SIGA Technologies, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011. SIGA is a biopharmaceutical company developing treatments for infectious diseases; its main commercial program is ST-246, an antiviral for smallpox. Shares outstanding were 51,418,518 as of October 17, 2011.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| R&D grant and contract revenue | $3.6 million | $6.6 million | $7.8 million | $16.2 million |
| Operating expenses | $9.6 million | $9.0 million | $31.4 million | $24.6 million |
| Operating loss | $6.0 million | $2.4 million | $23.6 million | $8.5 million |
| Net income (loss) | $0.2 million | $(4.4) million | $19.4 million | $(14.6) million |
| Basic EPS | $0.00 | $(0.10) | $0.38 | $(0.33) |
Margins and earnings quality. The filing reports grant and contract revenue and operating expenses, but does not provide a clear gross-profit measure or gross margin. Net income in 2011 was substantially affected by non-operating and tax items: the nine-month results included an $8.5 million noncash gain from the lower fair value of warrant liabilities and a $34.4 million income-tax benefit, including an approximately $32.9 million valuation-allowance reduction. Q3 included a $4.7 million warrant fair-value gain and a $1.5 million tax benefit. These items materially distinguish reported earnings from operating performance.
Cash flow and liquidity. Cash and cash equivalents were $12.4 million at September 30, 2011, versus $6.3 million at December 31, 2010; short-term investments fell from $15.0 million to zero. Current assets were $14.5 million and current liabilities $3.7 million. Net cash used in operating activities was $11.7 million in the first nine months, compared with $7.4 million in the prior-year period. Investing activities provided $14.9 million, largely reflecting the timing of Treasury-bill purchases and maturities; financing activities provided $2.8 million, including warrant and option exercises, partly offset by share repurchases for tax withholding. No conventional borrowings are reported; total liabilities were $4.8 million, including $1.0 million of warrant liabilities.
Changes versus the prior comparable period
- Nine-month grant and contract revenue declined $8.4 million, mainly due to lower federal funding for ST-246 and Lassa fever work.
- Nine-month SG&A rose $12.0 million to $17.6 million, primarily from higher employee compensation, including $9.6 million more stock-based compensation, and increased legal fees. Total stock-based compensation was $10.8 million versus $1.3 million.
- Nine-month R&D expense fell $5.6 million to $12.6 million, principally from lower ST-246 spending, partly offset by increased personnel costs.
- Warrant fair-value changes moved from a $6.1 million loss in the first nine months of 2010 to an $8.5 million gain in 2011; this is a noncash, market-driven item.
- The company recognized a $34.2 million net deferred-tax asset at September 30, 2011, compared with none at year-end 2010, following a partial valuation-allowance release based mainly on projected BARDA-contract earnings.
Outlook, risks, contingencies and unusual items
- BARDA contract: A five-year contract calls for delivery of two million ST-246 courses to the Strategic National Stockpile. SIGA is to sell 1.7 million courses and provide services for a base price of approximately $435 million, and contribute 300,000 courses manufactured with prior federal funding. Additional consideration depends on specified product enhancements and options. BARDA deleted an original option for up to 12 million additional courses after a competitor protest.
- PharmAthene litigation: A September 22, 2011 post-trial ruling found SIGA liable for breach of its duty to negotiate in good faith and promissory estoppel. It awarded PharmAthene 50% of net profits from ST-246 sales after SIGA first secures $40 million in net profits, for ten years following the first commercial sale, plus one-third of reasonable attorney and expert fees. SIGA sought reargument. The amount of the potential obligation was not estimable in the filing; the company said the outcome could have a materially adverse impact unless the ruling is changed on reargument or appeal.
- Funding and going concern: Management said existing funds, expected BARDA cash flows and continuing government grants and contracts should support operations for at least 12 months. SIGA also stated it has cumulative losses, needs additional funds for development, and may need to scale back or discontinue operations if it cannot obtain funding or achieve profitable operations. The litigation could undermine its funding outlook and tax-asset assumptions.
- Government dependence and execution: SIGA expects foreseeable revenue to depend substantially on U.S. government contracts and grants. Risks include contract delay, modification or cancellation, funding decisions, protests, fixed-price cost overruns, manufacturing and regulatory challenges, and reliance on third parties. ST-246 had FDA Fast Track designation, which the filing cautions does not guarantee faster review or approval.
- Other commitments and controls: Future minimum operating-lease commitments totaled $3.7 million. Management reported disclosure controls effective as of September 30, 2011 and no material change in internal control over financial reporting during the quarter. The filing also discusses a previously identified, remediated material weakness related to warrant anti-dilution accounting and a prior restatement.
Key facts investors should verify
- Developments in the PharmAthene reargument and any appeal, including the final calculation and timing of any profit-sharing or fee obligation.
- BARDA contract enforceability, delivery milestones, payment timing, options, and any changes following protests or government action.
- Whether operating cash use can be funded by contract receipts and grants, given $12.4 million of cash and $11.7 million of operating cash outflow in the first nine months.
- Assumptions supporting recognition of deferred tax assets, including forecast taxable income and the usability and expiration of net operating loss carryforwards.
- Underlying operating performance excluding warrant remeasurement and the large tax benefit; also note the filing revised previously reported 2011 diluted EPS for earlier quarters to reflect warrant dilution correctly.