10-K/A 1 siga-20121231x10ka.htm 10-K/A SIGA-2012.12.31-10K/A
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2012
 
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)
Delaware
13-3864870
(State or other jurisdiction of
(IRS Employer Identification. No.)
incorporation or organization)
 
 
 
660 Madison Avenue, Suite 1700
10065
New York, NY
(zip code)
(Address of principal executive offices)
 

Registrant’s telephone number, including area code: (212) 672-9100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
common stock, $.0001 par value
Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ¨ No x.
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act Yes ¨ No x.
 
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
 
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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. ¨.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one): Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller Reporting Company ¨.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x.



 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 30, 2012 as reported on the Nasdaq Global Market was approximately $147,685,687.
 
As of February 15, 2013 the registrant had outstanding 51,642,520 shares of common stock.
 
DOCUMENTS INCORPORATED BY REFERENCE

The following document is incorporated herein by reference: 
Document
Parts Into Which Incorporated
Proxy Statement for the Company’s 2013 Annual
Part III
Meeting of Stockholders
 
 



SIGA TECHNOLOGIES, INC.
FORM 10-K/A
EXPLANATORY NOTE

We are filing this Amended Annual Report on Form 10-K/A (the “Amended Filing” or “Form 10-K/A”) to our Annual Report on Form 10-K for the year ended December 31, 2012 (the “Original Filing”) to amend and restate our audited consolidated financial statements and related disclosures as of and for the years ended December 31, 2011 and 2010 included in Item 8, Note 3, “Revision and Restatement of Consolidated Financial Statements”, as well as selected quarterly financial data (excluding footnotes) for the periods from March 31, 2011 through December 31, 2011 included in Item 8, Note 15 - “Revised and Restated Financial Information By Quarter (Unaudited).”  The audited consolidated financial statements and related disclosures as of and for the year ended December 31, 2012 and the selected quarterly financial data for each of the quarters therein have also been revised to conform with the restated financial statements referred to herein; the conclusion to revise rather restate the amounts for 2012 resulted from the immaterial nature of the adjustments based on quantitative and qualitative considerations. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on March 6, 2013.

Background of the Restatement

On May 8, 2013, the Company concluded, based on the recommendation of management, that the previously issued consolidated financial statements as of and for the years ended December 31, 2011 and 2010 included in the Company's most recently filed Form 10-K are no longer appropriate to rely upon because they failed to account for certain outstanding warrants to purchase common stock of the Company (the “Warrants”) as liabilities rather than equity and to account for non-cash charges resulting from the periodic “mark-to-market” adjustments of the Warrants. The Company has determined that the aforementioned financial statements should be restated to reflect the aforementioned liabilities and non-cash charges.

The Company accounts for the Warrants in accordance with ASC 815, Derivatives and Hedging. ASC 815 requires that free-standing derivative financial instruments that contain certain anti-dilution provisions be classified as assets or liabilities at the time of the transaction, and be recorded at their fair value. ASC 815 also requires that any subsequent change in the fair value of the derivative instruments be reported in earnings or loss for so long as the derivative contracts are classified as assets or liabilities.

The cumulative effect of these non-cash adjustments on the Company's financial statements is an approximate decrease in the equity balance and a corresponding increase in total liabilities of $700,000 at December 31, 2012. Refer to Item 8, Note 3 for further details regarding the amounts of the adjustments. These adjustments neither impact the net cash used in operating activities nor change the cash and cash equivalents account balances for the applicable financial statements. As of and for the years ended December 31, 2011 and 2010, the quantitative impact of the non-cash adjustments on net income and net loss, respectively, were material. As of and for the year ended December 31, 2012, the quantitative and qualitative impact of the non-cash adjustments on net loss were not material.

For the convenience of the reader, this Amended Filing sets forth the Original Filing as modified and superseded where necessary to reflect the restatement. The following items have been amended principally as a result of, and to reflect, the restatement and revision:
Part I - Item 1A. Risk Factors
Part II - Item 6. Selected Financial Data
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations;
Part II - Item 8. Financial Statements and Supplementary Data;
Part II - Item 9A. Controls and Procedures; and

In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.
The sections of the Form 10-K which were not amended are unchanged and continue in full force and effect as originally filed. This Amended Filing is as of the date of the Original Filing on the Form 10-K and has not been updated to reflect events occurring subsequent to the Original Filing date other than those associated with the restatement of the Company's audited consolidated financial statements.


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SIGA TECHNOLOGIES, INC.
FORM 10-K/A

Table of Contents
 
 
PageNo.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Item 1. Business

There are no changes to Item 1 as disclosed in our originally filed Annual Report on Form 10-K for the year ended December 31, 2012.

Item 1A. Risk Factors
 
There are no changes to Item 1A as disclosed in our originally filed Annual Report on Form 10-K for the year ended December 31, 2012 except for the following risk factors.

This report contains forward-looking statements and other prospective information relating to future events. These forward-looking statements and other information are subject to risks and uncertainties that could cause our actual results to differ materially from our historical results or currently anticipated results including the following:
 
Risks Related to Our Financial Position and Need for Additional Financing
 
We have incurred operating losses since our inception and expect to incur net losses for the foreseeable future.

We incurred net operating losses of approximately $22.5 million and $31.4 million for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, 2011 and 2010, our accumulated deficit was approximately $139.4 million (revised), $125.3 million (restated) and $154.4 million (restated), respectively. We expect to continue to have significant operating expenses and will need to generate significant revenues to achieve and maintain profitability.
 
Our ability to fund operations is substantially dependent on cash flows from delivery of Arestvyr. If we do not achieve positive cash flows, we cannot guarantee that we can sustain or enhance our current level of operations. We expect that cash flows will fluctuate significantly and could be delayed from one quarter to another based on several factors. If cash flows grow slower than we anticipate, or if operating expenses or expenses resulting from the post-trial ruling in the litigation commenced by PharmAthene exceed our expectations or cannot be adjusted accordingly, then our business, results of operations, financial condition and cash flows will be materially and adversely affected. Because our strategy may include the acquisition of other businesses, acquisition and integration expenses and any cash required to fund these acquisitions will reduce our available cash.

Risks Related to Our Common Stock
 
We have identified a material weakness in our internal control over financial reporting that resulted in the restatement of our consolidated financial statements included in this Annual Report on Form 10-K/A. This material weakness, uncorrected, could continue to affect adversely our ability to report our results of operations and financial condition accurately and in a timely manner.
 
Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, and identified a material weakness related to the failure to ensure timely application of anti-dilution provisions contained in certain outstanding warrant arrangements. As a result of this material weakness, our management concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2012. See Part II - Item 9A, “Controls and Procedures.”

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The effectiveness of any controls or procedures is subject to certain limitations, and as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. We also cannot assure you that other material weaknesses will not arise as a result of our past failure to maintain adequate internal controls and procedures or that circumvention of those controls and procedures will not occur. Additionally, even improved controls and procedures may not be adequate to prevent or identify errors or irregularities or ensure that our financial statements are prepared in accordance with generally accepted accounting principles. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, fail to meet our public reporting requirements on a

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timely basis, or be unable to report properly on our business and the results of our operations, and the market price of our securities could be materially adversely affected.
 

Item 1B. Unresolved Staff Comments
 
None.

Item 2. Properties
 
Our headquarters are located in New York City, and our research and development facilities are located in Corvallis, Oregon. In New York, we occupy office space under an Office Service Agreement with an affiliate of a shareholder that, as currently amended, is cancelable upon 60 days notice. In January 2013, we entered into a sublease with the aforementioned affiliate to sublet expanded office space in a New York City location to serve as new corporate headquarters. The sublease is expected to commence in the first half of 2013 and expires in 2020.

In Corvallis, we lease approximately 32,700 square feet under an amended lease agreement signed in January 2007, which was amended and extended on June 1, 2011. The Company formerly occupied 5,700 square feet under a sublease agreement signed in January 2010 which expired in September 2011. Our facility in Oregon has been improved to meet the special requirements necessary for the operation of our research and development activities. The facilities leased in Corvallis includes space existing under the prior lease terms and newly constructed space in the same building under the most recent lease amendment. We believe that our current facilities are adequate to our needs.

Item 3. Legal Proceedings
 
In December 2006, PharmAthene, Inc. (“PharmAthene”) filed an action against us in the Delaware Court of Chancery (the “Court” or “Court of Chancery”) captioned PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-N. In its amended complaint, PharmAthene asked the Court to order us to enter into a license agreement with PharmAthene with respect to ST-246, also known as Arestvyr, to declare that we are obliged to execute such a license agreement, and to award damages resulting from our supposed breach of that obligation. PharmAthene also alleges that we breached an obligation to negotiate such a license agreement in good faith, and sought damages for promissory estoppel and unjust enrichment based on supposed information, capital, and assistance that PharmAthene allegedly provided to us during the negotiation process. The Court tried the case in January 2011.

In September 2011, the Court of Chancery issued its post-trial opinion. The Court denied PharmAthene’s requests for specific performance and expectation damages measured by present value of estimated future profits. Nevertheless, the Court held that we breached our duty to negotiate in good faith and were liable under the doctrine of promissory estoppel. The Court consequently awarded to PharmAthene what the Court described as an equitable payment stream or equitable lien consisting of fifty percent of the net profits that we achieve from sales of ST-246 after we secure $40 million in net profits, for ten years following the first commercial sale. In addition, the Court awarded PharmAthene one-third of its reasonable attorneys’ fees and expert witness expenses.

