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SIGA > SEC Filings for SIGA > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for SIGA TECHNOLOGIES INC

Form 10-Q for SIGA TECHNOLOGIES INC


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 of therapeutic solutions for some of the most lethal disease-causing pathogens - 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 create robust, modern countermeasures to dreaded viral diseases.

Commercial Product - ST-246

The Company's lead product, ST-246, is an orally administered antiviral drug that targets orthopoxviruses. In May 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 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 subject to the judgment entered by the Delaware Court of Chancery in PharmAthene's action against SIGA and the outcome of the pending appeal and cross-appeal.

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 certain financial instruments, 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 as filed on March 1, 2012. Other than the policies that follow, during the three and nine months ended September 30, 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.


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Results of Operations

Three months ended September 30, 2012 and 2011

Revenues from Grants for the three months ended September 30, 2012 and 2011 were $2.3 million and $3.6 million, respectively. The $1.3 million decrease in revenue from federal grants was due to a $645,000 decrease in revenue from our federal Grants supporting the development of ST-246, a $478,000 decrease in revenue to support development of our dengue antiviral as we expended all available funds for the fiscal year, and a $301,000 decrease in revenue related to the conclusion in late 2011 of a grant supporting development of a broad-spectrum antiviral.

Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2012 and 2011 were $3.1 million and $4.0 million, respectively, reflecting a decrease of approximately $830,000 or 21%. The decrease in SG&A expenses mainly relates to a $2.1 million decrease in non-cash stock-based compensation related to certain awards granted in 2011, partially offset by an increase of $780,000 in legal fees pertaining to litigation and a $535,000 increase in employee compensation.

Research and development ("R&D") expenses were $4.2 million for the three months ended September 30, 2012, a decrease of approximately $1.0 million or 19% from the $5.2 million incurred during the three months ended September 30, 2011. The decrease was primarily due to a decrease in expenses related to the development of ST-246, a dengue fever antiviral and a broad-spectrum antiviral.

During the three months ended September 30, 2012 and 2011, we incurred $1.6 million and $2.1 million, respectively, for the development of ST-246. For the three months ended September 30, 2012, we spent $356,000 on internal human resources dedicated to the drug's development and $1.3 million mainly on pre-clinical and clinical testing as well as regulatory activities. For the three months ended September 30, 2011, we spent $331,000 on internal human resources and $1.8 million mainly on clinical testing.

During the three months ended September 30, 2012, we spent $425,000 for the development of drug candidates for dengue fever and Lassa fever of which $303,000 was spent mainly on human resources and $122,000 was spent mainly on chemistry and certain laboratory equipment. For the three months ended September 30, 2011, we spent $513,000 for dengue fever, Lassa fever and other drug candidates for certain arenavirus pathogens and hemorrhagic fevers, of which $255,000 was mainly for internal human resources and $258,000 was spent mainly on the optimization and chemistry of the lead antiviral compounds.

Patent preparation expenses for the three months ended September 30, 2012 and 2011 were $377,000 and $482,000, respectively. These expenses are incurred 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 September 30, 2012 and 2011, we recorded a loss of $15,000 and a gain of $4.7 million, respectively, reflecting changes in the fair market value of warrants to purchase common stock during the respective years. The warrants to purchase our common stock were recorded at fair market value and classified as liabilities.

Other income for the third quarters of 2012 and 2011 consists of interest income on our cash and cash equivalents.

For the three months ended September 30, 2012, the benefit from income taxes of $2.5 million mainly reflects the tax benefit from net losses and a decrease to the valuation allowance based on current estimates of pre-tax income. If the current estimates of future taxable income are reduced or not realized, for example, based on the judgment entered by the Delaware Court of Chancery in PharmAthene's action against SIGA described in Part II, Item 1, "Legal Proceedings" and the outcome of the pending appeal and cross-appeal, 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 for the period in which 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.

Nine months ended September 30, 2012 and 2011

Revenues from Grants for the nine months ended September 30, 2012 and 2011 were $6.5 million and $7.8 million, respectively. The decrease in revenue was due to the cumulative impact of: a $1.1 million decrease in revenue from our federal Grants supporting the development of ST-246, a $1.2 million revenue decline related to the conclusion in late 2011 of two federal


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grants supporting development of a broad-spectrum antiviral, and an offsetting increase of $1.0 million related to development of our Lassa fever and dengue antivirals.

