SIGA TECHNOLOGIES INC - Annual Report: 2009 (Form 10-K)

 

 

 

 

x		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the fiscal year ended December 31, 2009
		Or
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from ________ to ___________

 

 

Delaware	13-3864870
(State or other jurisdiction of	(IRS Employer Identification. No.)
incorporation or organization)
35 East 62nd Street	10065
New York, NY	(zip code)
(Address of principal executive offices)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Document	Parts Into Which Incorporated
Proxy Statement for the Company's 2010 Annual	Part III
Meeting of Stockholders

 

 

 

				Page No.
PART I
Item 1.		Business		2
Item 1A.		Risk Factors		12
Item 1B.		Unresolved Staff Comments		27
Item 2.		Properties		27
Item 3.		Legal Proceedings		27
Item 4.		Reserved		27
PART II
Item 5.		Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		28
Item 6.		Selected Financial Data		29
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		38
Item 8.		Financial Statements and Supplementary Data		39
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		58
Item 9A.		Controls and Procedures		58
Item 9B.		Other Information		59
PART III
Item 10.		Directors, Executive Officers and Corporate Governance		60
Item 11.		Executive Compensation		60
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		60
Item 13.		Certain Relationships and Related Transactions, and Director Independence		61
Item 14.		Principal Accountant Fees and Services		61
PART IV
Item 15.		Exhibits, Financial Statements and Schedules		62
SIGNATURES				68

 

     Certain statements in this Annual Report on Form 10-K, including certain statements contained in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “can be,” “expects,” “may affect,” “may depend,” “believes,” “estimate,” “project” and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and SIGA cautions you that any forward-looking information provided by or on behalf of SIGA is not a guarantee of future performance. SIGA’s actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond SIGA’s control, including, but not limited to, (i) the risk that potential products that appear promising to SIGA or its collaborators cannot be shown to be efficacious or safe in subsequent pre-clinical or clinical trials, (ii) the risk that SIGA or its collaborators will not obtain appropriate or necessary governmental approvals to market these or other potential products, (iii) the risk that SIGA may not be able to obtain anticipated funding for its development projects or other needed funding, (iv) the risk that SIGA may not be able to secure funding from anticipated government contracts and grants, (v) the risk that SIGA may not be able to secure or enforce sufficient legal rights in its products, including patent protection, for its products, (vi) the risk that any challenge to our patent and other property rights, if adversely determined, could affect our business and, even if determined favorably, could be costly, (vii) the risk that regulatory requirements applicable to SIGA’s products may result in the need for further or additional testing or documentation that will delay or prevent seeking or obtaining needed approvals to market these products, (viii) the risk that the U.S. Biomedical Advanced Research & Development Authority (“BARDA”) may not complete the procurement set forth in its solicitation for the acquisition of smallpox antiviral for the strategic national stockpile, or may complete it on different terms, (ix) the risk that the volatile and competitive nature of the biotechnology industry may hamper SIGA’s efforts, (x) the risk that the changes in domestic and foreign economic and market conditions may adversely affect SIGA’s ability to advance its research or its products, and (xi) the effect of federal, state, and foreign regulation on SIGA’s businesses. All such forward-looking statements are current only as of the date on which such statements were made. SIGA does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

 

 

 

     Since we were incorporated in Delaware on December 28, 1995, SIGA has pursued the research, development and commercialization of novel products for the prevention and treatment of serious infectious diseases, including products for use in defense against biological warfare agents such as smallpox and Arenaviruses. Our lead product, ST-246®, is an orally administered antiviral drug that targets orthopox viruses. In December 2006 the FDA granted Orphan Drug designation to ST-246® for the prevention and treatment of smallpox. In May 2009, we submitted a response to a Request for Proposal (“RFP”) issued by BARDA with respect to the purchase of 1.7 million courses of a smallpox antiviral (the “BARDA Smallpox RFP”), and, in June 2009, BARDA informed us that our response to the BARDA Smallpox RFP was deemed technically acceptable and in the competitive range. There can be no assurance that SIGA or any other company will receive an award pursuant to this RFP. Further, any award on this RFP would be subject to negotiation of final contract terms and specifications; thus, the final terms under any contract with BARDA may be materially different than those indicated in the RFP.

 

     Our antiviral programs are designed to prevent or limit the replication of the viral pathogen. As a result of the success of our efforts to develop products for use against agents of biological warfare, we have not spent significant resources to further the development of our anti-infective technologies.

 

 

 

 

 

     Anti-Arenavirus Drug: Arenaviruses are hemorrhagic fever viruses that have been classified as Category A agents by the CDC due to the great risk that they pose to public health and national safety. Among the Category A viruses recognized by the CDC, there are four hemorrhagic fever arenaviruses (Junin, Machupo, Guanarito and Sabia viruses) for which there are no FDA approved treatments available. In order to meet this threat, SIGA scientists have identified two lead drug candidates, ST-294 and ST-193, which have demonstrated significant antiviral activity in cell culture assays against arenavirus pathogens. We have also demonstrated the therapeutic efficacy of ST-193 in several animal challenge studies. SIGA also has programs against other hemorrhagic fever viruses, including Dengue Fever, Rift Valley Fever, Lymphocytic choriomeningitis virus and Ebola. We believe that the availability of hemorrhagic fever virus antiviral drugs will address national and global security needs by acting as a significant deterrent and defense against the use of arenaviruses as weapons of bioterrorism. In 2006, SIGA received a three-year grant of $6.0 million from the NIH to support the development of antiviral drugs for Lassa fever virus. In 2008, SIGA received a two-year Phase I grant of $1.0 million from the NIH to support the development of antiviral drugs against Dengue Fever.

 

 

     Broad Spectrum Antiviral: Research and development efforts currently underway at SIGA are aimed at developing a comprehensive biodefense against those microbial agents most likely to be deployed as biological weapons. A broad-spectrum antiviral would have great utility against natural or intentional introduction of these agents into population centers, as well as provide a treatment option in areas where these pathogens are endemic. Screening for antivirals against specific CDC Category A and B pathogens, utilizing SIGA’s high throughput screening program, led to the identification of a unique collection of compounds with broad spectrum antiviral activity. Compounds with potent, non-toxic activity against a diversity of virus families are currently being characterized with respect to antiviral mechanism(s) of action. SIGA chemi-informatics tools are being employed to explore and determine structure-activity relationships within lead compound series. To date, we have documented sub-micromolar activity of the broad spectrum antiviral candidate, ST-669, against viruses in the Poxviridae, Filoviridae, Bunyaviridae, Arenaviridae, Flaviviridae, Togaviridae, Retroviridae, and Picornaviridae families. Lead series are currently being assessed with respect to the mechanism of antiviral action, formulated for testing in vivo, and administered by multiple routes and dosing regimens to those small animal species traditionally used for modeling the pathogenesis of Category A viruses. In September 2009, the Company was awarded a two-year, $1.7 million grant from the NIAID to support the development of broad spectrum, small-molecule inhibitors of bunyaviruses. The grant was awarded under the American Recovery and Reinvestment Act of 2009 (“the Recovery Act”).

 

     Dengue antiviral: Dengue fever, dengue hemorrhagic fever, and dengue shock syndrome are caused by one of four serotypes of dengue virus of the genus Flavivirus. Dengue is considered by the World Health Organization to be the most important arthropod-borne viral disease with an estimated 50-100 million people infected with the virus each year. There is currently no approved antiviral or vaccine for the treatment or prevention of dengue-mediated disease. SIGA currently has four drug series in the pre-clinical development stage, each with activity against all four serotypes of virus. Compounds from two of these series have recently shown efficacy in a murine model of disease, including ST-610 and ST-148. In 2008, SIGA was awarded a $1.0 million, two-year grant from the NIH to support lead optimization and animal efficacy for our Dengue antiviral program.

 

 

     The market for biodefense countermeasures has grown dramatically as a result of the increased awareness of the threat of global terror activity in the wake of the September 11, 2001 terrorist attacks and the October 2001 anthrax letter attacks. The U.S. government is the principal source of worldwide biodefense spending. Most U.S. government spending on biodefense programs results from development funding awarded by NIAID, BARDA and the Department of Defense (“DoD”), and procurement of countermeasures by The U.S. Department of Health and Human Services (“HHS”), the CDC and the DoD. The U.S. government is now the largest source of development and procurement funding for academic institutions and biotechnology companies conducting biodefense research or developing vaccines and immunotherapies directed at potential agents of bioterror or biowarfare.

 

     The Project BioShield Act, which became law in 2004, authorizes the procurement of countermeasures for biological, chemical, radiological and nuclear attacks for the Strategic National Stockpile (“SNS”), which is a national repository of medical assets and countermeasures designed to provide federal, state and local public health agencies with medical supplies needed to treat those affected by terrorist attacks, natural disasters, industrial accidents and other public health emergencies. Project BioShield provided appropriations of $5.6 billion to be expended over ten years. The Pandemic and All-Hazards Preparedness Act (“the Preparedness Act”), passed in 2006, established BARDA as the agency responsible for awarding procurement contracts for biomedical countermeasures and providing development funding for advanced research and development in the biodefense arena. The Preparedness Act supplements the funding available under Project BioShield for radiological, nuclear, chemical and biological countermeasures, and provides funding for infectious disease pandemics. Funding for BARDA is created by annual appropriations by Congress. Congress also appropriates annual funding for the CDC for the procurement of medical assets and countermeasures for the SNS and for NIAID to conduct biodefense research. This appropriation funding supplements amounts available under Project BioShield.

 

 

     Since 2002, HHS has provided over $10 billion to States and localities through various programs to enhance their emergency preparedness activities and to better enable them to respond to large-scale, natural or man-made public health emergencies, such as acts of bioterrorism or infectious disease outbreaks. One of the major concerns in the field of biological warfare agents is smallpox – although declared extinct in 1980 by the World Health Organization (WHO), there is a threat that a rogue nation or a terrorist group may have an illegal inventory of the virus that causes smallpox. The only legal inventories of the virus are held under extremely tight security at the CDC in Atlanta, Georgia and at a laboratory in Russia. As a result of this threat, the U.S. government has announced its intent to make significant expenditures on finding a way to counteract the virus if turned loose by terrorists or on a battlefield.

