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SIGA > SEC Filings for SIGA > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for SIGA TECHNOLOGIES INC

Form 10-Q for SIGA TECHNOLOGIES INC


6-Nov-2013

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 on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties.

Revision

As discussed in Note 13 to the Company's Consolidated Financial Statements included in this filing, on May 14, 2013, the Company amended and revised its consolidated balance sheet at December 31, 2012 and statements of operations and of cash flows for the three and nine months ended September 30, 2012. The following discussion and analysis of our financial condition and results of operations is based on and takes into account the revised amounts. For this reason, the data set forth in this section may not be comparable to discussion and data in our previously filed Quarterly Reports on Form 10-Q.

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 commercialize drugs to prevent and treat these high-priority threats. Our mission is to disarm dreaded viral diseases and create robust, modern biodefense countermeasures.

Lead Product - Arestvyr

Our lead product, Arestvyr (tecovirimat), also known as ST-246, is an orally administered antiviral drug that targets orthopoxviruses. On May 13, 2011, we signed the BARDA Contract pursuant to which we agreed to deliver two million courses of Arestvyr to the Strategic Stockpile. The base contract, worth approximately $463 million, includes $54 million related to development and supportive activities and contains various options to be exercised at BARDA's discretion. The period of performance for development and supportive activities runs until 2020. As originally issued, the BARDA Contract included an option for the purchase of up to 12 million additional courses of Arestvyr; 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 Arestvyr. Additionally, SIGA will contribute to BARDA 300,000 courses manufactured primarily 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 formulations of the drug as well as use Arestvyr for smallpox prophylaxis. As discussed in Part II, Item 1, "Legal Proceedings", the amount of profits we will retain pursuant to the BARDA Contract is subject to the outcome of the litigation in Delaware between SIGA and PharmAthene.

We believe Arestvyr is among the first new small-molecule drugs delivered to the Strategic Stockpile under Project BioShield. Arestvyr is an investigational product that is not currently approved by FDA as a treatment of smallpox or any other indication. FDA has designated Arestvyr for "fast-track" status, creating a path for expedited FDA review and eventual regulatory approval.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading "Results of Operations" following this 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-based awards including 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 of Analysis and Financial Condition and Results of Operation, included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed on March 6, 2013, as amended by the Form 10-K/A filed May 14, 2013. During the nine months ended September 30, 2013, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying these policies.


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Results of Operations

Revenues from research and development contracts and grants for the three months ended September 30, 2013 and 2012 were $2.3 million and $2.3 million, respectively. A decrease of $287,500 in revenues from our federal contracts supporting the development of Arestvyr was offset by a $290,000 increase in revenues related to higher usage of the dengue and Lassa fever federal grants.

Revenues from research and development contracts and grants for the nine months ended September 30, 2013 and 2012 were $4.6 million and $6.5 million, respectively. The decline in revenue is primarily due to a $1.4 million decrease in revenues from federal contracts supporting the development of Arestvyr, including the conclusion of a federal grant supporting the development of Arestvyr in conjunction with vaccine, and a $440,000 decrease in revenues related to lower usage of dengue and Lassa fever federal grants.

Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2013 and 2012 were $3.3 million and $3.1 million, respectively, reflecting an increase of approximately $127,000 or 4%. The net increase primarily relates to an increase of $184,000 in non-cash stock compensation expense and an increase of $140,000 in facility expenses, partially offset by a $223,000 decrease in professional fees.

SG&A for the nine months ended September 30, 2013 and 2012 were $9.5 million and $8.8 million, respectively, reflecting an increase of approximately $636,000 or 7%. The increase in SG&A expenses is mainly attributable to a $828,000 increase in employee compensation, which is related to an uptick in corporate headcount and an increase in non-cash stock compensation expense, partially offset by a $261,000 decrease in loss contingency expense and lower professional fees.

Research and development ("R&D") expenses were $4.3 million for the three months ended September 30, 2013, an increase of approximately $91,000 or 2% from the $4.2 million incurred during the three months ended September 30, 2012. The increase was primarily attributable to an increase in direct vendor-related expenses supporting the development of Arestvyr.

R&D expenses were $11.0 million for the nine months ended September 30, 2013, a decrease of approximately $2.8 million or 20% from the $13.8 million incurred during the nine months ended September 30, 2012. The decrease was primarily due to a decrease in direct vendor-related expenses supporting the development of Arestvyr.