SG&A for the nine months ended September 30, 2012 and 2011 were $8.8 million and $17.6 million, respectively, reflecting a decrease of approximately $8.7 million or 50%. The decrease in SG&A expenses mainly relates to a $9.4 million decrease in non-cash stock-based compensation related to certain awards granted in 2011, partially offset by an increase of $407,000 in the loss contingency pertaining to litigation and a $400,000 increase in employee compensation expense.

R&D expenses were $13.8 million for the nine months ended September 30, 2012, an increase of approximately $1.2 million or 10% from the $12.6 million incurred during the nine months ended September 30, 2011. The increase was primarily due to an increase in expenses related to the development of Lassa fever antivirals and employee compensation.

During the nine months ended September 30, 2012 and 2011, we incurred direct costs of $6.1 million and $4.6 million, respectively, for the development of ST-246. For the nine months ended September 30, 2012, we spent approximately $1.0 million on internal human resources dedicated to the drug's development and $5.1 million mainly on clinical testing. During the nine months ended September 30, 2011, we spent $1.2 million on internal human resources dedicated to the drug's development and $3.4 million mainly on pre-clinical and clinical testing as well as regulatory activities. From inception of the ST-246 development program to-date, we have invested a total of $51.4 million in the program, of which $9.3 million supported internal human resources and $42.1 million were used mainly for 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 the Department of Defense ("DoD").

During the nine months ended September 30, 2012, we spent approximately $1.7 million 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 $886,000 was spent mainly on human resources and $845,000 was spent on chemistry and certain laboratory equipment. During the nine months ended September 30, 2011, we spent $911,000 for the development of drug candidates for dengue fever and Lassa fever, of which $469,000 was spent mainly on human resources and $442,000 was spent mainly on the optimization and chemistry of the lead antiviral compounds. From inception of these programs to date, we have spent a total of $12.1 million related to the programs, of which $4.2 million, $7.6 million and $298,000 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.

Patent preparation expenses for the nine months ended September 30, 2012 and 2011 were $1.1 million and $1.2 million, respectively. These expenses are incurred 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 nine months ended September 30, 2012 and 2011, we recorded a loss of $127,000 and a gain of $8.5 million, respectively, reflecting changes in the fair market value of warrants to purchase common stock. The warrants to purchase our common stock were recorded at fair market value and classified as liabilities.

Other income for the first nine months of 2012 and 2011 consists of interest income on our cash and cash equivalents.

For the nine months ended September 30, 2012, the benefit from income taxes of $6.1 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 judgment entered by the Delaware Court of Chancery in PharmAthene's action against SIGA described in Part II, Item 1, "Legal Proceedings" and the outcome of the pending appeal and cross-appeal, 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 for the period in which 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.


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Liquidity and Capital Resources

On September 30, 2012, we had $22.7 million in cash and cash equivalents.

Operating activities
Net cash used in operations for the nine months ended September 30, 2012 and 2011 was $25.0 million and $11.7 million, respectively. The increase in net cash used in operating activities was primarily due to an increase in expenditures relating to the manufacturing of ST-246 under the BARDA Contract and working capital activity.

Investing activities
For the nine months ended September 30, 2012, net cash used in investing activities included capital expenditures of approximately $263,000 and the posting of $1.3 million of collateral for a surety bond related to the PharmAthene litigation. For the nine months ended September 30, 2011, cash provided by investing activities was approximately $14.9 million mainly related to the timing of purchases and maturities of U.S. Treasury bills.

Financing activities
Cash provided by financing activities was $10,000 and $2.8 million, during the nine months ended September 30, 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 (as described in 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. 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. As discussed in Part II, Item 1, "Legal Proceedings", the judgment entered by the Delaware Court of Chancery in the PharmAthene matter will have a materially adverse impact on the Company and our future results of operations unless we are successful in our appeal and cross-appeal.

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 expected receipt of a milestone payment for the product labeling plan, 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


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Contract is modified or canceled 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 cross-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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