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SIGA > SEC Filings for SIGA > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for SIGA TECHNOLOGIES INC

Form 10-K for SIGA TECHNOLOGIES INC


10-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties.

Overview

We are a company specializing in the development and commercialization of solutions for serious unmet medical needs and biothreats. Our lead product is Arestvyr™ (tecovirimat), also known as ST-246, an orally administered antiviral drug that targets orthopoxviruses. While Arestvyr is not yet licensed as safe or effective by the U.S. Food & Drug Administration, it is a novel small-molecule drug that is being delivered to the Strategic National Stockpile under Project Bioshield.

In the fourth quarter of 2013, the Company began an optimization program to increase efficiencies within its operations (the "Optimization Program"). 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 through a combination of headcount reduction, operation efficiencies and restricting internal efforts on early stage drug discovery programs.

Lead Product - Arestvyr

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 Item 3, "Legal Proceedings," the amount of profits we will retain pursuant to the BARDA Contract may be adversely affected by the outcome of PharmAthene's action against SIGA.

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 consolidated 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.

Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, collectability is reasonably assured, title and risk of loss have been transferred to the customer and there are no further contractual obligations.

Certain arrangements may provide for multiple deliverables, in which there may be a combination of: up-front licenses; research, development, regulatory or other services; and delivery of product. Multiple deliverable arrangements can be divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (i) the delivered item(s) have value to the customer on a standalone basis and (ii) in circumstances in which an arrangement includes a general right of return with respect to delivered items, then performance of the remaining deliverables must be considered probable and substantially in


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control of the Company. If multiple deliverables cannot be divided into separate units of accounting then the deliverables must be combined into a single unit of accounting.

Total consideration in a multiple deliverable arrangement is allocated to units of accounting on a relative fair value of selling price basis. Consideration allocated to a delivered item or unit of accounting is limited to the amount that is not contingent upon delivery of additional items.

The BARDA Contract is a multiple deliverable arrangement comprising delivery of courses and covered research and development activities. The BARDA Contract provides certain product replacement rights with respect to delivered courses. For this reason, recognition of revenue that might otherwise occur upon delivery of courses is expected to be deferred until our obligations related to potential replacement of delivered courses are satisfied. Accordingly we have deferred revenue for all amounts received to date under the BARDA Contract except for revenue recognized for amounts received with respect to BARDA's obligation to reimburse the cost of covered research and development services.

Subject to the above, payments for development activities are recognized as revenue is earned, over the period of effort. Funding for the acquisition of capital assets under cost-plus-fee contracts and grants is evaluated for appropriate recognition as a reduction to the cost of the acquired asset, a financing arrangement, or revenue, based on the specific terms of the related grant or contract.

Share-based Compensation
We account for our stock-based compensation using the fair value recognition provisions prescribed by the authoritative guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values.

Stock-based compensation expense for 2013, 2012 and 2011 was $2.3 million, $1.8 million and $12.5 million, respectively. The fair value of share-based awards is determined on the grant date; for options awards, fair value is generally estimated using the Black-Scholes model and for stock appreciation rights, fair value is estimated using a Monte Carlo method. The value of the portion of the award that is ultimately expected to vest is recorded as expense over the requisite periods in our consolidated statement of operations. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term over which stock awards will be outstanding before they are exercised, the expected volatility of our stock, and the number of stock-based awards that are expected to be forfeited. It is reasonably likely that future assumptions may change, in which case the fair value of future option awards may exceed or fall short of historical calculated fair values. In addition, for stock options with performance conditions, on a quarterly basis we estimate the most probable outcome of the performance conditions in order to determine the amount of compensation costs to be recorded over the remaining vesting period.

Fair Value of Financial Instruments
The measurement of fair value requires the use of techniques based on observable
and unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our market assumptions.
The inputs create the following fair value hierarchy:

• Level 1 - Quoted prices for identical instruments in active markets.



•         Level 2 - Quoted prices for similar instruments in active markets;
          quoted prices for identical or similar instruments in markets that are
          not active; and model-derived valuations where inputs are observable or
          where significant value drivers are observable.

• Level 3 - Instruments where significant value drivers are unobservable to third parties.