In May 2012, the Court entered its final order and judgment in this matter, implementing its post-trial opinion. Among other things, the final order and judgment provided that (a) net profits will be calculated in accordance with generally accepted accounting principles applied consistently with how they are applied in the preparation of our financial statements, (b) the net profits calculation will take into account expenses relating to ST-246 commencing with our acquisition of ST-246 in August 2004, and (c) PharmAthene may recover $2.4 million of attorneys’ fees and expenses. As of December 31, 2012, SIGA has recorded a $2.5 million loss contingency with respect to the fee, expense and interest portion of the judgment.

In June 2012, we appealed to the Supreme Court of the State of Delaware the final order and judgment and certain earlier rulings of the Court of Chancery. Shortly thereafter, PharmAthene filed its cross-appeal. We obtained a stay of enforcement of the fee and expense portion of the judgment by filing a surety bond for the amount of the judgment plus post-judgment interest. We posted $1.3 million as collateral for the surety bond which is recorded in other assets as of December 31, 2012. 
    
On July 27, 2012, we filed our opening brief on appeal, identifying the following points of error: (a) the Court of Chancery erred in holding that we breached our obligation to negotiate in good faith following the termination of the PharmAthene merger in 2006; (b) the Court of Chancery erred in holding that PharmAthene’s assistance enriched the Company and that PharmAthene is consequently entitled to relief under the doctrine of promissory estoppel; (c) the Court of Chancery erred in awarding relief in

3


the form of an equitable payment stream; and (d) the Court of Chancery erred in awarding PharmAthene a portion of its attorneys’ fees, expenses and expert witness costs. 

On August 26, 2012, PharmAthene filed its opening brief, answering with respect to our appeal and arguing in support of PharmAthene’s cross-appeal. With respect to the latter, PharmAthene claimed that the Court of Chancery erred in not finding that there was a binding license agreement and should have awarded either specific performance or expectation damages. On September 27, 2012, we filed a final brief in response. On October 8, 2012, PharmAthene filed its final brief in response. The oral argument on the appeal and cross-appeal was heard before the Supreme Court of Delaware,en banc, on January 10, 2013 and the Court took the arguments under advisement.

We expect that the Court of Chancery’s final order and judgment will have a materially adverse impact on the Company and its future results of operations unless the appeal and cross-appeal result in a materially positive change to the portion of the ruling awarding the equitable payment stream or equitable lien. We cannot assure success on the appeal and cross-appeal. 


Item 4. Mine Safety Disclosures

No disclosure is required pursuant to this item.

4



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Price Range of Common Stock

Our common stock trades under the symbol “SIGA”. Our common stock has been traded on the Nasdaq Global Market since September 3, 2009 and, prior to such date, had been traded on the Nasdaq Capital Market since September 9, 1997. Prior to that time there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices for the common stock, as reported on the Nasdaq Global Market:
2012
High
 
Low
First Quarter
$
3.89

 
$
2.51

Second Quarter
3.59

 
2.20

Third Quarter
3.57

 
2.72

Fourth Quarter
3.38

 
2.33

 
 
 
 
2011
High
 
Low
First Quarter
$
15.66

 
$
10.66

Second Quarter
15.40

 
9.53

Third Quarter
9.95

 
2.61

Fourth Quarter
3.58

 
1.78


As of February 15, 2013, the closing sale price of our common stock was $3.92 per share. There were 41 holders of record as of February 15, 2013. We believe that the number of beneficial owners of our common stock is substantially greater than the number of record holders, because a large portion of common stock is held in broker “street names”.
 
We have paid no dividends on our common stock and do not expect to pay cash dividends in the foreseeable future. We are not under any restriction as to our present or future ability to pay dividends. We currently intend to retain any future earnings to finance the growth and development of our business.

Performance Graph
 
The following line graph compares the cumulative total stockholder return through December 31, 2012, assuming reinvestment of dividends, by an investor who invested $100 on December 31, 2007 in each of (i) our common stock; (ii) the Nasdaq National Market-US; and (iii) the Nasdaq Pharmaceutical Index.


5


 
 
December 31,
 
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
SIGA Technologies, Inc.
 
$
100

 
$
106

 
$
188

 
$
455

 
$
82

 
$
85

NASDAQ Composite Index
 
$
100

 
$
59

 
$
86

 
$
100

 
$
98

 
$
114

NASDAQ Biotech Composite Index
 
$
100

 
$
87

 
$
101

 
$
116

 
$
130

 
$
171


Securities Authorized for Issuance Under Equity Compensation Plans
 
The information required by this item concerning securities authorized for issuance under equity compensation plans is set forth in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.


Item 6. Revised and Restated Selected Financial Data
 
As discussed in the Explanatory Note to this Amended Filing, the Company is amending and restating its audited consolidated financial statements and related disclosures for the years ended December 2011 and 2010 and amending and revising its audited consolidated financial statements and related disclosures for the year ended December 31, 2012, as included in this Item. The aforementioned revised and restated financial statements include selected consolidated financial data for the quarterly periods included in Item 8, “Revised and Restated Financial Information By Quarter (Unaudited).”

The selected financial data for the years ended December 31, 2012, 2011 and 2010 and the consolidated balance sheet data as of December 31, 2012 and 2011 have been derived from our revised and restated audited consolidated financial information included elsewhere in this Annual Report on Form 10-K. The selected financial data for the years ended December 31, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2010, 2009 and 2008 have been derived from applicable revised and restated audited consolidated financial statements not included in this annual report. The following table should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the revised and restated consolidated financial statements and related notes to those statements included elsewhere in this annual report.
 
Year Ended December 31,
 
2012
 
2011
(Restated)
 
2010
(Restated)
 
2009
 
2008
 
(in thousands, except share and per share data)
Revenues
$
8,971

 
$
12,726

 
$
19,216

 
$
13,812

 
$
8,066

Selling, general and administrative
11,410

 
23,932

 
8,131

 
7,533

 
4,608

Research and development
18,213

 
18,367

 
22,659

 
17,423

 
11,613

Patent preparation fees
1,883

 
1,808

 
1,149

 
734

 
582

Loss from operations
(22,536
)
 
(31,381
)
 
(12,722
)
 
(11,878
)
 
(8,737
)
       Decrease (increase) in fair value of common stock warrants
805

*
24,436

*
(38,110
)
*
(17,476
)
*
(1,510
)
       Interest expense
(173
)
 

 

 

 

       Other income, net
1

 
13

 
659

 
1

 
94

Loss before income taxes
(21,904
)
*
(6,932
)
*
(50,173
)
*
(29,354
)
*
(10,153
)
Benefit from (provision for) income taxes
7,844

 
36,032

 
(175
)
 

 

Net income (loss)
$
(14,060
)
*
$
29,100

*
(50,348
)
*
$
(29,354
)
*
$
(10,153
)
Basic earnings (loss) per share
$
(0.27
)
*
$
0.57

*
$
(1.12
)
*
$
(0.78
)
*
$
(0.29
)
Diluted earnings (loss) per share
$
(0.27
)
*
$
0.09

 
$
(1.12
)
*
$
(0.78
)
*
$
(0.29
)
Weighted average shares outstanding: basic
51,639,622

 
50,929,491

 
45,151,774

 
37,463,255

 
34,732,625

Weighted average shares outstanding: diluted
51,639,622

 
54,061,650

 
45,151,774

 
37,463,255

 
34,732,625

Cash and cash equivalents and short-term investments
$
32,017

 
$
49,257

 
$
21,331

 
$
19,496

 
$
2,322

Total assets
105,836

 
90,380

 
27,032

 
25,915

 
8,797

Long-term obligations
4,779

*
1,560

*
27,188

*
20,376

*
4,477

Stockholders’ equity
28,243

*
40,771

*
(12,913
)
*
(3,489
)
*
1

Net cash provided by (used in) operating activities
(20,223
)
 
25,574

 
(10,825
)
 
(8,471
)
 
(7,198
)

* Represents adjusted amounts for the revision in the year ended December 31, 2012 and the restatement for the years prior to and including December 31, 2011; refer to Note 3 to the Consolidated Financial Statements for further detail.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements and other financial information appearing elsewhere in this Amended Filing on Form 10-K/A. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties.
 
Restatement

As discussed in the Explanatory Note to this Amended Filing, the Company is amending and restating its audited consolidated financial statements and related disclosures as of and for the years ended December 31, 2011 and 2010, as included in Item 8, Note 3, as well as selected consolidated quarterly financial data (excluding footnotes) for the periods from March 31, 2011 through December 31, 2011, as included in Item 8, Note 15.  The audited consolidated financial statements and related disclosures as of and for the year ended December 31, 2012 have been revised to conform with the restated financial statements referred to herein. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on March 6, 2013.

The following discussion and analysis of our financial condition and results of operations incorporates the restated and revised amounts. For this reason, the data set forth in this section may not be comparable to discussion and data in our previously filed Annual Report on Form 10-K for the year ended December 31, 2012.


Overview
 
We are a pharmaceutical company specializing in the development and commercialization of pharmaceutical solutions for some of the most lethal disease-causing pathogens in the world - smallpox, Ebola, dengue, Lassa fever and other dangerous viruses. Our business is to discover, develop, manufacture and commercialize drugs to prevent and treat these high-priority threats. Our mission is to disarm dreaded viral diseases and create robust, modern biodefense countermeasures.    

