SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 0-23047
December 31, 1998
SIGA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3864870
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
420 Lexington Avenue, Suite 620
New York, NY 10170
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (212) 672-9100
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
As of March 25, 1999, the Registrant had outstanding 6,557,712 shares of Common
Stock. The aggregate market value of the registrant's Common Stock on such date
held by those persons deemed to be non-affiliates was approximately $5,641,905.
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PART I
Item 1. Business
Introduction
SIGA Pharmaceuticals, Inc. (the "Company") is a development stage,
biopharmaceutical company focused on the discovery, development and
commercialization of vaccines, antibiotics and novel anti-infectives for serious
infectious diseases. The Company's lead vaccine candidate is for the prevention
of group A streptococcal pharyngitis or "strep throat." The Company is
developing a technology for the mucosal delivery of its vaccines which may allow
those vaccines to activate the immune system at the mucus lined surfaces of the
body -- the mouth, the nose, the lungs and the gastrointestinal and urogenital
tracts -- the sites of entry for most infectious agents. The Company's
anti-infectives programs, aimed at the increasingly serious problem of drug
resistance, are designed to block the ability of bacteria to attach to human
tissue, the first step in the infection process.
The Company's Technologies
Vaccine Technologies: Mucosal Immunity and Vaccine Delivery
Using proprietary technology licensed from The Rockefeller University
("Rockefeller"), the Company is developing certain commensal bacteria
("commensals") as a means to deliver mucosal vaccines. Commensals are harmless
bacteria that naturally inhabit the body's surfaces with different commensals
inhabiting different surfaces, particularly the mucosal surfaces. The Company's
vaccine candidates utilize genetically engineered commensals to deliver antigens
from a variety of pathogens to the mucosal immune system. When administered, the
genetically engineered ("recombinant") commensals colonize the mucosal surface
and replicate. By activating a local mucosal immune response, the Company's
vaccine candidates are designed to prevent infection and disease at the earliest
possible stage. By comparison, most conventional vaccines are designed to act
after infection has already occurred.
The Company's commensal vaccine candidates utilize gram-positive bacteria,
one of two major classes of bacteria. Rockefeller scientists have identified a
protein region that is used by gram-positive bacteria to anchor proteins to
their surfaces. The Company is using the proprietary technology licensed from
Rockefeller to combine antigens from a wide range of infectious organisms, both
viral and bacterial, with the surface protein anchor region of a variety of
commensal organisms. By combining a specific antigen with a specific commensal,
vaccines can be tailored to both the target pathogen and its mucosal point of
entry.
To target an immune response to a particular mucosal surface, a vaccine
would employ a commensal organism that naturally inhabits that surface. For
example, vaccines targeting sexually transmitted diseases could employ
Lactobacillus acidophilus, a commensal colonizing the female urogenital tract.
Vaccines targeting gastrointestinal ("GI") diseases could employ Lactobacillus
casei, a commensal colonizing the GI tract. The Company has conducted initial
experiments using Streptococcus gordonii ("S. gordonii"), a commensal that
colonizes the oral cavity and that can potentially be used in vaccines targeting
pathogens that enter through the upper respiratory tract, such as the influenza
virus.
By using an antigen unique to a given pathogen, the technology can
potentially be applied to any infectious agent that enters the body through a
mucosal surface. The Company's founding scientists have expressed and anchored a
variety of viral and bacterial antigens on the outside of S. gordonii, including
the M6 protein from group A streptococcus, a group of organisms that cause a
range of diseases, including strep throat, necrotizing fasciitis, impetigo and
scarlet fever. In addition, proteins from other infectious agents, such as HIV
and human papilloma virus have also been expressed using this system. The
Company
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believes this technology will enable the expression of most antigens regardless
of size or shape. In animal studies, the Company has shown that the
administration of a recombinant S. gordonii vaccine prototype induces both a
local mucosal immune response and a systemic immune response.
The Company believes that mucosal vaccines developed using its proprietary
commensal delivery technology could provide a number of advantages, including:
More complete protection than conventional vaccines: Mucosal vaccines in
general may be more effective than conventional parenteral (injectable)
vaccines, due to their ability to produce both a systemic and local
(mucosal) immune response.
Safety advantage over other live vectors: A number of bacterial pathogens
have been genetically rendered less infectious, or attenuated, for use as
live vaccine vectors. Commensals, by virtue of their harmless nature, may
offer a safer delivery vehicle without fear of genetic reversion to the
infectious state inherent in attenuated pathogens.
Non-injection administration: Oral, nasal, rectal or vaginal administration
of the vaccine eliminates the need for painful injections with their
potential adverse reactions.
Potential for combined vaccine delivery: The Children's Vaccine Initiative
has called for the development of combined vaccines, specifically to reduce
the number of needle sticks per child, by combining several vaccines into
one injection, thereby increasing compliance and decreasing disease. The
Company believes its commensal delivery technology can be an effective
method of delivery of multi-component vaccines within a single commensal
organism that address multiple diseases or diseases caused by multiple
strains of an infectious agent.
Eliminating need for refrigeration: One of the problems confronting the
effective delivery of parenteral vaccines is the need for refrigeration at
all stages prior to injection. The stability of the commensal organisms in
a freeze-dried state would, for the most part, eliminate the need for
special climate conditions, a critical consideration, especially for the
delivery of vaccines in developing countries.
Low cost production: By using a live bacterial vector, extensive downstream
processing is eliminated, leading to considerable cost savings in the
production of the vaccine. The potential for eliminating the need for
refrigeration would add considerably to these savings by reducing the costs
inherent in refrigeration for vaccine delivery.
Anti-Infectives Technology: Prevention of Attachment and Infectivity
The bacterial infectious process generally includes three steps:
colonization, invasion and disease. The adherence of bacteria to a host's
surface is crucial to establishing colonization. Bacteria adhere through a
number of mechanisms, but generally by using highly specialized surface
structures which, in turn, bind to specific structures or molecules on the
host's cells or, as discussed below, to inanimate objects residing in the host.
Once adhered, many bacteria will invade the host's cells and either establish
residence or continue invasion into deeper tissues. During any of these stages,
the invading bacteria can cause the outward manifestations of disease, in some
cases through the production and release of toxin molecules. The severity of
disease, while dependent on a large combination of factors, is often the result
of the ability of the bacteria to persist in the host. These bacteria accomplish
this persistence by using surface molecules which can alter the host's
nonspecific mechanisms or its highly specific immune responses to clear or
destroy the organisms.
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Unlike conventional antibiotics, as discussed above, the Company's
anti-infectives approaches aim to block the ability of pathogenic bacteria to
attach to and colonize human tissue, thereby preventing infection at its
earliest stage. The Company's scientific strategy is to inhibit the expression
of bacterial surface proteins required for bacterial infectivity. The Company
believes that this approach has promise in the areas of hospital-acquired
drug-resistant infections and a broad range of other diseases caused by
bacteria.
Many special surface proteins used by bacteria to infect the host are
anchored in the bacterial cell wall. Scientists at Rockefeller have identified
an amino acid sequence and related enzyme, a selective protease, that are
essential for anchoring proteins to the surface of most gram-positive bacteria.
Published information indicates that this amino acid sequence is shared by more
than 50 different surface proteins found on a variety of gram-positive bacteria.
This commonality suggests that this protease represents a promising target for
the development of a new class of antibiotic products for the treatment of a
wide range of infectious diseases. Experiments by the Company's founding
scientists at Rockefeller have shown that without this sequence, proteins cannot
become anchored to the bacterial surface and thus the bacteria are no longer
capable of attachment, colonization or infection. Such "disarmed" bacteria
should be readily cleared by the body's immune system. The Company's drug
discovery strategy is to use a combination of structure-based drug design and
high throughput screening procedures to identify compounds that inhibit the
protease, thereby blocking the anchoring process. If successful, this strategy
should provide relief from many gram-positive bacterial infections, but may
prove particularly important in combating diseases caused by the emerging
antibiotic resistance of the gram-positive organisms S. aureus, Streptococcus
pneumoniae, and the enterococci.
In contrast to the above program, which focuses on gram-positive bacteria,
the Company's pilicide program, based upon initial research performed at
Washington University, focuses on a number of new and novel targets all of which
impact on the ability of gram-negative bacteria to assemble adhesive pili on
their surfaces. This research program is based upon the well-characterized
interaction between a periplasmic protein -- a chaperone -- and the protein
subunits required to form pili. In addition to describing the process by which
chaperones and pili subunits interact, this program has developed the assay
systems necessary to screen for potential therapeutic compounds, and has
provided an initial basis for selecting novel antibiotics that work by
interfering with the pili adhesion mechansism.
Surface Protein Expression System ("SPEX")
The ability to overproduce many bacterial and human proteins has been made
possible through the use of recombinant DNA technology. The introduction of DNA
molecules into E. coli has been the method of choice to express a variety of
gene products, because of this bacteria's rapid reproduction and well-understood
genetics. Yet despite the development of many efficient E. coli-based gene
expression systems, the most important concern continues to be associated with
subsequent purification of the product. Recombinant proteins produced in this
manner do not readily cross E. coli's outer membrane, and as a result, proteins
must be purified from the bacterial cytoplasm or periplasmic space. Purification
of proteins from these cellular compartments can be very difficult. Frequently
encountered problems include low product yields, contamination with potentially
toxic cellular material (i.e., endotoxin) and the formation of large amounts of
partially folded polypeptide chains in non-active aggregates termed inclusion
bodies.
To overcome these problems, the Company has taken advantage of its
knowledge of gram-positive bacterial protein expression and anchoring pathways.
