjustments based on inventory value at closing. In addition, SERB will pay the Company a $5.0 million payment upon achievement of a milestone relating to sourcing of a certain component of RSDL® decontamination lotion. The RSDL® Transaction closed on July 31, 2024. The Company and SERB made customary representations, warranties, and covenants in the RSDL® Agreement. In addition, the Company agreed, for a period of three years following the closing of the RSDL® Transaction, not to make, import, export, use, sell or otherwise dispose of, any product that is intended to remove or neutralize chemical warfare agents from the skin, including any product that contains the same chemical components as RSDL®, or to engage in a similar competing business.

At the closing of the RSDL® Transaction, the Company and SERB also entered into a transition services agreement to ensure the orderly transition of RSDL® decontamination lotion and the related assets to SERB, and a supply agreement pursuant to which the Company’s Winnipeg facility will continue to manufacture and supply bulk lotion to SERB under a long-term supply agreement. The Company and SERB will also enter into a reverse supply agreement shortly after the closing of the RSDL® Transaction pursuant to which SERB will supply to the Company finished RSDL® for the purposes of the Company performing certain transitional distribution services.

2024 Triggering Events

2024 Impairment of long-lived assets

During the preparation of our financial statements for the three months ended June 30, 2024, due to the decision to close the Company’s Baltimore-Bayview Drug Substance manufacturing facility and Rockville, Maryland Drug Product facility, the Company determined there were sufficient indicators of impairment for the Bayview and Rockville asset groups within the Bioservices reporting unit. As a result, the Company performed recoverability tests on those asset groups and concluded that the Bayview and Rockville asset groups were not recoverable as the undiscounted expected cash flows did not exceed their carrying values.

Asset groups are written down only to the extent that their carrying value is higher than their respective fair value. The Company, with the assistance of a third-party valuation firm, applied valuation methods to estimate the fair values for each of the assets within the different asset classes. An orderly liquidation value was applied to estimate the fair value of the personal property assets and market and cost based approaches were applied to estimate the fair value of the real property assets, each representing Level 3 non-recurring fair value measurements. Based on these analyses, the Company allocated and recognized a non-cash impairment charge of $27.2 million during the three months ended June 30, 2024.

FINANCIAL OPERATIONS OVERVIEW

Revenues

We generate Commercial Product revenues through sale of NARCAN® Nasal Spray, which is sold commercially over-the-counter at retail pharmacies and digital commerce websites as well as through physician-directed or standing order prescriptions at retail pharmacies, health departments, local law enforcement agencies, community-based organizations, substance abuse centers and other federal agencies. In addition, we previously generated Commercial product revenues through sale of the Company's travel health products, which we sold to Bavarian Nordic in May 2023.We generate MCM Product revenues from the sale of our marketed products and procured product candidates. The U.S. government ("USG") is the largest purchaser of our Government - MCM products and primarily purchases our products for the Strategic National Stockpile, a national repository of medical countermeasures including critical antibiotics, vaccines, chemical antidotes, antitoxins, and other critical medical supplies. The USG primarily purchases our products under long-term, firm fixed-price procurement contracts, generally with annual options.

We also generate revenue from our Services segment through our Bioservices portfolio, which is based on our established development and manufacturing infrastructure, technology platforms and expertise. Our services include a fully integrated molecule-to-market Bioservices business offering across development services, drug substance and drug product for small to large pharmaceutical and biotechnology industry and government agencies/non-governmental organizations. From time to time, clients require suite reservations at our various manufacturing sites, which may be considered leases depending on the facts and circumstances.

We have received contracts and grant funding from the USG and other non-governmental organizations to perform R&D activities, particularly related to programs addressing certain CBRNE threats and EIDs.

Our revenue, operating results and profitability vary quarterly based on the timing of production and deliveries, the timing of manufacturing services performed and the nature of our business, which involves providing large scale bundles of products and services as needs arise. We expect continued variability in our quarterly financial results.

Cost of Product Sales and Services

Commercial and MCM Products - The primary expenses that we incur to deliver our NARCAN® and MCM and other commercial products consist of fixed and variable costs. 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. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. Variable manufacturing costs primarily consist of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing operations, sales-based royalties, shipping and logistics. In addition to the fixed and variable manufacturing costs described above, the cost of product sales depends on utilization of available manufacturing capacity. For our commercial sales, other associated expenses include sales-based royalties, shipping, and logistics.

Services - The primary expenses that we incur to deliver our Bioservices offerings consist of fixed and variable costs, including personnel, equipment, and facilities costs. Our manufacturing process includes the production of bulk material and performing drug product work for containment and distribution of biological products. For drug product customers, we receive work in process inventory to be prepared for distribution.

Research and Development ("R&D") Expenses

We expense R&D costs as incurred. Our R&D 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 studies;
• costs of Bioservices for our clinical trial material; and
• costs of materials intended for use and used in clinical trials and R&D.

In many cases, we seek funding for development activities from external sources and third parties, such as governments and non-governmental organizations, or through collaborative partnerships. We expect our R&D spending will be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of R&D spending, the number of product candidates under development, the size, structure and duration of any clinical programs that we may initiate, the costs associated with manufacturing and development of 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.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of personnel-related costs and professional fees in support of our executives, sales and marketing, business development, government affairs, finance, accounting, information technology, legal, human resource functions and other corporate functions. Other costs include facility costs not otherwise included in cost of product sales and Bioservices or R&D expense.

Income taxes

Uncertainty in income taxes is accounted for using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

Changes in tax laws, rulings, policies, or related legal and regulatory interpretations occur frequently and may have significant favorable or adverse impacts on our effective tax rate. In 2021, the Organization for Economic Cooperation and Development ("OECD") released model rules for a 15% global minimum tax applied to cross-border profits of certain large multinational corporations, known as Pillar Two. Pillar Two has now been enacted by approximately 30 countries, including Ireland. This minimum tax is treated as a period cost beginning in 2024 and its impact is included on the Company's financial results of operations for the current period. The Company is monitoring legislative developments, as well as additional guidance from countries that have enacted legislation. We anticipate further legislative activity and administrative guidance in 2024.

