SIGA Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, with unaudited fourth-quarter results also presented. SIGA is a commercial-stage pharmaceutical company whose lead product, oral TPOXX (tecovirimat), is approved for smallpox treatment and primarily supplied to the U.S. Strategic National Stockpile.
Financial results and liquidity
- Revenue: $477.1 million in 2018, versus $12.3 million in 2017. Product sales and supportive services contributed $468.9 million; R&D contract revenue was $8.1 million, down from $12.3 million.
- Profit: Operating income was $355.1 million and net income was $421.8 million, compared with 2017 operating and net losses of $18.8 million and $36.2 million. Basic and diluted EPS were $5.28 and $5.18, respectively.
- Margins and earnings quality: Reported gross profit was approximately $373.6 million, or 78.3% of total revenue. Results were unusually elevated because FDA approval allowed recognition of $375.6 million of previously deferred revenue from the 2011 BARDA contract, along with 2018 contract payments. The filing also recognized $95.3 million of cost of sales and supportive services, including previously deferred costs. The $80.0 million PRV sale generated $78.9 million of other income, net of related expenses.
- Cash flow: Operating cash flow was $68.9 million, versus cash used of $18.4 million in 2017. Investing activities provided $78.2 million, primarily from PRV sale proceeds; financing activities used $3.8 million. Operating cash flow included BARDA payments and should not be equated with recurring earnings.
- Liquidity: At year-end, cash and cash equivalents were $100.7 million and restricted cash was $79.7 million, totaling $180.4 million. Restricted cash is designated for loan interest, fees and principal. Current assets were $121.3 million and current liabilities $11.3 million.
- Debt: Term-loan carrying value was $75.5 million; principal due at maturity is $80.0 million, with an additional $4.0 million payment. The loan matures in November 2020, bears interest at adjusted LIBOR plus 11.5%, and had a 19.4% effective rate at year-end. Substantially all assets, including intellectual property, secure the loan.
- Balance sheet: Total assets were $203.4 million and stockholders’ equity was $102.9 million, versus a $323.1 million stockholders’ deficit at year-end 2017. The change largely reflects 2018 earnings and recognition of deferred revenue.
Material changes versus prior periods
- Oral TPOXX received FDA approval on July 13, 2018. This removed the uncertainty around replacing previously delivered stockpile product and triggered recognition of substantial deferred revenue and related costs.
- SIGA sold its FDA Priority Review Voucher on October 31, 2018 for $80.0 million cash consideration.
- In September 2018, SIGA entered a new BARDA contract with potential payments of approximately $600.1 million as of February 28, 2019. Of this, approximately $51.7 million is in the five-year base period, $12.2 million relates to exercised options, and up to $536.2 million is tied to unexercised options.
- BARDA paid $41.0 million for a prior holdback and $50.0 million for an exercised 84-month product-expiry option under the 2011 contract. That contract expires in September 2020.
- Fourth-quarter 2018 unaudited results included revenue of $1.6 million and net income of $52.4 million; the annual filing attributes a material part of 2018 results to the PRV sale, recorded in the fourth quarter.
Outlook, risks and other notable matters
- Management stated that, based on forecast operating costs, it expects the company to continue as a going concern. The filing gives no specific earnings or revenue guidance.
- The $600.1 million 2018 BARDA contract is not guaranteed revenue: BARDA has sole discretion over whether and when to exercise most options, and the government may modify or terminate contracts. More than 80% of the contract’s potential value is option-based.
- Revenue is highly concentrated in U.S. government procurement. Oral TPOXX’s U.S. label limits sales to the Strategic Stockpile; international and other non-government markets are undeveloped and require additional regulatory clearances.
- IV TPOXX remains in development and is not FDA-approved. SIGA relies on third-party manufacturers and suppliers, and reported that it was still negotiating IV manufacturing and raw-material arrangements. Delays, cost overruns or failure to meet contract requirements could affect performance.
- Fixed-price contract obligations expose SIGA to cost-estimation and execution risk. The loan also imposes covenants, including minimum-cash requirements; SIGA reported compliance at December 31, 2018.
- Other risks include product replacement or recall obligations, patent challenges, warrant-liability valuation changes, and the realization of tax assets. The company reversed substantially all of its deferred-tax valuation allowance in 2018; this contributed to the $10.2 million tax benefit.
- The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Management also assessed disclosure controls as effective.
Important facts for investors to verify
- How much of the 2018 BARDA contract’s unexercised options are subsequently exercised, and the timing and economics of resulting deliveries.
- How much reported revenue and profit reflects prior-period deferred amounts and the one-time PRV sale, versus ongoing contract performance and cash receipts.
- Restricted-cash availability and the company’s ability to meet the November 2020 loan maturity, associated payment obligations and covenants.
- Progress toward IV TPOXX development, regulatory approval, and reliable manufacturing and supply arrangements.
- Whether the reversal of the deferred-tax valuation allowance and assumptions supporting future taxable income remain justified.