Lead Product - Arestvyr

Our lead product, Arestvyr (tecovirimat), also known as ST-246, is an orally administered antiviral drug that targets orthopoxviruses. On May 13, 2011, we signed the BARDA Contract pursuant to which we agreed to deliver two million courses of Arestvyr to the Strategic Stockpile. The base contract, worth approximately $463 million, includes $54 million related to development and supportive activities and contains various options to be exercised at BARDA’s discretion. The period of performance for development and supportive activities runs until 2020. As originally issued, the BARDA Contract included an option for the purchase of up to 12 million additional courses of Arestvyr; however, following a protest by a competitor of the Company, BARDA issued a contract modification on June 24, 2011 pursuant to which it deleted the option to purchase the additional courses. Under the BARDA Contract as modified, BARDA has agreed to buy from SIGA 1.7 million courses of Arestvyr. Additionally, SIGA will contribute to BARDA 300,000 courses manufactured primarily using federal funds provided by HHS under prior development contracts. The BARDA Contract as modified also contains options that will permit SIGA to continue its work on pediatric and geriatric formulations of the drug as well as use Arestvyr for smallpox prophylaxis. As discussed in Item 3, “Legal Proceedings”, the amount of profits we will retain pursuant to the BARDA Contract is subject to the judgment entered by the Delaware Court of Chancery in PharmAthene's action against SIGA and the outcome of the pending appeal and cross-appeal.

We expect Arestvyr will be among the first new small-molecule drugs delivered to the Strategic Stockpile under Project BioShield. Arestvyr is an investigational product that is not currently approved by FDA as a treatment of smallpox or any other indication. FDA has designated Arestvyr for “fast-track” status, creating a path for expedited FDA review and eventual regulatory approval.    

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 consolidated financial statements, which we discuss under the heading “Results of Operations” following this section of our Management’s Discussion and Analysis. 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 valuation of stock-based awards including options and warrants, revenue recognition, impairment of assets and income taxes. Below, we discuss these policies further, as well as the estimates and judgments involved.



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Critical Accounting Policies
 
The following is a brief discussion of the significant accounting policies and methods used by us in the preparation of our consolidated financial statements. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of all of the significant accounting policies.
 
Share-based Compensation
     We account for our stock-based compensation using the fair value recognition provisions prescribed by the authoritative guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values.
 
Stock-based compensation expense for 2012, 2011 and 2010 was $1.8 million, $12.5 million and $1.5 million, respectively. The fair value of share-based awards is determined on the grant date; for options awards, fair value is generally estimated using the Black-Scholes model and for stock appreciation rights, fair value is estimated using a Monte Carlo method. The value of the portion of the award that is ultimately expected to vest is recorded as expense over the requisite periods in our consolidated statement of operations. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term over which stock awards will be outstanding before they are exercised, the expected volatility of our stock, and the number of stock-based awards that are expected to be forfeited. It is reasonably likely that future assumptions may change, in which case the fair value of future option awards may exceed or fall short of historical calculated fair values. In addition, for stock options with performance conditions, on a quarterly basis we estimate the most probable outcome of the performance conditions in order to determine the amount of compensation costs to be recorded over the remaining vesting period.

Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, short-term investments, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. Common stock warrants, which are classified as liabilities are recorded at their fair market value as of each reporting period.
 
The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.
 
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.
 
Level 3 – Instruments where significant value drivers are unobservable to third parties.
 
We use model-derived valuations where inputs are observable in active markets to determine the fair value of certain common stock warrants on a recurring basis and classify such warrants in Level 2. The Black-Scholes model utilizes inputs consisting of: (i) the closing price of our common stock; (ii) the expected remaining life of the warrants; (iii) the expected volatility using a weighted-average of historical volatilities of SIGA and a group of comparable companies; and (iv) the risk-free market rate. At December 31, 2012 and 2011, the fair value of common stock warrants was as follows:
 
 
2012
(Revised)
 
2011
(Restated)
Common stock warrants, current
 
$
333,793

 
$
125,841

Common stock warrants, non-current
 
657,246

 
1,412,304

 
 
$
991,039

 
$
1,538,145


For the years ended December 31, 2012 and 2011, we did not hold any Level 3 securities.
 
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, collectability is reasonably assured, title and risk of loss have been transferred to the customer and there are no further contractual obligations.


7


Certain arrangements may provide for multiple deliverables, in which there may be a combination of: up-front licenses; research, development, regulatory or other services; and delivery of product. Multiple deliverable arrangements can be divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (i) the delivered item(s) have value to the customer on a standalone basis and (ii) in circumstances in which an arrangement includes a general right of return with respect to delivered items, then performance of the remaining deliverables must be considered probable and substantially in control of the Company. If multiple deliverables cannot be divided into separate units of accounting then the deliverables must be combined into a single unit of accounting.

Total consideration in a multiple deliverable arrangement is allocated to units of accounting on a relative fair value of selling price basis. Consideration allocated to a delivered item or unit of accounting is limited to the amount that is not contingent upon delivery of additional items.

The BARDA Contract is a multiple deliverable arrangement comprising delivery of courses and covered research and development activities. The BARDA Contract provides certain product replacement rights with respect to delivered courses. For this reason, recognition of revenue that might otherwise occur upon delivery of courses is expected to be deferred until our obligations related to potential replacement of delivered courses are satisfied. Furthermore, payment for delivered courses and reimbursement of amounts we spend on covered research services is not contractually due to commence until after we have delivered the first 500,000 courses. Accordingly we have deferred revenue for all amounts received to date. Once we have delivered the first 500,000 courses, we expect to recognize revenue with respect to BARDA’s obligation to reimburse the cost of covered research and development services performed prior to this point.

Subject to the above, payments for development activities are recognized as revenue is earned, over the period of effort. Funding for the acquisition of capital assets under cost-plus-fee contracts and grants is evaluated for appropriate recognition as a reduction to the cost of the acquired asset, a financing arrangement, or revenue, based on the specific terms of the related grant or contract.

Goodwill
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the fair value of the assets acquired and liabilities assumed involves certain judgments and estimates.

At December 31, 2012, our goodwill totaled $898,000. We evaluate goodwill for impairment at least annually or as circumstances warrant. Goodwill is tested for recoverability between annual evaluations whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In 2012, we 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 our market capitalization as an estimate of our fair value. In the past, our market capitalization has been significantly in excess of our carrying value. It is possible that our future market capitalization may fall short of our current market capitalization, in which case a potential impairment could result. Also, the use of an alternative method, such as the discounted expected future cash flows or market comparables to evaluate the fair value of the Company as a whole will possibly produce different results from our market capitalization.
 
Income Taxes
Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and related valuation allowance, if any, involves judgment. The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about our future profitability which are inherently uncertain. On an on-going basis, we evaluate whether a valuation allowance is needed to reduce our deferred income tax assets to an amount that is more likely than not to be realized. The evaluation process includes assessing historical and current results in addition to future expected results.

Our assessment that our deferred tax assets will be realized is based on estimates of future taxable income arising from the BARDA Contract. If the current estimates of future taxable income are reduced or not realized, for example, based on an appellate ruling in the PharmAthene litigation described in Item 3 “Legal Proceedings”, our assessment regarding the realization of deferred tax assets could change. Future changes in the estimated amount of deferred taxes expected to be realized will be reflected in our financial statements in the period the estimate is changed with a corresponding adjustment to operating results. Changes in estimates may occur and can have a significant favorable or unfavorable impact on our operating results from period to period.
 
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued updated accounting guidance which amended guidance on how to test goodwill for impairment. This update permits an entity to first assess qualitative factors to

8


determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. The updated guidance is effective for annual impairment tests performed in fiscal years beginning after December 15, 2011 with early adoption permitted. This update was adopted for the year ended December 31, 2012 and it did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective during interim and annual period beginning after December 15, 2011. This update was adopted for the year ended December 31, 2012 and it did not have a material impact on our consolidated financial statements.
    
In May 2011, the FASB issued guidance that changed the requirement for presenting “Comprehensive Income” in the consolidated financial statements. The update requires an entity to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. We adopted this new guidance on January 1, 2012.


Results of Operations
 
The following table sets forth certain consolidated statements of operations data as a percentage of net revenue for the periods indicated:
 
2012
 
2011
 
2010
Revenue
100

%
 
      100
%
 
      100
%
Selling, general and administrative
127

%
 
188
%
 
42
%
Research and development
203

%
 
144
%
 
118
%
Patent preparation fees
21

%
 
14
%
 
6
%
Operating loss
251

%
 
247
%
 
66
%

Years ended December 31, 2012, 2011, and 2010
 
Revenues from research and development contracts and grants for the years ended December 31, 2012 and 2011, were $9.0 million and $12.7 million, respectively. The decrease of $3.7 million, or 30%, is primarily attributable to the net impact of a $5.0 million decrease in contract and grant revenues related to Arestvyr, dengue and broad spectrum, offset by a $1.2 million increase in grant revenues related to Lassa fever. The largest portion of the net decrease in revenues comes from the restructuring of an NIH Arestvyr contract in connection with entry into the BARDA Contract in 2011, which impacted the timing of grant usage and the amount of funds available for usage. Additionally, $1.2 million of the revenue decrease is attributable to the conclusion in late 2011 of two federal grants supporting development of a broad spectrum antiviral.

