SIGA Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited results; dollar amounts are in U.S. dollars. SIGA develops infectious-disease treatments, with ST-246 as its lead smallpox antiviral. Revenue reported in these periods was from research and development grants and contracts.
Key financial results
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| R&D grant and contract revenue | $2.49 million | $4.19 million |
| Operating expenses | $13.60 million | $21.76 million |
| Operating loss | $11.11 million | $17.57 million |
| Pre-tax loss | $9.07 million | $13.75 million |
| Income tax benefit | $32.91 million | $32.90 million |
| Net income | $23.84 million | $19.14 million |
| Basic / diluted EPS | $0.47 / $0.44 | $0.38 / $0.35 |
Net income primarily reflects a $32.9 million tax benefit from partially releasing the valuation allowance on deferred tax assets; SIGA remained loss-making before tax and at the operating level. No gross margin is presented in the filing.
Liquidity, cash flow and balance sheet
- At June 30, 2011, cash and cash equivalents were $5.0 million and short-term investments were $10.0 million, totaling $15.0 million in cash and short-term investments.
- Current assets were $17.24 million and current liabilities were $3.25 million, implying working capital of about $13.99 million and a current ratio of about 5.3x.
- Six-month operating cash use was $8.76 million, versus $4.73 million in 2010. Investing activities provided $4.91 million, mainly reflecting Treasury bill maturities net of purchases; financing provided $2.51 million, including warrant and option exercises, partly offset by share repurchases.
- Total liabilities were $9.02 million, including a $5.75 million warrant liability. The balance sheet reports no borrowings or other conventional debt.
- Deferred tax assets, net, were $32.65 million, compared with zero at year-end 2010. Shares outstanding were 51.31 million at June 30, 2011.
Changes versus the prior-year period
- Revenue fell 44% in Q2, from $4.45 million to $2.49 million, and 56% for the first half, from $9.52 million to $4.19 million. SIGA attributed the declines largely to lower ST-246 grant and contract revenue and the conclusion of certain development awards, including DTRA and Lassa-related work.
- Q2 SG&A rose to $9.35 million from $2.23 million; first-half SG&A rose to $13.60 million from $4.20 million. Higher employee compensation, including non-cash stock compensation, was the main driver; first-half legal and accounting fees also increased.
- R&D expense declined 22% in Q2 and 31% for the first half, primarily because of lower ST-246 development spending. First-half ST-246 spending was $2.5 million, versus $6.3 million in 2010.
- Six-month operating cash use increased to $8.76 million from $4.73 million, which SIGA attributed to litigation and regulatory advisory costs and increased payroll.
Contract, outlook, risks and unusual items
- BARDA contract: Signed May 13, 2011, with a five-year base award described as worth approximately $433 million and options. After a competitor protest, a June 24 modification removed the option for up to 12 million additional courses. Under the modified terms, SIGA is to sell 1.7 million courses and contribute 300,000 courses manufactured with prior federal funding. Options remain for pediatric and geriatric versions and smallpox prophylaxis. The filing does not provide a clear schedule for contract cash receipts or deliveries.
- Liquidity outlook: Management believed existing funds, BARDA-related cash flows and continuing government grants and contracts would support operations for at least 12 months. SIGA also said it would need additional funding for product development and gave no assurance that future financing or other cash sources would be available on acceptable terms. Operations could be scaled back or discontinued if funding or profitable operations are not achieved.
- Tax and non-cash items: The $32.9 million tax benefit arose from a partial valuation-allowance release based mainly on the BARDA contract and forecasts of future taxable income. Stock-based compensation was $8.26 million for the first half, versus $1.07 million in 2010. A $3.80 million first-half gain from a decline in warrant fair value also affected reported earnings; these warrants remain recorded as a liability.
- Contingency: PharmAthene seeks a license to ST-246 and damages; its expert presented alternative damage theories of up to $1 billion. Trial took place in January 2011 and closing arguments in April. SIGA disputed the claims and said it could not estimate a range of loss, if any.
- Key risks: Dependence on U.S. government contracts and discretionary options; contract protests, modification or cancellation; fixed-price performance and manufacturing execution; regulatory approval and product-development uncertainty; need for additional capital; and the PharmAthene litigation. SIGA said disclosure controls were effective as of June 30, 2011, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the modified BARDA contract proceeds as expected, including delivery, payment timing, and exercise of remaining options.
- The magnitude and timing of cash burn relative to the $15.0 million in cash and short-term investments, and the assumptions supporting management’s 12-month liquidity outlook.
- The outcome and potential financial impact of the PharmAthene case, which SIGA could not estimate.
- Whether forecast taxable income supports realization of deferred tax assets and whether expiring or ownership-limited NOLs can be used.
- How operating performance evolves excluding the one-time tax benefit and non-cash warrant remeasurement, particularly as grant revenue declines and commercialization depends heavily on government demand.