 

     In addition to the U.S. government, we believe that other potential additional markets for the sale of biodefense countermeasures include:

     The FDA amended its regulations, effective June 30, 2002, so that certain new drug and biological products used to reduce or prevent the toxicity of chemical, biological, radiological, or nuclear substances may be approved for use in humans based on evidence of effectiveness derived only from appropriate animal studies and any additional supporting data. We believe that this change could make it possible for us to have our products which have been proven effective in animal studies to be approved for sale more quickly than under the standard regulatory path.

 

 

     SIGA currently has the following antiviral programs which are in various stages of development, ranging from initial research and screening to Phase I human clinical trials: Orthopox antiviral, New World Arenavirus antiviral, Old World Arenavirus antiviral, Filovirus (Ebola & Marburg) antivirals, Dengue Fever virus antiviral, and Bunyavirus antivirals. Currently there are no approved antivirals available against any of these viruses.

 

 

 

     SIGA has two approaches to the discovery and development of new antiviral compounds: high-throughput screening (“HTS”) and rational drug design. For HTS SIGA uses whole cell virus inhibition assays, pseudotype virus inhibition assays, as well as validated target biochemical assays. SIGA currently has a 200,000 small molecule compound library in-house that is utilized for screening in these various assays. This strategy allows for both target specific and target neutral screening and identification of novel antiviral compounds. Compounds are also screened for toxicity in various cell lines to develop a therapeutic index (“TI”) which is the concentration that the compound is toxic to 50% of the cells (CC50) divided by the concentration of compound required to inhibit 50% of the virus (EC50) (TI= CC50/EC50). Once hits are identified with an acceptable TI they are selected for chemical optimization and proceed into the antiviral drug development pipeline.

 

     For rational drug design SIGA applies advanced receptor structure-based Virtual Ligand Screening technology for ligand/inhibitor discovery. The analysis of the structure reveals potentially “drugable” pockets. The technology allows us to utilize the three-dimensional structure of the target receptor to screen large virtual compound collections as well as databases of commercially available compounds and prioritize them for subsequent experimental validation. Rational drug design is also used to develop structure activity relationships and lead optimization.

 

 

 

 

     National Institutes of Health. On September 23, 2009, the Company was awarded a two-year, $1.7 million grant from the NIH to support the development of broad spectrum, small-molecule inhibitors of bunyaviruses. The grant was awarded under the Recovery Act. In September 2009, SIGA was awarded a three-year, $3.0 million Phase II grant from the NIH to fund the continued development of ST-246® treatment of smallpox vaccine-related adverse events. On September 1, 2008, we were awarded a five-year, $55.0 million contract from the NIAID to support the development of additional formulations and orthopox-related indications for ST-246, our lead orthopox drug candidate. In September 2008, we were awarded $20.0 million from the NIAID in supplemental funding to our existing $16.5 million contract, to accelerate process development related to large-scale manufacturing and packaging of ST-246® and commercial-scale validation. The term of the contract was extended through September 28, 2011. In September 2008, we received a two-year, $1.0 million Phase I grant from the NIH to fund lead optimization and animal efficacy for our Dengue antiviral program. In September 2007, we received a two-year, $600,000 grant supporting the development of ST-246® treatment of smallpox vaccine-related adverse events. In July 2007, the NIH awarded us a two-year grant for a total of $530,000 to support our Strep Bacterial Commensal Vector (“BCV”) program as a subunit vaccine delivery system. In October and August 2006, the NIH awarded us a $16.5 million, 3-year contract and a $4.8 million, 3-year grant, respectively, both to advance the development of our lead drug candidate, ST-246®. In September 2006, the NIH awarded us a $6.0 million, 3-year grant for the development of an antiviral drug for Lassa fever virus. In August 2004, we were awarded four grants totaling approximately $11.1 million to support our work on smallpox and arenaviruses. For the years ending December 31, 2009, 2008, and 2007, we have recognized grants-related revenue of $3.1 million, $3.0 million, and $2.6 million, respectively, from grants with the NIH. In 2009, 2008 and 2007, we recognized $10.7 million, $5.0 million, and $2.2 million, respectively, in revenue from our contracts with the NIH.

 

 

     For a discussion of research and development expenses, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

 

 

     The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. Our competitors include most of the major pharmaceutical companies which have financial, technical and marketing resources significantly greater than ours. Biotechnology and other pharmaceutical competitors include Acambis, Achillion Pharmaceuticals, Arrow Therapeutics, Celldex Therapeutics, Inc., Bavarian Nordic AS, Chimerix Inc., Bioport, Emergent BioSolutions and Novartis. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint venture.

 

     Our biodefense product candidates face significant competition for U.S. government funding for both development and procurement of medical countermeasures for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures.

 

     Our potential commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than any products that we may develop. In addition, we may not be able to compete effectively if our product candidates do not satisfy government procurement requirements, particularly requirements of the U.S. government with respect to biodefense products.

 

 

 

     As of February 15, 2010, we had 55 full-time employees. None of our employees is covered by a collective bargaining agreement, and we consider our employee relations to be good. Our research and development facilities are located in Corvallis, Oregon where we lease approximately 18,100 square feet under a lease agreement signed in January 2007, which expires in December 2011. Our facility in Oregon has been improved to meet the special requirements necessary for the operation of our research and development activities. In January 2010 we entered into a sublease agreement for a 5,700 square foot additional research facility in Corvallis, Oregon.

 

 

     Our commercial success will depend in part on our and our collaborators’ ability to obtain and maintain patent protection for our proprietary technologies, drug targets and potential products and to effectively preserve our trade secrets. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory clearance processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the type and breadth of claims allowed in these patents.

 

     We have exclusively licensed the rights to five issued U.S. patents and one issued European patent. These patents have varying lives and they are related to licensed technology for the strep and Gram-positive products. We have one additional patent application in the U.S. and one application in Europe relating to this technology. In addition, we have a nonexclusive license from Washington University of one issued patent in the U.S. This patent is for the technology used for the Gram-negative product opportunities. We are also exclusive owner of six U.S. patents and eleven U.S. utility patent applications. One of these U.S. utility applications relates to our DegP product opportunities. We are also exclusive owner of two U.S. provisional patent applications.

 

 

PATENTS		Number Non- Exclusively Licensed from Washington Univ.		Number Owned by SIGA		Patent Expiration Dates
U.S.		1		6		2014 (4), 2015 (3), 2021 (1), 2016 (2), 2013 (1), 2017 (1)
Europe				2		2021 (1), 2015 (1), 2014 (1)

 

APPLICATIONS		Number Owned by SIGA
U.S. applications		11
U.S. provisionals		2
PCT		11
Australia		6
Canada		10
Europe		9
Japan		9

     We also rely upon trade secret protection for our confidential and proprietary information. No assurance can be given that other companies will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets.

 

 

     Regulatory Approval Process. Regulation by governmental authorities in the United States and other countries will be a significant factor in the production and marketing of any biopharmaceutical products that we may develop. The nature and the extent to which such regulations may apply to us will vary depending on the nature of any such products. Virtually all of our potential biopharmaceutical products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical and clinical testing and other approval procedures by the FDA and similar health authorities in foreign countries. Various federal statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations requires the expenditure of substantial resources.

 

     In order to test clinically, produce and market products for diagnostic or therapeutic use, a company must comply with mandatory procedures and safety standards established by the FDA and comparable agencies in foreign countries. Before beginning human clinical testing of a potential new drug in the United States, a company must file an IND and receive clearance from the FDA. This application is a summary of the pre-clinical studies that were conducted to characterize the drug, including toxicity and safety studies, as well as an in-depth discussion of the human clinical studies that are being proposed.

 

     The pre-marketing program required for approval by the FDA of a new drug typically involves a time-consuming and costly three-phase process. In Phase I, trials are conducted with a small number of healthy patients to determine the early safety profile, the pattern of drug distribution and metabolism. In Phase II, trials are conducted with small groups of patients afflicted with a target disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multi-center comparative trials are conducted with patients afflicted with a target disease in order to provide enough data for statistical proof of efficacy and safety required by the FDA and others.

 

     The FDA amended its regulations, effective June 30, 2002, so that certain new drug and biological products used to reduce or prevent the toxicity of chemical, biological, radiological, or nuclear substances may be approved for use in humans based on evidence of effectiveness derived only from appropriate animal studies and any additional supporting data.

 

 

     The FDA closely monitors the progress of each of the three phases of clinical testing and may, in its discretion, reevaluate, alter, suspend or terminate the testing based on the data that have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Estimates of the total time required for carrying out such clinical testing vary between two and ten years. Upon completion of such clinical testing, a company typically submits a New Drug Application (“NDA”) or Product License Application (“PLA”) to the FDA that summarizes the results and observations of the drug during the clinical testing. Based on its review of the NDA or PLA, the FDA will decide whether to approve the drug. This review process can be quite lengthy, and approval for the production and marketing of a new pharmaceutical product can require a number of years and substantial funding; there can be no assurance that any approvals will be granted on a timely basis, if at all.

 

     Once the product is approved for sale, FDA regulations govern the production process and marketing activities, and a post-marketing testing and surveillance program may be required to monitor continuously a product’s usage and its effects. Product approvals may be withdrawn if compliance with regulatory standards is not maintained. Other countries in which any products developed by us may be marketed could impose a similar regulatory process.

 

     An alternative regulatory mechanism is also available. The Emergency Use Authorization authority allows the FDA Commissioner to strengthen the public health protections against biological, chemical, radiological, and nuclear agents that may be used to attack the American people or the U.S. armed forces. Under this authority, the FDA Commissioner may allow medical countermeasures to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases or conditions caused by such agents, when there is no adequate, approved, and available alternative.

 

 

     Project BioShield. The Project BioShield Act of 2004 provides expedited procedures for bioterrorism related procurement and awarding of research grants, making it easier for HHS to quickly commit funds to countermeasure projects. Project BioShield relaxes procedures under the Federal Acquisition Regulation for procuring property or services used in performing, administering or supporting biomedical countermeasure research and development. In addition, if the Secretary of HHS deems that there is a pressing need, Project BioShield authorizes the Secretary to use an expedited award process, rather than the normal peer review process, for grants, contracts and cooperative agreements related to biomedical countermeasure research and development activity.