The carrying value of cash and cash equivalents, accounts receivable, short-term investments, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. Liability classified common stock warrants and outstanding debt are classified as Level 2 instruments and are recorded at their fair market value as of each reporting period. The determination of fair market value is subject to management's judgments.

For the years ended December 31, 2013 and 2012, we did not hold any Level 3 securities.

Goodwill
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the fair value of the assets acquired and liabilities assumed involves certain judgments and estimates.


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At December 31, 2013 and 2012, our goodwill was $898,000. We evaluate goodwill for impairment at least annually or as circumstances warrant. Goodwill is tested for recoverability between annual evaluations whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In 2013, we operated as one business and one reporting unit. Therefore, the goodwill impairment analysis was performed on the basis of the Company as a whole using our market capitalization as an estimate of our fair value. In the past, our market capitalization has been significantly in excess of our carrying value. It is possible that our future market capitalization may fall short of our current market capitalization, in which case a potential impairment could result.

Income Taxes
Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and related valuation allowance, if any, involves judgment. The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about our future profitability which are inherently uncertain. On an on-going basis, we evaluate whether a valuation allowance is needed to reduce our deferred income tax assets to an amount that is more likely than not to be realized. The evaluation process includes assessing historical and current results in addition to future expected results.

Our assessment that our deferred tax assets will be realized is based on estimates of future taxable income arising from the BARDA Contract. If the current estimates of future taxable income are reduced or not realized, for example, based on the outcome of PharmAthene's action against SIGA described in Item 3, "Legal Proceedings," our 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 our financial statements in the period the estimate is changed with a corresponding adjustment to operating results. Changes in estimates may occur and can have a significant favorable or unfavorable impact on our operating results from period to period.

Contingencies
We are currently involved in certain legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Accruals are based on our best estimates based on available information. On a periodic basis, as additional information becomes available, or based on specific events such as the outcome of litigation or settlement of claims, we may reassess the potential liability, if any, related to these matters and may revise these estimates, which could result in a material adjustment to our operating results.

Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued new guidance on the reporting of reclassifications from accumulated other comprehensive income to net income. The new guidance does not change the requirements for reporting net income or other comprehensive income in financial statements but requires disclosures regarding the reclassification of accumulated other comprehensive income by component into net income. The Company's adoption of this guidance on January 2, 2013 did not have a material effect on our financial statements.

In July 2013, the FASB issued new guidance on the financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not anticipate a material impact to the Company's financial position, results of operations or cash flows as a result of this change.

Results of Operations

Years ended December 31, 2013, 2012, and 2011

Revenues from research and development contracts and grants for the years ended December 31, 2013 and 2012, were $5.5 million and $9.0 million, respectively. The decrease of $3.5 million, or 39%, includes the impact of a $3.0 million decrease in revenues from our federal contracts supporting the development of Arestvyr and a $455,000 decrease in grant revenues related to Lassa fever.

Revenues from research and development contracts and grants for the years ended December 31, 2012 and 2011, were $9.0 million and $12.7 million, respectively. The decrease of $3.7 million, or 30%, is primarily attributable to the net impact of a $5.0 million decrease in contract and grant revenues related to Arestvyr, dengue and broad spectrum, offset by a $1.2 million increase in grant revenues related to Lassa fever. The largest portion of the net decrease in revenues comes from the restructuring of an NIH Arestvyr contract in connection with entry into the BARDA Contract in 2011, which impacted the timing of grant usage


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and the amount of funds available for usage. Additionally, $1.2 million of the revenue decrease is attributable to the conclusion in late 2011 of two federal grants supporting development of a broad spectrum antiviral.

Selling, general and administrative expenses ("SG&A") for the years ended December 31, 2013 and 2012 were $13.2 million and $11.4 million, respectively, reflecting an increase of approximately $1.8 million or 16%. The increase primarily relates to a $920,000 increase in employee compensation, which is related to an increase in corporate headcount and an increase in non-cash stock compensation expense, and an increase of $413,000 in facilities expenses.

SG&A for the years ended December 31, 2012 and 2011 were $11.4 million and $23.9 million, respectively, reflecting a decrease of approximately $12.5 million or 52%. The decrease in SG&A expenses primarily relates to a decrease in non-cash stock-based compensation of approximately $10.7 million and a $1.6 million non-recurring loss contingency expense recorded in 2011 in connection with the PharmAthene litigation.