Revenues from research and development contracts and grants for the years ended December 31, 2011 and 2010, were $12.7 million and $19.2 million, respectively. The decrease of $6.5 million, or 34%, relates to a $3.1 million decrease in revenue mainly due to the conclusion of a federal Arestvyr contract in the third quarter of 2011, and to a $3.7 million revenue decrease attributable to the conclusion in 2010 of a federal grant mainly supporting development of a Lassa fever antiviral.
     
Selling, general and administrative expenses (“SG&A”) for the years ended December 31, 2012 and 2011 were $11.4 million and $23.9 million, respectively, reflecting a decrease of approximately $12.5 million or 52%. The decrease in SG&A expenses primarily relates to a decrease in non-cash stock-based compensation of approximately $10.7 million and a $1.6 million non-recurring loss contingency expense recorded in 2011 in connection with the PharmAthene litigation.

SG&A for the years ended December 31, 2011 and 2010 were $23.9 million and $8.1 million, respectively, reflecting an increase of approximately $15.8 million or 195%. The increase in SG&A expenses mainly relates to a $13.0 million increase in compensation expense, which includes an increase in non-cash stock-based compensation of approximately $11.1 million, and an increase of $2.0 million for an estimated loss contingency in connection with an ongoing legal dispute.
     
     Research and development (“R&D”) expenses were $18.2 million for the year ended December 31, 2012, approximately matching the $18.4 million incurred during the year ended December 31, 2011. Decreases in direct vendor-related expenses supporting the development of Arestvyr, dengue antivirals and broad-spectrum antivirals were offset by increases in expenses
related to various operation initiatives, employee compensation and vendor-related costs supporting the development of Lassa fever antivirals.

     R&D expenses were $18.4 million for the year ended December 31, 2011, a decrease of $4.3 million or 19% from the $22.7 million incurred during the year ended December 31, 2010. The decrease was primarily due to direct vendor-related expenses supporting the development of Arestvyr decreasing $4.8 million from the prior year, offset by an increase to employee compensation expenses as a result of hiring additional R&D personnel. As of December 31, 2011 and 2010, we had 61 and 57 full-time R&D personnel, respectively.

During the years ended December 31, 2012, 2011, and 2010, we incurred direct costs of $7.4 million, $7.2 million and $12.2 million, respectively, on the development of Arestvyr. During the year ended December 31, 2012, we spent $1.3 million on internal human resources dedicated to the drug’s development and $6.0 million mainly on manufacturing and clinical testing. During the year ended December 31, 2011, we spent $1.4 million on internal human resources dedicated to the drug’s development and $5.8 million mainly on packaging and manufacturing. From inception of the ST-246 development program to-date, we invested a total of $52.7 million in the program, of which $9.7 million supported internal human resources, and $43.0 million were used mainly for manufacturing, clinical and pre-clinical work. These resources reflect research and development expenses directly related to the program. They exclude additional expenditures such as patent costs, allocation of indirect expenses, and other services provided by NIH and DoD.
 
During the years ended December 31, 2012, 2011, and 2010, we incurred direct costs of $2.2 million, $1.7 million and $2.5 million, respectively, to support the development of drug candidates for dengue fever, Lassa fever virus and other drug candidates for certain arenavirus pathogens and hemorrhagic fevers. During the year ended December 31, 2012, $1.2 million was spent on internal human resources and $1.0 million was spent mainly on the optimization and chemistry of lead antiviral compounds. During the year ended December 31, 2011, we spent $1.7 million for dengue fever, Lassa virus and other drug candidates for certain arenavirus pathogens and hemorrhagic fevers, of which $766,000 was mainly for internal human resources and $916,000 for medicinal chemistry and pre-clinical testing of our drug candidates. From inception of these programs to date, we spent a total of $12.5 million related to the programs, of which $4.4 million, $7.7 million and $299,000 were expended on internal human resources, pre-clinical work and equipment, respectively. These resources reflect research and development expenses directly related to the programs. They exclude additional expenditures such as patent costs, allocation of indirect expenses, and other services provided by NIH and DoD.

     During the years ended December 31, 2012, 2011, and 2010, we spent $4,000, $981,000 and $1.5 million, respectively, to support the development of a broad-spectrum antiviral drug candidate. During the year ended December 31, 2012, the $4,000 incurred was spent to support medicinal chemistry. During the year ended December 31, 2011, we spent $329,000 on internal human resources and $653,000 mainly on the optimization of lead antiviral compounds. From the inception of our program to develop a broad-spectrum antiviral drug to-date, we have spent a total of $2.5 million related to the program, of which $1.0 million and $1.5 million were mainly expended on internal human resources and supporting medicinal chemistry and the optimization of lead antiviral compounds, respectively. These resources reflect expenses directly related to the program. They exclude additional expenditures such as patent costs, allocation of indirect expenses, and other services provided by NIH and DoD.
 
The majority of our product programs are in the early stage of development. As a result, we cannot make reasonable estimates of the potential cost for most of our programs to be completed or the time it will take to complete the programs. There is a high risk of non-completion of any program because of the lead time to program completion, scientific issues that may arise and uncertainty of the costs. 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. If we are unable to obtain additional federal funding in the required amounts, the development timeline for these products would slow or possibly be suspended.

Patent preparation expenses for the years ended December 31, 2012, 2011 and 2010 were $1.9 million, $1.8 million and $1.1 million, respectively. These expenses reflect our ongoing efforts to protect our lead drug candidates in expanded geographic territories.
 
Changes in the fair value of certain warrants to acquire common stock are recorded as gains or losses. For the years ended December 31, 2012, 2011, and 2010, we recorded a gain of $804,516 (revised), a gain of $24.4 million (restated) and a loss of $38.1 million (restated), respectively, reflecting changes in the fair market value of warrants and rights to purchase common stock during the respective years. The warrants and rights to purchase our common stock were recorded at fair market value and classified as liabilities. 

Interest expense for the year ended December 31, 2012 was $173,000, reflecting certain vendor payable arrangements.


9


Other income for the years ended December 31, 2012, 2011, and 2010, was $500, $13,000 and $659,000, respectively. Other income normalized in 2011, after we received $648,000 from the U.S. government in 2010 for qualified therapeutic drug discovery tax grant. Other income in 2012, 2011 and 2010 consists of interest income on our cash and cash equivalents.

For the year ended December 31, 2012, we incurred net losses for tax purposes and consequently, recognized an income tax benefit of $7.8 million. For the year ended December 31, 2011, the benefit from income taxes of $36.0 million mainly reflects net losses as well as a partial reduction of our valuation allowance as a significant portion of our deferred tax assets became realizable on a more likely than not basis primarily as a result of the execution of the BARDA Contract and forecasts of pre-tax earnings. Prior to June 30, 2011, we provided a tax valuation allowance on our United States federal and state deferred tax assets based on our evaluation that such assets were not “more likely than not” to be realized.

The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about our future profitability which are inherently uncertain. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. If the current estimates of future taxable income are reduced or not realized, for example, based on an appellate ruling in the PharmAthene litigation described in Item 3, “Legal Proceedings”, the Company’s assessment regarding the realization of deferred tax assets could change. Future changes in the estimated amount of deferred taxes expected to be realized will be reflected in the Company’s financial statements in the period the estimate is changed with a corresponding adjustment to operating results. Changes in estimates may occur often and can have a significant favorable or unfavorable impact on the Company’s operating results from period to period.

In 2012 and 2011, previously available NOLs of approximately $1.2 and $0.9 million, respectively, expired.The remaining NOLs expire in various years between 2018 and 2032, if not utilized.

Liquidity and Capital Resources
 
On December 31, 2012, we had $32.0 million in cash and cash equivalents compared with $49.3 million at December 31, 2011. During the year ended December 31, 2012, we received a $12.3 million milestone payment upon receiving FDA concurrence with respect to the product labeling strategy under the BARDA Contract and net proceeds of $4.9 million from the issuance of debt after deducting the discount and issue costs.

In December 2012, we entered into a loan agreement with a lender to provide the Company a term loan of $5.0 million with a fixed interest rate of 9.85% per annum and a revolving line of credit of $7.0 million with a variable interest rate. Borrowings under the revolving line of credit are based on eligible outstanding accounts receivable and will bear interest at a rate per annum equal to 5.25% plus the higher of: (a) 1.50%, and (b) three-month LIBOR divided by a defined factor. The term of the loan is three years. As of December 31, 2012, the full term loan amount of $5 million was outstanding and no amounts were available to borrow against the revolving line of credit as there were no eligible accounts receivable.
 
Operating activities
Net cash used in operations for the year ended December 31, 2012 was $20.2 million; net cash provided by operations for the year ended December 31, 2011 was $25.6 million and net cash used in operations during the year ended December 31, 2010 was $10.8 million. In 2012, the Company used $17.6 million of cash for the manufacture of Arestvyr and $1.4 million of cash for development and supportive activities for Arestvyr. These cash uses relate to the performance of the BARDA contract. Partially offsetting the above-mentioned items was the receipt of a $12.3 million milestone payment on the BARDA contract relating to FDA concurrence with respect to SIGA’s labeling strategy for Arestvyr. In 2011, operating cash increased with the receipt of a $41 million advance payment on the BARDA contract.