Management believes that the assumptions and estimates related to the provision for income taxes are critical to the Company’s results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from these estimates. There have been no significant changes to our critical accounting policies and estimates contained in "Critical Accounting Policies and Estimates" in the Management's Discussion and Analysis, in Part II, Item 7, of the 2023 Form 10-K, as filed with the SEC.

New accounting standards

For a discussion of new accounting standards please see Note 2, "Summary of significant accounting policies", in Part I, Item 1, of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

Consolidated and Segment Operating Results:

(in millions, except %)

42

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Revenues and gross margin

(dollars in millions)

Total revenues decreased $83.2 million, or 25%, to $254.7 million for the three months ended June 30, 2024. The decrease was due to decreases in MCM Products revenue of $100.9 million and Commercial Products revenue of $17.9 million, partially offset by an increase in Services revenue of $35.6 million.

Total segment gross margin decreased $188.7 million, or 134%, to $(48.0) million for the three months ended June 30, 2024. Total segment gross margin percentage decreased 61 percentage points to (19)% for the three months ended June 30, 2024. The decrease in total segment gross margin was due to decreases in Services gross margin of $120.3 million, MCM Products gross margin of $51.5 million and Commercial Products gross margin of $16.9 million. Total segment gross margin and total segment gross margin percentage exclude Contracts and grants revenues because the related costs are R&D expenses.

See "Segment Results" for an expanded discussion of revenues and gross margin.

Unallocated corporate operating expenses

R&D Expenses

R&D expenses increased $6.7 million, or 26%, to $32.7 million for the three months ended June 30, 2024. The increase was primarily due to write-offs related to program terminations during the period and an increase in R&D overhead and severance costs. The increase was partially offset by the sale of our development program for CHIKV VLP to Bavarian Nordic and reduction in related overhead costs driven by the headcount reductions and an overall decrease in spend for funded projects.

SG&A Expenses

SG&A expenses decreased $5.5 million, or 6%, to $85.9 million for the three months ended June 30, 2024. The decrease was primarily due to lower employee related expenses and compensation as a result of restructuring initiatives during 2023, coupled with a decrease in marketing expense. The decrease was partially offset by higher legal services fees for disputes and other corporate initiatives, as well as higher restructuring costs. SG&A expenses as a percentage of total revenue increased 7 percentage points to 34% for the three months ended June 30, 2024.

Amortization of Intangible Assets

Amortization of intangible assets increased $0.2 million, or 1%, to $16.3 million for the three months ended June 30, 2024. The increase was primarily due to an increase in amortization expense for the intangible asset related to EbangaTM, which was the result of the contingent consideration payment made to Ridgeback in the third quarter of 2023.

Impairment of Long-Lived Assets

Impairment of long-lived assets decreased $279.5 million, or 91%, to $27.2 million for the three months ended June 30, 2024. The decrease was due to a $27.2 million non-cash impairment charge in the second quarter of 2024 related to our Bayview and Rockville asset groups within the Bioservices reporting unit, compared to a $306.7 million non-cash impairment charge recorded in the second quarter of 2023 related to our Camden, Bayview and Rockville asset groups within the Bioservices reporting unit.

Interest expense

Interest expense decreased $5.0 million, or 17%, to $23.6 million for the three months ended June 30, 2024. The decrease was primarily due to lower interest costs related to our syndicated borrowings and debt service costs attributable to the negotiation of the Fourth Amendment to Amended and Restated Credit Agreement, Waiver and First Amendment to Amended and Restated Collateral Agreement (the “Credit Agreement Amendment") in the second quarter of 2023, partially offset by higher interest expense related to the termination of our interest rate swap hedging agreements.

Gain (loss) on sale of business and assets held for sale

Gain (loss) on sale of business and assets held for sale was a loss of $40.0 million for the three months ended June 30, 2024 compared to a gain of $74.9 million for the three months ended June 30, 2023. The loss on sale of business and assets held for sale is related to the held for sale treatment of the Company’s drug product facility in Baltimore-Camden, which the Company agreed to sell to Bora. The gain on sale of business and assets held for sale in the prior year is attributable to the sale of our travel health business to Bavarian Nordic during the second quarter of 2023.

Other, net

Other, net went from $3.6 million in expense to $2.7 million in expense for the three months ended June 30, 2024. The change of $0.9 million was primarily attributable to lower interest income, due to lower balances in our money market accounts.

Income tax provision (benefit)

Income tax provision increased $2.1 million, or 19%, to $13.3 million for the three months ended June 30, 2024. The increase was primarily due to an increase in taxable income in the Company’s profitable jurisdictions.

Revenues and gross margin

(dollars in millions)

Total revenues increased $52.9 million, or 11%, to $555.1 million for the six months ended June 30, 2024. The increase was due to increases in Services revenue of $39.7 million, MCM Products revenue of $17.3 million and Contracts and grants revenue of $1.5 million, partially offset by a decrease in Commercial Products revenue of $5.6 million.

Total segment gross margin decreased $45.8 million, or 31%, to $99.8 million for the six months ended June 30, 2024. Total segment gross margin percentage decreased 11 percentage points to 18% for the six months ended June 30, 2024. The decrease in total segment gross margin was due to decreases in Services gross margin of $94.8 million and Commercial Products gross margin of $10.9 million, partially offset by an increase in MCM Products gross margin of $59.9 million. Total segment gross margin and Total segment gross margin percentage exclude Contracts and grants revenues because the related costs are R&D expenses.

See "Segment Results" for an expanded discussion of revenues and gross margin.

Unallocated corporate operating expenses

R&D Expenses

R&D expenses decreased $18.9 million, or 28%, to $47.8 million for the six months ended June 30, 2024. The decrease was primarily due to the sale of our development program for CHIKV VLP to Bavarian Nordic in the second quarter of 2023 and reduction in related overhead costs driven by the headcount reductions. The decrease was also driven by a reduction in spend for certain funded projects, excluding EbangaTM. The decrease was partially offset by write-offs related to program terminations during the period, an increase in the allocation of R&D overhead costs, an increase in severance costs and an increase in funded R&D related to EbangaTM.