This pathway has evolved to handle the transport of surface proteins that vary
widely in size, structure and function. Modifying the approach used to create
commensal mucosal vaccines, the Company has developed methods which, instead of
anchoring the foreign protein to the surface of the recombinant gram-positive
bacteria, result in it being secreted into the surrounding medium in a manner
which is readily amenable to simple batch purification. The Company believes the
advantages of this approach include the ease and lower cost of gram-positive
bacterial growth, the likelihood that secreted recombinant proteins will be
folded properly, and the ability to purify
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recombinant proteins from the culture medium without having to disrupt the
bacterial cells and liberating cellular contaminants. Gram-positive bacteria may
be grown simply in scales from those required for laboratory research up to
commercial mass production.
The Company's Product Candidates and Research and Discovery Programs
Mucosal Vaccines
Development of the Company's mucosal vaccine candidates involves: (i)
identifying a suitable immunizing antigen from a pathogen; (ii) selecting a
commensal that naturally colonizes the mucosal point of entry for that pathogen;
and (iii) genetically engineering the commensal to express the antigen on its
surface for subsequent delivery to the target population.
Strep Throat Vaccine Candidate. Until the age of 15, many children suffer
recurrent strep throat infections. Up to five percent of ineffectively treated
strep throat cases progress to rheumatic fever, a debilitating heart disease,
which worsens with each succeeding streptococcal infection. Since the advent of
penicillin therapy, rheumatic fever in the United States has experienced a
dramatic decline. However, in the last decade, rheumatic fever has experienced a
resurgence in the United States. Part of the reason for this is the latent
presence of this organism in children who do not display symptoms of a sore
throat, and, therefore, remain untreated and at risk for development of
rheumatic fever. Based on data from the Centers for Disease Control and
Prevention, there are five to 10 million cases of pharyngitis due to group A
streptococcus in the United States each year. There are over 32 million children
in the principal age group targeted by the Company for vaccination. Worldwide,
it is estimated that one percent of all school age children in the developing
world have rheumatic heart disease. Despite the relative ease of treating strep
throat with antibiotics, the specter of antibiotic resistance is always present.
In fact, resistance to erythromycin, the second line antibiotic in patients
allergic to penicillin, has appeared in a large number of cases.
No vaccine for strep throat has been developed because of the problems
associated with identifying an antigen that is common to the more than 100
different serotypes of group A streptococcus, the bacterium that causes the
disease. The Company has licensed from Rockefeller a proprietary antigen which
is common to most types of group A streptococcus, including types that have been
associated with rheumatic fever. When this antigen was orally administered to
animals, it was shown to provide protection against multiple types of group A
streptococcal infection. Utilizing this antigen, the Company is developing a
mucosal vaccine for strep throat.
The Company's technology expresses the strep throat antigen on the surface
of the commensal S. gordonii, which lives on the surface of the teeth and gums.
The Company believes that a single oral dose of the vaccine may be adequate to
provide protection. Indeed, investigators at other institutions have shown that
organisms of this type can safely colonize in the human oral cavity for up to
two years. The Company is currently completing pre-clinical development of its
strep throat vaccine candidate. Pre-clinical research in mice and rabbits has
established the ability of this vaccine candidate to colonize and induce both a
local and systemic immune response. The Company is collaborating with the
National Institutes of Health (the "NIH") and the University of Maryland Center
for Vaccine Development on the clinical development of this vaccine candidate.
The NIH in cooperation with the Company filed an Investigational New Drug
Application ("IND") with the United States Food and Drug Administration (the
"FDA") in December 1997. The first stage of these clinical trials under this IND
commenced at the University of Maryland in early 1999.
Periodontal Vaccine Candidate. Periodontal disease is characterized by
acute soft tissue inflammation and subsequent alveolar bone loss. It is
estimated that this condition afflicts up to 50% of the adult population by the
time they reach age 65, and is a major cause of tooth loss in the older
population. In
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addition, animal studies conducted at the University of Minnesota show that
bacteria from the mouth which enter the blood stream via diseased gums can
induce clotting which is the pivotal event in most heart attacks and strokes.
Current treatments for periodontal disease include mechanical debridement,
tissue resection and/or antibiotic therapy. It is believed that periodontal
disease is the result of an interaction between the immune system or the host
and a number of oral bacterial pathogens, principally Porphyromonas gingivalis
("P. gingivalis").
The Company has entered into a collaborative research agreement with the
State University of New York at Buffalo School of Dental Medicine ("SUNY
Buffalo") to develop a mucosal vaccine to prevent periodontal disease. The
vaccine, as currently constructed, features a surface antigen, fimbrillin from
P. gingivalis delivered to the oral cavity via the Company's proprietary mucosal
vaccine delivery system. In pre-clinical trials, mucosal immunization with, or
direct delivery of, fimbrillin-derived peptides to the oral cavity of germ-free
rats blocked the ability of P. gingivalis to colonize in the rats upon
subsequent challenge, and dramatically reduced associated periodontal disease
and bone loss. Two vaccine candidates are currently being studied in
pre-clinical animal colonization and challenge experiments.
STD Vaccine Candidates. One of the great challenges in vaccine research
remains the development of effective vaccines to prevent sexually transmitted
diseases (STDs). Three of the principal pathogens which are transmitted via this
route are: chlamydia, the most common bacterial STD; HIV, the causative agent of
AIDS; and human papilloma virus (HPV), which is linked to both genital warts and
cervical carcinoma. To date, a great deal of effort has been expended, without
appreciable success, to develop effective injectable prophylactic vaccines
versus these pathogens. Given that each of these pathogens enters the host
through the mucosa, the Company believes that induction of a vigorous mucosal
response to viral or bacterial antigens may protect against acquisition of the
initial infection. To test this hypothesis, the Company has expressed known
immunodominant antigens from these three pathogens in its proprietary mucosal
vaccine delivery system. These live recombinant vaccines will be delivered to
animals and tested for local and systemic immune response induction, and whether
these responses can block subsequent viral infections. The Company is
collaborating with Chiron Corporation on research toward the development of
mucosal vaccines against HIV.
Mucosal Vaccine Delivery System
The Company is also developing a proprietary mucosal vaccine delivery
system which is a component of the Company's vaccine candidates and which the
Company intends to license to other vaccine developers. The Company's commensal
vaccine candidates utilize gram-positive bacteria as vectors for the
presentation of antigens. Scientists at Rockefeller have identified a protein
region used by gram-positive bacteria to anchor proteins to their surfaces. The
Company is using proprietary technology licensed from Rockefeller to anchor
antigens from a wide range of infectious organisms, both viral and bacterial, to
the surface protein anchor region of a variety of commensal organisms. By
combining a specific antigen with a specific commensal, the Company believes
that vaccines can be tailored to both the target pathogen and its mucosal point
of entry.
The Company has developed several genetic methods for recombining foreign
sequences into the genome of gram-positive bacteria at a number of non-essential
sites. Various parameters have been tested and optimized to improve the level of
foreign protein expression and its immunogenicity. In pre-clinical studies,
recombinant commensals have been implanted into the oral cavities of several
animal species with no deleterious effects. The introduced vaccine strains have
taken up residence for prolonged periods of time and induce both a local mucosal
(IgA) as well as a systemic immune response (IgG and T-cell).
The Company has completed an early stage clinical evaluation of its mucosal
vaccine delivery system based on the commensal bacteria S. gordonii. These
clinical studies were designed to test the safety of the formulation, to monitor
the extent and duration of colonization of the nasal and oral cavities, and to
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determine if the delivery system could be eradicated at the end of the study
with a regimen of conventional antibiotics. A total of 47 volunteers between the
ages of 18 and 40 years completed the studies, in which S. gordonii was
delivered to the nasal passage and oral cavity. The results of the studies
indicated the delivery system was well-tolerated and that the delivery system
spontaneously eradicated or was easily eradicated by conventional antibiotics.
The current clinical studies at the University of Maryland are also designed to
evaluate S. gordonii as a commensal bacterial vector for the Company's vaccine
targeting strep throat.
Anti-Infectives
The Company's anti-infectives program is targeted principally toward
drug-resistant bacteria and hospital-acquired infections. According to estimates
from the Centers for Disease Control, approximately two million
hospital-acquired infections occur each year in the United States.
The Company's anti-infectives approaches aim to block the ability of
bacteria to attach to and colonize human tissue, thereby blocking infection at
the first stage in the infection process. By comparison, antibiotics available
today act by interfering with either the structure or the metabolism of a
bacterial cell, affecting its ability to survive and to reproduce. No currently
available antibiotics target the attachment of a bacterium to its target tissue.
By preventing attachment, the bacteria should be readily cleared by the body's
immune system.
Gram-Positive Antibiotic Technology. The Company's lead anti-infectives
program is based on a novel target for antibiotic therapy. The Company's
founding scientists have identified an enzyme, a selective protease, utilized by
most gram-positive bacteria to anchor certain proteins to the bacterial cell
wall. These surface proteins are the means by which certain bacteria recognize,
adhere to and colonize specific tissue. The Company's strategy is to develop
protease inhibitors. The Company believes protease inhibitors will have wide
applicability to gram-positive bacteria in general, including antibiotic
resistant staphlyococcus and a broad range of serious infectious diseases
including meningitis and respiratory tract infections. The Company has entered
into a collaborative research and license agreement with the Wyeth-Ayerst
Laboratories Division of American Home Products Corporation ("Wyeth-Ayerst") to
identify and develop protease inhibitors as novel antibiotics.