On December 31, 2012 and 2011, our accounts receivable balance was $4.7 million and $2.6 million, respectively. Our account receivable balances primarily reflect $3.8 million of reimbursable development and support costs incurred as part of the work performed under the BARDA Contract. SIGA will receive reimbursement once the Company meets minimum delivery thresholds. The remaining accounts receivable balance reflects work performed during December 2012 in connection with Arestvyr, dengue fever antiviral and Lassa fever antiviral development contracts. Funds outstanding related to the dengue fever antiviral and Lassa fever antiviral development contracts were collected during January and February 2013. Our accounts payable, accrued expenses and other current liabilities balance were $14.5 million and $6.9 million on December 31, 2012 and 2011, respectively. The increase is mainly due to outstanding payables to contract manufacturing organizations for inventory processed under the BARDA Contract.
 

10


Investing activities
Capital expenditures during the years ended December 31, 2012, 2011, and 2010 were approximately $588,200, $237,000 and $550,000, respectively, reflecting purchases of fixed assets in the ordinary course of business. In addition, for the year ended December 31, 2012, we posted $1.3 million of collateral for a surety bond related to the PharmAthene litigation.

The years ended December 31, 2011 and 2010 included several purchases and maturities of U.S. Treasury bills.
 
Financing activities
Cash provided by financing activities was $4.9 million, $2.6 million and $13.2 million, during the years ended December 31, 2012, 2011, and 2010, respectively. During the year ended December 31, 2012, we received proceeds of $10,000, from exercises of options to purchase common stock and net proceeds of $4.9 million from the issuance of debt.

During the year ended December 31, 2011, we received proceeds of $3.9 million from exercises of options and warrants to purchase common stock. The amount of proceeds was offset by the repurchase of common stock to meet minimum statutory tax withholding requirements.

During the year ended December 31, 2010, we received proceeds of $13.2 million from exercises of options and warrants to purchase common stock including proceeds under a letter agreement dated June 19, 2008 (as amended, the “Letter Agreement”) with MacAndrews & Forbes LLC (“M&F”), a related party.
 
Other
We have incurred cumulative net losses and expect to incur additional expenses to perform further research and development activities. We anticipate that we will need additional funds, beyond current capital resources, to complete the development of our products. We believe that the funds expected to be generated from our procurement contract with BARDA (see Note 4) together with our existing capital resources and continuing government contracts and grants will be sufficient to support our operations beyond the next twelve months. Payment from BARDA for delivery of courses of Arestvyr will not commence until after delivery of 500,000 courses. We currently expect achievement of this threshold and the resulting receipt of funds from BARDA to occur during 2013. If 500,000 courses are not delivered or if payment for delivery is not received in 2013, then the Company will experience a significant reduction in our forecasted capital resources and cash flows and consequently will need to seek additional capital resources. Such resources might include procurement contracts, collaborative agreements, strategic alliances, research grants and future equity and debt financing. There is no assurance that we will be successful in obtaining additional funding, or whether any funding from an equity or debt financing would be available on commercially reasonable terms, if at all. If we are unable to raise additional capital, future operations might need to be scaled back or discontinued. Furthermore, as discussed in Item 3, “Legal Proceedings”, our ability to support our operations may be adversely affected by the resolution of the pending appeal and cross-appeal in the litigation with PharmAthene. The financial statements do not include any adjustment relating to the recoverability of the carrying amount of recorded assets and liabilities that might result from the outcome of these uncertainties.
 
Contractual Obligations, Commercial Commitments and Purchase Obligations
 
Future contractual obligations and commercial commitments as of December 31, 2012 are expected to be as follows:
 
 
 
Payments due by period
 
Total
 
Less than 1 year
 
1 to 3 years
 
3 to 5 years
 
Greater than 5 years
Operating lease obligations (1)
$
4,511,434

 
$
866,098

 
$
1,783,332

 
$
1,862,004

 
$

Long term debt (2)
5,853,348

 
1,437,459

 
4,415,889

 

 

Purchase obligations
11,851,104

 
11,851,104

 

 

 

Total contractual obligations
$
22,215,886

 
$
14,154,661

 
$
6,199,221

 
$
1,862,004

 
$


(1)
Includes facilities and office space under an operating lease which expires in 2017. These obligations assume non-termination of agreements and represent expected payments, which are subject to change. In January 2013, we entered into a sublease with an affiliate of M&F, which is expected to commence in the first half of 2013 and to expire in 2020; rent payments under the sublease are not included in the above schedule. Refer to Note 9 for further description.
(2)
Consists of a $5 million term loan with a fixed interest rate of 9.85%. The amounts in the table above assume the payment of interest on our term loan through its maturity date and the payment amount of the notes in accordance with the loan agreement. Interest is payable monthly.


11


Off-Balance Sheet Arrangements
 
The Company does not have any off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Our investment portfolio includes cash, cash equivalents and short-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. We believe that our investment policy is conservative, both in the duration of our investments and the credit quality of the investments we hold. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities and our interest income is sensitive to changes in the general level of U.S. interest rates, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.


12


Item 8. Revised and Restated Financial Statements and Supplementary Data
 
Index to the Revised and Restated Consolidated Financial Statements
 

13



Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of SIGA Technologies, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/loss, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of SIGA Technologies, Inc. and its subsidiary at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2012. However, management has subsequently determined that a material weakness in internal control over financial reporting, related to the accounting for anti-dilution provisions contained in certain outstanding warrant agreements, existed as of that date. Accordingly, Management's Report on Internal Control over Financial Reporting appearing under Item 9A has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting relating to the accounting for anti-dilution provisions contained in certain outstanding warrant agreements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2012 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 3 to the consolidated financial statements, the 2011 and 2010 consolidated financial statements have been restated to correct an error.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

14


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP


New York, New York
March 6, 2013, except for the restatement described in Note 3 to the consolidated financial statements and the matter described in the penultimate paragraph of Management's Report on Internal Control over Financial Reporting (Restated), as to which the date is May 14, 2013.




15


SIGA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
 
As of December 31, 2012 and 2011
 
December 31, 2012
 
December 31, 2011 (Restated)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
32,017,490

 
$
49,256,930

Accounts receivable
970,288

 
2,637,103

Inventory
17,641,922

 

Prepaid expenses and other current assets
801,149

 
356,898

Deferred tax assets
33,515,327

 
727,772

Total current assets
84,946,176

 
52,978,703

 
 
 
 
Property, plant and equipment, net
987,869

 
818,992

Receivables from long-term contract
3,771,219

 

Deferred costs
2,841,534

 
250,072

Goodwill
898,334

 
898,334

Other assets
2,181,720

 
285,345

Deferred tax assets, net
10,209,278

 
35,149,031

Total assets
$
105,836,130

 
$
90,380,477

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
10,189,917

 
$
2,278,316

Accrued expenses and other current liabilities
4,283,849

 
4,644,461

Current common stock warrants
333,793

 
125,841

Current portion of long term debt
954,738

 

Total current liabilities
15,762,297

 
7,048,618

 
 
 
 
Deferred revenue
57,052,020

 
41,001,110

Common stock warrants
657,246

 
1,412,304

Long term debt
3,955,262

 

Other liabilities
166,303

 
147,586

Total liabilities
77,593,128

 
49,609,618

Commitments and contingencies (Note 14)
 
 
 
Stockholders’ equity
 
 
 
Common stock ($.0001 par value, 100,000,000 shares authorized, 51,642,520 and 51,637,352 issued and outstanding at December 31, 2012, and December 31, 2011, respectively)
5,164

 
5,164

Additional paid-in capital
167,588,374

 
166,056,692

Accumulated deficit
(139,350,536
)
 
(125,290,997
)
Total stockholders’ equity
28,243,002

 
40,770,859

Total liabilities and stockholders’ equity
$
105,836,130

 
$
90,380,477


The accompanying notes are an integral part of these financial statements.
SIGA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/LOSS
 
For the Years Ended December 31, 2012, 2011 and 2010
 
2012
 
2011 (Restated)
 
2010 (Restated)
Revenues
 
 
 
 
 
Research and development
$
8,970,835

 
$
12,725,792

 
$
19,215,837

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Selling, general and administrative
11,410,131

 
23,931,713

 
8,130,669

Research and development
18,213,036

 
18,367,348

 
22,658,959

Patent preparation fees
1,883,405

 
1,808,168

 
1,148,597

Total operating expenses
31,506,572

 
44,107,229

 
31,938,225

Operating loss
(22,535,737
)
 
(31,381,437
)
 
(12,722,388
)
Decrease (increase) in fair value of common stock warrants
804,516

 
24,436,309

 
(38,110,030
)
Interest expense
(172,993
)
 

 

Other income, net
522

 
13,061

 
659,292

   Loss before income taxes
(21,903,692
)
 
(6,932,067
)
 
(50,173,126
)
Benefit from (provision for) income taxes
7,844,153

 
36,031,646

 
(175,175
)
Net income (loss)
$
(14,059,539
)
 
$
29,099,579

 
$
(50,348,301
)
Basic earnings (loss) per share
$
(0.27
)
 
$
0.57

 
$
(1.12
)
Diluted earnings (loss) per share
$
(0.27
)
 
$
0.09

 
$
(1.12
)
Weighted average shares outstanding: basic
51,639,622

 
50,929,491

 
45,151,774

Weighted average shares outstanding: diluted
51,639,622

 
54,061,650

 
45,151,774

 
 
 
 
 
 
Net income (loss)
$
(14,059,539
)
 
$
29,099,579

 
$
(50,348,301
)
Change in net unrealized gain (loss) on short-term investments

 
(4,067
)
 
4,067

Comprehensive income (loss)
$
(14,059,539
)
 
$
29,095,512

 
$
(50,344,234
)

The accompanying notes are an integral part of these financial statements.

