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| SIGA > SEC Filings for SIGA > Form 10-Q on 7-May-2012 | All Recent SEC Filings |
7-May-2012
Quarterly Report
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes to those statements and other financial information appearing elsewhere in this Quarterly Report. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties.
Overview
We are a pharmaceutical company specializing in the development and commercialization of pharmaceutical solutions for some of the most lethal disease-causing pathogens in the world - smallpox, Ebola, dengue, Lassa fever and other dangerous viruses. Our business is to discover, develop, manufacture and successfully commercialize drugs to prevent and treat these high-priority threats. Our mission is to disarm dreaded viral diseases and create robust, modern biodefense countermeasures.
Commercial Product - ST-246
The Company's lead product, ST-246, is an orally administered antiviral drug that targets orthopoxviruses. On May 13, 2011, SIGA signed the BARDA Contract pursuant to which we agreed to deliver two million courses of ST-246 to the Strategic Stockpile. The five-year base contract award is worth approximately $435 million, and the BARDA Contract also includes various options to be exercised at BARDA's discretion. As originally issued, the BARDA Contract included an option for the purchase of up to 12 million additional courses of ST-246; however, following a protest by a competitor of the Company, BARDA issued a contract modification on June 24, 2011 pursuant to which it deleted the option to purchase the additional courses. Under the BARDA Contract as modified, BARDA has agreed to buy from SIGA 1.7 million courses of ST-246. Additionally, SIGA will contribute to BARDA 300,000 courses manufactured using federal funds provided by HHS under prior development contracts. The BARDA Contract as modified also contains options that will permit SIGA to continue its work on pediatric and geriatric versions of the drug as well as use ST-246 for smallpox prophylaxis. As discussed in Part II, Item 1, "Legal Proceedings", the amount of profits we are likely to retain pursuant to the BARDA Contract is dependent upon resolution of the pending dispute described in such section.
We believe ST-246 will be the first entirely new small-molecule drug delivered to the Strategic Stockpile under Project BioShield. FDA has designated ST-246 for "fast-track" status, creating a path for expedited FDA review and eventual regulatory approval.
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our condensed consolidated financial statements, which we discuss under the "Results of Operations" section of our Management's Discussion and Analysis. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the valuation of stock options and warrants, revenue recognition, impairment of assets and income taxes. Information regarding our critical accounting policies and estimates appear in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and filed on March 1, 2012. Other than the policies that follow, during the three months ended March 31, 2012, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying these policies.
Inventory
Inventories are stated at the lower of cost or estimated realizable value. The
Company capitalizes inventory costs associated with the Company's products when,
based on management's judgment, future commercialization is considered probable
and the future economic benefit is expected to be realized; otherwise, such
costs are expensed as research and development. Inventory is evaluated for
impairment periodically to identify inventory that may expire prior to expected
sale or has a cost basis in excess of its estimated realizable value. If certain
batches or units of product no longer meet quality specifications or become
obsolete due to expiration, the Company records a charge to cost of goods sold
to write down such unmarketable inventory to its estimated realizable value.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the "FASB") issued
updated accounting guidance which amended guidance on how to test goodwill for
impairment. This update permits an entity to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. The updated guidance is effective for annual impairment tests performed in fiscal years beginning after December 15, 2011. We adopted this guidance beginning in 2012 and expect it will not have a material impact on our condensed consolidated financial statements.
In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective during interim and annual period beginning after December 15, 2011. We adopted this guidance beginning in 2012; it does not have a material impact on our condensed consolidated financial statements.
In June 2011, the FASB issued accounting guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued updated accounting guidance which defers requirements regarding reclassifications of items out of comprehensive income on the face of the income statement while retaining other requirements of the initial guidance. These standards are effective for us beginning in the first quarter of fiscal year 2012. The adoption of this guidance does not have a material impact on our condensed consolidated financial statements.
Results of Operations
Three months ended March 31, 2012 and 2011
Revenues from Grants for the three months ended March 31, 2012 and 2011 were $1.5 million and $1.7 million, respectively. The decrease of $231,000, or 14%, is primarily attributable to a $191,000 decrease in revenue generated from our federal grants and contracts supporting the development of ST-246 and a $480,000 decrease related to the conclusion in late 2011 of two federal grants supporting development of a broad-spectrum antiviral. Revenue decreases from the aforementioned Grants was offset by revenue from a federal grant awarded in August 2011 to support development of a Lassa fever antiviral.
Selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2012 and 2011 were $2.2 million and $4.3 million, respectively, reflecting a decrease of approximately $2.0 million or 48%. The decrease in SG&A expenses mainly relates to a $880,000 decrease in non-cash stock-based compensation and a decrease of $1.1 million in legal fees. In the three months ended March 31, 2011, legal expenses were elevated due to trial costs pertaining to the litigation brought by PharmAthene, Inc.
Research and development ("R&D") expenses were $4.5 million for the three months ended March 31, 2012, an increase of approximately $900,000 or 25% from the $3.6 million incurred during the three months ended March 31, 2011. The increase was primarily due to an increase in expenses supporting development of ST-246, high-throughput screening, facilities and compensation.
During the three months ended March 31, 2012 and 2011, we incurred direct costs of $2.1 million and $1.0 million, respectively, on the development of ST-246. For the three months ended March 31, 2012, we spent approximately $298,000 on internal human resources dedicated to the drug's development and $1.8 million mainly on manufacturing and clinical testing. During the three months ended March 31, 2011, we spent $396,000 on internal human resources dedicated to the drug's development and $603,000 mainly on clinical testing. From inception of the ST-246 development program to-date, we invested a total of $47.0 million in the program, of which $8.6 million supported internal human resources and $38.7 million were used mainly for manufacturing, clinical and pre-clinical work. These resources reflect research and development expenses directly related to the program. They exclude additional expenditures such as patent costs, allocation of indirect expenses, and other services provided by BARDA, NIH and Department of Defense ("DoD").
During the three months ended March 31, 2012, we spent approximately $619,000 to support the development of drug candidates for dengue fever, Lassa fever and other drug candidates for certain arenavirus pathogens and hemorrhagic fevers, of which $262,000 was spent mainly on human resources and $357,000 was spent on chemistry and certain laboratory equipment. During the three months ended March 31, 2011, we spent $300,000 for the development of drug candidates for dengue fever and Lassa fever, of which $114,000 was spent mainly on human resources and $186,000 was spent mainly on the optimization and chemistry of the lead antiviral compounds. From inception of these programs to date, we spent a total of $10.9 million related to the programs, of which $3.6 million, $7.0 million and $250,000 were expended on internal human resources, pre-clinical work and equipment, respectively. These resources reflect research and development expenses directly related to the programs. They exclude additional expenditures such as patent costs, allocation of indirect expenses, and other services provided by BARDA,
NIH and DoD.
During the three months ended March 31, 2012 and 2011, we spent approximately $4,000 and $397,000, respectively, to support the development of a broad-spectrum antiviral drug candidate. During the three months ended March 31, 2011, we spent $397,000 to support the development of a broad-spectrum antiviral drug candidate, of which $83,000 was spent mainly on internal human resources and $314,000 mainly on the optimization and chemistry of lead antiviral compounds. From the inception of our program to develop a broad-spectrum antiviral drug to-date, we have spent a total of $2.5 million related to the program, of which $1.0 million was mainly expended on internal human resources and $1.5 million was expended to support medicinal chemistry and the optimization of lead antiviral compounds, respectively. These resources reflect expenses directly related to the program. They exclude additional expenditures such as patent costs, allocation of indirect expenses, and other services provided by BARDA, NIH and DoD.
Patent preparation expenses for the three months ended March 31, 2012 and 2011 were $336,000 and $342,000, respectively, mainly as a result of our continuing efforts to protect our drug candidates in expanded geographic territories.
Changes in the fair value of certain warrants to acquire common stock are recorded as gains or losses. For the three months ended March 31, 2012 and 2011, we recorded a loss of $437,000 and a gain of $1.8 million, respectively, reflecting changes in the fair market value of warrants and rights to purchase common stock during the respective years. The warrants and rights to purchase our common stock were recorded at fair market value and classified as liabilities.
Other income for the first quarters of 2012 and 2011 consists of interest income on our cash and cash equivalents.
For the three months ended March 31, 2012, the benefit from income taxes of $1.9 million mainly reflects the tax benefit from net losses. If the current estimates of future taxable income are reduced or not realized, for example, based on the ultimate outcome of the pending dispute described in Part II, Item 1, "Legal Proceedings" the Company's assessment regarding the realization of deferred tax assets could change. Future changes in the estimated amount of deferred taxes expected to be realized will be reflected in the Company's financial statements in the period the estimate is changed with a corresponding adjustment to operating results. Changes in estimates may occur often and can have a significant favorable or unfavorable impact on the Company's operating results from period to period.
Liquidity and Capital Resources
On March 31, 2012, we had $42.6 million in cash and cash equivalents.
