================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q (Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 2005 OR |_| Transition Report Pursuant To Section 13 Or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ___________ to _____________ Commission File No. 0-23047 ---------------------------- SIGA Technologies, Inc. (Exact name of registrant as specified in its charter) A Delaware Corporation IRS Employer No. 13-3864870 420 Lexington Avenue, Suite 408, New York, NY 10170 Telephone Number (212) 672-9100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No|X|. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No|X|. As of November 8, 2005 the registrant had 26,500,648 shares of common stock outstanding. ================================================================================
SIGA Technologies, Inc. Form 10-Q Table of Contents <TABLE> <CAPTION> Page No. <S> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements................................................................................2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............11 Item 3. Quantitative and Qualitative Disclosure About Market Risk..........................................17 Item 4. Controls and Procedures............................................................................17 PART II OTHER INFORMATION Item 1. Legal Proceedings..................................................................................18 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...................18 Item 3. Defaults Upon Senior Securities....................................................................18 Item 4. Submission of Matters to Vote of Security Holders..................................................18 Item 5. Other Information..................................................................................18 Item 6. Exhibits...........................................................................................18 SIGNATURES...................................................................................................19 </TABLE> 1
SIGA TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 30, 2005 December 31, (Unaudited) 2004 ------------ ------------ <S> <C> <C> ASSETS Current assets Cash and cash equivalents ......................................................... $ 193,856 $ 2,020,938 Accounts receivable ............................................................... 520,717 108,904 Prepaid expenses .................................................................. 177,134 278,547 ------------ ------------ Total current assets ............................................................. 891,707 2,408,389 Property, plant and equipment, net ................................................ 1,051,774 508,015 Goodwill .......................................................................... 898,334 898,334 Intangible assets, net ............................................................ 1,207,084 2,114,297 Other assets ...................................................................... 234,126 181,725 ------------ ------------ Total assets ..................................................................... $ 4,283,025 $ 6,110,760 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable .................................................................. $ 1,157,868 $ 1,148,277 Accrued expenses and other ........................................................ 327,051 403,072 Note payable ...................................................................... 107,520 -- ------------ ------------ Total current liabilities ........................................................ 1,592,439 1,551,349 Non-current portion of note payable .................................................. 133,586 -- Commitments and contingencies ........................................................ -- -- Stockholders' equity Series A convertible preferred stock ($.0001 par value, 10,000,000 shares authorized, 68,038 issued and outstanding at September 30, 2005 and December 31, 2004) .......................................................... 58,672 58,672 Common stock ($.0001 par value, 50,000,000 shares authorized, 24,500,648 issued and outstanding at September 30, 2005 and December 31, 2004) .......................................................... 2,450 2,450 Additional paid-in capital ........................................................ 48,691,350 48,679,650 Accumulated deficit ............................................................... (46,195,472) (44,181,361) ------------ ------------ Total stockholders' equity ....................................................... 2,557,000 4,559,411 ------------ ------------ Total liabilities and stockholders' equity ....................................... $ 4,283,025 $ 6,110,760 ============ ============ </TABLE> The accompanying notes are an integral part of these financial statements. 2
SIGA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues Research and development ......................... $ 2,910,065 $ 532,724 $ 6,232,625 $ 992,478 ----------- ------------ ------------ ------------ Operating expenses Selling, general and administrative .............. 415,275 919,165 2,071,223 3,036,559 Research and development ......................... 1,764,980 826,827 5,899,371 2,872,818 Patent preparation fees .......................... 8,031 83,580 273,921 230,320 Purchased in-process research & development ...... -- 568,329 -- 568,329 Loss on impairment of intangible assets .......... -- -- -- 610,063 ----------- ------------ ------------ ------------ Total operating expenses ....................... 2,188,286 2,397,901 8,244,515 7,318,089 ----------- ------------ ------------ ------------ Operating income (loss) ........................ 721,779 (1,865,177) (2,011,890) (6,325,611) Other income (loss), net ............................. 1,982 27,824 (2,221) 59,055 ----------- ------------ ------------ ------------ Net income (loss) .............................. $ 723,761 $ (1,837,353) $ (2,014,111) $ (6,266,556) =========== ============ ============ ============ Weighted average shares outstanding: Basic and diluted 24,500,648 23,443,881 24,500,648 23,462,307 =========== ============ ============ ============ Net income (loss) per share: basic and diluted $ 0.03 $ (0.08) $ (0.08) $ (0.27) =========== ============ ============ ============ </TABLE> The accompanying notes are an integral part of these financial statements. 3