16


SIGA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
For the Years Ended December 31, 2012, 2011 and 2010
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
Common Stock
 
Paid - In
 
Accumulated
 
Comprehensive
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
Deficit
 
Income (Loss)
 
Equity
Balances, December 31, 2009 (Restated)
43,061,635

 
$
4,306

 
$
100,548,497

 
$
(104,042,276
)
 
$

 
$
(3,489,473
)
Net loss


 


 


 
(50,348,301
)
 


 
(50,348,301
)
Change in net unrealized gain (loss) on short-term investments


 


 


 


 
4,067

 
4,067

Comprehensive loss


 


 


 


 


 
(50,344,234
)
Issuance of common stock upon exercise of stock options and warrants
5,957,808

 
596

 
8,880,394

 


 


 
8,880,990

Stock based compensation


 


 
1,483,955

 


 


 
1,483,955

Fair value of exercised common stock warrants


 


 
30,555,845

 


 


 
30,555,845

Balances, December 31, 2010 (Restated)
49,019,443

 
4,902

 
141,468,691

 
(154,390,577
)
 
4,067

 
(12,912,917
)
Net income


 


 


 
29,099,579

 


 
29,099,579

Change in net unrealized gain (loss) on short-term investments


 


 


 


 
(4,067
)
 
(4,067
)
Comprehensive income


 


 


 


 


 
29,095,512

Issuance of common stock upon exercise of stock options and warrants
2,123,454

 
213

 
3,946,024

 


 


 
3,946,237

Stock based compensation
700,000

 
70

 
12,463,702

 


 


 
12,463,772

Tax obligation from stock-based compensation
(205,545
)
 
(21
)
 
(1,353,635
)
 


 


 
(1,353,656
)
Fair value of exercised common stock warrants
 
 
 
 
9,531,911

 
 
 
 
 
9,531,911

Balances, December 31, 2011 (Restated)
51,637,352

 
5,164

 
166,056,693

 
(125,290,998
)
 

 
40,770,859

Net loss


 


 


 
(14,059,539
)
 


 
(14,059,539
)
Change in net unrealized gain (loss) on short-term investments


 


 


 


 


 

Comprehensive loss


 


 


 


 


 
(14,059,539
)
Issuance of common stock upon exercise of stock options and warrants
5,168

 

 
(247,833
)
 


 


 
(247,833
)
Stock based compensation


 


 
1,779,515

 


 


 
1,779,515

Balances, December 31, 2012
51,642,520

 
$
5,164

 
$
167,588,375

 
$
(139,350,537
)
 
$

 
$
28,243,002


The accompanying notes are an integral part of these financial statements.

17


SIGA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Years Ended December 31, 2012, 2011 and 2010
 
2012
 
2011 (Restated)
 
2010 (Restated)
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(14,059,539
)
 
$
29,099,579

 
$
(50,348,301
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and other amortization
419,358

 
568,288

 
625,343

Increase (decrease) in fair value of warrants
(804,516
)
 
(24,436,309
)
 
38,099,969

Stock based compensation
1,779,515

 
12,463,772

 
1,483,955

Changes in assets and liabilities:
 
 
 
 
 
                     Accounts receivable
(2,104,404
)
 
365,041

 
(596,283
)
                     Inventory
(17,641,922
)
 

 

                     Deferred costs
(2,591,462
)
 
(250,072
)
 

                     Prepaid expenses
(444,251
)
 
12,119

 
1,216,055

                     Other assets
(548,419
)
 
(4,697
)
 
24,103

                     Deferred income taxes, net
(7,847,802
)
 
(36,051,978
)
 
175,175

                     Accounts payable, accrued expenses and other current liabilities
7,550,989

 
2,659,597

 
(125,929
)
                     Deferred revenue
16,050,910

 
41,001,110

 

                     Other liabilities
18,717

 
147,586

 
(1,379,471
)
              Net cash provided by (used in) operating activities
(20,222,826
)
 
25,574,036

 
(10,825,384
)
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(588,235
)
 
(237,023
)
 
(549,944
)
Collateral for surety bond
(1,347,956
)
 

 

Proceeds from maturity of short term investments

 
40,000,000

 
31,250,000

Purchases of short term investments

 
(25,004,717
)
 
(41,235,922
)
              Net cash provided by (used in) investing activities
(1,936,191
)
 
14,758,260

 
(10,535,866
)
Cash flows from financing activities:
 
 
 
 
 
Net proceeds from exercise of warrants and options
9,577

 
3,946,237

 
13,196,990

Repurchase of common stock

 
(1,353,656
)
 

Proceeds from the issuance of debt
4,910,000

 

 

              Net cash provided by financing activities
4,919,577

 
2,592,581

 
13,196,990

Net increase (decrease) in cash and cash equivalents
(17,239,440
)
 
42,924,877

 
(8,164,260
)
Cash and cash equivalents at beginning of period
49,256,930

 
6,332,053

 
14,496,313

Cash and cash equivalents at end of period
$
32,017,490

 
$
49,256,930

 
$
6,332,053

 
 
 
 
 
 
Supplemental disclosure of non-cash financing activities:
 
 
 
 
 
   Reclass of common stock warrant liability to additional paid-in capital upon warrant exercise
$

 
$
9,531,911

 
$
30,555,845


The accompanying notes are an integral part of these financial statements

18


SIGA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Organization and Basis of Presentation
 
Description of Business
SIGA Technologies, Inc. (“SIGA” or the “Company”) is a pharmaceutical company specializing in the development and commercialization of pharmaceutical solutions for some of the most lethal disease-causing pathogens in the world - smallpox, Ebola, dengue, Lassa fever and other dangerous viruses. The Company aims to discover, develop, manufacture and commercialize drugs to prevent and treat these high-priority threats. The Company’s mission is to disarm dreaded viral diseases and create robust, modern biodefense countermeasures.
 
Basis of presentation
The consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and reflect the consolidated financial position, results of operations and cash flows for all periods presented.
 
The consolidated 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. Management believes that the funds expected to be generated from its procurement contract with the Biomedical Advance Research and Development Authority (“BARDA”) (see Note 4) together with existing capital resources and continuing government grants and contracts will be sufficient to support its operations beyond the next twelve months. As discussed in Note 4, payment from BARDA for delivery of courses of Arestvyr (tecovirimat), also known as ST-246®, will not commence until after delivery of 500,000 courses. Management currently expects achievement of this threshold and the resulting receipt of funds from BARDA to occur during 2013. If 500,000 courses are not delivered or if payment for delivery is not received in 2013, then the Company will experience a significant reduction in our forecasted capital resources and cash flows and consequently will need to seek additional capital resources. Such resources may include procurement contracts, collaborative agreements, strategic alliances, research grants, and future equity and debt financing. There is no assurance that the Company will be successful in obtaining additional funding, or whether any funding from either an equity or debt financing would be available on commercially reasonable terms, if at all. If the Company is unable to raise additional capital, future operations might need to be scaled back or discontinued. 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.

2. Summary of Significant Accounting Policies
 
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to 2012 presentation.

Use of Estimates
The consolidated 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. The most significant estimates include the variables used in the calculation of fair value of stock-based awards including options and warrants granted or issued by the Company; reported amounts of revenue and expenses; impairment of goodwill; and the realization of deferred tax assets. 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 Equivalents, Short-term Investments and Marketable Securities
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Highly liquid investments with maturities greater than three months and less than one year are classified as short-term investments. Such investments are generally money market funds, bank certificates of deposit, and U.S. Treasury bills.
 
The Company classifies short-term investments and marketable securities with readily determinable fair values as “available-for-sale.” Investments in securities that are classified as available-for-sale are measured at fair market value in the balance sheet and unrealized holding gains and losses on investments are reported as a separate component of stockholders’ equity until realized.

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 and no allowance has been provided for potential credit losses because management believes that any such losses would be minimal, if any.

Accounts Receivable
Accounts receivable are recorded net of provisions for doubtful accounts. At December 31, 2012 and 2011, 100% of accounts receivables represented receivables from National Institutes of Health (“NIH”) and BARDA. An allowance for doubtful accounts is based on specific analysis of the receivables. At December 31, 2012 and 2011, the Company had no allowance for doubtful accounts.
 
Inventory
Inventories are stated at the lower of cost or estimated realizable value. The Company capitalizes inventory costs associated with the Company’s products when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. Inventory is evaluated for impairment periodically to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to write down such unmarketable inventory to its estimated realizable value.

Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line method over the estimated useful lives of the various asset classes. The estimated useful lives are as follows: 5 years for laboratory equipment; 3 years for computer equipment; and 7 years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the lease term. Maintenance, repairs and minor replacements are charged to expense as incurred.
 
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectability is reasonably assured, title and risk of loss have been transferred to the customer and there are no further contractual obligations.