 

     Under Project BioShield, the Secretary of HHS, with the concurrence of the Secretary of the Department of Homeland Security and upon the approval of the President, can contract to purchase unapproved countermeasures for the SNS in specified circumstances. Congress is notified of a recommendation for a stockpile purchase after Presidential approval. Project BioShield specifies that a company supplying the countermeasure to the SNS is paid on delivery of a substantial portion of the countermeasure. To be eligible for purchase under these provisions, the Secretary of HHS must determine that there are sufficient and satisfactory clinical results or research data, including data, if available, from pre-clinical and clinical trials, to support a reasonable conclusion that the countermeasure will qualify for approval or licensing within eight years. Project BioShield also allows the Secretary of HHS to authorize the emergency use of medical products that have not yet been approved by the FDA. To exercise this authority, the Secretary of HHS must conclude that:

     Although this provision permits the Secretary of HHS to circumvent the FDA approval process, its use would likely be limited to rare circumstances.

 

 

     Public Readiness and Emergency Preparedness Act. The Public Readiness and Emergency Preparedness Act, or PREP Act, provides immunity for manufacturers from all claims under state or federal law for “loss” arising out of the administration or use of a “covered countermeasure.” However, injured persons may still bring a suit for “willful misconduct” against the manufacturer under some circumstances. “Covered countermeasures” include security countermeasures and “qualified pandemic or epidemic products”, including products intended to diagnose or treat pandemic or epidemic disease, such as pandemic vaccines, as well as treatments intended to address conditions caused by such products. For these immunities to apply, the Secretary of HHS must issue a declaration in cases of public health emergency or “credible risk” of a future public health emergency. Since 2007, the Secretary of HHS has issued 8 declarations under the PREP Act to protect from liability countermeasures that are necessary to prepare the nation for potential pandemics or epidemics, including a declaration on October 10, 2008, that provides immunity from tort liability as it relates to smallpox countermeasures.

 

     Foreign Regulation. As noted above, in addition to regulations in the United States, we might be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our drug candidates. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The actual time required to obtain clearance to market a product in a particular foreign jurisdiction may vary substantially, based upon the type, complexity and novelty of the pharmaceutical drug candidate, the specific requirements of that jurisdiction, and in some countries whether the FDA has previously approved the drug for marketing. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary from country to country.

 

     Regulations Regarding Government Contracting. The status of an organization as a government contractor in the United States and elsewhere means that the organization is also subject to various statutes and regulations, including the Federal Acquisition Regulation, which governs the procurement of goods and services by agencies of the United States and other countries. These governing statutes and regulations can impose stricter penalties than those normally applicable to commercial contracts, such as criminal and civil damages liability and suspension and debarment from future government contracting. In addition, pursuant to various statutes and regulations, government contracts can be subject to unilateral termination or modification by the government for convenience in the United States and elsewhere, detailed auditing requirements, statutorily controlled pricing, sourcing and subcontracting restrictions and statutorily mandated processes for adjudicating contract disputes.

 

     American Recovery and Reinvestment Act. The Recovery Act was passed on February 13, 2009 in response to the current economic crisis. The Recovery Act is designed to spur job creation and preservation, increase economic activity and investment in long-term economic growth, and improve levels of accountability and transparency in government spending, in part through grants like the one we were awarded in September 2009. Recipients of Recovery Act funds are required to report quarterly on the amount of funds spent, the status of the funded project, the number of jobs created and/or saved as a result of the funded project, and other details, all of which are made available to the public through the federal government’s official Recovery Act website, Recovery.gov. Compliance with Recovery Act requirements will thus involve increased public disclosure regarding our activities, and may increase our costs.

 

 

     We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.

 

 

     In addition, our company website can be found on the Internet at www.siga.com. The website contains information about us and our operations. Copies of each of our filings with the SEC on Form 10-K, Form 10-Q, and Form 8-K, and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. To view the reports, access www.siga.com, click on “Investor Relations” and “SEC Filing”.

 

 

 

 

 

     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:

 

 

 

     We incurred net losses of approximately $17.6 million, $8.6 million, and $5.6 million, for the years ended December 31, 2009, 2008, and 2007, respectively. On January 1, 2009, we recognized a $2.7 million increase in our opening accumulated deficit balance reflecting the cumulative effect of a change in accounting principle recorded in connection with certain warrants to acquire shares of the Company’s common stock. As of December 31, 2009, 2008, and 2007, our accumulated deficit was approximately $90.9 million, $70.6 million, and $62.0 million, respectively. We expect to continue to have significant operating expenses. We will need to generate significant revenues to achieve and maintain profitability.

 

     We cannot guarantee that we will achieve sufficient revenues for profitability. Even if we do achieve profitability, we cannot guarantee that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow slower than we anticipate, or if operating expenses 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 might include acquisitions of other businesses, acquisition expenses and any cash used to make these acquisitions will reduce our available cash.

 

 

     Unless and until we successfully sell any of our products, such as pursuant to the BARDA Smallpox RFP, we will continue to be dependent on our ability to raise money through the exercise of existing options or warrants or through the issuance of new equity. There is no guarantee that we will continue to be successful in raising such funds. If we are unable to raise additional equity funds, we may be forced to discontinue or cease certain operations. We currently have sufficient operating capital to finance our operations beyond the next twelve months. Our annual operating needs vary from year to year depending upon the amount of revenue generated through grants, contracts and licenses and the amount of projects we undertake, as well as the amount of resources we expend, in connection with acquisitions all of which may materially differ from year to year and may adversely affect our business.

 

     Any additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us.

 

 

 

 

     The volatile price of our stock makes it difficult for investors to predict the value of their investments, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to:

     Additionally, because the volume of trading in our stock fluctuates significantly at times, any information about SIGA in the media may result in significant volatility in our stock price.

 

     We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance.

 

     In addition, the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

 

 

     Our certificate of incorporation allows our Board of Directors to issue up to 10,000,000 shares of preferred stock and to fix the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of these shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and could be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with our future activities, could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control.

 

 

     Our directors, executive officers and principal stockholders beneficially own a significant percentage of our common stock. They also have, through the exercise or conversion of certain securities, the right to acquire additional common stock. As a result, these stockholders, if acting together, have the ability to significantly influence the outcome of corporate actions requiring shareholder approval. Additionally, this concentration of ownership may have the effect of delaying or preventing a change in control of SIGA. As of December 31, 2009, directors, officers and principal stockholders beneficially owned approximately 31.0% of our stock.

 

 

 

 

     Until and unless we successfully sell any of our products, our ability to generate revenues will largely depend on our ability to enter into additional research grants, collaborative agreements, strategic alliances, contracts and license agreements with third parties or maintain the agreements we currently have in place. Substantially all of our revenues for the years ended December 31, 2009, 2008, and 2007, respectively, were derived from grants and contracts. Our current revenue is primarily derived from contract work being performed for the NIH under grants and two major contracts which are scheduled to expire from September 2011 through September 2013.

 

     The U.S. government may choose to award future contracts for the supply of smallpox anti-virus and other biodefense product candidates that we are developing to our competitors instead of to us. If we are unable to win particular contracts, we may not be able to operate in the market for products that are provided under those contracts for a number of years. For example, BARDA has issued a request for proposal for treatment courses for symptomatic individuals exposed to smallpox for the SNS. We have submitted a proposal responding to this request for proposal. We expect that our ability to secure an award will depend primarily on the technical merits of ST-246®. The U.S. government may purchase another company’s product candidate instead. If we are unable to consistently win new contract awards over an extended period, or if we fail to anticipate all of the costs and resources that will be required to secure such contract awards, our growth strategy and our business, financial condition, and operating results could be materially adversely affected.

 

 

      Our business with the U.S. government is subject to specific procurement regulations and a variety of other legal compliance obligations. These laws and rules include those related to:

 

     In addition, before awarding us any contracts, the U.S. government could require that we respond satisfactorily to a request to substantiate our commercial viability and industrial capabilities. Compliance with these obligations increases our performance and compliance costs. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. The termination of a government contract or relationship as a result of our failure to satisfy any of these obligations would have a negative impact on our operations and harm our reputation and ability to procure other government contracts in the future.

 

 

     Government contracts customarily contain provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:

     Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the government’s convenience. Under general principles of government contracting law, if the government terminates a contract for convenience, the terminated company may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination.

 

     If the government terminates a contract for default, the defaulting company is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. Our government contracts could be terminated under these circumstances. Some government contracts grant the government the right to use, for or on behalf of the U.S. government, any technologies developed by the contractor under the government contract. If we were to develop technology under a contract with such a provision, we might not be able to prohibit third parties, including our competitors, from using that technology in providing products and services to the government.

 

 

 

 

     We have invested a substantial majority of our efforts and financial resources in the development of our drug candidates. Our ability to generate near-term revenue is particularly dependent on the success of our smallpox antiviral drug candidate ST-246®. The commercial success of our drug candidates will depend on many factors, including:

     We expect to rely on FDA regulations known as the “animal rule” to obtain approval for our biodefense drug candidates. The animal rule permits the use of animal efficacy studies together with human clinical safety trials to support an application for marketing approval. These regulations are relatively new, and we have limited experience in the application of these rules to the drug candidates that we are developing. It is possible that results from these animal efficacy studies may not be predictive of the actual efficacy of our drug candidates in humans. If we are not successful in completing the development and commercialization of our drug candidates, our business could be harmed.

 

 

     Before obtaining regulatory approval for the sale of our drug candidates, we must conduct extensive pre-clinical development, clinical trials to demonstrate the safety of our drug candidates and clinical or animal trials to demonstrate the efficacy of our drug candidates. Pre-clinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials or animal efficacy studies will be successful, and interim results of a clinical trial or animal efficacy study do not necessarily predict final results.

 

 

     A failure of one or more of our clinical trials or animal efficacy studies can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, pre-clinical testing and the clinical trial or animal efficacy study process that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates, including:

 

     In general, our research and development programs are at an early stage of development. To obtain FDA approval for our biological warfare defense products we will be required to perform at least one animal efficacy model and provide animal and human safety data. Our other products will be subject to the usual FDA regulatory requirements which include a number of phases of testing in humans.

 

     The FDA has not approved any of our biopharmaceutical product candidates. Any drug candidate we develop will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial sale. We cannot be sure our approach to drug discovery will be effective or will result in the development of any drug. We cannot predict with certainty whether any drug resulting from our research and development efforts will be commercially available within the next several years, or if they will be available at all.