SIGA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended September 30, 2005 2004 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net loss ................................................................................ $ (2,014,111) $ (6,266,556) Adjustments to reconcile net loss to net cash used in operating activities: Purchase in-process research & development ............................................ -- 568,329 Loss on impairment of intangible assets ............................................... -- 610,063 Loss on impairment of investments ..................................................... 15,000 -- Loss on write-off of prepaid expenses ................................................. 91,083 -- Depreciation .......................................................................... 111,294 269,455 Amortization of intangible assets ..................................................... 907,213 473,564 Stock based compensation .............................................................. -- 47,400 Issuance of stock options to non-employee directors ................................... 11,700 -- Changes in assets and liabilities: Accounts receivable .................................................................. (411,813) (2,719) Prepaid expenses ..................................................................... 10,330 (38,760) Other assets ......................................................................... (67,401) (27,977) Accounts payable and accrued expenses ................................................ (66,430) 331,776 ------------ ------------ Net cash used in operating activities ................................................ (1,413,135) (4,035,425) ------------ ------------ Cash flows from investing activities: Acquisition of intangible assets ....................................................... -- (1,033,022) Capital expenditures ................................................................... (655,053) (49,932) ------------ ------------ Net cash used in investing activities ................................................ (655,053) (1,082,954) ------------ ------------ Cash flows from financing activities: Proceeds from note payable .............................................................. 276,435 -- Repayment of note payable ............................................................... (35,329) -- Net proceeds from issuance of common stock .............................................. -- 6,784,607 Proceeds from exercise of options and warrants .......................................... -- 69,375 ------------ ------------ Net cash provided from financing activities ........................................... 241,106 6,853,982 ------------ ------------ Net increase (decrease) in cash and cash equivalents ..................................... (1,827,082) 1,735,603 Cash and cash equivalents at beginning of period ......................................... 2,020,938 1,440,724 ------------ ------------ Cash and cash equivalents at end of period ............................................... $ 193,856 $ 3,176,327 ============ ============ Non-cash supplemental information: Conversion of preferred stock to common stock ........................................... $ -- $ 13,994 Transfer of intangible assets for investment in Pecos Labs, Inc. ........................ $ -- $ 15,000 Shares issued for acquisition of assets from ViroPharma Incorporated .................... $ -- $ 1,480,000 Shares issued for services .............................................................. $ -- $ 47,400 </TABLE> The accompanying notes are an integral part of these financial statements. 4
Notes to the September 30, 2005 Financial Statements (Unaudited) 1. Basis of Presentation The financial statements of SIGA Technologies, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and the rules of the Securities and Exchange Commission (the "SEC") for quarterly reports on Forms 10-Q and do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2004, included in the 2004 Form 10-K. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results expected for the full year. The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred cumulative net losses and expects to incur additional losses to perform further research and development activities. The Company does not have commercial products and has limited capital resources. Management's plans with regard to these matters include continued development of its products as well as seeking additional research support funds and financial arrangements. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient financing on commercially reasonable terms. Management believes that its anticipated cash flows, including receipt of funding from government contracts and grants, are sufficient to support its operations through the third quarter of 2006 and that sufficient cash flows will be available to meet the Company's business objectives. In the event that sufficient funds are not available, the Company will need to postpone or discontinue some or all of its planned operations and projects. Continuance of the Company as a going concern is dependent upon, among other things, the success of the Company's research and development programs and the Company's ability to obtain adequate financing. The financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets and liabilities that might result from the outcome of these uncertainties. On November 2, 2005, the Company entered into a Securities Purchase Agreement for the issuance and sale of 2,000,000 shares of the Company's common stock at $1.00 per share and warrants to purchase 1,000,000 shares of the Company's common stock. The warrants are exercisable at 110% of the closing price on the closing date of the transaction at any time and from time to time through and including the seventh anniversary of the closing date. The investors are also entitled to purchase additional shares of the Company's common stock for a gross amount of $2,000,000 at an initial price of $1.10 per share for a period of 90 trading days following the effectiveness of a registration statement. With respect to the transaction, the Company entered into an Exclusive Finder's Agreement. Finders fee under the agreement include cash compensation of 7% of the gross amount financed and a warrant to acquire 60,000 shares of the Company's common stock at terms equal to the investors' warrants. The Company received gross proceeds of $2,000,000 from the transaction on November 3, 2005. 2. Significant Accounting Policies Use of Estimates The financial statements and related disclosures are prepared in conformity with accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. These estimates include the realization of deferred tax assets, useful lives and impairment of tangible and intangible assets, and the value of options and warrants granted by the Company. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. Actual results could differ from these estimates. Cash and cash equivalents Cash and cash equivalents consist of short term, highly liquid investments, with original maturities of less than three months when purchased and are stated at cost. Interest income is accrued as earned. 5
Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the various asset classes. Estimated lives are 5 years for laboratory equipment; 3 years for computer equipment; 7 years for furniture and fixtures; and the shorter of the estimated lives or the life of the lease for leasehold improvements. Maintenance, repairs and minor replacements are charged to expense as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the Balance Sheet and any gain or loss is reflected in the Statement of Operations. Revenue Recognition The Company recognizes revenue from contract research and development and research payments in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is reasonably assured, contractual obligations have been satisfied and title and risk of loss have been transferred to the customer. The Company recognizes revenue from non-refundable up-front payments, not tied to achieving a specific performance milestone, over the period which the Company is obligated to perform services or based on the percentage of costs incurred to date, estimated costs to complete and total expected contract revenue. Payments for development activities are recognized as revenue as earned, over the period of effort. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, providing there is no future service obligation associated with that milestone. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. For the three month periods ended September 30, 2005 and 2004, revenues from National Institutes of Health ("NIH") Small Business Innovation Research ("SBIR") grants approximated 92% and 83%, respectively, of total revenues recognized by the Company. For the nine month periods ended September 30, 2005 and 2004, revenues from NIH SBIR grants approximated 93% and 70%, respectively, of total revenues recognized by the Company. Accounts Receivable Accounts receivable are recorded net of provisions for doubtful accounts. An allowance for doubtful accounts is based on specific analysis of the receivables. At September 30, 2005 and December 31, 2004 the Company had no allowance for doubtful accounts. Research and development Research and development expenses include costs directly attributable to the conduct of research and development programs, including employee related costs, materials, supplies, depreciation on and maintenance of research equipment, the cost of services provided by outside contractors, and facility costs, such as rent, utilities, and general support services. All costs associated with research and development are expensed as incurred. Costs related to the acquisition of technology rights, for which development work is still in process, and that have no alternative future uses, are expensed as incurred. Goodwill Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company performs an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Goodwill impairment is determined using a two-step approach in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. Identified Intangible Assets Acquisition-related intangible assets include acquired technology, customer contracts, grants and covenants not to compete, and are amortized on a straight line basis over periods ranging from 3.5 to 4 years. In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company performs a review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the 6
related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Changes in events or circumstances that may affect long-lived assets include, but are not limited to, cancellations or terminations of research contracts or pending government grants. Income taxes Income taxes are accounted for under the asset and liability method prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized. Net income (loss) per common share The Company computes, presents and discloses earnings per share in accordance with SFAS 128 "Earnings Per Share" ("EPS") which specifies the computation, presentation and disclosure requirements for earnings per share of entities with publicly held common stock or potential common stock. The statement defines two earnings per share calculations, basic and diluted. The objective of basic EPS is to measure the performance of an entity over the reporting period by dividing income (loss) by the weighted average shares outstanding. The objective of diluted EPS is consistent with that of basic EPS, that is to measure the performance of an entity over the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period. The calculation of diluted EPS is similar to basic EPS except the denominator is increased for the conversion of potential common shares. The Company incurred losses for the nine months ended September 30, 2005 and September 30, 2004 and as a result, certain equity instruments are excluded from the calculation of diluted loss per share. At September 30, 2005 and 2004, 68,038 shares of the Company's Series A convertible preferred stock have been excluded from the computation of diluted loss per share as they are anti-dilutive. At September 30, 2005 and 2004, outstanding options to purchase 9,538,228 and 8,500,561 shares, respectively, of the Company's common stock with exercise prices ranging from $1.00 to $5.50 have been excluded from the computation of diluted loss per share as they are anti-dilutive. At September 30, 2005 and 2004, outstanding warrants to purchase 8,419,594 and 8,478,310 shares, respectively, of the Company's common stock, with exercise prices ranging from $1.45 to $3.60 have been excluded from the computation of diluted loss per share as they are anti-dilutive. Fair value of financial instruments The carrying value of cash and cash equivalents, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. Concentration of credit risk The Company has cash in bank accounts that exceed the Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses on its cash accounts. No allowance has been provided for potential credit losses because management believes that any such losses would be minimal. Stock compensation The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock-based compensation program. Accordingly, employees' and directors' related compensation expense is recognized only to the extent of the intrinsic value of the compensatory options or shares granted. 7