SG&A Expenses

SG&A expenses decreased $22.1 million, or 11%, to $170.6 million for the six months ended June 30, 2024. The decrease was primarily due to lower employee related expenses and compensation as a result of restructuring initiatives during 2023 and lower professional services fees related to corporate initiatives, including organizational transformation consulting fees. These decreases were partially offset by higher legal services fees for disputes and strategic corporate initiatives, as well as higher restructuring costs. SG&A expenses as a percentage of total revenue decreased 7 percentage points to 31% for the six months ended June 30, 2024.

Amortization of Intangible Assets

Amortization of intangible assets decreased $0.6 million, or 2%, to $32.5 million for the six months ended June 30, 2024. The decrease was primarily due to a decrease in amortization expense resulting from the intangibles sold with our travel health business to Bavarian Nordic, partially offset by an increase in amortization expense for the intangible asset related to EbangaTM, which was the result of the contingent consideration payment made to Ridgeback in the third quarter of 2023.

Impairment of Long-Lived Assets

Impairment of long-lived assets decreased $279.5 million, or 91%, to $27.2 million for the six months ended June 30, 2024. The decrease was due to a $27.2 million non-cash impairment charge in the second quarter of 2024 related to our Bayview and Rockville asset groups within the Bioservices reporting unit, compared to a $306.7 million non-cash impairment charge recorded in the second quarter of 2023 related to our Camden, Bayview and Rockville asset groups within the Bioservices reporting unit.

Interest expense

Interest expense increased $1.4 million, or 3%, to $47.9 million for the six months ended June 30, 2024. The increase was primarily due to interest expense related to the termination of our interest rate swap hedging agreements and one-time debt service costs attributable to the negotiation of the Forbearance Agreement and Sixth Amendment (the “Forbearance Agreement and Amendment”) and the Seventh Amendment to the Amended and Restated Credit Agreement, partially offset by lower interest costs related to our syndicated borrowings.

Gain (loss) on sale of business and assets held for sale

Gain (loss) on sale of business and assets held for sale was a loss of $40.0 million for the six months ended June 30, 2024 compared to a gain of $74.9 million for the six months ended June 30, 2023. The loss on sale of business and assets held for sale is related to the held for sale treatment of the Company’s drug product facility in Baltimore-Camden, which the Company agreed to sell to Bora. The gain on sale of business and assets held for sale in the prior year is attributable to the sale of our travel health business to Bavarian Nordic during the second quarter of 2023.

Other, net

Other, net went from $1.3 million in income to $6.1 million in expense for the six months ended June 30, 2024. The change of $7.4 million was primarily attributable to lower interest income, due to lower balances in our money market accounts and a write-off of an equity method investment.

Income tax provision (benefit)

Income tax provision decreased $20.4 million, or 55%, to $16.4 million for the six months ended June 30, 2024. The decrease was largely due to the jurisdictional mix of income and losses. The effective tax rate was (6)% for the six months ended June 30, 2024 as compared with (9)% in 2023. The effective annual tax rate increased largely due the jurisdictional mix of income and losses.

SEGMENT RESULTS

COMMERCIAL PRODUCTS SEGMENT

(dollars in millions)

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

NARCAN®

NARCAN® sales decreased $13.9 million, or 10%, to $120.0 million for the three months ended June 30, 2024. The decrease was primarily driven by an unfavorable price and volume mix in 2024 to U.S. public interest channels and lower Canadian market sales, partially offset by higher sales of over-the-counter (“OTC”) NARCAN® through wholesaler channels, which launched in the third quarter of 2023.

Other Commercial Products

Other Commercial Products sales decreased $4.0 million, or 100%, to no sales for the three months ended June 30, 2024. During the second quarter of 2023, the Company sold Vivotif® and Vaxchora® to Bavarian Nordic as part of our travel health business.

Cost of Product Sales and Gross Margin

Cost of Commercial Product sales decreased $1.0 million, or 2%, to $53.4 million for the three months ended June 30, 2024. The decrease was primarily due to no current period costs related to Vivotif® and Vaxchora®, which were sold to Bavarian Nordic as part of our travel health business, partially offset by higher NARCAN® expense as a result of increased unit volume.

Commercial Products gross margin decreased $16.9 million, or 20%, to $66.6 million for the three months ended June 30, 2024. Commercial Products gross margin percentage decreased 5 percentage points to 56% for the three months ended June 30, 2024. The decrease was largely due to an unfavorable price and volume mix in 2024 for NARCAN® products, partially offset by the sale of the products associated with our travel health business to Bavarian Nordic. Commercial Products segment adjusted gross margin is consistent with gross margin.

NARCAN®

NARCAN® sales increased $4.2 million, or 2%, to $238.5 million for the six months ended June 30, 2024. The increase was primarily driven by higher NARCAN® sales to U.S. public interest channels and higher sales of OTC NARCAN®, partially offset by lower Canadian retail sales.

Other Commercial Products

Other Commercial Products sales decreased $9.8 million, or 100%, to no sales for the six months ended June 30, 2024. During the second quarter of 2023, we sold Vivotif® and Vaxchora® to Bavarian Nordic as part of our travel health business.

Cost of Commercial Product Sales and Gross Margin

Cost of Commercial Product sales increased $5.3 million, or 5%, to $105.5 million for the six months ended June 30, 2024. The increase was primarily due to higher NARCAN® expense as a result of increased unit volume, partially offset by the sale of the products associated with our travel health business to Bavarian Nordic.

Commercial Products gross margin decreased $10.9 million, or 8%, to $133.0 million for the six months ended June 30, 2024. Commercial Products gross margin percentage decreased 3 percentage points to 56% for the six months ended June 30, 2024. The decrease was largely due to an unfavorable price and volume mix in 2024 for NARCAN® products, partially offset by the sale of the products associated with our travel health business to Bavarian Nordic. Commercial Products segment adjusted gross margin is consistent with gross margin.