 

 

     Even if we receive initially positive pre-clinical or clinical results, such results do not mean that similar results will be obtained in later stages of drug development, such as additional pre-clinical testing or human clinical trials. All of our potential drug candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that none of our drug candidates will or can:

     In addition, third parties may preclude us from marketing our drugs through enforcement of their proprietary rights that we are not aware of, or third parties may succeed in marketing equivalent or superior drug products. Our failure to develop safe, commercially viable drugs would have a material adverse effect on our business, financial condition and results of operations.

 

 

 

     A pharmaceutical product cannot generally be marketed in the U.S. until it has completed rigorous pre-clinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Pharmaceutical products typically take many years to satisfy regulatory requirements and require the expenditure of substantial resources depending on the type, complexity and novelty of the product and its intended use.

 

     Before commencing clinical trials in humans, we must submit and receive clearance from the FDA by means of an IND application. Institutional review boards and the FDA oversee clinical trials and such trials:

     Before receiving FDA clearance to market a product in the absence of a medical or public health emergency, we must demonstrate that the product is safe and effective on the patient population that will be treated. Data we obtain from pre-clinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances. Additionally, we have limited experience in conducting and managing the clinical trials and manufacturing processes necessary to obtain regulatory clearance.

 

 

     If full regulatory clearance of a product is granted, this clearance will be limited only to those states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive full marketing clearance.

 

 

 

 

     Any product we develop may not achieve market acceptance. The degree of market acceptance of any of our products will depend on a number of factors, including:

     Physicians, patients or the medical community in general may not accept or utilize any product we may develop. Our ability to generate revenues and income with respect to drugs, if any, developed through the use of our technology will depend, in part, upon the extent to which reimbursement for the cost of such drugs will be available from third-party payors, such as government health administration authorities, private healthcare insurers, health maintenance organizations, pharmacy benefits management companies and other organizations. Third-party payors are increasingly disputing the prices charged for pharmaceutical products. If third-party reimbursement was not available or sufficient to allow profitable price levels to be maintained for drugs we develop, it could adversely affect our business.

 

 

 

 

 

     If we or others identify side effects after any of our products are on the market, or if manufacturing problems occur:

     Any of the above occurrences could harm or prevent sales of the affected products or could increase the costs and expenses of commercializing and marketing these products.

 

 

     The U.S. government and private insurers have considered ways to change, and have changed, the manner in which healthcare services are provided in the U.S. Potential approaches and changes in recent years include controls on healthcare spending and the creation of large purchasing groups. In the future, the U.S. government may institute further controls and limits on healthcare spending, including through the Medicare and Medicaid programs. These controls and limits might affect the payments we could collect from sales of any products. Uncertainties regarding future healthcare reform and private market practices could adversely affect our ability to sell any of our products profitably in the U.S. At present, we do not foresee any change in FDA regulatory policies that would adversely affect our development programs.

 

 

     As we continue to expand our operations outside of the United States, we must comply with numerous laws and regulations relating to international business operations. The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.

 

     The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the U.S. Department of Justice. The SEC is involved with enforcement of the books and records provisions of the FCPA.

 

     Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical studies and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

 

 

     Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. Our expanding presence outside of the United States will require us to dedicate additional resources to compliance with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.

 

     The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting. Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long term disqualification as a government contractor. The termination of a government contract or relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts. The SEC also may suspend or bar issuers from trading securities on United States exchanges for violations of the FCPA’s accounting provisions.

 

 

 

     Our drug candidates require several manufacturing steps, and may involve complex techniques to assure quality and sufficient quantity, especially as the manufacturing scale increases. Our products must be made consistently and in compliance with a clearly defined manufacturing process. Accordingly, it is essential to be able to validate and control the manufacturing process to assure that it is reproducible. Slight deviations anywhere in the manufacturing process, including obtaining materials, filling, labeling, packaging, storage and shipping and quality control and testing, some of which all pharmaceutical companies, including SIGA, experience from time to time, may result in lot failures, delay in the release of lots, product recalls or spoilage. We will not be able to sell any lot that fails to satisfy release testing specifications.

 

 

     We currently rely on third parties to manufacture drug candidates that we require for pre-clinical and clinical development. In addition, we indicated in our response to the BARDA Smallpox RFP that we intend to manufacture ST-246® using contract manufacturers. Any significant delay in obtaining adequate supplies of our drug candidates could adversely affect our ability to develop or commercialize these drug candidates. We expect that we will rely on third parties for a portion of the manufacturing process for commercial supplies of drug candidates that we successfully develop. If our contract manufacturers are unable to scale-up production to generate enough materials for commercial launch, the success of those products may be jeopardized. Our current and anticipated future dependence upon others for the manufacture of our drug candidates may adversely affect our ability to develop drug candidates and commercialize any product that receives regulatory approval on a timely and competitive basis.

 

     We currently rely on third parties to demonstrate regulatory compliance and for quality assurance with respect to the drug candidates manufactured for us. We intend to continue to rely on these third parties for these purposes with respect to production of commercial supplies of drugs that we successfully develop. Manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with applicable regulations.

 

 

     We cannot be certain that our present or future manufacturers will be able to comply with these regulations and other FDA regulatory requirements or similar regulatory requirements outside the U.S. While our contracts call for compliance with all applicable regulatory requirements, we do not control compliance by these manufacturers with these regulations and standards. If we or these third parties fail to comply with applicable regulations, sanctions could be imposed on us, which could significantly and adversely affect supplies of our drug candidates.

 

 

     Our biopharmaceutical research and development sometimes involves the controlled use of hazardous and radioactive materials and biological waste. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for damages, and this liability could exceed our resources. The research and development activities of our company do not produce any unusual hazardous products. We do use small amounts of radioactive isotopes commonly used in pharmaceutical research, which are stored, used and disposed of in accordance with Nuclear Regulatory Commission regulations. We maintain liability insurance in the amount of approximately $5,000,000 and we believe this should be sufficient to cover any contingent loss.

 

     We believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material additional capital expenditures for environmental control facilities in the near term. However, we may have to incur significant costs to comply with current or future environmental laws and regulations.

 

 

 

     U.S. government agencies such as the Defense Contract Audit Agency (the “DCAA”), routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.

 

     The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:

     In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

 

 

     In June 2009 we became aware that we did not comply with certain Department of Health and Human Services (“DHHS”) regulations requiring the submission of yearly audited statements to the Office of the Inspector General (“OIG”) Office of Audit Services. On September 30, 2009, we submitted the required audits and related statements to the OIG Office of Audit Services. We have asked that the OIG not take any enforcement action in this matter. There can be no assurance that no enforcement action will be taken in this matter and, if taken, whether such enforcement action would have a material adverse impact on our operations.

 

 

 

     We must comply with numerous laws and regulations relating to the formation, administration and performance of government contracts, which can make it more difficult for us to retain our rights under these contracts. These laws and regulations affect how we do business with federal, state and local government agencies. Among the most significant government contracting regulations that affect our business are:

 

 

     Our drug candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a drug candidate will prevent us from commercializing the drug candidate. We have limited experience in preparing, filing and prosecuting the applications necessary to gain regulatory approvals and expect to rely on third party contract research organizations and consultants to assist us in this process. Securing FDA approval requires the submission to the FDA of extensive pre-clinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information in order to establish the drug candidate’s safety and efficacy. Our future products may not be effective, may be only moderately effective, or may prove to have significant side effects, toxicities, or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

 

 

     We intend to have our products marketed outside the United States. To market our products in the European Union and many other foreign jurisdictions, we may need to obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval.

 

 

     The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We and our potential future collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

 

 

     We have obtained a “Fast Track” designation from the FDA for ST-246®. However, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw our Fast Track designation if the FDA believes that the designation is no longer supported by data from our clinical development program. Our Fast Track designation does not guarantee that we will qualify for or be able to take advantage of the FDA’s expedited review procedures or that any application that we may submit to the FDA for regulatory approval will be accepted for filing or ultimately approved.

 

 

 

     We do not have the ability to independently conduct the clinical trials, and certain animal trials, required to obtain regulatory approval for our products. We depend on independent investigators, contract research organizations and other third party service providers to conduct trials of our drug candidates and expect to continue to do so. We rely heavily on these third parties for successful execution of our trials, but do not exercise day-to-day control over their activities. We are responsible for ensuring that each of our trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected.

 

     Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule, or may not conduct our trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our drug candidates.

 

 

 

     Our commercial success will depend in part on our ability to obtain and maintain patent protection for our proprietary technologies, drug targets and potential products and to effectively preserve our trade secrets. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory clearance processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the type and breadth of claims allowed in these patents.

 

     We have a nonexclusive license from Washington University with respect to one issued U.S. patent. We are also exclusive owner of six U.S. patents and eleven U.S. patent applications. We are also the exclusive owner of two U.S. provisional patent applications. The issued patents have varying lives.

 

 

 

     We also rely on trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of trade secrets and proprietary information, we require our employees, consultants and some collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with us. These agreements may not provide meaningful protection for our trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information, and adequate remedies may not exist in the event of such unauthorized use or disclosure.

 

 

     Our commercial success will depend significantly on our ability to operate without infringing the patents or proprietary rights of third parties. Our technologies, or the technologies of third parties on which we may depend, may infringe the patents or proprietary rights of others. If there is an adverse outcome in any dispute concerning rights to these technologies, then we could be subject to significant liability, required to license disputed rights from or to other parties and/or required to cease using a technology necessary to carry out our research, development and commercialization activities. At present, we are unaware of any patent infringement claim relating to any of our products that is likely to be asserted.

 

     The costs to establish or defend against claims of infringement or interference with patents or other proprietary rights can be expensive and time-consuming, even if the outcome is favorable. An outcome of any patent or proprietary rights administrative proceeding or litigation that is unfavorable to us may have a material adverse effect on us. We could incur substantial costs if we are required to defend ourselves in suits brought by third parties or if we initiate such suits. We may not have sufficient funds or resources in the event of litigation. Additionally, we may not prevail in any such action.

 

     Any dispute resulting from claims based on patents and proprietary rights could result in a significant reduction in the coverage of the patents or proprietary rights owned, optioned by or licensed to us and limit our ability to obtain meaningful protection for our rights. If patents are issued to third parties that contain competitive or conflicting claims, we may be legally prohibited from researching, developing or commercializing potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. We may be legally prohibited from using technology owned by others, may not be able to obtain any license to the patents or technologies of third parties on acceptable terms, if at all, or may not be able to obtain or develop alternative technologies.