The following table illustrates the effect on net income (loss) available to common stockholders and earnings (loss) per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS 148, "Accounting for Stock-Based Compensation - Transaction and Disclosure, an amendment to FASB Statement No. 123." <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> Net profit (loss), as reported .................................... $ 723,761 $ (1,837,353) $(2,014,111) $(6,266,556) ============ ============ =========== =========== Add: Stock-based employee compensation expense recorded under APB No. 25 ......................................... -- -- (11,700) -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ............................ (172,201) (816,882) (624,243) (1,084,685) ------------ ------------ ----------- ----------- Pro forma net profit (loss) applicable to common shareholders ..... $ 551,560 $ (2,654,235) $(2,650,054) $(7,351,241) ============ ============ =========== =========== Net profit (loss) per share: Basic and diluted -as reported .................................... $ 0.03 $ (0.08) $ (0.08) $ (0.27) ============ ============ =========== =========== Basic and diluted -pro forma ...................................... $ 0.02 $ (0.11) $ (0.11) $ (0.31) ============ ============ =========== =========== </TABLE> On June 2, 2005, the Company granted each of its non-employee directors their annual award of 10,000 options under the Company's Amended and Restated 1996 Incentive and Non-Qualified Option Plan. The options have an exercise price of $1.22 per share, the price of the Company's common shares as of the Company's 2005 annual meeting. The difference between the exercise price and the fair market value of the Company's common shares on the date of the grant resulted in non-cash compensation expense of $11,700. There were no other options grants during the nine months ended September 30, 2005. The weighted average fair value of options granted to employees during 2004 was $1.08 using the Black-Scholes option pricing model. The following assumptions were used for 2004: no dividend yield, expected volatility of 100%, weighted average free interest rates of 3.89% and a weighted average expected term of 6.5 years. Segment information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the Chief Executive Officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location and only has one reportable segment as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". 3. Research Agreements On September 1, 2005, the Company entered into an agreement with Saint Louis University for the continued development of one of the Company's leading compounds. The agreement is funded through the National Institutes of Health. Under the agreement, SIGA will receive approximately $1.0 million during the term of September 1, 2005 to February 28, 2006. Revenues will be recognized as services are performed. On September 22, 2005, the Company entered into a $3.2 million, one year contract with the United States Army Medical Research and Material Command ("USAMRMC"). The agreement, for the rapid identification and treatment of anti-viral diseases, is funded through the United States Air Force ("USAF"). Advance payments under the agreement, received prior to the performance of services, are deferred and recognized as revenue as the related services are performed. On October 4, 2005, the Company received advance payment of $1.0 million. Three equal advance payments of $733,333 are scheduled for on or about January 1, 2006, April 1, 2006 and July 1, 2006. 8
4. Intangible Assets Amortization expense recorded for the nine months ended September 30, 2005 and 2004 was as follows: Nine Months Ended September 30, 2005 2004 ------------ ------------ Amortization of acquired grants $ 736,010 $ 81,780 Amortization of customer contract and grants 25,070 80,987 Amortization of covenants not to compete 84,167 146,472 Amortization of acquired technology 61,966 164,325 ------------ ------------ $ 907,213 $ 473,564 ============ ============ 5. Stockholders' Equity At September 30, 2005, the Company's authorized share capital consisted of 60,000,000 shares, of which 50,000,000 are designated common shares and 10,000,000 are designated preferred shares. The Company's Board of Directors is authorized to issue preferred shares in series with rights, privileges and qualifications of each series determined by the Board. Holders of the Series A Convertible Preferred Stock are entitled to (i) cumulative dividends at an annual rate of 6% payable when and if declared by the Company's board of directors; (ii) in the event of liquidation of the Company, each holder is entitled to receive $1.4375 per share (subject to certain adjustments) plus all accrued but unpaid dividends; (iii) convert each share of Series A to a number of fully paid and non-assessable shares of common stock as calculated by dividing $1.4375 by the Series A Conversion Price (shall initially be $1.4375); and (iv) vote with the holders of other classes of shares on an as-converted basis. 6. Related Parties During the nine months ended September 30, 2005, the Company incurred costs of $301,600 related to work performed by Transtech Pharma, Inc., a related party, and its affiliates in connection with one of the Company's lead product programs. On September 30, 2005, the Company's outstanding payables included $186,700 payable to the related party and its affiliates. Revenues for the nine months ended September 30, 2005 included $25,400 related to services provided by the Company to Transtech Pharma, Inc. The balance is included in the Company's accounts receivable on September 30, 2005. 7. Note Payable On May 20, 2005, the Company borrowed approximately $276,000 under a Promissory Note payable to General Electric Capital Corporation. The note is payable in 36 monthly installments of principal and interest of 10.31% per annum. The note is secured by a master security agreement dated as of April 29, 2005 and by specific property listed under the master security agreement. 9