Gram-Negative Antibiotic Technology. The Company has entered into a set of
technology transfer and related agreements with MedImmune, Inc. ("MedImmune"),
Astra AB and The Washington University, St. Louis ("Washington University"),
pursuant to which the Company has acquired rights to certain gram-negative
antibiotic targets, products, screens and services developed at Washington
University. The Company is using this technology in the development of
antibiotics against gram-negative pathogens. These bacteria utilize structures
called pili to adhere to target tissue, and the Company plans to exploit the
assembly and export of these essential infective structures as novel
anti-infective targets.
Research carried out at Washington University has demonstrated that assembly
of type P pili on gram-negative bacteria requires the participation of both a
periplasmic molecular chaperone and an outer membrane usher. Since the
gram-negative pili are the primary mechanism by which these organisms adhere to
and colonize host tissue, inhibition of their assembly should effectively
inhibit disease caused by this class of organisms. Detailed structural data is
available on the molecular chaperone and scientists at Washington University are
developing the same for the usher protein. This information has been used in
concert with molecular modeling techniques to identify potential structures that
will bind to the conserved residues of the chaperone and usher proteins. With
identification of these structures, natural and synthetic molecules that inhibit
chaperone/usher function can be screened using high throughput assays developed
by scientists at Washington University. The Company believes that this approach
is a departure from conventional antibiotics and therefore may afford a method
to circumvent the resistance mechanisms already established in many
gram-negative bacteria.
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Scientists at Washington University have elucidated the role of chaperones
- -- a family of periplasmic proteins -- in the formation of pili, which are
essential for the virulence of certain gram-negative bacteria, such as E. coli
or the Enterobacteriaceae (Salmonella, Shigella, Klebsiella, etc.). The
elucidation of this pathway provides several targets for the development of
novel anti-infectives: (i) blocking the interaction between chaperones and pilin
subunits; (ii) interfering with chaperone-dependent folding of pilin subunits;
or (iii) interfering with how pilin subunits exit from the bacteria's outer
membrane (through the "usher" component). The chaperone-pilin complex has been
examined using x-ray crystallography, and assays measuring the chaperone
interactions have been established. The Company and Washington University are
reviewing potential compounds which interfere with the chaperone-pilin
interaction, as well as seeking alternative intervention sites in the pilus
formation pathway.
Surface Protein Expression System
The Company's proprietary SPEX protein expression uses the protein export
and anchoring pathway of gram-positive bacteria as a means to facilitate the
production and purification of biopharmaceutical proteins. The Company has
developed vectors which allow foreign genes to be inserted into the chromosome
of gram-positive bacteria in a manner such that the encoded protein is
synthesized, transported to the cell surface and secreted into the medium. This
system has been used to produce milligram quantities of soluble antigenically
authentic protein that can be easily purified from the culture medium by
affinity chromatography. The Company believes this technology can be extended to
a variety of different antigens and enzymes.
The Company has commenced yield optimization and process validation of this
system. This program is designed to transfer the method from a laboratory scale
environment to a commercial production facility. The Company's business strategy
is to license this technology on a non-exclusive basis for a broad range of
applications.
Collaborative Research and Licenses
The Company sponsors research and development activities in laboratories at
Rockefeller, Oregon State, SUNY Buffalo, and Washington University. The Company
established a research and development facility in Corvallis, Oregon in June
1998. The Company has entered into the following license agreements and
collaborative research arrangements:
Rockefeller University. The Company and Rockefeller have entered into an
exclusive worldwide license agreement whereby the Company has obtained the right
and license to make, use and sell mucosal vaccines based on gram-positive
organisms and products for the therapy, prevention and diagnosis of diseases
caused by streptococcus, staphylococcus and other organisms. The license covers
two issued United States patents and one issued European patent as well as 11
pending United States patent applications and corresponding foreign patent
applications. The issued United States patents expire in 2005 and 2014,
respectively. The agreement generally requires the Company to pay royalties on
sales of products developed from the licensed technologies and fees on revenues
from sublicensees, where applicable, and the Company is responsible for certain
milestone payments and for the costs of filing and prosecuting patent
applications.
Oregon State. Oregon State is also a party to the Company's license
agreement with Rockefeller whereby the Company has obtained the right and
license to make, use and sell products for the therapy, prevention and diagnosis
of diseases caused by streptococcus. Pursuant to a separate research support
agreement with Oregon State, the Company is providing funding for sponsored
research through December 31, 1999, with exclusive license rights to all
inventions and discoveries resulting from this research.
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National Institutes of Health. The Company has entered into a clinical
trials agreement with the NIH pursuant to which the NIH, with the cooperation of
the Company, will conduct a clinical trial of the Company's strep throat vaccine
candidate.
SUNY Buffalo. The Company has entered into a research agreement with SUNY
Buffalo to develop a mucosal vaccine to prevent periodontal disease. Pursuant to
the agreement, the Company is providing funding for sponsored research through
June 30, 1999 and has an exclusive option to license all inventions and
discoveries resulting from this research.
Wyeth-Ayerst. The Company has entered into a collaborative research and
license agreement with Wyeth-Ayerst in connection with the discovery and
development of anti-infectives for the treatment of gram-positive bacterial
infections. Pursuant to the agreement, Wyeth-Ayerst is providing funding for a
joint research and development program, subject to certain milestones, through
September 30, 1999 and is responsible for additional milestone payments.
Chiron. The Company has entered into a collaborative research agreement
with Chiron regarding research toward the development of mucosal vaccines
against HIV. The agreement expires on December 31, 1999. Pursuant to the
agreement, each company retains sole rights to any technology invented solely by
such company and the companies will jointly own any technology jointly developed
by the companies.
Washington University. The Company has entered into a research
collaboration and worldwide license agreement with the Washington University
pursuant to which the Company has obtained the right and license to make, use
and sell antibiotic products based on gram-negative technology for all human and
veterinary diagnostic and therapeutic uses. The license covers five pending
United States patent applications and corresponding foreign patent applications.
The agreement generally requires the Company to pay royalties on sales of
products developed from the licensed technologies and fees on revenues from
sublicensees, where applicable, and the Company is responsible for certain
milestone payments and for the costs of filing and prosecuting patent
applications. Pursuant to the agreement, the Company has agreed to provided
funding to Washington University for sponsored research through February 6,
2000, with exclusive license rights to all inventions and discoveries resulting
from this research.
Patents and Proprietary Rights
Protection of the Company's proprietary compounds and technology is
essential to the Company's business. The Company's policy is to seek, when
appropriate, protection for its lead compounds and certain other proprietary
technology by filing patent applications in the United States and other
countries. The Company has licensed the rights to six issued United States
patents and one issued European patent. The Company has also licensed the rights
to one allowed United States patent application, 17 pending United States patent
applications as well as corresponding foreign patent applications.
The patents and patent applications licensed by the Company relate to all
of the core technology used in the development of the Company's leading product
candidates, including the mucosal vaccine delivery system, the SPEX protein
expression system for producing biopharmaceutical products, the protective
streptococcal antigens and the antibiotic development target, as well as a
variety of early stage research projects. Each of the Company's products
represented by each of the patents is in a very early stage in its development
process.
The Company also relies upon trade secret protection for its 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 the Company's trade secrets or that the
Company can meaningfully protect its trade secrets.
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Government Regulation
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
products that may be developed by the Company. The nature and the extent to
which such regulation may apply to the Company will vary depending on the nature
of any such products. Virtually all of the Company's potential 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, 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 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 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 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 the Company may be marketed impose a similar regulatory process.
Competition
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include most of the major pharmaceutical companies, which have financial,
technical and marketing resources significantly greater than those of the
Company. Biotechnology and other pharmaceutical competitors include Cubist
Pharmaceuticals, Inc., Microcide Pharmaceuticals, Inc., Oravax, Inc., Maxim
Pharmaceuticals, Inc., ID Vaccines Ltd., Actinova PLC, and
10
Vaxcel, Inc. 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. There can be no assurance that the Company's competitors will not
succeed in developing products that are more effective or less costly than any
which are being developed by the Company or which would render the Company's
technology and future products obsolete and noncompetitive.
Human Resources and Facilities
As of March 25, 1999 the Company had 19 full time employees. The Company's
employees are not covered by a collective bargaining agreement and the Company
considers its employee relations to be excellent.
Item 2. Properties
The Company's headquarters are located in New York, New York and its
research and development facilities are located in Corvallis, Oregon. In New
York, the Company leases approximately 5,200 square feet under a lease that
expires in November 2002. In Corvallis, the Company leases approximately 10,000
square feet under a lease that expires in December 2005.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At its stockholder meeting held on November 20, 1998, the stockholders of
the Company elected the following persons as directors of the Company to hold
office until the next annual meeting of the stockholders or until their
successors are duly elected and qualified: Judson Cooper, Joshua Schein, Stephen
C. Knight, Jeffrey Rubin and Adam Eilenberg (each received 4,594,480 votes for
and 29,375 votes against). In addition, the stockholders of the Company voted to
amend the Company's 1996 Incentive and Non-Qualified Stock Option Plan to
increase the number of shares of Common Stock issuable under the plan from
333,333 to 833,333 (1,894,531 voted for, 48,500 voted against and 7,600
abstained).
11
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock commenced trading on the Nasdaq SmallCap Market
on September 9, 1997 under the symbol "SGPH." The following table sets forth,
for the periods indicated, the high and low sales prices for the Common Stock,
as reported on the Nasdaq SmallCap Market.