MCM PRODUCTS SEGMENT

(dollars in millions)

Anthrax MCM

Anthrax MCM sales increased $17.6 million, or 83%, to $38.7 million for the three months ended June 30, 2024. The increase reflects the impact of timing of sales related to CYFENDUS® and BioThrax®, partially offset by a decrease in Anthrasil® sales, due to timing. Anthrax vaccine product sales are primarily made under annual purchase options exercised by the USG. Fluctuations in revenues result from the timing of the exercise of annual purchase options, the timing of USG purchases, the availability of governmental funding and the Company’s delivery of orders that follow.

Smallpox MCM

Smallpox MCM sales decreased $105.9 million, or 86%, to $17.9 million for the three months ended June 30, 2024. The decrease was primarily due to timing of USG purchases of ACAM2000® and VIGIV. Fluctuations in revenues from Smallpox MCM result from the timing of the exercise of annual purchase options in the existing procurement contracts, the timing of USG purchases, the availability of governmental funding and Company delivery of orders that follow.

Other Products

Other Products sales decreased $12.6 million, or 65%, to $6.8 million for the three months ended June 30, 2024. The decrease was due to lower BAT® and RSDL® product sales, due to timing of deliveries.

Cost of MCM Product Sales and Gross Margin

Cost of MCM Product sales decreased $49.4 million, or 61%, to $31.1 million for the three months ended June 30, 2024. The decrease was primarily due to lower sales of ACAM2000®, BAT®, RSDL® and Anthrasil®, lower allocations to Cost of MCM Product sales at our Bayview facility and a reduction in Trobigard® related costs, due to the Belgium FAMHP’s approval of the Company's request to revoke the Market Authorization for Trobigard® (the "Trobigard® revocation"). This decrease was partially offset by higher shutdown costs, Raxibacumab inventory reserves and overhead allocations at our Winnipeg facility.

MCM Product gross margin decreased $51.5 million, or 61%, to $32.3 million for the three months ended June 30, 2024. MCM Product gross margin percentage was consistent at 51% for the three months ended June 30, 2024. MCM Products segment adjusted gross margin excludes the impacts of non-cash items related to restructuring costs of $2.7 million and the changes in the fair value of contingent consideration of $0.1 million.

Anthrax MCM

Anthrax MCM sales increased $51.6 million, or 120%, to $94.6 million for the six months ended June 30, 2024. The increase was due to the impact of timing of sales related to CYFENDUS® and BioThrax®, partially offset by a decrease in Anthrasil® sales, due to timing. Anthrax vaccine product sales are primarily made under annual purchase options exercised by the USG. Fluctuations in revenues result from the timing of the exercise of annual purchase options, the timing of USG purchases, the availability of governmental funding and the Company’s delivery of orders that follow.

Smallpox MCM

Smallpox MCM sales decreased $62.9 million, or 48%, to $68.1 million for the six months ended June 30, 2024. The decrease was due to timing of USG purchases ACAM2000®, partially offset by ACAM2000® sales to non-U.S. customers and higher VIGIV sales, due to timing. Fluctuations in revenues result from the timing of the exercise of annual purchase options in existing procurement contracts, the timing of USG purchases, the availability of governmental funding and Company delivery of orders that follow.

Other Products

Other Products sales increased $28.6 million, or 104%, to $56.1 million for the six months ended June 30, 2024. The increase was primarily due to higher BAT® product sales to USG and non-U.S. customers.

Cost of MCM Product Sales and Gross Margin

Cost of MCM Product sales decreased $42.6 million, or 31%, to $93.3 million for the six months ended June 30, 2024. The decrease was primarily due to lower sales of ACAM2000®, lower allocations to Cost of MCM Product sales at our Bayview facility, lower shut down costs, a reduction in Trobigard® related costs, due to the Trobigard® revocation, partially offset by higher BAT® and BioThrax® sales.

MCM Product gross margin increased $59.9 million, or 91%, to $125.5 million for the six months ended June 30, 2024. MCM Product gross margin percentage increased 24 percentage points to 57% for the six months ended June 30, 2024. The increase was largely due to overall higher sales volumes with a favorable product mix weighted more heavily to higher margin products coupled with lower allocations to Cost of MCM Product sales at our Bayview facility and lower shutdown related costs, a reduction in Trobigard® related costs, due to the Trobigard® revocation, and realization of previously adjusted inventory values. MCM Products segment adjusted gross margin excludes the impacts of restructuring costs of $2.6 million and the changes in the fair value of contingent consideration of $0.6 million.

SERVICES SEGMENT

(dollars in millions)

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Services Revenues

Bioservices revenues increased $38.1 million, or 144%, to $64.5 million for the three months ended June 30, 2024. The increase was primarily attributable to the $50.0 million arbitration settlement (the “Settlement Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”), one of the Janssen Pharmaceutical Companies of Johnson & Johnson, related to the 2022 termination of the manufacturing services agreement with Janssen (the “Janssen Agreement”), coupled with an increase in production at the Company’s Camden facility. The increase was partially offset by lower production at the Company's Canton and Winnipeg facilities coupled with the prior year quarter recognition of revenue related to the resolution of a customer’s outstanding obligation.

Bioservices lease revenues decreased $2.5 million, or 93%, to $0.2 million for the three months ended June 30, 2024. The decrease was related to the completion of a lease for a Bioservices customer at our Canton facility.

Cost of Services and Gross Margin

Cost of services increased $155.9 million to $211.6 million for the three months ended June 30, 2024. The increase was primarily due to the Settlement Agreement with Janssen and resulting write-down of related assets to net realizable value, partially offset by a decrease in production at the Company's Canton facility and a decrease in overhead costs at our Maryland facilities.

Services gross margin decreased $120.3 million to $(146.9) million for the three months ended June 30, 2024. Services gross margin percentage decreased 136 percentage points to (227)% for the three months ended June 30, 2024. The decrease was primarily due to the Settlement Agreement with Janssen and resulting revenue and write-down of related assets mentioned above, coupled with lower production at the Company's Canton and Winnipeg facilities, partially offset by an increase in production at the Company’s Camden facility and a decrease in overhead costs at our Maryland facilities. Services segment adjusted gross margin excludes the impacts of the settlement charge, net of $110.2 million and restructuring costs of $0.4 million.