During the nine months ended September 30, 2013 and 2012, we incurred direct costs of $3.5 million and $6.1 million, respectively, on the development of Arestvyr. For the nine months ended September 30, 2013, we spent approximately $484,000 on internal human resources dedicated to the drug's development and $3.0 million mainly on manufacturing and clinical testing. During the nine months ended September 30, 2012, we spent $1.0 million on internal human resources dedicated to the drug's development and $5.1 million mainly on clinical testing and manufacturing. From inception of the ST-246 development program to-date, we have invested a total of $56.1 million in the program, of which $10.1 million supported internal human resources and $46.0 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 the Department of Defense ("DoD").

During the nine months ended September 30, 2013, we spent approximately $1.5 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 $908,000 was spent mainly on human resources and $626,000 was spent on chemistry and certain laboratory equipment. During the nine months ended September 30, 2012, we spent $1.7 million for the development of drug candidates for dengue fever and Lassa fever, of which $886,000 was spent mainly on human resources and $845,000 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 $14.0 million related to the programs, of which $5.3 million, $8.4 million and $299,000 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.

The majority of our product programs are in the early stage of development. As a result, we cannot make reasonable estimates of the potential cost for most of our programs to be completed or the time it will take to complete the programs. There is a high risk of non-completion of any program because of the lead time to program completion, scientific issues that may arise and uncertainty of the costs. However, we could receive additional grants, contracts or technology licenses in the short-term. The potential cash and timing is not known and we cannot be certain if they will ever occur. If we are unable to obtain additional federal funding in the required amounts, the development timeline for these products would slow or possibly be suspended.


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Patent preparation expenses for the three and nine months ended September 30, 2013 were $329,000 and $1.1 million, respectively. These expenses reflect our ongoing efforts to protect our lead drug candidates in expanded geographic territories.

Changes in the fair value of certain warrants to acquire common stock are recorded as gains or losses. Such warrants to purchase our common stock are classified as liabilities and recorded at fair market value. For the three and nine months ended September 30, 2013, we recorded losses of $735,000 and $729,000, respectively, reflecting changes in the fair market value of warrants to purchase common stock during the respective periods. For the three and nine months ended September 30, 2012, we recorded losses of $133,000 (revised) and $228,000 (revised), respectively.

Interest expense for the three and nine months ended September 30, 2013 was $293,000 and $1.0 million, reflecting interest on outstanding long-term debt and certain vendor payable arrangements. There was no interest expense for the three and nine months ended September 30, 2012.

For the three and nine months ended September 30, 2013, we incurred net losses for tax purposes and consequently, recognized an income tax benefit of $1.7 million and $5.9 million, respectively. For the three and nine months ended September 30, 2012, the benefit from income taxes of $2.5 million and $6.1 million mainly reflects the tax benefit from net losses offset by an increase 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 outcome of the litigation in Delaware between SIGA and PharmAthene litigation as 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 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.

The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about our future profitability which are inherently uncertain. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. If the current estimates of future taxable income are reduced or not realized, for example, based on the PharmAthene litigation 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 September 30, 2013, we had $105.2 million in cash and cash equivalents compared with $32.0 million at December 31, 2012.

In the third quarter of 2013, the Company received approximately $101 million from BARDA of which approximately $96 million was for the aggregate delivery of approximately 725,000 courses of Arestvyr™ (tecovirimat), also known as ST-246®, to the Strategic Stockpile and approximately $5 million was for reimbursement of expenses related to research and development expenses and supportive activities. In the second quarter of 2013, we also received an $8.2 million milestone payment under the BARDA Contract for successfully completing the milestone requirements for the Final Drug Product Commercial Validation batches and report. Additionally, in the second quarter of 2013, we drew down $7.0 million from a revolving line of credit which was subsequently repaid in the third quarter of 2013. During the year ended December 31, 2012, we received a $12.3 million milestone payment upon receiving FDA concurrence with respect to the product labeling strategy under the BARDA Contract and received net proceeds of $4.9 million from the issuance of debt after deducting the discount and issue costs.

Borrowings under the revolving line of credit are due for repayment as we collect on eligible outstanding accounts receivable.

In the fourth quarter of 2013, the Company began an optimization program to sharpen focus and increase efficiencies within its operations. This program, which includes a reduction in employee headcount, is intended to align the Company's resources, staff and efforts with the most promising growth opportunities. With the implementation of the optimization program, the Company is targeting a $6 million reduction in annual operating expenses.