Price Range
1997 High Low
- ---- ------ -------
Third Quarter (from September 9, 1997) $6 1/8 $ 5
Fourth Quarter 7 3 1/4
1998
- ----
First Quarter 4 7/8 4
Second Quarter 4 5/8 3 7/8
Third Quarter 4 15/32
Fourth Quarter 3 7/8
As of March 25, 1998, there were approximately 38 holders of record of the
Common Stock. The Company believes that the number of beneficial owners is
substantially greater than the number of record holders, because a large portion
of the Common Stock is held of record in broker "street names."
The Company has paid no dividends on its Common Stock and does not expect
to pay cash dividends in the foreseeable future. The Company is not under any
contractual restriction as to its present or future ability to pay dividends.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
Sales of Unregistered Securities in 1998
In February 1998, the Company sold 335,530 shares of Common Stock to
MedImmune, Inc. The sale was exempt from registration under the Securities Act
of 1933, pursuant to Regulation D under the Act, as it was a transaction not
involving a public offering.
12
Item 6. Management Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The Company is a development stage, biopharmaceutical company. Since its
inception in December 1995, the Company's efforts have been principally devoted
to research and development, securing patent protection, obtaining corporate
relationships and raising capital. Since its inception through December 31,
1998, the Company has sustained cumulative net losses of $11,015,480, including
non-cash charges in the amount of $1,457,458 for the write-off of research and
development expenses associated with the acquisition of certain technology
rights acquired from a third party in exchange for the Company's common stock.
In addition, a non-cash charge of $450,450 was incurred for stock option and
warrant compensation expense. The Company's losses have resulted primarily from
expenditures incurred in connection with research and development, patent
preparation and prosecution and general and administrative expenses. From
inception through December 31, 1998, research and development expenses amounted
to $4,536,745, patent preparation and prosecution expenses totaled $937,277,
general and administration expenses amounted to $5,128,266. From inception
through December 31, 1998 revenues from research and development agreements
totaled $1,125,000
The Company expects to continue to incur substantial costs in the future
resulting from ongoing research and development programs, manufacturing of
products for use in clinical trials and pre-clinical testing of the Company's
products. The Company also expects that general and administrative costs,
including patent and regulatory costs, necessary to support clinical trials,
research and development, will continue to be substantial in the future.
Accordingly, the Company expects to incur operating losses for the foreseeable
future. There can be no assurance that the Company will ever achieve profitable
operations.
To date, the Company has not marketed, or generated revenues from the commercial
sale of any products. The Company's current product candidates are not expected
to be commercially available for several years.
Results of Operations
Twelve Months ended December 31, 1998, December 31, 1997 and December 31, 1996
Revenues from research and development contracts were $450,000 for the
twelve months ended December 31, 1998 compared to $675,000 for the same period
of 1997, and no revenue for the twelve months ended December 31, 1996. The
revenue was the result of payments made to the Company under an agreement
entered into in July of 1997 with Wyeth-Ayerst, under which the Company receives
certain payments for research and development activities sponsored by
Wyeth-Ayerst. At the time the agreement was entered into in July of 1997,
Wyeth-Ayerst made an up front payment of $300,000. As a result of this payment,
revenues for the twelve months ended December 31, 1998 were 33% less than
revenues received for the same period of 1997. For the twelve months ended
December 31, 1996, the Company's first full year of operations, there was no
revenue.
Research and development expenses increased to $2,927,755 for the twelve
months ended December 31, 1998 from $946,785 for the same period in 1997. The
209% increase in spending is consistent with the Company's plan to expand its
research and development activities. The 1998 spending reflects the opening of
the Company's research facility in Corvallis, Oregon in June, production of
product for clinical trails and the clinical management expenses associated with
those trials. The increase is also the result of
13
additional agreements to fund research and development with third parties in
exchange for licenses to their technology. The Company also incurred a non-cash
charge for the twelve months ended December 31, 1998 of $1,457,458 for the
write-off of in-process research and development associated with the acquisition
of certain technology from MedImmune, Inc. in exchange for 335,530 shares of the
Company's common stock. There were no such charges incurred in the prior years.
The $946,785 of research and development expenses for the twelve months ended
December 31, 1997 reflect an increase of $284,580 from the $662,205 level
incurred during the twelve months ended December 31, 1996. The 43%increase is
largely the result of increased levels of funding for research and development
performed by third parties under research agreements.
General and administrative expenses increased 79% in the twelve months
ended December 31, 1998 to $2,784,763 from $1,554,686 for the twelve months
ended December 31, 1997. The increase is due to an increase in staff, higher
accounting and legal expenses associated with being a public company, and higher
spending levels needed to support the Company's expanded research and
development effort. The $1,554,686 of general and administrative expenses
incurred during the twelve months ended December 31, 1997 represents an increase
of 97% from the $787,817 of costs incurred for the twelve months ended December
31, 1996. This increase was primarily the result of expenses incurred to support
the acquisition of patents and technology from third parties and initiation and
expansion of the Company's research and development activities with those third
parties. In addition, general and administrative costs increased from 1996 to
1997 as a result of the Company becoming a publicly traded enterprise.
Patent preparation expense of $197,071 for the twelve months ended December
31, 1998 represents a decrease of 31% from the $287,207 incurred for the twelve
month period ending December 31, 1997. The decline reflects a redirection of the
Company's activity away from technology and patent acquisition to the
development of potential products from the patents and technology acquired by
the Company in prior years. The Company's patent efforts are directed at
supporting its existing technology and development of patents on technology
developed directly by the Company. Patent preparation expenses for the twelve
months ended December 31, 1996 were $452,999, the $287,207 of expense incurred
for the same period of 1997 is a 37% decline from 1996. The decrease is spending
reflects decreased activity in patent and technology acquisition in favor of
increased spending for research and development of technology previously
acquired.
Total operating loss for the twelve months ended December 31, 1998 was
$6,931,454 a 218% increase from the $2,182,260 loss for the twelve months ended
December 31, 1997. The increase in the operating loss is consistent with the
Company's operating plan and reflects increased spending for research and
development, both with third parties and at the Company's research facility. In
addition, general and administrative cost have also increased to support the
higher level of research activity. Of the $4,524,194 increase in operating
expenses in the 1998 period compared to the same period of 1997, $1,457,458 or
31%, was the result of the one-time non-cash charge for the write-off of
in-process research and development associated with the acquisition of certain
technology from MedImmune. The operating loss of $2,182,260 for the twelve
months ended December 31, 1997 was $88,222 lower than the $2,270,482 operating
loss incurred for the twelve months ended December 31, 1996. The 3.9% decrease
in the operating loss was the result of a decrease in patent preparation fees,
stock and warrant compensation and revenue from the Wyeth Ayerst agreement
offsetting increases in research and development expenses and higher levels of
general and administrative costs.
Interest income for the twelve months ended December 31, 1998 was $379,788
compared to interest expense of $12,378 for the prior year period. The change is
the result of repayment of debt outstanding in the prior year period from the
proceeds of the Company's initial public offering and the interest income earned
on the investment of the proceeds from that offering in the twelve month period
ended December 31, 1998. In the twelve months ended December 31, 1996 the
Company had $2,306 of interest income compared to the $12,378 of interest
expense incurred in the twelve months ended December 31, 1997.
14
Net loss per common share for the twelve months ended December 31, 1998 was
$0.99 compared to $0.52 for the same twelve months of 1997. The 90% increase in
loss per share is the result of lower revenues and higher levels of spending as
described above, partially offset by the 55% increase in the weighted average
number of shares outstanding from the Initial Public Offering and the issuance
of 335,530 shares to MedImmune. Excluding the one-time charge of $1,457,458 for
the write-off of in-process research and development that resulted from the
agreement with MedImmune, the loss per share was $0.77 per share, a 48% increase
over the loss incurred in 1997. The net loss per share of $0.52 for the twelve
months ended December 31, 1997 was $0.14 per share less than the net loss of
$0.66 per share incurred in the twelve months ended December 31, 1996. The
reduction in the loss per share was primarily the result of the increase in the
weighted number of shares in the twelve month period of 1997 and a small
reduction in the operating loss.
Liquidity and Capital Resources
As of December 31, 1998 the Company had $4,966,873 in cash and cash
equivalents and $4,322,819 of net working capital. In July, August and September
of 1998 the Company sold certain laboratory equipment, computer equipment and
furniture to a third party, for $493,329, $385,423 and $260,333, respectively,
under sale/leaseback arrangements. The leases have a term of 42 months and
require minimum monthly payments of $13,171, $10,290 and $6,950, respectively.
The Company has an option to purchase the equipment for Fair Market Value
(defined in the agreement as 15% of original cost) at the end of the lease. In
July of 1997 the Company entered into a collaborative research and license
agreement with Wyeth-Ayerst. Under the terms of the agreement, the Company has
granted Wyeth-Ayerst an exclusive worldwide license to develop, make, use and
sell products derived from specified technologies. If certain milestones are
met, the agreement requires Wyeth-Ayerst to sponsor further research by the
Company for the development of the licensed technologies for a period of two
years from the effective date of the agreement, in return for payments to the
Company totaling $1,200,000. Through December 31, 1998 the Company has received
a total of $1,125,000 from Wyeth-Ayerst.
The Company anticipates that its current resources will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures through at least the first quarter of 2000. In addition, the
Company will attempt to generate additional working capital through a
combination of collaborative agreements, strategic alliances, research grants
and equity financings. However, no assurance can be provided that additional
capital will be obtained through these sources.