Certain arrangements may provide for multiple deliverables, in which there may be a combination of: up-front licenses; research, development, regulatory or other services; and delivery of product. Multiple deliverable arrangements can be divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (i) the delivered item(s) have value to the customer on a standalone basis and (ii) in circumstances in which an arrangement includes a general right of return with respect to delivered items, then performance of the remaining deliverables must be considered probable and substantially in control of the Company. If multiple deliverables cannot be divided into separate units of accounting then the deliverables must be combined into a single unit of accounting.

Total consideration in a multiple deliverable arrangement is allocated to units of accounting on a relative fair value of selling price basis. Consideration allocated to a delivered item or unit of accounting is limited to the amount that is not contingent upon delivery of additional items.

Subject to the above, payments for development activities are recognized as revenue as earned, over the period of effort. Funding for the acquisition of capital assets under cost-plus-fee contracts or grants is evaluated for appropriate recognition as a reduction to the cost of the asset, a financing arrangement, or revenue based on the specific terms of the related grant or contract.  

For the years ended December 31, 2012, 2011, and 2010, revenues from NIH and BARDA were 100%, 96% and 91%, respectively, of total revenues recognized by the Company.
 
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, including services related to the Company’s clinical trials 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.
 

19


Goodwill
The Company evaluates goodwill for impairment at least annually or as circumstances warrant. The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. The Company operates as one business and one reporting unit. Therefore, the goodwill impairment analysis is performed on the basis of the Company as a whole, using the market capitalization of the Company as an estimate of its fair value.

Share-based Compensation
Stock-based compensation expense for all share-based payment awards made to employees and directors is determined on the grant date; for options awards, fair value is estimated using the Black-Scholes model and for stock appreciation rights (“SARs”), fair value is estimated using a Monte Carlo method. The value of the portion of the award that is ultimately expected to vest is recorded as expense over the requisite service periods in the Company’s consolidated statement of operations.
 
These compensation costs are recognized net of an estimated forfeiture rate over the requisite service periods of the awards. Forfeitures are estimated on the date of the respective grant and revised if actual or expected forfeiture activity differs from original estimates.
 
Income Taxes
The Company recognizes income taxes utilizing the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities at enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established if it is more likely than not that some or the entire deferred tax asset will not be realized. The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about the Company’s future profitability which are inherently uncertain.
 
The Company applies the applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. The Company has no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from December 31, 2012. The Company files federal income tax returns and income tax returns in various state and local tax jurisdictions. The open tax years for U.S. federal, state and local tax returns is generally 2009 - 2012; open tax years relating to unused net operating loss carryforwards (“NOLs”) begin in 1998. In the event that the Company concludes that it is subject to interest and/or penalties arising from uncertain tax positions, the Company will present interest and penalties as a component of income taxes. No amounts of interest or penalties were recognized in the Company’s consolidated financial statements for each of the years in the three-year period ended December 31, 2012.
 
Net Loss per Share
The objective of basic earning per share (“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, except that it also gives effect to all potentially dilutive common shares outstanding during the period.


20


The following is a reconciliation of the basic and diluted net income (loss) per share computation: 
 
Year Ended December 31,
 
2012 (Revised)
 
2011 (Restated)
 
2010 (Restated)
Net (loss) income for basic EPS
$
(14,059,539
)
 
$
29,099,579

 
$
(50,348,301
)
Change in fair value of warrants

 
(24,436,309
)
 

Net loss (income), adjusted for change in fair value of warrants for diluted EPS
$
(14,059,539
)
 
$
53,535,888

 
$
(50,348,301
)
Weighted-average shares: basic
51,639,622

 
50,929,491

 
45,151,774

Effect of potential common shares

 
3,132,159

 

Weighted-average shares: diluted
51,639,622

 
54,061,650

 
45,151,774

Earnings (loss) per share: basic
$
(0.27
)
 
$
0.57

 
$
(1.12
)
Earnings (loss) per share: diluted
$
(0.27
)
 
$
0.09

 
$
(1.12
)
Anti-dilutive employee share-based awards, excluded

 
504,668

 


The diluted earnings per share calculation reflects the effect of the assumed exercise of outstanding warrants and any corresponding elimination of the benefit included in operating results from the change in fair value of the warrants. Diluted shares outstanding include the dilutive effect of in-the-money options and warrants, unvested restricted stock and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the average amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible, are collectively assumed to be used to repurchase shares.

The Company incurred losses for the years ended December 31, 2012 and 2010 whereas for the year ended December 31, 2011, the Company had net income. For all periods presented, certain equity instruments are excluded from the calculation of diluted earnings (loss) per share as the effect of such shares is anti-dilutive. The weighted average number of equity instruments excluded consist of:
 
Year Ended December 31,
 
2012
 
2011
 
2010
Stock Options
2,865,861

 
504,668

 
4,649,361

Stock-Settled Stock Appreciation Rights
421,020

 

 

Restricted Stock Units
351,011

 

 

Warrants
2,263,538

 

 
8,052,933


As discussed in Note 6, the appreciation of each SSAR was capped at a determined maximum value. As a result, the weighted average number shown in the table above for stock-settled stock appreciation rights reflects the weighted average maximum number of shares that could be issued.

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. Common stock warrants which are classified as liabilities are recorded at their fair market value as of each reporting period.

The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.

21



Level 3 – Instruments where significant value drivers are unobservable to third parties.

The Company uses model-derived valuations where inputs are observable in active markets to determine the fair value of certain common stock warrants on a recurring basis and classify such warrants in Level 2. The Company utilizes the Black-Scholes model consisting of the following variables: (i) the closing price of SIGA’s common stock; (ii) the expected remaining life of the warrant; (iii) the expected volatility using a weighted-average of historical volatilities from a combination of SIGA and comparable companies; and (iv) the risk-free market rate. At December 31, 2012 and 2011, the fair value of such warrants was as follows:
 
 
2012
(Revised)
 
2011
(Restated)
Common stock warrants, current
 
$
333,793

 
$
125,841

Common stock warrants, non-current
 
657,246

 
1,412,304

 
 
$
991,039

 
$
1,538,145


For the years ended December 31, 2012 and 2011, SIGA did not hold any Level 3 securities.

As of December 31, 2012, the Company had $5.0 million outstanding from a loan entered into on December 31, 2012 (refer to Note 8 for details). The fair value of the loan approximates cost at December 31, 2012.
 
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.

Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued updated accounting guidance, which amended guidance on how to test goodwill for impairment. This update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. The updated guidance is effective for annual impairment tests performed in fiscal years beginning after December 15, 2011 with early adoption permitted. SIGA adopted this update for the year ended December 31, 2012 and the update did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective during interim and annual period beginning after December 15, 2011. SIGA adopted this update for the year ended December 31, 2012 and the update did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued guidance that changed the requirement for presenting Comprehensive Income in the consolidated financial statements. The update requires an entity to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. SIGA adopted this new guidance on January 1, 2012.


22


3. Restatement and Revision of Consolidated Financial Statements

On May 8, 2013, the Company concluded, based on the recommendation of management, that the previously issued consolidated financial statements as of and for the years ended December 31, 2011 and 2010 included in the Company's most recently filed Form 10-K are no longer appropriate to rely upon because they failed to account for certain outstanding warrants to purchase common stock of the Company (the “Warrants”) as liabilities rather than equity and to account for non-cash charges resulting from the periodic “mark-to-market” adjustments of the Warrants. The Company has determined that the aforementioned financial statements should be restated to correct this error and reflect the aforementioned liabilities and non-cash charges.

The audited consolidated financial statements and related disclosures as of and for the year ended December 31, 2012 have also been revised to correct this error and conform with the restated financial statements referred to herein. The impact to the financial statements as of and for the year ended December 31, 2012 was not material.

The effects of the revision and restatement on the consolidated balance sheets are summarized in the following table:
 
December 31, 2012
 
December 31, 2011
 
As Originally Reported
 
Adjustments
 
Revised
 
As Originally Reported
 
Adjustments
 
Restated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
32,017,490

 
 
 
$
32,017,490

 
$
49,256,930

 
 
 
$
49,256,930

Accounts receivable
970,288

 
 
 
970,288

 
2,637,103

 
 
 
2,637,103

Inventory
17,641,922

 
 
 
17,641,922

 

 
 
 

Prepaid expenses and other current assets
801,149

 
 
 
801,149

 
356,898

 
 
 
356,898

Deferred tax assets, net
33,515,327

 
 
 
33,515,327

 
727,772

 
 
 
727,772

              Total current assets
84,946,176

 

 
84,946,176

 
52,978,703

 

 
52,978,703

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
987,869

 
 
 
987,869

 
818,992

 
 
 
818,992

Receivables from long-term contract
3,771,219

 
 
 
3,771,219

 

 
 
 

Deferred costs
2,841,534

 
 
 
2,841,534

 
250,072

 
 
 
250,072

Goodwill
898,334

 
 
 
898,334

 
898,334

 
 
 
898,334

Other assets
2,181,720

 
 
 
2,181,720

 
285,345

 
 
 
285,345

Deferred tax assets, net
10,209,278

 
 
 
10,209,278

 
35,149,031

 
 
 
35,149,031

              Total assets
$
105,836,130

 
$

 
$
105,836,130

 
$
90,380,477

 
$

 
$
90,380,477

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 Accounts payable
$
10,189,917

 
 
 
$
10,189,917

 
$
2,278,316

 
 
 
$
2,278,316

Accrued expenses and other current liabilities
4,283,849

 
 