 

     In December 2006, PharmAthene, Inc. (“PharmAthene”) filed an action against us in the Delaware Court of Chancery captioned PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-N. In its amended complaint, PharmAthene asks the Court to order us to enter into a license agreement with PharmAthene with respect to ST-246®, as well as issue a declaration that we are obliged to execute such a license agreement, and 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, as well as seeks damages for promissory estoppel and unjust enrichment based on supposed information, capital and assistance that PharmAthene allegedly provided to us during the negotiation process. In January 2008, the Court of Chancery denied our motion to dismiss the original complaint, and discovery proceeded. In May 2009, PharmAthene amended its complaint with respect to its claim for breach of an obligation to negotiate in good faith, and we filed our answer to the amended complaint and counterclaim denying the new claim and asserting defenses.

 

     PharmAthene has submitted an expert report asserting several alternative theories of damages, including amounts in a wide range of up to one billion dollars. We believe that the expert’s damages analyses are flawed and methodologically unsound. We also continue to believe that we have meritorious defenses to the claims. No trial date has been set. It is not currently possible to estimate a range of loss, if any.

 

 

     In addition, like many biopharmaceutical companies, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us. It is possible that we and/or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations.

 

 

 

     We might experience growth in the number of our employees and the scope of our operations. This potential future growth could place a significant strain on our management and operations. Our ability to manage this potential growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems and to hire, train and manage our employees.

 

 

 

 

 

     Our headquarters are located in New York City and our research and development facilities are located in Corvallis, Oregon. In New York, we occupy approximately 1,800 square feet under an Office Service Agreement with an affiliate of a shareholder, that is cancelable upon 60 days notice. In Corvallis, we lease approximately 18,100 square feet under an amended lease agreement signed in January 2007, which expires in December 2011. Our facility in Oregon has been improved to meet the special requirements necessary for the operation of our research and development activities. In January 2010 we entered into a sublease agreement for 5,700 square feet of additional research facility in Corvallis, Oregon. In the opinion of the management, these facilities are sufficient to meet the current and anticipated future requirements of SIGA.

 

 

     In December 2006, PharmAthene, Inc. (“PharmAthene”) filed an action against us in the Delaware Court of Chancery captioned PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-N. In its amended complaint, PharmAthene asks the Court to order us to enter into a license agreement with PharmAthene with respect to ST-246®, as well as issue a declaration that we are obliged to execute such a license agreement, and 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, as well as seeks damages for promissory estoppel and unjust enrichment based on supposed information, capital and assistance that PharmAthene allegedly provided to us during the negotiation process. In January 2008, the Court of Chancery denied our motion to dismiss the original complaint, and discovery proceeded. In May 2009, PharmAthene amended its complaint with respect to its claim for breach of an obligation to negotiate in good faith, and we filed our answer to the amended complaint and counterclaim denying the new claim and asserting defenses.

 

     PharmAthene has submitted an expert report asserting several alternative theories of damages, including amounts in a wide range of up to one billion dollars. We believe that the expert’s damages analyses are flawed and methodologically unsound. We also continue to believe that we have meritorious defenses to the claims. No trial date has been set. It is not currently possible to estimate a range of loss, if any.

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

     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 Capital Market or Nasdaq Global Market, as applicable.

 

Price Range
2008	High			Low
First Quarter	$	3.27		$	1.78
Second Quarter	$	3.91		$	2.12
Third Quarter	$	4.19		$	2.29
Fourth Quarter	$	3.80		$	1.94
2009	High			Low
First Quarter	$	5.86		$	3.15
Second Quarter	$	8.88		$	4.73
Third Quarter	$	8.63		$	6.25
Fourth Quarter	$	10.09		$	4.83

     The following line graph compares the cumulative total stockholder return through December 31, 2009, assuming reinvestment of dividends, by an investor who invested $100 on December 31, 2004 in each of (i) our common stock, (ii) the Nasdaq National Market-US; and (iii) the Nasdaq Pharmaceutical Index.

 

 

Value of Initial Investment		12/31/04			12/31/05			12/31/06			12/31/07			12/31/08			12/31/09
SIGA Technologies, Inc.		$	100.00		$	57.23		$	225.90		$	185.54		$	196.99		$	349.40
NASDAQ Composite Index		$	100.00		$	101.37		$	111.03		$	121.92		$	72.49		$	104.31
NASDAQ Biotech Composite Index		$	100.00		$	102.84		$	103.89		$	108.65		$	94.93		$	109.77

 

 

 

 

 

 

 

The year
ended					Selling, general			Research and			Patent
December 31,		Revenues			& administrative			development			preparation fees
2009		$	13,812		$	7,533		$	17,423		$	734
2008		$	8,066		$	4,608		$	11,613		$	582
2007		$	6,699		$	3,704		$	9,943		$	515
2006		$	7,258		$	4,624		$	9,149		$	295
2005		$	8,477		$	2,481		$	8,295		$	232

The year														Weighted average
ended										Net loss per share:				shares outstanding:
December 31,		Operating loss				Net loss				basic & diluted				basic and diluted
2009		$	(11,879	)		$	(17,618	)		$	(0.47	)		37,463,255
2008		$	(8,737	)		$	(8,599	)		$	(0.25	)		34,732,625
2007		$	(7,463	)		$	(5,639	)		$	(0.17	)		33,330,814
2006		$	(6,810	)		$	(9,899	)		$	(0.35	)		28,200,130
2005		$	(2,532	)		$	(2,288	)		$	(0.09	)		24,824,824

As of and for											Total
the year ended					Cash & cash			Long term			stockholders'			Net cash used in
December 31,		Total assets			equivalents			obligations			equity			operating activities
2009		$	25,915		$	14,496		$	6,398		$	10,488		$	(8,471	)
2008		$	8,797		$	2,322		$	2,924		$	1,555		$	(7,198	)
2007		$	10,589		$	6,832		$	3,243		$	5,228		$	(5,448	)
2006		$	14,028		$	10,640		$	4,696		$	7,282		$	(4,438	)
2005		$	6,132		$	1,772		$	642		$	3,231		$	(1,392	)

 

 

     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 Annual Report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties.

 

 

     Since our inception on December 28, 1995, SIGA has pursued the research, development and commercialization of novel products for the prevention and treatment of serious infectious diseases, including products for use in defense against biological warfare agents such as smallpox and Arenaviruses. Our lead product, ST-246®, is an orally administered antiviral drug that targets orthopox viruses. In December 2006 the FDA granted Orphan Drug designation to ST-246® for the prevention and treatment of smallpox. In September 1, 2008, we were awarded a five-year, $55.0 million contract from the NIAID, to support the development of additional formulations and orthopox-related indications for ST-246, our lead orthopox drug candidate. In September 2008, we were awarded $20.0 million from the NIAID in supplemental funding to our existing $16.5 million contract, to accelerate process development related to large-scale manufacturing and packaging of ST-246® and commercial-scale validation. The term of the contract was extended through September 28, 2011. In May 2009, we submitted the BARDA Smallpox RFP, and, in June 2009, BARDA informed us that our response to the BARDA Smallpox RFP was deemed technically acceptable and in the competitive range. There can be no assurance that SIGA or any other company will receive an award pursuant to this RFP. Further, any award on this RFP would be subject to negotiation of final contract terms and specifications; thus, the final terms under any contract with BARDA may be materially different than those indicated in the RFP.

 

     Our anti-viral programs are designed to prevent or limit the replication of the viral pathogen. As a result of the success of our efforts to develop products for use against agents of biological warfare, we have not spent significant resources to further the development of our anti-infective technologies.

 

 

     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 assessment of recoverability of goodwill, which could affect goodwill impairments; and the assessment of recoverability of long-lived assets, which primarily would affect operating income if  an impairment exists. Below, we discuss these policies further, as well as the estimates and judgments involved. Other key accounting policies, including revenue recognition, are less subjective and involve a lower degree of estimates and judgment.

 

 

     The following is a brief discussion of the more 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
     The Company accounts for its stock-based compensation programs under the provisions Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 718 Compensation – Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (“employee stock purchases”) based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based awards on the grant date using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recorded as expense over the requisite periods in the Company’s consolidated statement of operations. SIGA calculates the fair value of options awarded under its Employee Stock Purchase Plan using the Black-Scholes model with weighted average assumptions for the expected volatility, risk-free interest rate, expected holding period, and dividend yield. 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.

 

 

 

 

 

		December 31,			December 31,
		2009			2008
Common stock warrants classified as current liabilities		$	3,260,000		$	-
Common stock warrants classified as long term liabilities			6,398,216			2,923,532
Total		$	9,658,216		$	2,923,532

 

 

 

 

Goodwill
     Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.

 

     The Company evaluates goodwill for impairment annually, in the fourth quarter of each year. In addition, the Company would test goodwill for recoverability between annual evaluations whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Examples of such events could include a significant adverse change in legal matters, liquidity or in the business climate, an adverse action or assessment by a regulator or government organization, loss of key personnel, or new circumstances that would cause an expectation that it is more likely than not that we would sell or otherwise dispose of a reporting unit. Goodwill impairment is determined using a two-step approach in accordance with FASB ASC 350-20 Intangibles - Goodwill and Other – Goodwill. The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In 2009, the Company operated as one business and one reporting unit. Therefore, the goodwill impairment analysis was performed on the basis of the Company as a whole using the market capitalization of the Company as an estimate of its fair value. In the past, our market capitalization has been significantly in excess of the Company’s carrying value. It is reasonably likely that the future market capitalization of SIGA may exceed or fall short of our current market capitalization, in which case a different amount for potential impairment would result. The use of the discounted expected future cash flows to evaluate the fair value of the Company as a whole is will possibly produce different results than the Company’s market capitalization.

 

 

		As reported on				As adjusted on				Effect of change in
		December 31, 2008				January 1, 2009				accounting principle
Common stock warrants		$	-			$	2,710,000			$	2,710,000
Accumulated deficit		$	(70,605,553	)		$	(73,315,553	)		$	(2,710,000	)

Recent accounting pronouncements
     In September 2009, the FASB issued ASU 2009-13, Multiple Element Arrangements (“ASU 2009-13”). ASU 2009-13 addresses the determination of when the individual deliverables included in a multiple arrangement may be treated as separate units of accounting. ASU 2009-13 also modifies the manner in which the transaction consideration is allocated across separately identified deliverables and establishes definitions for determining fair value of elements in an arrangement. This standard must be adopted by us for new arrangements and material modifications to existing arrangements no later than January 1, 2011 with earlier adoption permitted. We are currently evaluating the impact, if any, that this standard update will have on our consolidated financial statements.