8. Commitments and Contingencies As of September 30, 2005, our purchase obligations are not material. We lease certain facilities and office space under operating leases. Minimum future rental commitments under operating leases having non-cancelable lease terms in excess of one year are as follows: Year ended December 31, 2005 $ 114,900 2006 255,400 2007 261,800 2008 133,200 2009 135,900 2010 22,700 ----------- Total $ 923,900 =========== 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our financial statements and notes to those statements and other financial information appearing elsewhere in this Quarterly Report. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Overview Since our inception in December 1995, we have been principally engaged in the research and development of novel products for the prevention and treatment of serious infectious diseases, including products for use in the defense against biological warfare agents such as Smallpox and Arenaviruses. The effort to develop a drug for Smallpox is being aided by SBIR grants from the NIH totaling approximately $5.3 million that were awarded in the third quarter of 2004 and a $1.6 million contract with the U.S. Army which began in January 2003. The Arenavirus program is being supported by SBIR grants from the NIH totaling approximately $5.8 million that were awarded in the third quarter of 2004. Our anti-viral programs are designed to prevent or limit the replication of the viral pathogen. Our anti-infectives programs are aimed at the increasingly serious problem of drug resistance. These programs are designed to block the ability of bacteria to attach to human tissue, the first step in the infection process. We are also developing a technology for the mucosal delivery of our vaccines which may allow the vaccines to activate the immune system at the mucus lined surfaces of the body -- the mouth, the nose, the lungs and the gastrointestinal and urogenital tracts -- the sites of entry for most infectious agents. We do not have commercial biomedical products, and we do not expect to have such products for one to three years, if at all. We believe that we will need additional funds to complete the development of our biomedical products. Our plans with regard to these matters include continued development of our products as well as seeking additional research support funds and financial arrangements. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient financing on terms acceptable to us. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Our biotechnology operations are run out of our research facility in Corvallis, Oregon. We continue to seek to fund a major portion of our ongoing antiviral, antibiotic and vaccine programs through a combination of government contracts and grants and strategic alliances. While we have had success in obtaining strategic alliances, contract and grants, no assurance can be given that we will continue to be successful in obtaining funds from these sources. Until additional relationships are established, we expect to continue to incur significant research and development costs and costs associated with the manufacturing of product for use in clinical trials and pre-clinical testing. It is expected that general and administrative costs, including patent and regulatory costs, necessary to support clinical trials and research and development will continue to be significant in the future. To date, we have not marketed, or generated revenues from the commercial sale of any products. Our biopharmaceutical product candidates are not expected to be commercially available for one to three years, if at all. Accordingly, we expect to incur operating losses for the foreseeable future. There can be no assurance that we will ever achieve profitable operations. Critical Accounting Estimates The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading "Results of Operations" following this section of our MD&A. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the assessment of recoverability of goodwill, which impacts goodwill impairments; assessment of recoverability of long-lived assets, which primarily impacts operating income when we impair intangible assets. Below, we discuss these policies further, as well as the estimates and judgments involved. We also have other policies that we consider key accounting policies, such as for revenue recognition; however, these policies do not require us to make estimates or judgments that are difficult or subjective. 11
Revenue Recognition The Company recognizes revenue from contract research and development and research progress payments in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is reasonably assured, contractual obligations have been satisfied and title and risk of loss have been transferred to the customer. The Company recognizes revenue from non-refundable up-front payments, not tied to achieving a specific performance milestone, over the period which the Company is obligated to perform services or based on the percentage of costs incurred to date, estimated costs to complete and total expected contract revenue. Payments for development activities are recognized as revenue is earned, over the period of effort. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, providing there is no future service obligation associated with that milestone. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. Goodwill Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company performs an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Goodwill impairment is determined using a two-step approach in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In 2004, the Company operated as one business and one reporting unit. Therefore, the goodwill impairment analysis was performed on the basis of the Company as a whole using the market capitalization of the Company as an estimate of its fair value. The estimated fair values might produce significantly different results if other reasonable assumptions and estimates were to be used. Identified Intangible Assets Acquisition-related intangibles include acquired technology, customer contracts, grants and covenants not to compete, and are amortized on a straight line basis over periods ranging from 3.5-4 years. In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company performs a review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Results of Operations Three months ended September 30, 2005 and September 30, 2004 Revenues from grants and research and development contracts were approximately $2.9 million for the three months ended September 30, 2005, compared to $533,000 for the three months ended September 30, 2004. The increase mainly relates to the award of two Phase I and two Phase II SBIR grants by the NIH during the third quarter of 2004. The Phase II grants are for a two year period ending in the third quarter of 2006. The total award for these grants is approximately $11.1 