SIGA Technologies, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results; year-earlier comparisons reflect revised figures for warrant accounting.
Business context
SIGA is a pharmaceutical company focused on treatments for high-priority infectious threats. Its lead product, Arestvyr (tecovirimat, also known as ST-246), is an investigational antiviral and was not FDA-approved for any indication as of the filing. The principal commercial arrangement is a BARDA contract for delivery of Arestvyr to the U.S. Strategic National Stockpile and related development work.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue, primarily R&D contracts and grants | $2.29 million | $2.29 million | $4.59 million | $6.46 million |
| Operating loss | $5.56 million | $5.40 million | $17.00 million | $17.28 million |
| Net loss | $4.90 million | $3.06 million | $12.84 million | $11.44 million |
| Loss per share, basic and diluted | $0.09 | $0.06 | $0.25 | $0.22 |
- Revenue and margins: Revenue was R&D contract and grant revenue; the filing does not report product-sales revenue or a meaningful product gross margin. BARDA product-delivery cash receipts are deferred rather than recognized as revenue while replacement obligations remain.
- Cash flow: Operating activities provided $72.8 million in the first nine months of 2013, versus $25.0 million used in the comparable 2012 period. The 2013 inflow was principally driven by $101 million received from BARDA, partly offset by manufacturing and development spending. Capital expenditures were $0.6 million.
- Liquidity and debt: Cash and cash equivalents were $105.2 million at September 30, 2013, up from $32.0 million at year-end 2012. Total debt was approximately $4.45 million, including $1.96 million current and $2.48 million long-term. Deferred revenue was $162.1 million.
- Balance sheet: Total assets were $201.6 million and stockholders’ equity was $19.3 million at September 30, 2013. Inventory was $17.0 million and deferred contract costs were $21.9 million.
Material changes and notable items
- Nine-month revenue declined 29% year over year, mainly because of lower Arestvyr development-contract revenue and reduced use of dengue and Lassa fever grants. Nine-month R&D expense decreased 20% to $11.0 million; SG&A increased 7% to $9.5 million.
- SIGA received approximately $101 million from BARDA in Q3: about $96 million for cumulative delivery of approximately 725,000 Arestvyr courses and $5 million for R&D and supportive activities. The company recorded $162.1 million of deferred revenue associated with delivered courses and services.
- The modified BARDA contract is valued at approximately $463 million and provides for BARDA to purchase 1.7 million courses, with SIGA contributing 300,000 courses. The contract also includes development and supportive activities and options; the original option for up to 12 million additional courses was deleted.
- Interest expense was $1.04 million for the first nine months of 2013, versus none in 2012. Non-cash warrant fair-value losses were $0.73 million for the nine-month period.
- The company revised prior-period warrant accounting, classifying certain warrants as liabilities and recording non-cash fair-value changes. It reported that the related material weakness in internal control had been remediated by September 30, 2013.
Outlook, risks and contingencies
- Management said BARDA proceeds, existing capital, and continuing government contracts and grants should fund operations beyond the next 12 months. This depends partly on continued contract performance and funding.
- In Q4 2013, SIGA began an optimization program, including headcount reductions, targeting $6 million in annual operating-expense savings. Expected restructuring costs were $0.5–$0.8 million, including $0.275–$0.350 million in cash outlays.
- PharmAthene litigation: Delaware’s Supreme Court affirmed SIGA’s breach of its duty to negotiate in good faith, reversed prior promissory-estoppel and equitable-damages rulings, and remanded for consideration of possible expectation damages and fees. The outcome and potential amount are uncertain. SIGA recorded a $2.6 million contingency for fees, expenses, and interest; the filing does not provide a clear estimate of any potential expectation-damages award. The company had posted $1.3 million of collateral for a surety bond.
- Other key risks include Arestvyr’s investigational status and regulatory uncertainty; dependence on government contracts and grants; possible BARDA contract changes or delays; uncertainty in deferred-revenue recognition and deferred-tax-asset realization; and risks to product development, intellectual property, and financing.
Investor verification priorities
- Track Arestvyr delivery milestones, BARDA contract performance, and the timing and criteria for recognizing deferred revenue and related costs.
- Review developments in the PharmAthene remand, including any damages or fee award beyond the recorded contingency.
- Assess whether the planned cost savings are achieved and compare actual restructuring costs with the stated range.
- Monitor cash use, debt repayment, grant and contract funding, and whether management’s liquidity outlook remains supported.
- Confirm regulatory progress for Arestvyr and follow the company’s controls and financial-reporting disclosures after the warrant-accounting revision.