Services revenues

Bioservices revenues increased $43.8 million, or 112%, to $82.8 million for the six months ended June 30, 2024. The increase was primarily attributable to the $50 million arbitration settlement with Janssen related to the Settlement Agreement, coupled with increased production at our Camden facility. The increase was partially offset by reduced production activities at the Company's Canton and Winnipeg facilities.

Bioservices lease revenues decreased $4.1 million, or 91%, to $0.4 million for the six months ended June 30, 2024. The decrease was related to the completion of a lease for a Bioservices customer at our Canton facility.

Cost of Services and Gross Margin

Cost of Services increased $134.5 million, or 125%, to $241.9 million for the six months ended June 30, 2024. The increase was primarily due to the Settlement Agreement with Janssen and resulting write-down of related assets to net realizable value, coupled with higher production activities at the Company’s Camden facility, partially offset by higher allocations to Cost of MCM Product sales and lower costs associated with production activities at the Company’s Canton facility.

Services gross margin decreased $94.8 million, or 148%, to $(158.7) million for the six months ended June 30, 2024. Services gross margin percentage decreased 44 percentage points to (191)% for the six months ended June 30, 2024. The decrease was primarily due to the Settlement Agreement with Janssen and resulting revenue and write-down of related assets mentioned above, coupled with lower production at the Company's Canton and Winnipeg facilities, partially offset by an increase in production at the Company’s Camden facility and a decrease in overhead costs at our Maryland facilities. Services segment adjusted gross margin excludes the impacts of the settlement charge, net of $110.2 million and restructuring costs of $0.2 million.

OTHER REVENUE

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

Contracts and Grants

Contracts and grants revenue was consistent at $6.6 million for the three months ended June 30, 2024.

Contracts and Grants

Contracts and grants revenue increased $1.5 million, or 11%, to $14.6 million for the six months ended June 30, 2024. The increase was related to work under the EbangaTM program, partially offset by the wind-down of our other funded development initiatives.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Our financial condition is summarized as follows:

(dollars in millions)

Principal Sources of Capital Resources

We have historically financed our operating and capital expenditures through existing cash and cash equivalents, cash from operations, development contracts and grant funding and borrowings under our Revolving Credit Facility, our Term Loan Facility, and other lines of credit we have established from time to time. We also obtain financing from the sale of our common stock upon exercise of stock options and participation in an at-the-market equity offering program that we entered into on May 17, 2023 (the "ATM Program"), which we are currently ineligible to use. As of June 30, 2024, we had unrestricted cash and cash equivalents of $69.7 million and remaining capacity under our Revolving Credit Facility of $41.8 million.

Going Concern

The consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

As of June 30, 2024, there was $222.7 million outstanding on the Company’s senior revolving credit facility (“Revolving Credit Facility”) and $190.3 million on the senior term loan facility (“Term Loan Facility” and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) that mature in May 2025 and the Senior Credit Facilities are subject to the Forbearance Agreement and Amendment as described below, with respect to the Company’s noncompliance with certain operational and financial covenants. As of June 30, 2024, the Company had $69.7 million in cash and cash equivalents. As a result of these factors, the Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The evaluation considered the potential mitigating effects of management’s plans that have not been fully implemented. Management has evaluated the mitigating effects of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. Management's plans include (A) further amending the Senior Secured Credit Facilities, and (B) improving operating performance, reducing working capital and the potential of the sale of assets to pay down the Senior Secured Credit Facilities before they become due. As neither plan is in the complete control of management, neither is probable of occurring. In this regard, management may not be able to further amend the Senior Secured Credit Facilities or find a buyer for the assets it is willing to divest and may not be able to close on any asset sale for which management is able to reach an agreement with a buyer. As a result, the Company may be unable to meet its obligations as they become due. In addition, any asset sales that are completed could have potential negative impacts on the Company's future operating cash flows and profitability.

Debt Covenants

The Senior Secured Credit Facilities mature in May 2025, and provide for (1) revolving credit commitments, (2) a term loan, and (3) the issuance of commercial letters of credit. As of March 31, 2024, the Company was not in compliance with the minimum consolidated EBITDA covenant under the Senior Secured Credit Facilities and did not satisfy a covenant requiring it to raise not less than $75.0 million through issuance of equity and/or unsecured indebtedness by April 30, 2024. In addition, the Company was required to deliver audited annual financial statements without a “going concern” explanatory paragraph with respect to its financial statements for the year ended December 31, 2023, which was not achieved. However, on February 29, 2024, the requisite lenders agreed to enter into the Forbearance Agreement and Amendment with the Company, which included a limited waiver of certain events of default, including those that resulted from (a) any violation of the financial covenants set forth in the Senior Secured Credit Facilities with respect to the fiscal quarter ending December 31, 2023 and the fiscal quarter ending March 31, 2024 and (b) the going concern explanatory paragraph contained in the audited financial statements for the year ended December 31, 2023. This forbearance period (the “Forbearance Period”) expired on April 30, 2024.

On April 29, 2024, the requisite lenders agreed to enter into a Consent, Waiver and Seventh Amendment to the Amended and Restated Credit Agreement (the “Seventh Amendment”) with the Company. The Seventh Amendment, among other things: (a) reduces available commitments under the Revolving Credit Facility to $240.0 million through July 30, 2024, to $210.0 million from July 31, 2024 through September 29, 2024, to $205.0 million from September 30, 2024 through October 30, 2024, to $180.0 million from October 31, 2024 through November 29, 2024, and to $170.0 million from November 30, 2024 and thereafter (in each case subject to potential limited additional borrowings from a specified reserve with the consent of the lenders); (b) amends the interest rate benchmark in the definition of Applicable Margin from (i) 5.00% per annum to 7.00% per annum with respect to Base Rate Loans and (ii) 6.50% per annum to 8.50% per annum with respect to SOFR Loans, RFR Loans and Eurocurrency Rate Loans; and (c) requires the Company to raise equity or unsecured indebtedness of at least $85.0 million by July 31, 2024 (or such later date on or before September 29, 2024 as agreed to by the Administrative Agent), provided that such requirement will be reduced by the aggregate net cash proceeds received from certain dispositions that are applied to reduce amounts outstanding under the Revolving Credit Facility. The Company expects to apply the proceeds from the Camden Transaction and the RSDL® Transaction to reduce borrowings under the Revolving Credit Facility in order to satisfy the capital raise requirement, the deadline for which was recently extended to September 29, 2024. There is no guarantee the Company will be able to meet the capital raise requirement by this deadline.

