SIGA Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results; dollar amounts are in U.S. dollars. SIGA is a commercial-stage pharmaceutical company focused on health security, with oral TPOXX as its lead product.
Financial results and position
| Metric | Q3 2018 | Nine months 2018 | Comparable 2017 |
|---|---|---|---|
| Total revenue | $471.1 million | $475.5 million | $1.4 million and $10.9 million, respectively |
| Operating income (loss) | $368.9 million | $360.6 million | $(5.7) million and $(14.0) million, respectively |
| Net income (loss) | $388.1 million | $369.4 million | $(9.8) million and $(25.9) million, respectively |
| Basic / diluted EPS | $4.85 / $4.71 | $4.64 / $4.53 | $(0.12) / $(0.12) and $(0.33) / $(0.33), respectively |
| Operating cash flow | Not separately reported | $72.5 million | $(10.2) million |
- Q3 product sales and supportive-services revenue was $468.9 million; research and development revenue was $2.2 million. Cost of sales and supportive services was $95.2 million, implying approximately 79% gross margin on reported total revenue. R&D expense was $3.7 million and SG&A was $3.1 million.
- Q3 pre-tax income was $362.6 million and the income-tax benefit was $25.4 million, including a $25.8 million discrete benefit primarily from determining that substantially all deferred tax assets were realizable.
- At September 30, cash and cash equivalents were $104.0 million, restricted cash was $4.1 million, and total current assets were $113.7 million versus current liabilities of $5.2 million. Working capital was approximately $108.5 million.
- Long-term debt had a $74.4 million carrying value and an $88.6 million estimated fair value. The loan’s effective interest rate was 19.21%; there were no scheduled principal payments before maturity, and the loan includes a $4.0 million payment due with principal repayment.
- Total assets were $143.7 million and stockholders’ equity was $52.5 million. Cash, cash equivalents and restricted cash totaled $108.1 million at period end.
Material changes and unusual items
- FDA approved oral TPOXX for smallpox on July 13, 2018. Approval resolved the prior uncertainty over whether delivered courses would need replacement, allowing SIGA to recognize previously deferred revenue. The filing attributes $375.6 million of Q3 revenue to consideration received in prior periods under the 2011 BARDA contract, and separately reports $91 million of Q3 revenue associated with a $41 million holdback and a $50 million payment for 84-month product expiry.
- The company recognized previously deferred contract costs in Q3; cost of sales and supportive services was $95.2 million. Thus, the exceptionally high reported revenue and earnings largely reflect recognition of earlier contract consideration, not solely current-period deliveries or cash receipts.
- SIGA adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased 2018 revenue by approximately $1.0 million for Q3 and $1.3 million for the nine-month period; prior-year comparatives were not recast.
- Nine-month operating cash flow was $72.5 million, compared with net income of $369.4 million. Cash generation included the $41 million holdback and $50 million option payment and reflects substantial non-cash and deferred-revenue accounting adjustments.
- The company recorded $5.3 million of warrant fair-value losses for the nine months. Approximately $6.0 million of warrants were exercised in Q3, resulting in approximately 760,000 net shares issued.
Contracts, outlook and risks
- The September 2018 BARDA contract contemplates up to approximately $628.7 million over the contract term: approximately $51.7 million in the five-year base period and up to $577.0 million in options. BARDA alone decides whether and when to exercise those options; the filing identifies approximately 92% of contract value as option-based.
- The contract covers oral TPOXX procurement, IV TPOXX manufacturing and development, post-marketing activities, and supportive procurement. Remaining performance obligations under the 2011 and 2018 BARDA contracts and the IV development contract totaled $60.2 million at September 30; expected recognition is over five years.
- On October 31, 2018, after quarter end, SIGA sold its Priority Review Voucher for $80 million. Proceeds were placed in a restricted account for specified loan principal and interest payments and certain transaction costs; they were not unrestricted period-end cash.
- Management said current forecasts supported going-concern status. No quantified earnings or revenue guidance is provided. Future results depend heavily on BARDA purchases and option exercises, government appropriations, contract performance and funding, and development and regulatory outcomes for IV TPOXX and any additional indications.
- Key risks include BARDA’s discretion to decline options or modify/cancel contracts; dependence on U.S. government stockpile demand; clinical, animal-study and regulatory uncertainty for IV TPOXX and foreign markets; reliance on third-party manufacturers and storage providers; and elevated debt costs and exposure to LIBOR increases. SIGA reported compliance with loan covenants at September 30.
- The filing says pending ordinary-course claims are not expected to have a material adverse effect, while noting litigation can still consume resources. It also discloses related-party legal services and leases with MacAndrews & Forbes, and a potential royalty arrangement with vTv tied to future development or sales.
Important facts for investors to verify
- How much of the $577.0 million in BARDA options is ultimately exercised, and the timing and economics of deliveries and development work.
- How much future operating cash flow comes from new deliveries and services versus recognition of previously deferred consideration; reconcile reported revenue with cash collections and contract costs.
- The terms and permitted use of the $80 million PRV-sale proceeds restricted after September 30, and the company’s resulting debt repayment plans and interest burden.
- Progress, funding and regulatory milestones for IV TPOXX, including manufacturing and third-party supplier or storage readiness.
- The sustainability of deferred-tax-asset realizability and the effect of contract estimates, warrant revaluation, loan covenants and interest-rate changes on future results.