million. For the three months ended September 30, 2005 and 2004 we recorded revenues of $2.7 million and $430,000, respectively, from these grants. Approximately $1.1 million of the revenue recognized from these grants during the three months ended September 30, 2005, related to expenditures that the Company incurred during the quarter ended June 30, 2005, prior to approval of the second year of these grants. We also received a one year SBIR grant from the NIH for $252,000 in August 2004 to support our Strep vaccine program. For the three months ended September 30, 2005 and 2004 we recorded revenue of $12,000 and $14,000, respectively, from this grant. Revenue from our contract with the U.S. Army approximated $94,100 for the three month period ending September 30, 2005; compared to $88,000 for the same period in 2004. On September 1, 2005, the Company entered into an agreement with Saint Louis University for the continued development of one of the Company's leading compounds. The agreement is funded through the National Institutes of Health. Under the agreement, SIGA will receive approximately $1.0 million during the term of September 1, 2005 to February 28, 2006. Revenues are recognized as services are performed. For the three months 12
ended September 30, 2005, the Company recognized revenues of $50,000 from the agreement. On September 22, 2005, the Company entered into a $3.2 million, one year contract with USAMRMC. The agreement, for the rapid identification and treatment of anti-viral diseases, is funded through the USAF (the "USAF Agreement"). Advance payments under the USAF Agreement, received prior to the performance of services, are deferred and recognized as revenue as the related services are performed. For the three months ended September 30, 2005, the Company recognized revenues of $73,000 from the USAF Agreement. On October 4, 2005, the Company received advance payment of $1.0 million. Three equal advance payments of $733,333 are scheduled for on or about January1, 2006, April 1, 2006 and July 1, 2006. Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2005 and 2004 declined by 504,000 or 55%, to $415,000 from $919,000, respectively. During the three months ended September 30, 2005, the Company recorded a credit of $200,000 in legal expenses which resulted from the re-negotiation of certain legal invoices. In addition to the credit recorded by the Company, legal fees declined by approximately $200,000 from the three months ended September 30, 2004 reflecting higher legal fees during the 2004 period due to the acquisition of certain assets from ViroPharma Incorporated ("Viropharma"), the review and amendment of our corporate governance policies and procedures to ensure compliance with Sarbanes Oxley and NASDAQ requirements. Consulting fees for the three months ended September 30, 2005 declined $60,000 from the three months ended September 30, 2004 mainly due to certain expenditures incurred in 2004 in connection with our efforts to secure certain government contracts. Research and development expenses were $1.8 million for the three months ended September 30, 2005; an increase of approximately 113% from the $827,000 of expenses incurred for the three months ended September 30, 2004. Approximately $623,000 of the increase related to preclinical development work in connection with our lead product programs. Payroll expenses for the three months ended September 30, 2005 increased $203,000 from the same period in 2004 mainly due to the hiring of 8 additional scientists in 2005. Amortization of intangible assets in the amount of $274,000 and $145,000 for the three months ended September 30, 2005 and 2004, respectively, represented approximately 17% of the increase. Patent preparation expenses for the three months ended September 30, 2005 were $8,000 compared to $84,000 for the three months ended September 30, 2004. We incurred higher costs during the 2004 three months period for the filings of patents in connection with the assets acquired from Plexus Vaccine Inc. and the ViroPharma assets acquisition. For the three months ended September 30, 2004, as a result of the acquisition of certain assets from Viropharma, we immediately expensed $568,000 as purchased in-process research and development ("IPRD"). The amount expensed as IPRD was attributed to certain technology that has not reached technological feasibility and has no alternative future use. Other income of $2,000 for the three months ended September 30, 2005 reflected interest income for the period. Other income of $27,800 for the same period in 2004 was comprised of interest income of $12,800 and $15,000 received by SIGA as a result of a settlement of a lawsuit against one of the Company's founders. All of our product programs are in the early stage of development. At this stage of development, we cannot estimate the potential cost for any program to be completed or the time it will take to complete the project. There is a high risk of non-completion for any program because of the lead time to program completion and uncertainty relating to costs. Net cash inflows from any products developed from these programs is at least one to three years away. However, we could receive additional grants, contracts or technology licenses in the short-term. The potential cash and timing is not known and we cannot be certain if they will ever occur. The risk of failure to complete any program is high, as each is in the relatively early stage of development. Products for the biological warfare defense market, such as the Smallpox anti-viral, could be available for sale in one to three years. We expect the future research and development cost of this program to increase as the potential products enter animal studies and safety testing. Funds for future development will be partially paid for by NIH SBIR grants, the contract we have with the U.S. Army, additional government funding and from future financing. If we are unable to obtain additional federal grants and contracts or funding in the required amounts, the development timeline for these products would slow or possibly be suspended. Delay or suspension of any of our programs could have an adverse impact on our ability to raise funds in the future, enter into collaborations with corporate partners or obtain additional federal funding from contracts or grants. 13