 

 

 

 

 

		2009		2008		2007
Revenue		100%		100%		100%
Selling, general and administrative		55%		57%		55%
Research and development		126%		144%		148%
Patent preparation fees		5%		7%		8%
Operating loss		86%		108%		111%

 

     Revenues from research and development contracts and grants for the years ended December 31, 2009 and 2008, were $13.8 million and $8.1 million, respectively. The increase of $5.7 million, or 71.2%, is mainly due to an increase of $4.2 million in revenue recognized from our existing program for the large-scale manufacturing and packaging of ST-246®. Revenue recognized from our $55 million contract with the NIH to support the development of additional formulations and orthopox-related indications of ST-246® increased by $1.5 million.

 

     Revenues from research and development contracts and grants for the years ended December 31, 2008 and 2007, were $8.1 million and $6.7 million, respectively. The increase of $1.4 million or 20.4% in revenue recorded for the year ended December 31, 2008 reflects an increase of $3.0 million in revenues recognized from grants and contracts with the NIH supporting our lead programs. Revenue recognized from our programs with the USAF was $38,000 and $1.9 million for the years ended December 31, 2008 and 2007, respectively. In 2008, we completed our two, one-year programs with the USAF.

 

     Selling, General and Administrative expenses (“SG&A”) for the years ended December 31, 2009 and 2008 were $7.5 million and $4.6 million, respectively, reflecting an increase of approximately $2.9 million or 63.5%. Higher SG&A expenses were mainly due to an increase of $204,000 in accounting services resulting from additional governmental audits, an increase of $998,000 in stock based compensation charges, a $71,000 increase in insurance premiums, an increase of $133,000 in foreign and public relations consulting, and an increase of $1.3 million in general corporate and litigation legal support.

 

     Selling, General and Administrative expenses for the years ended December 31, 2008 and 2007 were $4.6 million and $3.7 million, respectively. The increase of $900,000 or 24% is due to an increase of $456,000 in legal fees attributed to litigation support, an increase of $83,000 in insurance costs, an increase of $230,000 in non-cash compensation recorded in accordance with ASC 718, and an increase of $71,000 in business development costs incurred in the current period.

 

     Research and development (“R&D”) expenses were $17.4 million for the year ended December 31, 2009, an increase of $5.8 million or 50% from the $11.6 million incurred during the year ended December 31, 2008. Expenditures related to the manufacturing, packaging, and stability of ST-246® increased $3.3 million. Other costs related ST-246® as well as the development of our other lead drug candidates increased $1.2 million from the prior year. Employee compensation expenses increased $978,000 mainly due to the hiring of additional expert R&D and support personnel. As of December 31, 2009 and 2008, the Company had 49 and 36 full time R&D employees, respectively.

 

     Research and development (“R&D”) expenses for the years ended December 31, 2008 and 2007 were $11.6 million and $9.9 million, respectively. The increase of $1.7 million or 17% is mainly due to higher expenditures related to clinical and pre-clinical testing of our lead drug candidates, which increased $1.7 million from the prior year. Employee related expenses for the year ended December 31, 2008 increased $674,000 from the prior year, reflecting a transition to highly specialized workforce and an increase in non-cash stock based compensation expense. Travel expenses for the year ended December 31, 2008 increased $148,000 from the prior year. These increases were offset by a decline of $790,000 in depreciation and amortization mainly related to fully depreciated leasehold improvements and fully amortized intangible assets; and a decline of $324,000 in expenditures related to our agreements with the USAF, which were completed during 2008.

 

 

     During the years ended December 31, 2009, 2008, and 2007, we spent $10.9 million, $5.4 million, and $3.2 million, respectively, on the development of ST-246®. During the year ended December 31, 2009, we spent $1.5 million on internal human resources dedicated to the drug’s development and $9.4 million mainly on packaging and manufacturing. During the year ended December 31, 2008, we spent $1.2 million on internal human resources dedicated to the drug’s development and $4.2 million mainly on clinical trials and manufacturing. For the year ended December 31, 2007, we spent $924,000 on internal human resources and $2.24 million mainly on manufacturing and clinical testing. From inception of the ST-246® development program to-date, we invested a total of $26.0 million in the program, of which $5.2 million supported internal human resources, and $20.8 million were used mainly for manufacturing, clinical and pre-clinical work. These resources reflect SIGA’s research and development expenses directly related to the program. They exclude additional expenditures such as the cost to acquire the program, patent costs, allocation of indirect expenses, and the value of other services received from the NIH and the DoD.

 

 

     The agreements with the USAF and US Army ended in the second quarter of 2008. For the years ended December 31, 2008, and 2007, we spent $102,000, and $1.3 million, respectively, in expenses related to our USAF and US Army Agreements. For the year ended December 31, 2008, we spent $77,000 on internal human resources and $26,000 for external R&D services. During the year ended December 31, 2007, we spent $910,000 on internal human resources and $372,000 for external R&D services. Costs related to our work on the USAF Agreements from September 2005 to date were $3.4 million, of which we spent $1.8 million and $1.6 million on internal human resources and external R&D services, respectively. These resources reflect SIGA’s research and development expenses directly related to these agreements. They exclude additional expenditures such as patent costs and allocation of indirect expenses.

 

     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. Our lead product, ST-246, is an orally administered anti-viral drug that targets the smallpox virus. In December 2005, the FDA accepted our IND application for ST-246® and granted it Fast-Track status. In December 2006, the FDA granted Orphan Drug designation to ST-246, for the prevention as well as the treatment of smallpox. We expect that costs to complete the development of ST-246® for adult therapeutic use will approximate $20 million to $25 million, that the development could be completed in 18 months to 36 months, and that a New Drug Application could be filed as the development process is completed. There is a high risk of non-completion of any program, including ST-246, because of the lead time to program completion, scientific issues that may arise and uncertainty of the costs. Net cash inflow from any product developed from our programs is at least one to three years away. However, we could receive additional grants, contracts or technology licenses in the short-term. The potential cash and timing is not known and we cannot be certain if they will ever occur.

 

     The risk of failure to complete any program is high, as each, other than our smallpox program, is in the relatively early stage of development. Products for the biological warfare defense market, such as the ST-246® smallpox anti-viral, could generate revenues in one to three years. We believe the products directed toward this market are on schedule. We expect the future research and development cost of our biological warfare defense programs to increase as potential products enter animal studies and safety testing, including human safety trials. Funds for future development will be partially paid for by NIH contracts and grants, additional government funding and from future financing. If we are unable to obtain additional federal grants and contracts or funding in the required amounts, the development timeline for these products would slow or possibly be suspended. Delay or suspension of any of our programs could have an adverse impact on our ability to raise funds in the future, enter into collaborations with corporate partners or obtain additional federal funding from contracts or grants.

 

 

     Patent preparation expenses for the years ended December 31, 2009 and 2008 were $734,000 and $582,000, respectively. The increase of $153,000 or 26.2% is mainly related to our efforts to protect our lead drug candidates in expanded geographic territories.

 

     Patent preparation expenses for the years ended December 31, 2008 and 2007 were $582,000 and $515,000, respectively. The increase of $66,000 or $12.9% is mainly due to additional filings related to our lead drug candidates.

 

     Total operating loss for the years ended December 31, 2009 and 2008 was $11.9 million and $8.7 million, respectively. The increase of $3.2 million or 36.0% in net operating loss is a result of the continued expansion of SIGA’s R&D and specialized personnel, the increase of $1.1 million in non-cash stock based compensation, and an increase of $1.3 million in general corporate and litigation related legal fees.

 

     Total operating loss for the years ended December 31, 2008 and 2007 was $8.7 million and $7.5 million, respectively. The increase of $1.2 million or 17% in net operating loss relates mainly to the growth in SIGA’s operations, including the transition to highly specialized R&D workforce, manufacturing of our lead drug candidate for testing, and clinical and pre-clinical testing of our leading programs. Our net operating loss also increased as a result of additional general corporate and litigation related legal fees.

 

     Changes in the fair value of certain warrants to acquire common stock are recorded as gains or losses. For the years ended December 31, 2009, 2008, and 2007, we recorded a loss of $5.7 million, a gain of $43,000, and a gain of $1.4 million, 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 common stock of SIGA were recorded at fair market value and classified as liabilities.

 

     Other income for the years ended December 31, 2009, 2008, and 2007, was $1,000, $94,000, and $394,000, respectively. Other income in 2009, 2008, and 2007 represented interest income on our cash and cash equivalents. Interest income declined as a result of lower cash balances and a decline in interest rates.

 

 

     On December 31, 2009, we had $14.5 million in cash and cash equivalents and $5.0 million in short-term investments. During the year ended December 31, 2009, we received net proceeds of $7.4 million from exercises of warrants and options to purchase shares of the Company’s Common stock and net proceeds of $18.6 million, after offering related expenses, from the sale of 2,725,339 shares of common stock at $7.35 per share.

 

     On September 23, 2009, the Company was awarded a two-year, $1.7 million grant from the NIAID of the NIH, to support the development of broad spectrum, small-molecule inhibitors of bunyaviruses. The grant was awarded under the Recovery Act.

 

     In September 2009, SIGA received a three-year, $3.0 million Phase II grant from the NIH to fund the continued development of ST-246® treatment of smallpox vaccine-related adverse events.

 

     Operating activities
     Net cash used in operations during the years ended December 31, 2009, 2008, and 2007 was $8.5 million, $7.2 million and $5.4 million, respectively. The increase in net cash used in operations is mainly due to the use of additional cash to support the growth in SIGA’s operations, including the transition to a highly specialized R&D workforce, funds used to support general corporate and litigation related legal fees, the stability, packaging, and manufacturing of ST-246®, and clinical and pre-clinical testing of our leading programs.

 

 

     On December 31, 2009 and 2008, our accounts receivable balance was $2.4 million and $2.0 million, respectively. The increase in our account receivable balances reflects the expanded work performed during November and December of 2009 under our two contracts with the NIAID. Funds outstanding under these contracts were collected during January and February, 2010. Our accounts payable and accrued expenses balance was $4.2 million and $3.0 million on December 31, 2009 and 2008, respectively. The increase of $1.2 million in our accounts payable and accrued expenses balance mainly reflects the expanded work performed under our two contracts with the NIAID in November and December, 2009.