 
4,283,849

 
4,644,461

 
 
 
4,644,461

Current common stock warrants
287,036

 
46,757

 
333,793

 

 
125,841

 
125,841

Current portion of long term debt
954,738

 
 
 
954,738

 

 
 
 

              Total current liabilities
15,715,540

 
46,757

 
15,762,297

 
6,922,777

 
125,841

 
7,048,618

 
 
 
 
 
 
 
 
 
 
 
 
Deferred revenue
57,052,020

 
 
 
57,052,020

 
41,001,110

 
 
 
41,001,110

Common stock warrants

 
657,246

 
657,246

 
622,938

 
789,366

 
1,412,304

Long term debt
3,955,262

 
 
 
3,955,262

 

 
 
 

Other liabilities
166,303

 
 
 
166,303

 
147,586

 
 
 
147,586

              Total liabilities
76,889,125

 
704,003

 
77,593,128

 
48,694,411

 
915,207

 
49,609,618

Stockholders' equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
5,164

 
 
 
5,164

 
5,164

 
 
 
5,164

Additional paid-in capital
152,340,303

 
15,248,071

 
167,588,374

 
150,551,211

 
15,505,481

 
166,056,692

Accumulated deficit
(123,398,462
)
 
(15,952,074
)
 
(139,350,536
)
 
(108,870,309
)
 
(16,420,688
)
 
(125,290,997
)
              Total stockholders' equity
28,947,005

 
(704,003
)
 
28,243,002

 
41,686,066

 
(915,207
)
 
40,770,859

              Total liabilities and stockholders' equity
$
105,836,130

 
$

 
$
105,836,130

 
$
90,380,477

 
$

 
$
90,380,477




23


The effects of the revision and restatement on the consolidated statements of operations and comprehensive income/loss are summarized in the following tables:
 
Year Ended December 31, 2012
 
As Originally Reported
 
Adjustments
 
Revised
Revenues
 
 
 
 
 
       Research and development
$
8,970,835

 
 
 
$
8,970,835

Operating expenses
 
 
 
 
 
       Selling, general and administrative
11,410,131

 
 
 
11,410,131

       Research and development
18,213,036

 
 
 
18,213,036

       Patent preparation fees
1,883,405

 
 
 
1,883,405

   Total operating expenses
31,506,572

 

 
31,506,572

   Operating loss
(22,535,737
)
 

 
(22,535,737
)
       Decrease (increase) in fair value of common stock warrants
335,902

 
468,614

 
804,516

       Interest expense
(172,993
)
 
 
 
(172,993
)
       Other income, net
522

 
 
 
522

   Loss before benefit from income taxes
(22,372,306
)
 
468,614

 
(21,903,692
)
       Benefit from income taxes
7,844,153

 
 
 
7,844,153

Net income (loss)
$
(14,528,153
)
 
$
468,614

 
$
(14,059,539
)
Basic earnings (loss) per share
$
(0.28
)
 
$
0.01

 
$
(0.27
)
Diluted earnings (loss) per share
$
(0.28
)
 
$
0.01

 
$
(0.27
)
Weighted average shares outstanding: basic
51,639,622

 

 
51,639,622

Weighted average shares outstanding: diluted
51,639,622

 

 
51,639,622


 
Year Ended December 31, 2011
 
As Originally Reported
 
Adjustments
 
Restated
Revenues
 
 
 
 
 
       Research and development
$
12,725,792

 
 
 
$
12,725,792

Operating expenses
 
 
 
 
 
       Selling, general and administrative
23,931,713

 
 
 
23,931,713

       Research and development
18,367,348

 
 
 
18,367,348

       Patent preparation fees
1,808,168

 
 
 
1,808,168

   Total operating expenses
44,107,229

 

 
44,107,229

   Operating loss
(31,381,437
)
 

 
(31,381,437
)
       Decrease (increase) in fair value of common stock warrants
8,930,906

 
15,505,403

 
24,436,309

       Other income, net
13,061

 
 
 
13,061

   Loss before benefit from income taxes
(22,437,470
)
 
15,505,403

 
(6,932,067
)
       Benefit from income taxes
36,031,646

 
 
 
36,031,646

Net income (loss)
$
13,594,176

 
$
15,505,403

 
$
29,099,579

Basic earnings (loss) per share
$
0.27

 
$
0.30

 
$
0.57

Diluted earnings (loss) per share
$
0.09

 
$

 
$
0.09

Weighted average shares outstanding: basic
50,929,491

 

 
50,929,491

Weighted average shares outstanding: diluted
54,061,650

 

 
54,061,650



24


 
Year Ended December 31, 2010
 
As Originally Reported
 
Adjustments
 
Restated
Revenues
 
 
 
 
 
       Research and development
$
19,215,837

 
 
 
$
19,215,837

Operating expenses
 
 
 
 
 
       Selling, general and administrative
8,130,669

 
 
 
8,130,669

       Research and development
22,658,959

 
 
 
22,658,959

       Patent preparation fees
1,148,597

 
 
 
1,148,597

   Total operating expenses
31,938,225

 

 
31,938,225

   Operating loss
(12,722,388
)
 

 
(12,722,388
)
       Decrease (increase) in fair value of common stock warrants
(15,957,068
)
 
(22,152,962
)
 
(38,110,030
)
       Other income, net
659,292

 
 
 
659,292

   Loss before benefit from income taxes
(28,020,164
)
 
(22,152,962
)
 
(50,173,126
)
       Benefit from income taxes
(175,175
)
 
 
 
(175,175
)
Net income (loss)
$
(28,195,339
)
 
$
(22,152,962
)
 
$
(50,348,301
)
Basic earnings (loss) per share
$
(0.62
)
 
$
(0.50
)
 
$
(1.12
)
Diluted earnings (loss) per share
$
(0.62
)
 
$
(0.50
)
 
$
(1.12
)
Weighted average shares outstanding: basic
45,151,774

 

 
45,151,774

Weighted average shares outstanding: diluted
45,151,774

 

 
45,151,774


25


The effects of the revision and restatement on the consolidated statements of cash flows are summarized in the following tables:

 
December 31, 2012
 
As Originally Reported
 
Adjustments
 
Revised
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(14,528,153
)
 
$
468,614

 
$
(14,059,539
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
 
 
    Depreciation and other amortization
419,358

 
 
 
419,358

              Increase in fair value of warrants
(335,902
)
 
(468,614
)
 
(804,516
)
              Stock based compensation
1,779,515

 
 
 
1,779,515

              Changes in assets and liabilities:
 
 
 
 
 
                     Accounts receivable
(2,104,404
)
 
 
 
(2,104,404
)
                     Inventory
(17,641,922
)
 
 
 
(17,641,922
)
                     Deferred costs
(2,591,462
)
 
 
 
(2,591,462
)
                     Prepaid expenses
(444,251
)
 
 
 
(444,251
)
                     Other assets
(548,419
)
 
 
 
(548,419
)
                     Deferred revenue
16,050,910

 
 
 
16,050,910

                     Accounts payable, accrued expenses and other current liabilities
7,550,989

 
 
 
7,550,989

                     Deferred income taxes, net
(7,847,802
)
 
 
 
(7,847,802
)
                     Other liabilities
18,717

 
 
 
18,717

              Net cash used in operating activities
(20,222,826
)
 

 
(20,222,826
)
Cash flows from investing activities:
 
 
 
 
 
       Capital expenditures
(588,235
)
 
 
 
(588,235
)
       Collateral for surety bond
(1,347,956
)
 
 
 
(1,347,956
)
              Net cash provided by (used in) investing activities
(1,936,191
)
 

 
(1,936,191
)
Cash flows from financing activities:
 
 
 
 
 
Net proceeds from exercise of warrants and options
9,577

 
 
 
9,577

Proceeds from issuance of debt
4,910,000

 
 
 
4,910,000

              Net cash provided by financing activities
4,919,577

 

 
4,919,577

Net increase (decrease) in cash and cash equivalents
(17,239,440
)
 

 
(17,239,440
)
Cash and cash equivalents at beginning of period
49,256,930

 
 
 
49,256,930

Cash and cash equivalents at end of period
$
32,017,490

 
$

 
$
32,017,490

 
 
 
 
 
 
Supplemental disclosure of non-cash financing activities:
 
 
 
 
 
   Reclass of common stock warrant liability to additional paid-in capital upon exercise
$

 
 
 
$










26


 
December 31, 2011
 
As Originally Reported
 
Adjustments
 
Restated
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
13,594,176

 
$
15,505,403

 
$
29,099,579

Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
 
 
    Depreciation and other amortization
568,288

 


 
568,288

              Increase in fair value of warrants
(8,930,906
)
 
(15,505,403
)
 
(24,436,309
)
              Stock based compensation
12,463,772

 


 
12,463,772

              Changes in assets and liabilities:
 
 
 
 
 
                     Accounts receivable
365,041

 


 
365,041

                     Deferred costs
(250,072
)
 


 
(250,072
)
                     Prepaid expenses
12,119

 


 
12,119

                     Other assets
(4,697
)
 


 
(4,697
)
                     Deferred revenue
41,001,110

 


 
41,001,110

                     Accounts payable, accrued expenses and other current liabilities
2,659,597

 


 
2,659,597

                     Deferred income taxes, net
(36,051,978
)
 


 
(36,051,978
)
                     Other liabilities
147,586