In addition, pursuant to the Seventh Amendment, the Company is obligated to apply 100% of the aggregate net cash proceeds received from certain dispositions to the prepayment of amounts outstanding under the Revolving Credit Facility, except where such proceeds exceed $85,000,000, in which case such mandatory prepayment of the Revolving Credit Facility will no longer be required. Mandatory prepayment of the Term Loan Facility will not be required unless and until the aggregate net proceeds from such dispositions exceed $85,000,000, at which point 100% of such proceeds must be used toward repayment of amounts outstanding under the Term Loan Facility.

Under the Seventh Amendment, the Company is also subject to (a) a monthly minimum consolidated EBITDA covenant through May 15, 2025 and a monthly maximum capital expenditures covenant through March 31, 2025, (b) a minimum liquidity requirement, and (c) additional financial statement reporting and business plan forecast obligations. In connection with the entry into the Seventh Amendment, the Company paid an amendment fee of an aggregate amount equal to 0.5% of the total credit exposure as of the Seventh Amendment effective date and will be required to pay an additional amendment fee of 1.0% of total credit exposure at December 1, 2024 and each month thereafter. The Senior Secured Credit Facilities and the Company’s other debt facilities are described in more detail below in Note 10, “Debt.” As of the date of these financial statements, the Company is in compliance with the terms of the Senior Secured Credit Facilities.

If we default under the Senior Secured Credit Facilities, the lenders would have the right to accelerate the repayment of borrowings under the Senior Secured Credit Facilities, which would result in a cross-default of the Company’s obligations under the 3.875% Senior Unsecured Notes due 2028 (the “Senior Unsecured Notes”). If the Company were unable to obtain additional waivers or forbearance of such covenants or defaults, to successfully renegotiate the terms of the Senior Secured Credit Facilities, or to cure the potential covenant breach or default, and the lenders enforced one or more of their rights upon default and/or the default resulted in a cross-default under the Senior Unsecured Notes, the Company would be unable to meet its obligations under those agreements and would likely be forced into insolvency proceedings.

Based on the facts and circumstances described above, there can be no assurance that the Company would be able to comply with its debt covenants in the future. As a result, the Company continues to evaluate a number of factors related to its ability to continue as a going concern, including its ability to comply with the terms and operating and financial covenants required by the Senior Secured Credit Facilities, its ability to satisfy the capital raise requirement required by the Senior Secured Credit Facilities, other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, and disruptions or volatility caused by factors such as regional conflicts, inflation, and supply chain disruptions. The Company has engaged legal and financial advisors to assist with a comprehensive review of alternatives to enhance its capital structure, which may include taking steps to cure any potential defaults or seeking forbearance, waivers, further cost reductions, asset sales, restructurings or other alternatives to avoid an event of default.

At-the-Market Equity Offering Facility

The Company may, from time to time, sell up to $150.0 million aggregate gross sales price of shares of its common stock through Evercore Group L.L.C. and RBC Capital Markets, LLC, as sales agents, under the ATM Program that we entered into on May 17, 2023. There were no sales of the Company’s common stock under the ATM Program during the three months ended June 30, 2024. The Company’s Registration Statement on Form S-3 expires on August 9, 2024 and the Company is not eligible to file a new Registration Statement on Form S-3 until 2025 due to the delayed filing of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2023. The Company will not be eligible to sell any shares under the ATM Program until a new Registration Statement is filed and becomes effective. During the second quarter of 2023, we sold 1.1 million shares of our common stock under the ATM Program for gross proceeds of $9.1 million, representing an average price of $8.22 per share. As of June 30, 2024, $140.9 million aggregate gross sales price of shares of the Company’s common stock remains available for issuance under the ATM Program. The Company intends to use proceeds obtained from the sale of shares under the ATM Program for general corporate purposes.

Cash Flows

The following table provides information regarding our cash flows for the six months ended June 30, 2024 and 2023:

(in millions)

Operating Activities:

Net cash used in operating activities for the six months ended June 30, 2024 decreased $283.3 million as compared with the six months ended June 30, 2023. The decrease in net cash used in operating activities was primarily due to positive working capital changes of $287.3 million, driven primarily by changes in prepaid and other assets related to the write down to net realizable values of the assets classified within “Other long term assets” related to the Janssen Agreement and Settlement Agreement, and higher cash collections on accounts receivable.

Investing Activities:

Net cash used in investing activities for the six months ended June 30, 2024 increased $258.0 million as compared with the six months ended June 30, 2023. The increase in net cash used in investing activities was attributable to $270.2 million in proceeds from the sale of our travel health business in 2023, partially offset by a reduction in purchases of property, plant and equipment.

Financing Activities:

Net cash used in financing activities for the six months ended June 30, 2024 decreased $487.2 million as compared with the six months ended June 30, 2023. The decrease in net cash used in financing activities was primarily due to a reduction of principal payments of $286.3 million on our Revolving Credit Facility and $148.9 million on our Term Loan Facility, partially offset by an increase in proceeds of $65.0 million under our Revolving Credit Facility in the current period and proceeds of $8.2 million from the sale of stock under the ATM Program in the prior period.

Debt

As of June 30, 2024, the Company has $863.8 million of fixed and variable rate debt with varying maturities. See Note 10, “Debt” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Form 10-Q for further discussion.

Uncertainties and Trends Affecting Funding Requirements

We expect to continue to fund our short-term and long-term anticipated operating expenses, capital expenditures and debt service requirements from the following sources:

• existing cash and cash equivalents;
• net proceeds from the sale of our products and Bioservices;
• development contracts and grant funding;
• proceeds from the sale of our common stock through the ATM Program;
• proceeds from potential asset sales; and
• our Senior Secured Credit Facilities and any replacement or 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 (but not limited to):

• the level, timing and cost of product sales and Bioservices;
• the extent to which we acquire or invest in and integrate companies, businesses, products or technologies;
• the acquisition of new facilities and capital improvements to new or existing facilities;
• 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; and
• the costs of commercialization activities, including product marketing, sales and distribution.