The Company's working capital and capital requirements will depend upon
numerous factors, including progress of the Company's research and development
programs; pre-clinical and clinical testing; timing and cost of obtaining
regulatory approvals; levels of resources that the Company devotes to the
development of manufacturing and marketing capabilities; technological advances;
status of competitors; and the ability of the Company to establish collaborative
arrangements with other organizations.
The Year 2000
The Company has completed its assessment of the potential impact of the
year 2000 on the ability of the Company's computerized information systems to
accurately process information that may be date sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or systems failures. The Company currently believes
that the costs of addressing this issue will not have a material adverse impact
on the Company's financial position. The Company has not been able to complete
an assessment of any year 2000 issues that may effect third parties, including
the Company's current and prospective suppliers. The Company plans to devote all
resources required to resolve any significant third-party year 2000 compliance
problems in a timely manner. Any year 2000 compliance problems of the Company,
its customers or vendors could have a material adverse effect on the Company's
business, results of operations and financial condition.
Item 7. Financial Statements and Supplementary Data
The information called for by this Item 7 is included following the "Index
to Financial Statements" contained in this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
15
PART III
Item 9. Directors and Executive Officers of the Registrant
The directors, officers and key employees of the Company are as follows:
Name Age Position
- ---- --- --------
Joshua D. Schein, Ph.D. 38 Chief Executive Officer, Secretary and Director
Judson A. Cooper 40 Chairman of the Board, Executive Vice President
Thomas N. Konatich 53 Chief Financial Officer and Treasurer
Dennis E. Hruby, Ph.D. 47 Vice President of Research
Adam D. Eilenberg 42 Director
Stephen C. Knight, M.D. 38 Director
Jeffrey Rubin 31 Director
Joshua D. Schein, Ph.D. has served as Chief Executive Officer of the
Company since August 1998 and as acting Chief Executive Officer from April 1998
to August 1998. Dr. Schein has also served as Secretary and a Director of the
Company since December 1995. Dr. Schein served as Chief Financial Officer of the
Company from December 1995 until April 1998. From December 1995 to June 1998,
Dr. Schein was a Director of DepoMed, Inc. a publicly traded biotechnology
company. From January 1996 to August 1998, Dr. Schein was an executive officer
and a director of Virologix Corporation, a private biotechnology company. From
June 1996 to September 1998, Dr. Schein was an executive officer and a director
of Callisto Pharmaceuticals, Inc. Dr. Schein is currently a director of both
Virologix and Callisto. From 1994 to 1995, Dr. Schein served as a Vice President
of Investment Banking at Josephthal, Lyon and Ross, Incorporated, an investment
banking firm. From 1991 to 1994, Dr. Schein was a Vice President at D. Blech &
Company, Incorporated, a merchant and investment banking firm focused on the
biopharmaceutical industry. Dr. Schein received a Ph.D. in neuroscience from the
Albert Einstein College of Medicine and an MBA form the Colombia Graduate School
of Business. Dr. Schein is a principal of CSO Ventures LLC ("CSO") and Prism
Ventures LLC ("Prism"), privately held limited liability companies.
Judson A. Cooper has served as Chairman of the Board of Directors of the
Company since August 1998 and as acting Chairman of the Board from April 1998 to
August 1998. Mr. Cooper has also served as Director of the Company since
December 1995 and Executive Vice President since November 1996. From December
1995 until November 1996 Mr. Cooper served as President. From August 1995 to
June 1998, Mr. Cooper was a Director of DepoMed, Inc., a publicly traded
biotechnology company. From January 1996 to August 1998, Mr. Cooper was an
executive officer and a director of Virologix Corporation, a private
biotechnology company. From June 1996 to September 1998, Mr. Cooper was an
executive officer and a director of Callisto Pharmaceuticals, Inc. Mr. Cooper is
currently a director of both Virologix and Callisto. Mr. Cooper has been a
private investor from September 1993 to December 1995. From 1991 to 1993, Mr.
Cooper served as a Vice President of D. Blech & Company, Incorporated. Mr.
Cooper is a graduate of the Kellog School of Management. Mr. Cooper is a
principal of CSO Ventures LLC ("CSO") and Prism Ventures LLC ("Prism"),
privately held limited liability companies.
Thomas N. Konatich has served as Chief Financial Officer and Treasurer of
the Company since April 1, 1998. From November 1996 through March 1998, Mr.
Konatich served as Chief Financial Officer and a Director of Innapharma, Inc., a
privately held pharmaceutical development company. From 1993 through November
1996, Mr. Konatich served as Vice President and Chief Financial Officer of
Seragen, Inc., a publicly traded biopharmaceutical development company. From
1988 to 1993, he was Treasurer of Ohmicron Corporation, a venture capital firm.
Mr. Konatich has an MBA from the Columbia Graduate School of Business.
16
Dennis F. Hruby, Ph.D. has served as Vice-President of Research of the
Company since April 1,1997. From January 1996 through March 1997, Dr. Hruby
served as a senior scientific advisor to the Company. Dr. Hruby is a Professor
of Microbiology at Oregon State University, and from 1990 to 1993 was Director
of the Molecular and Cellular Biology Program and Associate Director of the
Center for Gene Research and Biotechnology. From 1993 to 1995, Dr. Hruby served
as Vice-President of Research for M6 Pharmaceuticals, Inc. Dr. Hruby specializes
in virology and cell biology research, and the use of viral and bacterial
vectors to produce recombinant vaccines. Dr. Hruby has published more than 100
research, review articles and book chapters. He is a member of the American
Society of Virology, the American Society for Microbiology and a fellow of the
American Academy of Microbiology. Dr. Hruby received a Ph.D. in microbiology
from the University of Colorado Medical Center and a B.S. in microbiology from
Oregon State University.
Adam D. Eilenberg has been a director of the Company since November 1998.
Mr. Eilenberg is a member of the law firm, Ehrenreich Eilenberg Krause and
Zivian LLP, which serves as general corporate and securities counsel to the
Company. From 1987 to 1994, Mr. Eilenberg was first associated with and then a
partner of Heller Horowitz & Felt, P.C., and from 1981 to 1986 was associated
with the New York law firm then known as Kramer, Levin, Nessin, Kamin & Frankel.
Mr. Eilenberg's firm represents several other privately held biotechnology and
high technology companies in which Messrs. Cooper and Schein hold significant or
controlling interests, as well as Pharmos Corporation, a public drug development
company in which Dr. Stephen C. Knight, a director of the Company, is a
director. Mr. Eilenberg received his law degree in 1980 from Harvard University.
Stephen C. Knight, M.D., a director of the Company since November 1998, is
Chief Financial Officer and Senior Vice President of Financial Business
Development at Epix Medical, Inc. Prior to joining Epix Medical in July 1996,
Dr. Knight was a Senior Consultant at Arthur D. Little, Inc. While at Arthur D.
Little, Dr. Knight specialized in mergers and acquisitions, strategic planning,
and valuation in the pharmaceutical industry. Dr. Knight has performed medical
research at the National Institutes of Health, AT&T Bell Laboratories, and Yale
and Columbia Universities. Dr. Knight received an M.D. from Yale University
School of Medicine and a Master's Degree form the Yale School of Organization
and Management.
Jeffrey Rubin has been a director of the Company since November 1998. Mr.
Rubin is Principal and Managing Director of The Whitestone Group, an asset
management and investment banking firm he formed in January 1998. From 1994 to
1997, Mr. Rubin was founder and a director of the Fastcast Corporation, a
company specializing in optical technologies. From 1989 to 1994, Mr. Rubin was a
Vice President of American European Corporation, an import/export company. Mr.
Rubin received a Bachelor of Arts degree in 1989 from the University of
Michigan.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports that they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations from certain of the Company's executive
officers and directors that no other such reports were required, the Company
believes that during 1998 all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten-percent beneficial owners were
complied with on a timely basis.
17
Item 10. Executive Compensation
The following table summarizes the total compensation of the Chief Executive
Officer of the Company for 1998 and the two previous years, as well as all other
executive officers of the Company who received compensation in excess of
$100,000 for 1998.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------- --------------------------
Stock
Underlying
Name/ Other Annual Options/ All Other
Principal Position Year Salary Bonuses Compensation(1) Warrants Compensation
- ------------------ ---- ------ ------- --------------- -------- ------------
Joshua D.Schein, Ph.D., 1998 $170,940 -- -- 16,667 --
Chief Executive Officer 1997 154,616 -- -- 16,667 --
Director 1996 153,116 -- -- 16,667 --
Judson A. Cooper, 1998 170,939 -- -- 16,667 --
Executive Vice 1997 154,616 -- -- 16,667 --
President and Chairman 1996 153,116 -- -- 16,667 --
Walter Flamenbaum(2), 1998 183,843 -- -- 100,000(2) --
President
Dennis E. Hruby, Ph.D., 1998 167,148 -- -- 40,000 --
Vice President Research 1997 78,549 -- 27,366 10,000 --
1996 50,000 -- -- -- --
Thomas N. Konatich, 1998 120,172 -- -- -- --
Vice President & Chief Financial
Officer
David H. de Weese (3) 1998 77,050(3) -- -- -- --
Chief Executive Officer 1997 231,923 -- -- 477,683(3) --
1996 21,635 -- -- 16,667(3) --
- ----------
(1) Other than as indicated, no person received more than the lesser of $50,000
or 10% of total annual salary and bonus.
(2) Mr. Flamenbaum resigned from the Company in September 1998. His 100,000
options were cancelled at that time.
(3) Mr. de Weese resigned from the Company in April 1998. Mr. de Weese retained
warrants to purchase 230,508 shares of Common Stock at $3.00 per share. His
remaining warrants and options were cancelled.
