SIGA Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. SIGA develops treatments for serious unmet medical needs and biothreats; its lead product, TPOXX, is an investigational antiviral being supplied to the U.S. Strategic National Stockpile under a BARDA contract. TPOXX was not FDA-approved at the filing date.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue, primarily R&D contract and grant revenue | $4.3 million | $1.9 million | $9.5 million | $3.2 million |
| Operating loss | $4.1 million | $9.3 million | $8.3 million | $16.3 million |
| Net loss | $7.5 million | $9.6 million | $16.1 million | $20.0 million |
| Loss per share, basic and diluted | $0.10 | $0.18 | $0.20 | $0.37 |
| Operating cash flow | Not presented by quarter | $2.5 million | $(34.7) million |
- Q2 R&D revenue rose 124%; first-half revenue rose 199%, primarily reflecting increased TPOXX development activity under federal contracts.
- Q2 R&D expense increased 72% to $5.1 million; first-half R&D expense increased 108% to $11.4 million, mainly from higher TPOXX vendor costs. First-half expense also included a net $536,000 inventory write-down.
- Q2 SG&A declined 18% to $3.1 million and first-half SG&A declined 7% to $5.9 million, largely due to lower legal and professional fees following resolution of the PharmAthene litigation; increased compensation partly offset the reductions.
- Interest expense was $3.7 million for Q2 and $7.3 million for the first half, versus $10,000 in each 2016 comparable period, reflecting the Term Loan. The 2016 periods also included PharmAthene judgment interest and Chapter 11 reorganization costs.
Balance sheet and liquidity
- At June 30, 2017, cash and cash equivalents were $30.9 million, up from $28.7 million at year-end 2016. Restricted cash was $22.4 million, down from $27.5 million.
- Current assets were $58.9 million and current liabilities were $13.6 million. Total liabilities were $459.4 million, including $376.5 million deferred revenue and $68.8 million Term Loan debt. Stockholders’ deficiency was $303.4 million.
- First-half operating cash flow was positive $2.5 million, compared with negative $34.7 million in 2016. The 2017 figure included $8.5 million of BARDA product-delivery receipts and working-capital changes; cash flow should be considered alongside ongoing production and operating costs.
- The Term Loan has an $80 million principal amount, an effective interest rate of 18.5% at June 30, and no scheduled principal payments before maturity. It is secured by substantially all company assets, including intellectual property. SIGA reported covenant compliance at quarter-end.
BARDA contract, outlook and risks
- The BARDA contract is valued at approximately $472.3 million and calls for 2.0 million TPOXX courses to be delivered; 300,000 courses are expected to be provided at no additional cost. As of June 30, SIGA had received $368.9 million under the Base Contract. Delivery receipts are recorded as deferred revenue, and related production costs are deferred; thus reported revenue does not reflect the full value of product delivered.
- A roughly $40.9 million holdback is conditional on FDA approval, cumulative delivery of 2.0 million courses, and the absence of a continuing replacement obligation. Based on a targeted NDA filing by year-end 2017, management expected eligibility for payment in the second half of 2018. The filing cautions that approval, delivery, timing, and payment are not assured.
- Management stated that if a substantial portion of the holdback or other substantial cash inflows is not received by the end of Q3 2018, additional funding would be required to continue operations and avoid a potential Term Loan default. Possible responses include financing, new contracts, asset sales, BARDA contract changes, expense reductions, or loan modifications; there is no assurance these would be available.
- Previously delivered courses may require no-cost supplementation because the provisional dosage increased, and delivered product is subject to replacement obligations for specified approval, quality, expiry, or recall conditions. These obligations could increase costs and delay recognition of deferred revenue.
- BARDA holds discretion over remaining contract options, including a potential $50 million payment tied to FDA approval of an 84-month expiry. SIGA’s base contract runs through September 2020. The TPOXX development funding agreements also include government termination or restructuring rights.
- Other risks include regulatory and clinical uncertainty, ability to meet contract terms and obtain funding, high and potentially variable LIBOR-linked loan costs, and stock-price-driven warrant liability. SIGA had no material off-balance-sheet arrangements and stated ordinary-course pending claims were not expected to have a material adverse effect.
Other material items and changes
- SIGA paid PharmAthene an aggregate $217 million in 2016 to satisfy the judgment; the litigation-related liability was fully paid.
- Effective in 2017, the company entered a new headquarters lease and terminated its former sublease after quarter-end. It estimated combined new-lease and rent-discrepancy payments of approximately $2.0 million through August 2020, versus an estimated $2.4 million under the former arrangement, and expected a Q3 2017 exit liability of $1.0–$1.2 million plus an approximately $0.1 million asset write-off.
- Management concluded disclosure controls were effective as of June 30, 2017; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Progress and timing of the TPOXX NDA, FDA review, approval, and any labeling or stability requirements.
- Course delivery totals, replacement obligations, associated production costs, and whether the conditions for the BARDA holdback are met.
- Cash runway and funding needs relative to the Q3 2018 liquidity warning, loan minimum-cash covenants, and restricted-cash availability.
- Term Loan interest exposure, maturity and repayment terms, and continued covenant compliance.
- Recognition and recoverability of deferred revenue and deferred costs, and the potential impact of contract options or changes.