 

     Investing activities
     Capital expenditures during the years ended December 31, 2009, 2008, and 2007 were approximately $340,000 for each of 2009 and 2008, and $1.2 million in 2007. During the year ended December 31, 2009, we invested $5.0 million in U.S. Treasury bills that mature in April 2010.

 

     Financing activities
     Cash provided by financing activities was $26.0 million, $3.0 million, and $2.9 million during the years ended December 31, 2009, 2008, and 2007, respectively. During the years ended December 31, 2009 and 2008, we received net proceeds of $7.4 and $3.2 million, respectively, from exercises of options and warrants to purchase common stock.

 

           In December 2009 we received net proceeds of $18.6 million from the sale of 2,725,339 shares of common stock, par value $0.0001 per share, for $7.35 per share, pursuant to subscription agreements with the investors who participated in the offering.

 

     Other
     On June 19, 2008, we entered into a letter agreement (the “Letter Agreement”), with MacAndrews & Forbes, LLC (“M&F”), a related party, for M&F’s commitment to invest (“the Investment Commitment”), at SIGA’s discretion, up to $8 million over a one-year period (the “Investment Period”) in exchange for (i) SIGA common stock at per share price equal to the lesser of (A) $3.06 or (B) the average of the volume-weighted average price per share for the 5 trading days immediately preceding each funding date, and (ii) warrants to purchase 40% of the number of SIGA shares acquired by M&F, exercisable at 115% of the common stock purchase price on such funding date (the “Consideration Warrants”). The Consideration Warrants will be exercisable for up to four years following the issuance of such warrants. M&F has the option, during the Investment Period, to invest in the Company under the same investment terms (the “Investment Option”).

 

     On April 29, 2009, SIGA and M&F entered into a letter agreement (the "Extension Agreement") extending the Investment Period of the Company’s Letter Agreement with M&F through June 19, 2010 and increasing the number of draws pursuant to the Investment Commitment and the Investment Option to no more than six. On April 30, 2009, we issued M&F 490,196 shares of common stock and 196,078 warrants to acquire common stock in exchange for total proceeds of $1.5 million. The warrants are exercisable until April 30, 2013, for an exercise price of $3.519 per share. On September 17, 2009 the Company issued M&F 326,797 shares of common stock and 130,719 warrants to acquire common stock in exchange for total proceeds of $1.0 million. The warrants are exercisable until September 17, 2013, for an exercise price of $3.519 per share. As of December 31, 2009, $5.5 million of the commitment remains outstanding.

 

     We have incurred cumulative net losses and expect to incur additional losses to perform further research and development activities. We do not have commercial products and have limited capital resources. We will need additional funds to complete the development of our products. Our plans with regard to these matters include continued development of our products as well as seeking additional capital through a combination of collaborative agreements, strategic alliances, research grants, and future equity and debt financing. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining future financing on commercially reasonable terms or that we will be able to secure funding from anticipated government contracts and grants.

 

 

     We believe that our existing funds combined with cash flows primarily from continuing government grants and contracts will be sufficient to support our operations for at least the next 12 months. The success of the Company is dependent upon commercializing its research and development programs and the Company’s ability to obtain adequate future financing. If the Company is unable to raise adequate capital and/or achieve profitable operations, 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.

 

     Our technical operations are based in our research facility in Corvallis, Oregon. We continue to seek to fund a major portion of our ongoing antiviral, antibiotic and vaccine programs through a combination of government grants, contracts and strategic alliances. While we have had success in obtaining strategic alliances, contracts and grants, there is no assurance that we will continue to be successful in obtaining funds from these sources. Until additional relationships are established, we expect to continue to incur significant research and development costs and costs associated with the manufacturing of product for use in clinical trials and pre-clinical testing. It is expected that general and administrative costs, including patent and regulatory costs, necessary to support clinical trials and research and development will continue to be significant in the future. We expect to incur operating losses for the foreseeable future and there can be no assurance that we will ever achieve profitable operations.

 

 

 

     As of December 31, 2009, our purchase obligations are not material. We lease certain facilities and office space under operating leases. Our obligations under such leases do not extend past December 31, 2011. Minimum future rental commitments under operating leases having non-cancelable lease terms in excess of one year are as follows:

 

Year ended December 31,		Lease obligations
2010			562,808
2011			573,077
Total		$	1,135,885

 

 

 

     The Company implemented FASB ASC 855 Subsequent Events (“ASC 855”) on June 15, 2009. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of ASC 855 did not impact the Company’s financial position or results of operations. The Company evaluated all events and transactions that occurred after December 31, 2009. During this period, the Company did not have any material recognizable or reportable subsequent events.

 

 

     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.

 

 

 

 

Report of Independent Registered Public Accounting Firm		40
Consolidated Balance Sheets as of December 31, 2009 and 2008		41
Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007		42
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007		43
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007		44
Notes to Consolidated Financial Statements		45

 

 

 

 

 

 

 

 

 

 

 

		December 31,				December 31,
		2009				2008
ASSETS
Current assets
Cash and cash equivalents		$	14,496,313			$	2,321,519
Short term investments			4,999,300				-
Accounts receivable			2,405,861				1,959,608
Deferred transaction costs			-				581,358
Prepaid expenses			1,585,072				1,392,607
Total current assets			23,486,546				6,255,092
Property, plant and equipment, net			1,225,656				1,360,018
Goodwill			898,334				898,334
Other assets			304,751				283,856
Total assets		$	25,915,287			$	8,797,300
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	3,458,013			$	1,806,073
Accrued expenses and other			740,333				1,210,496
Deferred revenue			1,570,234				1,302,600
Common stock warrants			3,260,000				-
Total current liabilities			9,028,580				4,319,169
Common stock warrants			6,398,216				2,923,532
Total liabilities			15,426,796				7,242,701
Stockholders' equity
Common stock ($.0001 par value, 100,000,000 shares authorized,
43,061,635 and 35,383,720 issued and outstanding at December 31, 2009
and December 31, 2008, respectively)			4,306				3,538
Additional paid-in capital			101,417,677				72,156,614
Accumulated deficit (See Note 2)			(90,933,492	)			(70,605,553	)
Total stockholders' equity			10,488,491				1,554,599
Total liabilities and stockholders' equity		$	25,915,287			$	8,797,300

 

 

 

		2009				2008				2007
Revenues
Research and development		$	13,811,858			$	8,065,618			$	6,698,717
Operating expenses
Selling, general and administrative			7,533,167				4,608,089				3,704,058
Research and development			17,423,453				11,612,892				9,942,503
Patent preparation fees			734,165				581,548				515,263
Total operating expenses			25,690,785				16,802,529				14,161,824
Operating loss			(11,878,927	)			(8,736,911	)			(7,463,107	)
Decrease (increase) in fair value of common
stock rights and common stock warrants			(5,740,449	)			43,482				1,430,301
Other income (expense), net			1,437				94,052				394,249
Net loss		$	(17,617,939	)		$	(8,599,377	)		$	(5,638,557	)
Weighted average shares outstanding: basic and diluted			37,463,255				34,732,625				33,330,814
Net loss per share: basic and diluted		$	(0.47	)		$	(0.25	)		$	(0.17	)

 

 

 

															Total
		Common Stock					Additional				Accumulated				Stockholders'
		Shares		Amount			Paid-in Capital				Deficit				Equity
Balance at January 1, 2007		32,452,210		$	3,245		$	63,646,224			$	(56,367,619	)		$	7,281,850
Issuance of common stock upon exercise of stock
options and warrants		1,485,339			149			3,013,841								3,013,990
Stock based compensation								570,922								570,922
Net loss												(5,638,557	)			(5,638,557	)
Balance at December 31, 2007		33,937,549		$	3,394		$	67,230,987			$	(62,006,176	)		$	5,228,205
Issuance of common stock upon exercise of stock
options and warrants		1,446,171			144			3,186,220								3,186,364
Stock based compensation								1,041,293								1,041,293
Fair value of warrants issued for financing commitment								422,331								422,331
Fair value of exercised common stock warrants								275,783								275,783
Net loss												(8,599,377	)			(8,599,377	)
Balance at December 31, 2008		35,383,720		$	3,538		$	72,156,614			$	(70,605,553	)		$	1,554,599
Issuance of common stock upon exercise of stock
options and warrants		4,952,576			495			7,419,737								7,420,232
Net proceeds from the issuance of 2,725,339 shares																-
of common stock ($7.35 per share)		2,725,339			273			18,565,147								18,565,420
Stock based compensation								2,141,772								2,141,772
Fair value of exercised common stock warrants								1,715,765								1,715,765
Recognition of deferred transaction costs								(581,358	)							(581,358	)
Cumulative Effect of Accounting Change												(2,710,000	)			(2,710,000	)
Net loss												(17,617,939	)			(17,617,939	)
Balance at December 31, 2009		43,061,635			4,306			101,417,677				(90,933,492	)			10,488,491

 

 

 

	2009				2008				2007
Cash flows from operating activities:
Net loss	$	(17,617,939	)		$	(8,599,377	)		$	(5,638,557	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation		475,091				459,882				1,083,705
Amortization of intangible assets		-				-				165,243
(Increase) decrease in fair value of rights and warrants		5,740,449				(43,482	)			(1,430,301	)
Stock based compensation		2,141,772				1,041,293				570,922
Changes in assets and liabilities:
Accounts receivable		(446,253	)			(973,119	)			(369,457	)
Prepaid expenses		(192,465	)			(1,262,492	)			10,917
Other assets		(20,895	)			(22,090	)			(15,565	)
Deferred revenue		267,634				1,302,600				-
Accounts payable and accrued expenses		1,181,777				898,899				175,260
Net cash used in operating activities		(8,470,829	)			(7,197,886	)			(5,447,833	)
Cash flows from investing activities:
Capital expenditures		(340,729	)			(340,222	)			(1,243,068	)
Purchases of short term investments		(4,999,300	)			-				-
Net cash used in investing activities		(5,340,029	)			(340,222	)			(1,243,068	)
Cash flows from financing activities:
Net proceeds from exercise of warrants and options		7,420,232				3,186,364				3,013,990
Net proceeds from the sale of 2,725,339 shares
of common stock ($7.35 per share)		18,565,420				-				-
Deferred transaction costs		-				(159,027	)			-
Repayment of notes payable		-				-				(130,329	)
Net cash provided by financing activities		25,985,652				3,027,337				2,883,661
Net (decrease) increase in cash and cash equivalents		12,174,794				(4,510,771	)			(3,807,240	)
Cash and cash equivalents at beginning of period		2,321,519				6,832,290				10,639,530
Cash and cash equivalents at end of period	$	14,496,313			$	2,321,519			$	6,832,290
Cash paid for interest on notes payable	$	-			$	-			$	10,192

 

 

 

 

 

 

     Management believes that existing funds combined with cash flows primarily from continuing government grants and contracts will be sufficient to support its operations for at least 12 months. The success of the Company is dependent upon commercializing its research and development programs and the Company’s ability to obtain adequate future financing. If the Company is unable to raise adequate capital and/or achieve profitable operations, 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.