18
The following tables set forth information with respect to the named
executive officers concerning the grant, repricing and exercise of options
during the last fiscal year and unexercised options held as of the end of the
fiscal year.
Option Grants for the Year Ended December 31, 1998
Common Stock % of Total
Underlying Options Granted Exercise Expiration
Name Options Granted to Employees Price Per Share Date
- ---- --------------- --------------- --------------- ----------
Joshua D. Schein ................ 16,667 6.5% $4.00 4/15/08
Judson A. Cooper ................ 16,667 6.5% $4.00 4/15/08
Dennis E. Hruby ................. 40,000 15.6% $4.63 4/1/08
Thomas Konatich ................. 95,000 37.0% $4.44 4/1/08
Aggregated Option Exercises for the Year Ended December 31, 1998 and Option
Values as of December 31, 1998:
Number of Securities
Underlying Unexercised Options Value of Unexercised
Shares at December 31, 1997 In-the-Money Options(1)
Acquired Value -----------------------------------------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Joshua D
Schein, Ph.D .......... -- -- 50,001 -- 0 --
Judson A
Cooper ................ -- -- 50,001 -- 0 --
Dennis E
Hruby ................. -- -- 10,000 40,000 0 0
Thomas
Konatich .............. -- -- 0 95,000 -- 0
- --------------
(1) Based upon the closing price on December 31, 1998 as reported on the Nasdaq
SmallCap Market and the exercise price per option.
Stock Option Plan
As of January 1, 1996, the Company adopted its 1996 Incentive and
Non-Qualified Stock Option Plan (the "Plan"), pursuant to which stock options
may be granted to key employees, consultants and outside directors.
The Plan is administered by a committee (the "Committee") comprised of
disinterested directors. The Committee will determine persons to be granted
stock options, the amount of stock options to be granted to each such person,
and the terms and conditions of any stock options as permitted under the Plan.
The members of the Committee have not yet been appointed.
19
Both Incentive Options and Nonqualified Options may be granted under the
Plan. An Incentive Option is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Any Incentive Option granted under the Plan will have an
exercise price of not less than 100% of the fair market value of the shares on
the date on which such option is granted. With respect to an Incentive Option
granted to an employee who owns more than 10% of the total combined voting stock
of the Company or of any parent or Subsidiary of the Company, the exercise price
for such option must be at least 110% of the fair market value of the shares
subject to the option on the date the option is granted. A Nonqualified Option
(i.e., an option to purchase Common Stock that does not meet the Code's
requirements for Incentive Options) must have an exercise price of at least the
fair market value of the stock at the date of grant.
The Plan, as amended, provides for the granting of options to purchase
833,333 shares of Common Stock, of which 540,561 options were outstanding as of
December 31, 1998,
Employment Contracts and Directors Compensation
Dr. Joshua Schein, Chief Executive Officer of the Company, has an
employment agreement with the Company which expires in December 2000 and is
cancelable by the Company only for cause, as defined in the agreement. Dr.
Schein receives an annual base salary of $225,000 and 16,667 stock options per
year, exercisable at the fair market value on the date of grant, and is eligible
to receive additional stock options and bonuses at the discretion of the Board
of Directors. In addition, Dr. Schein will receive a cash payment equal to 1.5%
of the total consideration received by the Company in a transaction resulting in
a change of ownership of at least 50% of the outstanding Common Stock of the
Company.
Judson Cooper, Chairman of the Board of Directors of the Company, has an
employment agreement with the Company which expires in December 2000 and is
cancelable by the Company only for cause, as defined in the agreement. Mr.
Cooper currently receives an annual base salary of $225,000 and 16,667 stock
options per year, exercisable at the fair market value on the date of grant, and
is eligible to receive additional stock options and bonuses at the discretion of
the Board of Directors. In addition, Mr. Cooper will receive a cash payment
equal to 1.5% of the total consideration received by the Company in a
transaction resulting in a change of ownership of at least 50% of the
outstanding Common Stock of the Company.
Thomas Konatich, Chief Financial Officer of the Company, has an employment
agreement with the Company that expires on April 1, 2000 and is cancelable by
the Company only for cause, as defined in the agreement. Mr. Konatich receives
an annual base salary of $170,000 and received options to purchase 95,000 shares
of Common Stock, at $4.44 on April 1, 1998. The options vest on a pro rata basis
on the first, second, third and fourth anniversaries of the agreement. Mr.
Konatich is also eligible to receive additional stock options and bonuses at the
discretion of the Board of Directors.
Dr. Dennis Hruby, Vice President of Research of the Company, has an
employment agreement with the Company which expires on January 1, 2000 and is
cancelable by the Company only for cause, as defined in the agreement. Dr. Hruby
received options to purchase 40,000 shares of Common Stock at an exercise price
of $4.63 per share. The options become exercisable on a pro rata basis on the
first, second, third and fourth anniversaries of the agreement. Dr. Hruby is
eligible to receive additional stock options and bonuses at the discretion of
the Board of Directors.
Directors' Compensation.
In 1998, outside Directors earned $1,500 for each Board meeting attended.
20
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 25, 1998, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's Directors, and
(iii) all current Directors and executive officers of the Company as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Amount of
Name and Address of Beneficial Percentage
Beneficial Owner(1) Ownership(2) of Total
- ------------------- ----------- ---------
Judson Cooper(3) 519,117 7.9%
Joshua D. Schein, Ph.D.(4) 511,017 7.7%
Steven M. Oliveira 421,516 6.4%
129 Post Road East
Westport, CT 06880
Richard B. Stone 470,665 7.2%
135 East 57th St., 11th FL
New York, NY 10022
MedImmune, Inc. 333,530 5.1%
35 West Watkins Mill Road
Gaithersburg, MD 20878
Stephen Knight 0 *
71 Rogers Street
Cambridge, MA 02142
Jeffrey Rubin 0 *
111 Deer Run
Roslyn, NY 11577
Adam Eilenberg 0 *
11 E. 44th Street
New York, NY 10017
All Officers and Directors as a Group (seven persons) 1,090,134 16.5%
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise indicated the address of each beneficial owner identified
420 Lexington Avenue, Suite 620, New York, NY 10170.
(2) Unless otherwise indicated, each person has sole investment and voting power
with respect to the shares indicated. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares as of a
given date which such person has the right to acquire within 60 days after such
date. For purposes of computing the percentage of outstanding shares held by
each person or group of persons named above on a given date, any security which
such person or persons has the right to acquire within 60 days after such date
is deemed to be outstanding for the purpose of computing the
21
percentage ownership of such person or persons, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person.
(3) Includes currently exercisable options to purchase 50,001 shares of Common
Stock.
(4) Includes currently exercisable options to purchase 50,001 shares of Common
Stock.
Item 12. Certain Relationships and Related Transactions
Effective January 15, 1998, the Company entered into a consulting agreement
with Prism Ventures LLC pursuant to which Prism has agreed to provide certain
business services to the Company, including business development, operations and
other advisory services, licensing, strategic alliances, merger and acquisition
activity, financings and other corporate transactions. Pursuant to the terms of
the agreement, Prism receives an annual fee of $150,000 and 16,667 stock options
per year. The agreement expires on January 15, 2001, and is cancelable by the
Company only for cause as defined in the agreement. Mr. Cooper and Dr. Schein
are the members of Prism. In October of 1998, the Company and Prism agreed to
suspend the agreement for as long as the two principals are employed by the
Company under the provisions of their amended employment agreements. During
1998, Prism was paid $112,500 pursuant to the agreement.
22
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) FINANCIAL STATEMENTS
Report of Independent Accountants
Balance Sheet at December 31, 1997 and 1998
Statement of Operations for the years ended December 31, 1997 and
1998, and for the period from inception through December 31, 1998
Statement of Changes in Stockholders' Equity for the period from
inception through December 31, 1998
Statement of Cash Flows for the years ended December 31, 1997 and
1998, and for the period from inception through December 31, 1998
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or note thereto.
(3) EXHIBITS; EXECUTIVE COMPENSATION PLANS
Exhibits
- -------
3 Articles of Incorporation and By-Laws
3(a) Articles of Incorporation of the Company (Incorporated by reference to
Form SB-2 Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
3(b) Bylaws of the Company (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
4 Instruments defining the rights of holders
4(a) Form of Common Stock Certificate (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
4(b) 1996 Incentive and Non-Qualified Stock Option Plan ++(Incorporated by
reference to Form SB-2 Registration Statement of the Company dated March
10, 1997 (No. 333-23037)).
4(c) Warrant Agreement dated as of September 15, 1996 between the Company and
Vincent A. Fischetti (1) (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
23
4(d) Warrant Agreement dated as of November 18, 1996 between the Company and
David de Weese (1) (Incorporated by reference to Form SB-2 Registration
Statement of the Company dated March 10, 1997 (No. 333-23037)).
4(e) Form of Bridge Loan Letter Agreement for Bridge Investors (Incorporated
by reference to Form SB-2 Registration Statement of the Company dated
March 10, 1997 (No. 333-23037)).
4(f) Form of Promissory Note for Bridge Investors (Incorporated by reference
to Form SB-2 Registration Statement of the Company dated March 10, 1997
(No. 333-23037)).
4(g) Form of Warrant Agreement for Bridge Investors (Incorporated by reference
to Form SB-2 Registration Statement of the Company dated March 10, 1997
(No. 333-23037)).
4(h) Form of Registration Rights Agreement for Bridge Investors (Incorporated
by reference to Form SB-2 Registration Statement of the Company dated
March 10, 1997 (No. 333-23037)).