Research and development ("R&D") expenses were $13.9 million for the year ended December 31, 2013, a decrease of approximately $4.4 million or 24% from the $18.2 million incurred during the year ended December 31, 2012. $2.4 million of the decrease relates to lower direct vendor-related expenses supporting the development of Arestvyr, dengue antivirals, broad-spectrum antivirals and high-throughput screening. An additional $1.2 million of the decrease is attributable to $775,000 reduction in employee compensation and a $468,000 inventory write-off in 2012.

R&D expenses were $18.2 million for the year ended December 31, 2012, approximately matching the $18.4 million incurred during the year ended December 31, 2011. Decreases in direct vendor-related expenses supporting the development of Arestvyr, dengue antivirals and broad-spectrum antivirals were offset by increases in expenses related to various operation initiatives, employee compensation and vendor-related costs supporting the development of Lassa fever antivirals.

Restructuring expenses for the year ended December 31, 2013 were $513,000. In the fourth quarter of 2013, the Company began the Optimization Program to increase efficiencies within its operations. The program, which included 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, of which a substantial portion of the reduction has been implemented at December 31, 2013. The following table summarizes the activity for the restructuring:

                   Accrued as of January                                                         Accrued as of
                          1, 2013             Charges        Payments      Non-Cash Items      December 31, 2013
Severance Charges  $                  -     $  325,000     $ (207,000 )   $             -     $         118,000
Asset Impairments                     -        188,000              -            (188,000 )                   -
                   $                  -     $  513,000     $ (207,000 )   $      (188,000 )   $         118,000

During the years ended December 31, 2013, 2012, and 2011, we incurred direct costs of $4.0 million, $7.4 million and $7.2 million, respectively, on the development of Arestvyr. During the year ended December 31, 2013, we spent $597,000 on internal human resources dedicated to the drug's development and $3.4 million mainly on manufacturing and clinical testing. During the year ended December 31, 2012, we spent $1.3 million on internal human resources dedicated to the drug's development and $6.0 million mainly on manufacturing and clinical testing. During the year ended December 31, 2011, we spent $1.4 million on internal human resources dedicated to the drug's development and $5.8 million mainly on packaging and manufacturing. From inception of the ST-246 development program to-date, we invested a total of $56.7 million in the program, of which $10.2 million supported internal human resources, and $46.4 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 NIH and DoD.

During the years ended December 31, 2013, 2012, and 2011, we incurred direct costs of $1.8 million, $2.2 million and $1.7 million, respectively, to support the development of drug candidates for dengue fever, Lassa fever virus and other drug candidates for certain arenavirus pathogens and hemorrhagic fevers. During the year ended December 31, 2013, we spent $1.0 million on internal human resources and $738,000 was spent mainly on the optimization and chemistry of lead antiviral compounds. During the year ended December 31, 2012, $1.2 million was spent on internal human resources and $1.0 million was spent mainly on the optimization and chemistry of lead antiviral compounds. During the year ended December 31, 2011, we spent $1.7 million for dengue fever, Lassa virus and other drug candidates for certain arenavirus pathogens and hemorrhagic fevers, of which $766,000 was mainly for internal human resources and $916,000 for medicinal chemistry and pre-clinical testing of our drug candidates. From inception of these programs to date, we spent a total of $14.2 million related to the programs, of which $5.5 million, $8.5 million and $299,000 were expended on internal human resources, pre-clinical work and equipment, respectively. These resources


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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 NIH and DoD.

Patent preparation expenses for the years ended December 31, 2013, 2012 and 2011 were $1.4 million, $1.9 million and $1.8 million, respectively. These expenses reflect our ongoing efforts to protect our lead drug candidates in varied geographic territories.

Changes in the fair value of liability classified warrants to acquire common stock are recorded as gains or losses. For the years ended December 31, 2013, 2012, and 2011, we recorded a loss of $74,000, a gain of $805,000 and a gain of $24.4 million, respectively. The warrants and rights to purchase our common stock were recorded at fair market value and classified as liabilities.