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, collaboration and licensing arrangements, cost reductions, assets sales or a combination of these options.

If we raise funds by issuing equity securities, including through the ATM Program, our stockholders may experience dilution. Public or bank debt financing, if available, may involve agreements that include covenants, like those contained in our Senior Unsecured Notes and the Senior Secured Credit Facilities, which could limit or restrict our ability to take specific actions, such as incurring additional debt, making capital expenditures, pursuing acquisition opportunities, buying back shares 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.

Economic conditions, including market volatility and adverse impacts on financial markets, may make it more difficult to obtain financing on attractive terms, or at all. Any new debt funding, if available, may be on terms less favorable to us than our Senior Secured Credit Facilities or the Senior Unsecured Notes. If financing is unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.

Unused Credit Capacity

Available room under the Revolving Credit Facility as of June 30, 2024 and December 31, 2023 was:

(in millions)

57

For a discussion of additional risks arising from our operations, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, under the heading “Item 1A. Risk Factors” in addition to updates contained in “Item 1A-Risk Factors” of this Quarterly Report on Form 10-Q.

Market risk

We have interest rate and foreign currency market risk. Because of the short-term maturities of our cash and cash equivalents, we believe that an increase in market rates would likely not have a significant impact on the realized value of our investments.

Interest rate risk

We have debt with a mix of fixed and variable rates of interest and we are satisfied with the current fix-float mix of the Company's debt portfolio. Floating rate debt carries interest based generally on the eurocurrency rate, as defined in our Amended and Restated Credit Agreement, as amended from time to time, plus an applicable margin. Increases in interest rates could result in an increase in interest payments for our floating rate debt. See Note 10, "Debt" in the Notes to Consolidated Financial Statements in Part I, Item 1. of this Form 10-Q.

From time to time, we may use derivative instruments to manage our interest rate risk and market risk exposure.

We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our operating results assuming various changes in market interest rates. A hypothetical increase of one percentage point in the eurocurrency rate as of June 30, 2024 would increase our interest expense by approximately $4.1 million annually.

Foreign currency exchange rate risk

We have exposure to foreign currency exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Swiss franc and British pound. We manage our foreign currency exchange rate risk primarily by either entering into foreign currency hedging transactions or incurring operating expenses in the local currency in the countries in which we operate, to the extent practical. We currently do not hedge all of our foreign currency exchange exposure and the movement of foreign currency exchange rates could have an adverse or positive impact on our results of operations.

Evaluation of disclosure controls and procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2024, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2023 contains disclosure regarding the risks and uncertainties related to the Company’s business under the heading Item 1A. Risk Factors. There have been no material changes to the Company’s risk factors as presented in the Company’s 2023 Form 10-K, except as described below:

We have incurred significant indebtedness in connection with our acquisitions and servicing our debt requires a significant amount of cash. We may not have sufficient cash flow from our operations to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to further refinance, our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We may also seek additional debt financing to support our ongoing activities or to provide additional financial flexibility. Debt financing can have significant adverse consequences for our business, including:

• requiring us to dedicate a substantial portion of cash flows from operations to payment on our debt, which would reduce available funds for other corporate initiatives;
• increasing the amount of interest that we have to pay on debt with variable interest rates, if market rates of interest increase, to the extent we are unable to offset such risk through our hedging instruments;
• subjecting us, as under our Senior Secured Credit Facilities and the indenture governing the Senior Unsecured Notes, to restrictive covenants that reduce our ability to take certain corporate actions, acquire companies, products or technology, or obtain further debt financing;
• requiring us to pledge our assets as collateral, which could limit our ability to obtain additional debt financing;
• limiting our flexibility in planning for, or reacting to, general adverse economic and industry conditions; and
• placing us at a competitive disadvantage compared to our competitors that have less debt, better debt servicing options or stronger debt servicing capacity.

We may not have sufficient funds or be able to obtain additional financing to pay the amounts due under our indebtedness. In addition, failure to comply with the covenants under our Senior Secured Credit Facilities and other debt agreements, including the maintenance of a specified consolidated net leverage ratio, debt service coverage ratio, consolidated EBITDA level, minimum liquidity level, maximum capital expenditure level and required liquidity raise under our Senior Secured Credit Facilities, the additional terms and conditions imposed by the Seventh Amendment could result in an event of default under those agreements. An event of default could result in the acceleration of amounts due under a particular debt agreement and a cross-default and acceleration under other debt agreements, and we may not have sufficient funds to pay or be able to obtain additional financing to make any accelerated payments.

Our current indebtedness restricts and any additional debt financing may restrict the operation of our business and limit the cash available for investment in our business operations.

The Senior Secured Credit Facilities include the Term Loan Facility, which had an outstanding principal balance of $190.3 million as of June 30, 2024, and the ability to borrow up to $240.0 million under our Revolving Credit Facility, which excludes $30.0 million subject to consent of the lenders, under which we had $222.7 million of outstanding borrowings as of June 30, 2024. The available commitments under our Revolving Credit Facility decreased to $225.0 million on July 31, 2024, and will decrease to $200.0 million on October 31, 2024. In addition, on August 7, 2020, we completed an offering of $450.0 million aggregate principal amount of Senior Unsecured Notes. We may also seek additional debt financing to support our ongoing activities or to provide additional financial flexibility. Debt financing can have significant adverse consequences for our business, including:

• the level, timing and cost of product sales and bioservices;
• the extent to which we acquire or invest in and integrate companies, businesses, products or technologies;
• the acquisition of new facilities and capital improvements to new or existing facilities;
• 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 extent to which we repurchase common stock under any future share repurchase program; and
• the costs of commercialization activities, including product marketing, sales and distribution.

