SIGA Technologies, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. SIGA develops medicines for high-priority pathogens; its lead product, ST-246, is being manufactured under a U.S. government procurement contract. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue, primarily research grants | $2.3 million | $3.6 million | $6.5 million | $7.8 million |
| Operating expenses | $7.7 million | $9.6 million | $23.7 million | $31.4 million |
| Operating loss | $5.4 million | $6.0 million | $17.3 million | $23.6 million |
| Net income (loss) | $(2.9) million | $0.2 million | $(11.3) million | $19.4 million |
| Net cash used in operations | Not provided for quarter | Not provided for quarter | $25.0 million | $11.7 million |
- Gross margin is not clearly presented; reported revenue was from grants, and the filing says BARDA contract revenue cannot be recognized until specified conditions are met.
- At September 30, cash and cash equivalents were $22.7 million, down from $49.3 million at December 31, 2011. Current assets were $42.5 million versus current liabilities of $15.8 million.
- Total liabilities were $60.3 million, including $43.6 million of deferred revenue. The filing does not disclose interest-bearing debt.
- Working capital use included $17.4 million of ST-246 inventory and $2.1 million of deferred contract costs. Inventory and deferred costs are principally associated with BARDA contract manufacturing.
Changes and drivers
- Q3 grant revenue declined $1.3 million year over year, mainly from lower ST-246 and dengue grant revenue and the conclusion of a broad-spectrum antiviral grant.
- Nine-month SG&A fell 50% to $8.8 million, primarily because stock-based compensation declined $9.4 million; R&D rose 10% to $13.8 million, principally due to Lassa fever development and employee compensation.
- Net results were affected by non-cash warrant remeasurement: a $0.1 million loss in the first nine months of 2012 versus an $8.5 million gain in 2011. The prior-year nine-month result also included a $34.4 million tax benefit, compared with $6.1 million in 2012.
- Operating cash use increased from $11.7 million to $25.0 million, mainly because of ST-246 manufacturing spending and working-capital changes.
Outlook, risks and contingencies
- The five-year BARDA base contract is valued at approximately $435 million. As modified, it covers purchase of 1.7 million ST-246 courses and SIGA’s contribution of 300,000 federally funded courses; the original option for up to 12 million additional courses was deleted. Revenue and related costs remain deferred until contract conditions are satisfied.
- After quarter-end, in October 2012, FDA concurred with the product-labeling strategy. SIGA invoiced BARDA for a $12.3 million milestone payment and expected receipt in Q4; this was not cash reported at September 30.
- Management believed cash on hand, expected BARDA cash flows and government grants would fund operations for at least 12 months. It also cautioned that additional funding may be needed and is not assured; failure to obtain funding or achieve profitable operations could require scaling back or discontinuing operations.
- In the PharmAthene litigation, the Delaware Court of Chancery ordered an equitable payment stream equal to 50% of ST-246 net profits after SIGA achieves $40 million in net profits, for ten years following the first commercial sale, and awarded $2.4 million in fees and expenses. SIGA recorded a $2.5 million contingency for fees, expenses and interest and posted $1.3 million collateral for a surety bond. Appeals were pending, with oral argument scheduled for January 10, 2013. SIGA warned the judgment could materially adversely affect future results; the ultimate profit-sharing exposure is unresolved.
- Other risks include product safety and efficacy, regulatory approval, government contract changes or delays, reliance on grants and procurement funding, and patent protection. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Outcome and financial impact of the PharmAthene appeal and cross-appeal, including how any ST-246 profit-sharing obligation would be calculated.
- Whether BARDA delivery conditions are met, and timing and collection of the $12.3 million milestone and other contract payments.
- ST-246 production costs, inventory quality and recoverability, and the timing of revenue recognition.
- Cash burn, grant availability, and whether the company can sustain operations beyond management’s stated 12-month outlook.
- Assumptions supporting recognition of deferred tax assets, which management said could change with future taxable-income estimates or the litigation outcome.