Nine months ended September 30, 2005 and September 30, 2004 Revenues from grants and research and development contracts were approximately $6.2 million for the nine months ended September 30, 2005, compared to $992,000 for the nine months ended September 30, 2004. The increase mainly relates to the award of two Phase I and two Phase II SBIR grants by the NIH during the third quarter of 2004. The Phase II grants are for a two year period ending in the third quarter of 2006. The total award for these grants is approximately $11.1 million. For the nine months ended September 30, 2005 and 2004 we recorded revenues of $5.7 million and $430,000, respectively, from these grants. We also received a one year SBIR grant from the NIH for $252,000 in August 2004 to support our Strep vaccine program. For the nine months ended September 30, 2005 and 2004 we recorded revenue of $140,000 and $14,000, respectively, from this grant. Revenue from our contract with the U.S. Army approximated $282,000 for the nine month period ending September 30, 2005; compared to $269,000 for the same period in 2004. On September 1, 2005, the Company entered into an agreement with Saint Louis University for the continued development of one of the Company's leading compounds. The agreement is funded through the National Institutes of Health. Under the agreement, SIGA will receive approximately $1.0 million during the term of September 1, 2005 to February 28, 2006. Revenues are recognized as services are performed. For the nine months ended September 30, 2005, the Company recognized revenues of $50,000 from the agreement. On September 22, 2005, the Company entered into a $3.2 million, one year contract with USAMRMC. The agreement, for the rapid identification and treatment of anti-viral diseases, is funded through the USAF (the "USAF Agreement"). Advance payments under the USAF Agreement, received prior to the performance of services, are deferred and recognized as revenue as the related services are performed. For the nine months ended September 30, 2005, the Company recognized revenues of $73,000 from the USAF Agreement. During the nine months ending September 30, 2004 we recognized revenue of $255,000 from an SBIR grant for our DegP anti infective that we completed in the second quarter of 2004. Selling, general and administrative expenses ("SG&A") for the nine months ended September 30, 2005 and 2004 approximated $2.1 million and $3.0 million, respectively. The decline of $900,000 or 31% is mainly attributed to a decline of $720,000 in legal fees, a decline of $81,000 in accounting fees and a decline of $212,000 in consulting fees. During the nine months ended September 30, 2005, SIGA recorded a credit of $200,000 in legal expenses which resulted from the re-negotiation of certain legal invoices. In addition to the credit recorded by the Company, legal fees declined by approximately $520,000 from the nine months ended September 30, 2004 reflecting higher legal fees during the 2004 period due to the acquisition of certain assets from ViroPharma, the review and amendment of our corporate governance policies and procedures to ensure compliance with Sarbanes Oxley and NASDAQ requirements. Legal expenses in the first nine months of 2004 were also incurred in connection with the sale of certain non-core vaccine assets and a legal action that the Company initiated against a former founder. The higher accounting expenses during the nine months period ended September 30, 2004 was mainly related to the acquisition of certain assets from ViroPharma, the sale of certain non-core vaccine assets and the review of a potential acquisition. Higher consulting expenses during the nine months ended September 30, 2004 were incurred in connection with our efforts to secure certain government contracts. Research and development expenses were $5.9 million for the nine months ended September 30, 2005; an increase of approximately 105% or $3.0 million from the $2.9 million of expenses incurred for the nine months ended September 30, 2004. Approximately $2.4 million of the increase related to preclinical development work in connection with our lead product programs. Payroll expenses for the nine months ended September 30, 2005 increased $497,000 from the same period in 2004 mainly due to the hiring of 8 additional scientists in 2005. Amortization of intangible assets in the amount of $823,000 and $327,000 for the nine months ended September 30, 2005 and 2004, respectively, represented approximately 17% of the increase. Patent preparation expenses for the nine months ended September 30, 2005 were $274,000 compared to $230,000 for the nine months ended September 30, 2004. The increase of $40,000 is the result of increased costs arising from the Plexus Vaccine Inc. and ViroPharma Incorporated asset acquisitions, which were incurred in the second half of 2004 and the first half of 2005. Loss on impairment of intangible assets of $610,000 was recorded in the second quarter of 2004. In May 2004, we sold intangible assets from our immunological bioinformatics technology and certain non-core vaccine development assets to a privately-held company, Pecos Labs, Inc. ("Pecos") in exchange for 150,000 shares of Pecos' common stock. In addition, concurrent with the asset transfer, we terminated our employment agreement with our former President and reduced the covenants not to compete with the former President to one year from the date of termination. As a result of that transaction, we performed an impairment review of our intangible assets in accordance with SFAS 144 and recorded an impairment charge of $610,000. The impairment of intangible assets consists of $307,000 of impairment related to grants transferred to Pecos and $303,000 of impairment related to the reduction in the covenants not to compete to one year from the date of terminating the Presidents' employment agreement with us. 14