In addition, our Senior Secured Credit Facilities and our Senior Unsecured Notes each contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other indebtedness. For example, if we default under the Senior Secured Credit Facilities, the lenders would have the right to accelerate the repayment of borrowings under the Senior Secured Credit Facilities, which would result in a cross-default and acceleration of the Company’s obligations under the Senior Unsecured Notes. The occurrence of a default under any of these arrangements would permit the holders of the notes or the lenders under our Senior Secured Credit Facilities to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable, and there is no assurance that we would have sufficient funds to satisfy any such accelerated obligations.

We require significant additional funding to be able to continue as a going concern and we may be unable to raise capital when needed or on acceptable terms, which would harm our ability to grow our business, and our results of operations and financial condition. In addition, any capital we raise may result in dilution to our current stockholders.

As of June 30, 2024, we had unrestricted cash and cash equivalents of $69.7 million and remaining capacity under our Revolving Credit Facility of $41.8 million. Also as of June 30, 2024, there was $222.7 million outstanding on our Revolving Credit Facility and $190.3 million on our Term Loan Facility that mature in May 2025. The Senior Credit Facilities are subject to the Forbearance Agreement and Amendment with respect to the Company’s noncompliance with certain operational and financial covenants. As a result of these factors, the Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

On April 29, 2024, the requisite lenders agreed to enter into the Seventh Amendment with the Company. The Seventh Amendment, among other things: (a) reduces available commitments under the Revolving Credit Facility to $240.0 million through July 30, 2024, to $210.0 million from July 31, 2024 through September 29, 2024, to $205.0 million from September 30, 2024 through October 30, 2024, to $180.0 million from October 31, 2024 through November 29, 2024, and to $170.0 million from November 30, 2024 and thereafter (in each case subject to potential limited additional borrowings from a specified reserve with the consent of the lenders); (b) amends the interest rate benchmark in the definition of Applicable Margin from (i) 5.00% per annum to 7.00% per annum with respect to Base Rate Loans and (ii) 6.50% per annum to 8.50% per annum with respect to SOFR Loans, RFR Loans and Eurocurrency Rate Loans; and (c) in lieu of the $75.0 million capital raise referenced above, requires the Company to raise equity or unsecured indebtedness of at least $85.0 million by July 31, 2024 (or such later date on or before September 29, 2024 as agreed to by the Administrative Agent), provided that such requirement will be reduced by the aggregate net cash proceeds received from certain dispositions that are applied to reduce amounts outstanding under the Revolving Credit Facility. Under the Seventh Amendment, the Company is also subject to (a) a monthly minimum consolidated EBITDA covenant through May 15, 2025 and a monthly maximum capital expenditures covenant through March 31, 2025, (b) a minimum liquidity requirement and (c) additional financial statement reporting and business plan forecast obligations.

The Company may be unable to comply with debt covenants in future periods without additional sources of liquidity or future amendments to or forbearance arrangements under the Credit Agreement. We will need to obtain substantial additional funding in connection with our continuing operations, which cannot be assured.

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. Our Registration Statement on Form S-3 expires on August 9, 2024 and we are ineligible to file a new Registration Statement on Form S-3 until 2025. There can be no assurance that we will become eligible to file a shelf registration statement or to have such a shelf registration statement become effective after such period, which may inhibit our ability to access the capital markets to raise funds.

If we raise funds by issuing equity securities, including through our ATM Program, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants, like those contained in our Senior Secured Credit Facilities and the indenture governing the Senior Unsecured Notes, 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. Our Senior Secured Credit Facilities as well as the indenture governing the Senior Unsecured Notes restrict our ability to incur additional indebtedness.

Economic conditions may make it difficult to obtain financing on attractive terms, or at all. If financing is unavailable or lost, our business, operating results, financial condition and cash flows would be adversely affected, and we could be forced to delay, reduce the scope of or eliminate many of our planned activities.

We may not realize the expected benefits of the sale of our travel health business to Bavarian Nordic, the sale of RSDL® to SERB, and the pending sale of our drug product facility in Baltimore-Camden to Bora.

On May 15, 2023, pursuant to the Purchase and Sale Agreement, we completed the previously announced sale to Bavarian Nordic of our travel health business, including rights to Vaxchora® and Vivotif®, as well as our development-stage chikungunya vaccine candidate CHIKV VLP, our manufacturing site in Bern, Switzerland and certain of our development facilities in San Diego, California for a cash purchase price of $270.2 million, subject to certain customary adjustments. In addition, we may receive milestone payments of up to $80.0 million related to the development of CHIKV VLP and receipt of marketing approval and authorization in the U.S. and Europe, and sales-based milestone payments of up to $30.0 million based on aggregate net sales of Vaxchora® and Vivotif® in calendar year 2026.

On June 20, 2024, Cangene bioPharma LLC (“Cangene”), a subsidiary of the Company (together with Cangene, the “Seller”), entered into an Asset Purchase Agreement with Bora, under which the Seller will sell its drug product facility in Baltimore-Camden for a total value of approximately $30 million. Approximately 350 of the Seller’s employees are expected to join Bora as part of the transaction.

On July 31, 2024, the Company entered into a Stock and Asset Purchase Agreement with SERB Pharmaceuticals, through its wholly owned subsidiary BTG International Inc. (collectively, “SERB”), pursuant to which, among other things, the Company sold its worldwide rights to RSDL®, to SERB (the “RSDL® Transaction”) for a cash purchase price of $75 million, which was paid at closing and will be subject to customary adjustments based on inventory value at closing. In addition, SERB will pay the Company a $5 million payment upon achievement of a milestone relating to sourcing of a certain component of RSDL® decontamination lotion. The Transaction also included the sale to SERB of all the outstanding capital stock of Emergent Protective Products USA Inc. (“EPPU”), a wholly owned subsidiary of the Company, which leases a manufacturing facility in Hattiesburg, Mississippi, as well as certain assets related to RSDL®, including intellectual property rights, contract rights, inventory and marketing authorizations. In addition, the employees of EPPU are expected to join SERB in connection with the RSDL® Transaction.

There can be no assurance that we will be able to realize in full the expected benefits of these transactions. If we are unable to or do not realize the expected strategic, economic, or other benefits of these transactions, it could adversely affect our business and financial position.