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Operating activities
Net cash provided by operations for the nine months ended September 30, 2013 was $72.8 million and net cash used in operations for the nine months ended September 30, 2012 was $25.0 million. The increase in cash provided by operating activities relates to the receipt of $101 million from BARDA offset by the expenditures for the manufacture of Arestvyr in addition to development and supportive activities for Arestvyr in performance of the BARDA Contract. On September 30, 2013 and 2012, our accounts receivable balance was $1.2 million and $3.7 million, respectively, reflecting the timing of collections from grants and contracts, including the BARDA Contract. Our accounts payable, accrued expenses and other current liabilities balance were $14.0 million and $15.8 million on September 30, 2013 and 2012, respectively. The amounts outstanding in both periods are mainly due to the timing of outstanding payables to contract manufacturing organizations for work-in-process inventory and to vendors for research and development services under the BARDA Contract.

Investing activities
Capital expenditures during the nine months ended September 30, 2013 and 2012 were approximately $568,000 and $1.6 million, respectively, reflecting purchases of fixed assets in the ordinary course of business and in 2013, expenditures for certain furniture and equipment for the new office space in New York.

Financing activities
Cash provided by financing activities was $953,000 and $10,000, during the nine months ended September 30, 2013 and 2012, respectively. In the nine months ended September 30, 2013, we received $1.6 million from exercises of options and warrants to purchase common stock which was offset by a $500,000 repayment of the term loan in accordance with the loan repayment schedule.

Other
We have incurred cumulative net losses and expect to incur additional expenses to perform further research and development activities. As of September 30, 2013, we have delivered an aggregate of approximately 725,000 courses of Arestvyr™ (tecovirimat), also known as ST-246®, to the Strategic Stockpile. As a result, we met a key requirement of the BARDA Contract (refer to Note 2) and received payment of approximately $96 million for the courses of product delivered to date. We believe that the funds received from the BARDA Contract (see Note 2) together with our existing capital resources and continuing government contracts and grants will be sufficient to support our operations beyond 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 outcome in the litigation with PharmAthene. 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.


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Safe Harbor Statement

Certain statements in this Quarterly Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including statements relating to our performance under the BARDA Contract, our effort to seek approval and licensing from the United States Food and Drug Administration, the progress of our development programs and timelines for bringing products to market and the resolution of our ongoing litigation with PharmAthene, Inc. 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 us or our collaborators cannot be shown to be efficacious or safe in subsequent animal, pre-clinical or clinical trials, (ii) the risk that we or our collaborators will not obtain appropriate or necessary governmental approvals to market these or other potential products, (iii) the risk that we may not be able to obtain anticipated funding for our development projects or other needed funding, (iv) the risk that we may not complete performance under the BARDA contract on schedule or in accordance with the contractual terms, (v) the risk that we may not be able to secure or enforce sufficient legal rights in our products, including intellectual property protection, (vi) the risk that any challenge to our patent and other property rights, if adversely determined, could affect our business and, even if determined favorably, could be costly, (vii) the risk that regulatory requirements applicable to our 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 our contract with BARDA, or other governmental contracts, (ix) the risk that our BARDA contract is modified or canceled at the request or requirement of the U.S. Government, (x) the risk that the volatile and competitive nature of the biotechnology industry may hamper our efforts to develop or market our products, (xi) the risk that changes in domestic and foreign economic and market conditions may affect our ability to advance our research or products adversely,
(xii) the effect of federal, state or foreign regulation, including drug regulation and international trade regulation, on our business, (xiii) the risk that our outstanding indebtedness may make it more difficult to obtain additional financing, (xiv) the risk that the U.S. Government's responses (including inaction) to the national and global economic situation, including possible courses of action related to the so-called "sequester" or related to any future government shutdown (partial or complete) may affect our business adversely, (xv) the risk that our internal controls will not be effective in detecting or preventing a misstatement in our financial statements, (xvi) the risk that some amounts received and recorded as deferred revenue ultimately may not be recognized as revenue, (xvii) the risk that the recent remand to the Delaware Chancery Court could result in a burdensome new award of damages,
(xviii) the risk that that remand may result in extended and expensive litigation, (xix) the risk that our litigation with PharmAthene may impede our efforts to continue to grow our company, and (xx) the risk that we may not be able to establish our intended positions or otherwise not prevail in any further court proceedings.

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, 2012, as amended by SIGA's Form 10-K/A as filed on May 14, 2013, 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. All forward-looking statements are current only as of the date on which such statements were made. We do not undertake any obligation to update publicly any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

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