4(i) Stock Purchase Agreement between the Company and MedImmune, Inc., dated
as of February 10, 1998. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997).
4(j) Registration Rights Agreement between the Company and MedImmune, Inc.,
dated as of February 10, 1998. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997).
10 Material Contracts
10(a) License and Research Support Agreement between the Company and The
Rockefeller University, dated as of January 31, 1996; and Amendment to
License and Research Support Agreement between the Company and The
Rockefeller University, dated as of October 1, 1996(2) (Incorporated by
reference to Form SB-2 Registration Statement of the Company dated March
10, 1997 (No. 333-23037)).
10(b) Research Agreement between the Company and Emory University, dated as of
January 31, 1996(2) (Incorporated by reference to Form SB-2 Registration
Statement of the Company dated March 10, 1997 (No. 333-23037)).
10(c) Research Support Agreement between the Company and Oregon State
University, dated as of January 31, 1996(2) (Incorporated by reference to
Form SB-2 Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
10(d) Employment Agreement between the Company and Dr. Joshua D. Schein, dated
as of January 1, 1996(1) ++ (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
10(e) Employment Agreement between the Company and Judson A. Cooper, dated as
of January 1, 1996; and Amendment No. 1 to Employment Agreement between
the Company and Judson A. Cooper, dated as of November 18, 1996(1) ++
(Incorporated by reference to Form SB-2 Registration Statement of the
Company dated March 10, 1997 (No. 333-23037)).
10(f) Employment Agreement between the Company and Dr. Kevin F. Jones, dated as
of January 1, 1996 ++ (Incorporated by reference to Form SB-2
Registration Statement of the Company dated
24
March 10, 1997 (No. 333-23037)).
10(g) Employment Agreement between the Company and David de Weese, dated as of
November 18, 1996(1) ++ (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
10(h) Consulting Agreement between the Company and CSO Ventures LLC, dated as
of January 1, 1996 (Incorporated by reference to Form SB-2 Registration
Statement of the Company dated March 10, 1997 (No. 333-23037)).
10(i) Consulting Agreement between the Company and Dr. Vincent A. Fischetti,
dated as of January 1, 1996 (Incorporated by reference to Form SB-2
Registration Statement of the Company dated March 10, 1997 (No.
333-23037)).
10(j) Consulting Agreement between the Company and Dr. Dennis Hruby, dated as
of January 1, 1996 Incorporated by reference to Form SB-2 Registration
Statement of the Company dated March 10, 1997 (No. 333-23037)).
10(k) Letter Agreement between the Company and Dr. Vincent A. Fischetti, dated
as of March 1, 1996 Incorporated by reference to Form SB-2 Registration
Statement of the Company dated March 10, 997 (No. 333-23037)).
10(l) Employment Agreement between the Company and Dr. Dennis Hruby, dated as
of April 1, 1997 ++ (Incorporated by reference to Amendment No. 1 to Form
SB-2 Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).
10(m) Clinical Trials Agreement between the Company and National Institute of
Allergy and Infectious Diseases, dated as of July 1, 1997 (Incorporated
by reference to Amendment No. 1 to Form SB-2 Registration Statement of
the Company dated July 11, 1997 (No. 333-23037)).
10(n) Research Agreement between the Company and The Research Foundation of
State University of New York, dated as of July 1, 1997(2) (Incorporated
by reference to Amendment No. 1 to Form SB-2 Registration Statement of
the Company dated July 11, 1997 (No. 333-23037)).
10(o) Collaborative Research and License Agreement between the Company and
American Home Products Corporation, dated as of July 1, 1997(2)
(Incorporated by reference to Amendment No. 3 to Form SB-2 Registration
Statement of the Company dated September 2, 1997 (No. 333-23037)).
10(p) Collaborative Evaluation Agreement between the Company and Chiron
Corporation, dated as of July 1, 1997 (Incorporated by reference to
Amendment No. 1 to Form SB-2 Registration Statement of the Company dated
July 11, 1997 (No. 333-23037)).
10(q) Consulting Agreement between the Company and Dr. Scott Hultgren, dated as
of July 9, 1997 (Incorporated by reference to Amendment No. 1 to Form
SB-2 Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).
10(r) Letter of Intent between the Company and MedImmune, Inc., dated as of
July 10, 1997 (Incorporated by reference to Amendment No. 1 to Form SB-2
Registration Statement of the Company dated July 11, 1997 (No.
333-23037)).
10(s) Research Collaboration and License Agreement between the Company and The
Washington
25
University, dated as of February 6, 1998 (2)+. (Incorporated by reference
to the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997.
10(t) Technology Transfer Agreement between the Company and MedImmune, Inc.,
dated as of February 10, 1998.+ (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997).
10(u) Employment Agreement between the Company and Dr. Dennis Hruby, dated as
of January 1, 1998.+ (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997).
10(v) Employment Agreement between the Company and Dr. Walter Flamenbaum, dated
as of February 1, 1998.++ (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997).
10(w) Employment Agreement between the Company and Thomas Konatich, dated as of
April 1, 1998.++ (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997).
10(x) Consulting Agreement between the Company and Prism Ventures LLC, dated as
of January 15, 1998. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997).
27 Financial Data Schedule*
- ----------
1 These agreements were entered into prior to the reverse split of the
Company's Common Stock and, therefore, do not reflect such reverse split.
2 Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.
* Filed herewith
+ Filed without exhibits and schedules (to be provided supplementally upon
request of the Commission).
++ This document is a management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1998.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGA PHARMACEUTICALS, INC.
Date: March 30, 1999 By: /s/ Joshua D. Schein
-----------------------------------------
Joshua D. Schein
Chief Executive
Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1933, this
registration statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated:
Signatures Title Date
- -------- ---- ----
/s/ Thomas Konatich Chief Financial Officer March 30, 1999
- --------------------- (Principal Accounting and
Thomas Konatich Financial Officer)
/s/ Judson A. Cooper Chairman of the Board March 30, 1999
- ---------------------
Judson Cooper
Director
- ---------------------
Jeffrey Rubin
Director
- ---------------------
Stephen Knight
/s/ Adam D. Eilenberg Director March 30, 1999
- ---------------------
Adam D. Eilenberg
/s/ Joshua Schein Director March 30, 1999
- ---------------------
Joshua Schein
27
SIGA Pharmaceuticals, Inc.
(A development stage company)
Index to Financial Statements
- --------------------------------------------------------------------------------
Report of Independent Accountants......................................... F-2
Balance Sheet as of December 31, 1998 and 1997............................ F-3
Statement of Operations for the years ended December 31, 1998 and
1997, and for the period from inception through December 31, 1998.... F-4
Statement of Changes in Stockholders' Equity for the period
from inception through December 31, 1998............................. F-5
Statement of Cash Flows for the years ended December 31, 1998, and
1997, and for the period from inception through December 31, 1998.... F-6
Notes to Financial Statements............................................. F-7
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders
of SIGA Pharmaceuticals, Inc.
In our opinion, the accompanying balance sheet and related statements of
operations, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of SIGA Pharmaceuticals, Inc.
(a development stage company) at December 31, 1998 and 1997, and the results of
its operations for the years ended December 31, 1998 and 1997, and for the
period from inception through December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 24, 1999
F-2
SIGA Pharmaceuticals, Inc.
(A development stage company)
Balance Sheet
- --------------------------------------------------------------------------------
December 31,
1998 1997
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 4,966,873 $ 10,674,104
Accounts receivable -- 150,000
Prepaid sponsored research -- 11,684
Prepaid expenses and other current assets 134,969 43,698
------------ ------------
Total current assets 5,101,842 10,879,486
Equipment, net 1,696,404 29,814
Investments 132,220 --
Other assets 147,002 142,841
------------ ------------
Total assets $ 7,077,468 $ 11,052,141
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 266,371 $ 224,623
Accrued expenses 143,364 240,985
Current portion of capital lease obligations 369,288 --
------------ ------------
Total liabilities 779,023 465,608
Capital lease obligations, net of current portion 650,659
Commitments and contingencies
(Notes 6, 7, 8, 9 and 10) -- --
Stockholders' equity
Preferred stock (.0001 par value, 10,000,000
shares authorized, none issued and
outstanding) -- --
Common stock (.0001 par value, 25,000,000
shares authorized, 6,577,712 and 6,242,182
shares issued and outstanding at December 31, 1998
and December 31, 1997 respectively) 658 624
Additional paid-in capital 16,697,424 15,049,723
Unrealized losses on available for sale securities (34,816) --
Deficit accumulated during the development stage (11,015,480) (4,463,814)
------------ ------------
Total stockholders' equity (deficit) 5,647,786 10,586,533
------------ ------------
Total liabilities and stockholders' equity $ 7,077,468 $ 11,052,141
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-3
SIGA Pharmaceuticals, Inc.