As a result of the acquisition of certain assets from Viropharma in August 2004, we immediately expensed $568,000 as purchased in-process research and development ("IPRD"). The amount expensed as IPRD was attributed to certain technology that has not reached technological feasibility and has no alternative future use. Other loss of $2,200 for the nine months ended September 30, 2005 comprised of interest income of approximately $12,800 and loss on impairment of our investment in Pecos' common stock of $15,000. Other income of $59,000 for the same period in 2004 was comprised of $44,000 interest income and $15,000 received by SIGA as a result of a settlement of a lawsuit against one of the Company's founders. All of our product programs are in the early stage of development. At this stage of development, we cannot estimate the potential cost for any program to be completed or the time it will take to complete the project. There is a high risk of non-completion for any program because of the lead time to program completion and uncertainty relating to costs. Net cash inflows from any products developed from these programs is at least one to three years away. However, we could receive additional grants, contracts or technology licenses in the short-term. The potential cash and timing is not known and we cannot be certain if they will ever occur. The risk of failure to complete any program is high, as each is in the relatively early stage of development. Products for the biological warfare defense market, such as the Smallpox anti-viral, could be available for sale in one to three years. We expect the future research and development cost of this program to increase as the potential products enter animal studies and safety testing. Funds for future development will be partially paid for by NIH SBIR grants, the contract we have with the U.S. Army, additional government funding and from future financing. If we are unable to obtain additional federal grants and contracts or funding in the required amounts, the development timeline for these products would slow or possibly be suspended. Delay or suspension of any of our programs could have an adverse impact on our ability to raise funds in the future, enter into collaborations with corporate partners or obtain additional federal funding from contracts or grants. Liquidity and Capital Resources The financial statements of SIGA Technologies have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of September 30, 2005 we had approximately $194,000 in cash and cash equivalents. We believe that these funds and our anticipated cash flows, including receipt of funding from government contracts and grants, will be sufficient to support our operations through the third quarter of 2006. On November 2, 2005, the Company entered into a Securities Purchase Agreement for the issuance and sale of 2,000,000 shares of the Company's common stock at $1.00 per share and warrants to purchase 1,000,000 shares of the Company's common stock. The warrants are exercisable at 110% of the closing price on the closing date of the transaction at any time and from time to time through and including the seventh anniversary of the closing date. The investors are also entitled to purchase additional shares of the Company's common stock for a gross amount of $2,000,000 at an initial price of $1.10 per share for a period of 90 trading days following the effectiveness of a registration statement. With respect to the transaction, the Company entered into an Exclusive Finder's Agreement. Finders fee under the agreement include cash compensation of 7% of the gross amount financed and a warrant to acquire 60,000 shares of the Company's common stock at terms equal to the investors' warrants. The Company received gross proceeds of $2,000,000 from the transaction on November 3, 2005. We have incurred cumulative net losses and expect to incur additional losses to perform further research and development activities. We do not have commercial products and have limited capital resources. Our plans with regard to these matters include continued development of our products as well as seeking additional working capital through a combination of collaborative agreements, strategic alliances, research grants, equity and debt financing. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient financing on commercially reasonable terms. Our working capital and capital requirements will depend upon numerous factors, including pharmaceutical research and development programs; pre-clinical and clinical testing; timing and cost of obtaining regulatory approvals; 15
levels of resources that we devote to the development of manufacturing and marketing capabilities; technological advances; status of competitors; and our ability to establish collaborative arrangements with other organizations. Off-Balance Sheet Arrangements SIGA does not have any off-balance sheet arrangements. Safe Harbor Statement This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including statements regarding the efficacy of potential products, the timelines for bringing such products to market and the availability of funding sources for continued development of such products. Forward-looking statements are based on management's estimates, assumptions and projections, and are subject to uncertainties, many of which are beyond the control of SIGA. Actual results may differ materially from those anticipated in any forward-looking statement. Factors that may cause such differences include the risks that (a) potential products that appear promising to SIGA or its collaborators cannot be shown to be efficacious or safe in subsequent pre-clinical or clinical trials, (b) SIGA or its collaborators will not obtain appropriate or necessary governmental approvals to market these or other potential products, (c) SIGA may not be able to obtain anticipated funding for its development projects or other needed funding, (d) SIGA may not be able to secure funding from anticipated government contracts and grants, (e) SIGA may not be able to secure or enforce adequate legal protection, including patent protection, for its products and (f) unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures. More detailed information about SIGA and risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this presentation, is set forth in SIGA's filings with the Securities and Exchange Commission, including SIGA's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and in other documents that SIGA has filed with the Commission. SIGA urges investors and security holders to read those documents free of charge at the Commission's Web site at http://www.sec.gov. Interested parties may also obtain those documents free of charge from SIGA. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk None Item 4. Controls and Procedures (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective. (b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 17
Part II Other information Item 1. Legal Proceedings - SIGA is not a party, nor is its property the subject of, any legal proceedings other than routine litigation incidental to its business. Item 2. Unregistered Sale of Equity Securities and Use of Proceeds - None Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits * 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). * Filed herewith 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGA Technologies, Inc. (Registrant) Date: November 8, 2005 By: /s/ Thomas N. Konatich --------------------------- Thomas N. Konatich Chief Financial Officer 19