Operating activities
Net cash used in operations for the three months ended March 31, 2012 and 2011
was $6.5 million and $4.3 million, respectively. The increase in net cash used
in operating activities was primarily due to (i) an increase in expenditures
relating to research and development and manufacturing under the BARDA Contract
and (ii) working capital activity.
Investing activities
Capital expenditures during the three months ended March 31, 2012 and 2011 were
approximately $183,000 and $44,000, respectively.
Financing activities
Cash provided by financing activities was $2,000 and $1.8 million, during the
three months ended March 31, 2012 and 2011, respectively, from exercises of
options and warrants to purchase common stock.
Other
We have incurred cumulative net losses and expect to incur additional expenses
to perform further research and development activities. We may need additional
funds to complete the development of our products in the future. We plan to fund
future development work and operations through sources of cash that may include:
collaborative agreements, strategic alliances, research grants, future equity
and debt financing, procurement contracts and cash and investments on hand.
There is no assurance that we would be successful in obtaining future financing
on commercially reasonable terms. We believe that our existing funds combined
with cash flows primarily from the BARDA Contract (refer to Note 2 to our
unaudited financial statements included elsewhere in this Quarterly Report on
Form 10-Q) and continuing government Grants will be sufficient to support our
operations for at least the next twelve months. As discussed in Part II, Item 1,
"Legal Proceedings", our ability to support our operations may be adversely
affected by the resolution of the pending dispute described in such section. Our
success is dependent upon generating commercial sales and our ability to fund
future business activities. If we are unable to achieve profitable operations
and/or raise adequate capital, future operations might need to be scaled back or
discontinued. The financial statements do not include any
adjustment relating to the recoverability of the carrying amount of recorded assets and liabilities that might result from the outcome of these uncertainties.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Safe Harbor Statement
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, as amended, including
statements relating to the safety and efficacy of our products, the progress of
our development programs and timelines for bringing products to market, the
enforceability of the BARDA Contract and the resolution of our ongoing
litigation with PharmAthene, Inc. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and SIGA cautions you that any
forward-looking information provided by or on behalf of SIGA is not a guarantee
of future performance. SIGA's actual results could differ materially from those
anticipated by such forward-looking statements due to a number of factors, some
of which are beyond SIGA's control, including, but not limited to, (i) the risk
that potential products that appear promising to SIGA or its collaborators
cannot be shown to be efficacious or safe in subsequent pre-clinical or clinical
trials, (ii) the risk that SIGA or its collaborators will not obtain appropriate
or necessary governmental approvals to market these or other potential products,
(iii) the risk that SIGA may not be able to obtain anticipated funding for its
development projects or other needed funding, (iv) the risk that SIGA may not be
able to secure funding from anticipated or current government contracts and
grants, (v) the risk that SIGA may not be able to secure or enforce sufficient
legal rights in its products, including patent protection, (vi) the risk that
any challenge to our patent and other property rights, if adversely determined,
could affect SIGA's business and, even if determined favorably, could be costly,
(vii) the risk that regulatory requirements applicable to SIGA's products may
result in the need for further or additional testing or documentation that will
delay or prevent seeking or obtaining needed approvals to market these products,
(viii) the risk that one or more protests could be filed and upheld in whole or
in part or other governmental action taken, in either case leading to a delay of
performance under the BARDA Contract or other governmental contracts, (ix) the
risk that the BARDA Contract is modified or cancelled at the request or
requirement of the U.S. government, (x) the risk that the adverse portions of
the post-trial decision by the Delaware Chancery Court in the litigation brought
by PharmAthene, Inc. will be upheld in further proceedings, including any
appeal, or that the favorable portions will be modified, (xi) the risk that the
volatile and competitive nature of the biotechnology industry may hamper SIGA's
efforts to develop or market its products, (xii) the risk that the changes in
domestic and foreign economic and market conditions may adversely affect SIGA's
ability to advance its research or its products, and (xiii) the effect of
federal, state, and foreign regulation, including drug regulation and
international trade regulation, on SIGA's businesses. More detailed information
about SIGA and risk factors that may affect the realization of forward-looking
statements, including the forward-looking statements in this presentation, is
set forth in SIGA's filings with the Securities and Exchange Commission,
including SIGA's Annual Report on Form 10-K, for the fiscal year ended December
31, 2011, and in other documents that SIGA has filed with the Commission. SIGA
urges investors and security holders to read those documents free of charge at
the Commission's Web site at http://www.sec.gov. Interested parties may also
obtain those documents free of charge from SIGA. Forward-looking statements are
current only as of the date on which such statements were made, and except for
our ongoing obligations under the United States of America federal securities
laws, we undertake no obligation to publicly update any forward-looking
statements whether as a result of new information, future events or otherwise.
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