 

 

 

 

	As reported on				As adjusted on				Effect of change in
	December 31, 2008				January 1, 2009				accounting principle
Common stock warrants	$	-			$	2,710,000			$	2,710,000
Accumulated deficit	$	(70,605,553	)		$	(73,315,553	)		$	(2,710,000	)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

	December 31,			December 31,
	2009			2008
Common stock warrants classified as current liabilities	$	3,260,000		$	-
Common stock warrants classified as long term liabilities		6,398,216			2,923,532
Total	$	9,658,216		$	2,923,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on December 31, 2008	$	-
Cumulative effect of the change in accounting principle recorded on January 1, 2009		2,710,000
The fair value of warrants issued to M&F in the fiscal year 2009		(1,715,765	)
Increase in the fair value of the common stock warrants		2,265,765
Balance on December 31, 2009	$	3,260,000

 

 

 

 

 

 

Weighted Average Assumptions		2009		2008		2007
Expected volatility		81.40%		68.50%		66.00%
Dividend Yield		0.00%		0.00%		0.00%
Risk-free interest rate		2.21%		2.79%		4.61% - 4.83%
Expected holding period		5 Yrs		5 Yrs		5 Yrs

 

 

Options outstanding at January 1, 2007		7,546,145				2.07
Granted		935,000				3.17
Forfeited		(92,086	)			2.29
Expired		(50,393	)			5.04
Exercised		(368,898	)			1.71
Options outstanding at December 31, 2007		7,969,768			$	2.28
Granted		900,000				2.93
Forfeited		(26,167	)			3.20
Expired		(190,834	)			4.34
Exercised		(1,146,713	)			2.45
Options outstanding at December 31, 2008		7,506,054			$	2.28
Granted		568,500				6.48
Forfeited		(290,001	)			3.25
Expired		-				-
Exercised		(1,659,636	)			1.76
Options outstanding at December 31, 2009		6,124,917			$	2.76

 

 

				Weighted
				Average
	Number of			Intrinsic Value
	Shares			($)
Nonvested options at December 31, 2008		1,452,291		0.41
Nonvested options at December 31, 2009		1,180,165		2.22
Options vested during 2009		340,627		2.88
Options available for future grant at December 31, 2009		584,464
Weighted average fair value of options granted during 2009	$	4.29
Weighted average fair value of options granted during 2008	$	1.72
Weighted average fair value of options granted during 2007	$	1.87
Weighted average fair value of options forfeited during 2009	$	3.25
Weighted average fair value of options forfeited during 2008	$	1.70
Weighted average fair value of options forfeited during 2007	$	1.33
Total intrinsic value of options exercised during 2009	$	6,959,180
Total intrinsic value of options exercised during 2008	$	937,630
Total intrinsic value of options exercised during 2007	$	506,000

 

		Number of		Weighted				Number Fully		Number of
		Options		Average				Vested &		Options		Weighted		Aggregate
Range of		Outstanding at		Remaining		Weighted		Exercisable at		Expected to Vest		Average		Intrinsic Value at
Exercise		December 31,		Contractual		Average Exercise		December 31,		at December 31,		Exercise		December 31,
Price($)		2009		Life (Years)		Price ($)		2009		2009		Price ($)		2009
0.94 - 1.85		1,298,750		4.59		1.36		1,298,750		-		1.36		$	5,764,740
2.00 - 2.73		3,181,000		2.75		2.47		2,747,667		414,894		2.47			9,146,952
3.10 - 5.95		1,311,667		7.84		3.66		788,336		501,063		3.74			1,635,577
6.10 - 9.32		333,500		9.52		7.35		110,000		213,990		6.17			-
		6,124,917						4,944,753		1,129,947				$	16,547,269

 

 

 

				Weighted Average
	Number of Warrants			Exercise Price
Outstanding at January 1, 2007	9,441,915			$	2.52
Granted	-				-
Exercised	(1,179,538	)			2.26
Canceled / Expired	-				-
Outstanding at December 31, 2007	8,262,377			$	2.55
Granted	238,000				3.06
Exercised	(595,624	)			2.62
Canceled / Expired	(1,079,186	)			3.34
Outstanding at December 31, 2008	6,825,567			$	2.44
Granted	326,797				3.52
Exercised	(2,850,612	)			1.87
Canceled / Expired	-				-
Outstanding at December 31, 2009	4,301,752			$	2.59

Number of
Warrants		Exercise Price
Outstanding		$
2,469,554		1.18 - 1.90
564,797		3.06 - 3.52
1,267,401		4.99
4,301,752

 

 

 

 

 

 

 

 

	2009				2008
Laboratory equipment	$	2,301,312			$	2,104,673
Leasehold improvements		2,868,849				2,868,848
Computer equipment		229,209				136,540
Furniture and fixtures		310,898				310,899
		5,710,268				5,420,960
Less - accumulated depreciation		(4,484,612	)			(4,060,942	)
Property, plant and equipment, net	$	1,225,656			$	1,360,018

 

 

	2009			2008
Vacation	$	159,591		$	158,000
Bonuses		194,700			292,000
Legal		55,000			360,000
Other		331,042			400,496
Total Accrued Expenses and Other	$	740,333		$	1,210,496

 

 

 

	2009				2008
Net Operating Losses		20,286				17,271
Deferred Research and Development Costs		6,613				5,607
Amortization of Acquired Assets		571				683
Stock Based Compensation		-				-
Depreciation of Property Plant and Equipment		866				984
Total Deferred Tax Asset		28,336				24,545
Valuation Allowance		(28,336	)			(24,545	)
Net Deferred Tax Assets	$	-			$	-

 

 

					Additions Charged
		Balance at			to Costs and						Balance at End of
December 31,		Beginning of Year			Expenses			Deductions			Year
2009		$	24,545		$	3,903		$	112		$	28,336
2008		$	21,621		$	3,020		$	96		$	24,545
2007		$	19,057		$	2,603		$	39		$	21,621

 

 

	2009			2008
Statutory federal income tax rate	-34.00	%		-34.00	%
State tax benefit, net of federal taxes	-2.77	%		-4.84	%
Other	15.21	%		3.95	%
Valuation allowance on deferred tax assets	21.56	%		34.89	%
Effective tax rate	0.00	%		0.00	%

 

 

	Year ended December 31,		Lease obligations
	2010			562,808
	2011			573,077
	Total		$	1,135,885

Other
     In December 2006, PharmAthene, Inc. (“PharmAthene”) filed an action against us in the Delaware Court of Chancery, captioned PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-N. In its amended complaint, PharmAthene asks the Court to order us to enter into a license agreement with PharmAthene with respect to ST-246®, as well as issue a declaration that we are obliged to execute such a license agreement, and 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, as well as seeks damages for promissory estoppel and unjust enrichment based on supposed information, capital and assistance that PharmAthene allegedly provided to us during the negotiation process. In January 2008, the Court of Chancery denied our motion to dismiss the original complaint and discovery proceeded. In May 2009, PharmAthene amended its complaint with respect to its claim for breach of an obligation to negotiate in good faith, and we filed our answer to the amended complaint and counterclaim denying the new claim and asserting defenses.

 

     PharmAthene has submitted an expert report asserting several alternative theories of damages, including amounts in a wide range of up to one billion dollars. We believe that the expert’s damages analyses are flawed and methodologically unsound. We also continue to believe that we have meritorious defenses to the claims. No trial date has been set. It is not currently possible to estimate a range of loss, if any.

 

 

 

 

2009 For The Quarter Ended		March 31,				June 30,				September 30,				December 31,				Total
Revenues		$	1,926			$	4,009			$	3,922			$	3,955			$	13,812
Selling, general & administrative		$	2,060			$	1,802			$	1,522			$	2,149			$	7,533
Research and development		$	2,697			$	4,713			$	4,828			$	5,185			$	17,423
Patent preparation fees		$	109			$	84			$	191			$	350			$	734
Operating loss		$	(2,940	)		$	(2,590	)		$	(2,619	)		$	(3,730	)		$	(11,879	)
Net income (loss)		$	(6,885	)		$	(10,353	)		$	(1,429	)		$	1,049			$	(17,618	)
Net loss per share: basic and diluted		$	(0.19	)		$	(0.28	)		$	(0.04	)		$	0.02			$	(0.47	)
Market price range for common stock
High		$	5.86			$	8.88			$	8.63			$	10.09			$	10.09
Low		$	3.15			$	4.73			$	6.25			$	4.83			$	3.15
2008 For The Quarter Ended		March 31,				June 30,				September 30,				December 31,				Total
Revenues		$	1,983			$	1,732			$	1,863			$	2,488			$	8,066
Selling, general & administrative		$	1,005			$	1,165			$	945			$	1,493			$	4,608
Research and development		$	2,836			$	2,500			$	2,853			$	3,424			$	11,613
Patent preparation fees		$	130			$	134			$	198			$	120			$	582
Operating loss		$	(1,988	)		$	(2,067	)		$	(2,134	)		$	(2,548	)		$	(8,737	)
Net income (loss)		$	(858	)		$	(3,141	)		$	(3,029	)		$	(1,571	)		$	(8,599	)
Net loss per share: basic and diluted		$	(0.03	)		$	(0.09	)		$	(0.09	)		$	(0.04	)		$	(0.25	)
Market price range for common stock
High		$	3.06			$	3.80			$	4.00			$	3.57			$	4.00
Low		$	1.93			$	2.18			$	2.36			$	2.19			$	1.93