Interest expense for the year ended December 31, 2013 was $1.2 million consisting of interest on outstanding debt and certain vendor payable arrangements. Interest expense for the year ended December 31, 2012 was $173,000, reflecting certain vendor payable arrangements.

Other income for the years ended December 31, 2013, 2012, and 2011, was $1,500, $500 and $13,000, respectively. Other income mainly consists of interest income on our cash and cash equivalents.

For the year ended December 31, 2013, we incurred net losses of $24.8 million for tax purposes and a corresponding tax benefit of $7.6 million. The effective tax rate at December 31, 2013 was 30.7%. Our effective tax rate was impacted by recurring items such as state and local taxes, non-deductible expenses and changes in tax laws.

For the year ended December 31, 2012, we incurred net losses for tax purposes and consequently, recognized an income tax benefit of $7.8 million. For the year ended December 31, 2011, the benefit from income taxes of $36.0 million mainly reflected a partial reduction of our valuation allowance as a significant portion of our deferred tax assets became realizable on a more likely than not basis primarily as a result of the execution of the BARDA Contract and forecasts of pre-tax earnings. Prior to June 30, 2011, we provided a tax valuation allowance on our United States federal and state deferred tax assets based on our evaluation that such assets were not "more likely than not" to be realized.

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 outcome in the PharmAthene litigation described in Item 3, "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.

In 2012 and 2011, previously available NOLs of approximately $1.2 and $0.9 million, respectively, expired.The remaining NOLs expire in various years between 2018 and 2032, if not utilized.

Liquidity and Capital Resources

On December 31, 2013, we had $91.3 million in cash and cash equivalents compared with $32.0 million at December 31, 2012.

During the year ended December 31, 2013, the Company received approximately $109.7 million from BARDA under the BARDA Contract of which approximately $96.1 million was for the aggregate delivery of approximately 725,000 courses of Arestvyr™ (tecovirimat) to the Strategic Stockpile, approximately $5.4 million was for reimbursement of expenses related to research and development expenses and supportive activities, and $8.2 million was for a milestone payment for successfully completing the milestone requirements for the Final Drug Product Commercial Validation batches and report. In addition to the 725,000 courses of Arestvyr delivered to the Strategic Stockpile for which we received payment, 195,000 courses were delivered at no cost to BARDA in accordance with the BARDA Contract.

In the fourth quarter of 2013, the Company initiated the Optimization Program which included a reduction in employee headcount. With the implementation of the Optimization Program, the Company is targeting a $6 million reduction in annual operating expenses, of which a substantial portion of the reduction has been implemented as of December 31, 2013.


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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 net proceeds of $4.9 million from the issuance of debt after deducting the discount and issue costs. In December 2012, we entered into a loan agreement with a lender to provide the Company a term loan of $5.0 million with a fixed interest rate of 9.85% per annum and a revolving line of credit of $7.0 million with a variable interest rate. Borrowings under the revolving line of credit are based on eligible outstanding accounts receivable and will bear interest at a rate per annum equal to 5.25% plus the higher of: (a) 1.50%, and (b) three-month LIBOR divided by a defined factor. The term of the loan is three years. As of December 31, 2013, $4 million of the term loan was outstanding and no amounts were available to borrow against the revolving line of credit as there were no eligible accounts receivable.

Operating activities
Net cash provided by operations for the year ended December 31, 2013 was $58.4 million; net cash used in operations for the year ended December 31, 2012 was $20.2 million and net cash provided by operations during the year ended December 31, 2011 was $25.6 million. In 2013, the Company received approximately $109.7 million from BARDA, partially offset by $27.0 million of cash payments to CMOs for the manufacture, development and other supportive activities for Arestvyr.

In 2012, the Company used $17.6 million of cash for the manufacture of Arestvyr and $1.4 million of cash for development and supportive activities for Arestvyr. These cash uses relate to the performance of the BARDA contract. Partially offsetting the above-mentioned items was the receipt in 2012 of a $12.3 million milestone payment on the BARDA contract relating to FDA concurrence with respect to SIGA's labeling strategy for Arestvyr.

On December 31, 2013 and 2012, our accounts receivable balance was $1.0 million . . .

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