(A development stage company)
Statement of Operations
- --------------------------------------------------------------------------------
December 28,
1995 (Inception)
Year Ended December 31, to December
1998 1997 31, 1998
Revenue
Research and development contracts $ 450,000 $ 675,000 $ 1,125,000
Operating expenses
General and administrative (including
amounts to related parties of $465,734
and $429,231 for the years ended
December 31, 1998 and 1997, respectively) 2,784,763 1,554,686 5,128,266
Research and development (including
amounts to related parties of $81,570
and $77,831 for the years ended
December 31, 1998 and 1997, respectively) 2,927,755 946,785 4,536,745
Acquisition of in-process research and development 1,457,458 -- 1,457,458
Patent preparation fees 197,071 287,207 937,277
Stock option and warrant compensation 14,407 68,582 450,450
------------ ------------ ------------
Total operating expenses 7,381,454 2,857,260 12,510,196
------------ ------------ ------------
Operating loss (6,931,454) (2,182,260) (11,385,196)
Interest income/(expense) 379,788 (12,378) 369,716
------------ ------------ ------------
Net loss (6,551,666) (2,194,638) (11,015,480)
Other comprehensive loss
Unrealized losses on available for sale
securities (34,816) -- (34,816)
------------ ------------ ------------
Comprehensive loss $ (6,586,482) $ (2,194,638) $(11,050,296)
------------ ------------ ------------
Basic and diluted loss per share $ (.99) $ (.52)
------------ ------------
Weighted average common shares
outstanding used for basic and
diluted loss per share 6,540,022 4,217,044
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-4
SIGA Pharmaceuticals, Inc.
(A development stage company)
Statement of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
Deficit Unrealized Total
Accumulated losses on Stock-
Additional Stock During the available holders'
Paid-in Subscriptions Development for sale Equity
Shares Par Value Capital Outstanding Stage securities (Deficit)
Issuance of common stock at
inception 2,079,170 $ 208 $ 1,040 $ (1,248) $ --
Net loss -- -- -- -- $ (1,000) -- $ (1,000)
--------- -------- ----------- ----------- ------------ -------- -----------
Balances at December 31, 1995 2,079,170 208 1,040 (1,248) (1,000) -- (1,000)
Net proceeds from issuance
and sale of common stock 1,038,008 104 1,551,333 -- -- -- 1,551,437
Net proceeds from issuance
and sale of common stock 250,004 25 748,985 -- -- -- 749,010
Receipt of stock subscriptions
outstanding -- -- -- 1,248 -- -- 1,248
Issuance of compensatory options
and warrants -- -- 367,461 -- -- -- 367,461
Net loss -- -- -- -- (2,268,176) -- (2,268,176)
--------- -------- ----------- ----------- ------------ -------- -----------
Balances at December 31, 1996 3,367,182 337 2,668,819 (2,269,176) -- 399,980
Net proceeds from issuance and sale
of common stock 2,875,000 287 12,179,322 -- 12,179,609
Issuance of warrants with bridge
notes 133,000 -- 133,000
Stock option and warrant
compensation -- -- 68,582 -- -- -- 68,582
Net loss -- -- -- -- (2,194,638) -- (2,194,638)
--------- -------- ----------- ----------- ------------ -------- -----------
Balance at December 31, 1997 6,242,182 624 15,049,723 -- (4,463,814) -- 10,586,533
Issuance of common stock to acquire
third party's rights to
certain technology 335,530 34 1,457,424 -- 1,457,458
Issuance of compensatory options 175,870 -- 175,870
and warrants
Stock option and warrant
compensation 14,407 -- 14,407
Unrealized losses on available for
sale securities (34,816) (34,816)
Net loss -- -- -- -- (6,551,666) -- (6,551,666)
--------- -------- ----------- ----------- ------------ -------- -----------
Balance at December 31, 1998 6,577,712 $ 658 $16,697,424 $ -- $(11,015,480) $(34,816) $ 5,647,786
--------- -------- ----------- ----------- ------------ -------- -----------
The accompanying notes are an integral part of these financial statements.
F-5
SIGA Pharmaceuticals, Inc.
(A development stage company)
Statement of Cash Flows
- --------------------------------------------------------------------------------
December 28,
Year Ended 1995 (Inception)
December 31, to December
1998 1997 31, 1998
Cash flows from operating activities
Net loss $ (6,551,666) $ (2,194,638) $(11,015,480)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 211,520 9,212 227,981
Stock option and warrant compensation 190,277 68,582 626,320
Amortization of debt discount -- 133,000 133,000
Write-off in-process research and development 1,457,458 -- 1,457,458
Changes in assets and liabilities
Prepaid sponsored research 11,684 389,322 --
Accounts receivable 150,000 (150,000) --
Other current assets (91,271) (43,698) (134,969)
Accounts payable and accrued expenses (55,873) 284,670 409,735
Other assets (4,161) (142,232) (147,002)
------------ ------------ ------------
Net cash used in operating activities (4,682,032) (1,645,782) (8,442,957)
------------ ------------ ------------
Cash flows from investing activities
Capital expenditures (1,878,110) (17,601) (1,924,385)
Purchase of minority interest (167,036) -- (167,036)
------------ ------------ ------------
Net cash used in investing activities (2,045,146) (17,601) (2,091,421)
------------ ------------ ------------
Cash flows from financing activities
Net proceeds from issuance of common stock -- 12,179,609 14,480,056
Receipt of stock subscriptions outstanding -- -- 1,248
Deferred offering costs -- 115,688 --
Proceeds from bridge notes -- 1,000,000 1,000,000
Repayment of bridge notes -- (1,000,000) (1,000,000)
Proceeds from sale and leaseback of equipment 1,139,085 -- 1,139,085
Principal payments on capital lease obligations (119,138) -- (119,138)
------------ ------------ ------------
Net cash provided from
financing activities 1,019,947 12,295,297 15,501,251
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (5,707,231) 10,631,914 4,966,873
Cash and cash equivalents, beginning of period 10,674,104 42,190 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 4,966,873 $ 10,674,104 $ 4,966,873
------------ ------------ ------------
There were no cash payments for interest or income taxes for the periods ended
December 31, 1998 and 1997.
The accompanying notes are an integral part of these financial statements.
F-6
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Organization and Basis of Presentation
Organization
SIGA Pharmaceuticals, Inc. (the "Company") was incorporated in the State of
Delaware on December 28, 1995. The Company is engaged in the discovery,
development and commercialization of vaccines, antibiotics, and novel
anti-infectives for the prevention and treatment of infectious diseases.
The Company's technologies are licensed from third parties. In 1998 the
Company opened its research facility in the State of Oregon, reducing the
Company's dependency on third parties to conduct research on its behalf.
Basis of presentation
The Company's activities since inception have consisted primarily of
sponsoring and performing research and development, performing business and
financial planning, preparing and filing patent applications, and raising
capital. Accordingly, the Company is considered to be a development stage
company.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Since inception the Company has
incurred cumulative net operating losses of $11,015,480 and expects to
incur additional losses to perform further research and development
activities. These conditions raise substantial doubts about the Company's
ability to continue as a going concern. The company's ability to continue
as a going concern is dependent upon its ability to meet its obligations as
they become due, and obtain additional funding to support is future
operations. Management is actively pursuing various options, which include
additional financing. Management believes that its funds are sufficient to
support its operations in the next twelve months and that sufficient
funding will be available to meet its planned business objectives. 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 outcome of these uncertainties.
2. Summary of Significant Accounting Policies
Cash equivalents
Cash equivalents consist of short term, highly liquid investments, with
original maturities of less than three months when purchased and are stated
at cost. Interest is accrued as earned.
Investments
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities, (`SFAS 115"). At December 31, 1998 the
Company classified it's investment in marketable securities as available
for sale and reported them at fair market value, with the unrealized
holding gains and losses, net of tax effect, reported as a separate
component of stockholders' equity.
Equipment
Equipment is stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets, none of
which exceeds seven years.
F-7
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Revenue recognition
Revenue from research and development collaborative contracts are
recognized based upon the provisions of the agreements.
Research and development
Research and development costs are expensed as incurred and include costs
of third parties who conduct research and development, pursuant to
development and consulting agreements, on behalf of the Company. Costs
related to the acquisition of technology rights, for which development work
is still in process, and that have no alternative future uses, are expensed
as incurred and considered a component of research and development costs.
Income taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and the
tax basis of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided if
it is more likely than not that some or all of the deferred tax asset will
not be realized.
Net loss per common share
Effective December 31, 1997 the Company adopted Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS 128") which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS") by all entities that have publicly traded common
stock or potential common stock (options, warrants, convertible securities
or contingent stock arrangements). Basis EPS is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings.
At December 31, 1998 and 1997, outstanding options to purchase 540,561 and
117,076 shares of common stock respectively, with exercise prices ranging
from $1.50 to $5.50 have been excluded from the computation of diluted loss
per share as they are antidilutive. Outstanding warrants to purchase
734,724 and 949,016 shares of common stock, at December 31, 1998 and 1997,
respectively, with exercise prices ranging from $1.50 to $8.25 were also
antidilutive and excluded from the computation of diluted loss per share.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
F-8
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Fair value of financial instruments
The carrying value of cash and cash equivalents, and accounts payable and
accrued expenses approximates fair value due to the relatively short
maturity of these instruments.
Concentration of Credit Risk
The Company has cash in bank accounts that exceed the FDIC insured limits.
The Company has not experienced any losses on its cash accounts. No
allowance has been provided for potential credit losses because management
believes that any such losses would be minimal.
Accounting for stock based compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). As provided by SFAS
123, the Company has elected to continue to account for its stock-based
compensation programs according to the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense has been recognized to the extent of
employee or director services rendered based on the intrinsic value of
compensatory options or shares granted under the plans. The Company has
adopted the disclosure provisions required by SFAS 123.
New accounting pronouncements
On June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards number 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective for
all financial statements of all fiscal years beginning after June 15, 1999.
FAS 133 requires that an entity recognizes all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of
derivatives (i.e., gains and losses) depends on the intended use of the
derivative and the resulting designations. The adoption of FAS 133 is not
expected to have a material impact on the Company's financial statements.
Effective January 1, 1998 the Company adopted Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" ("FAS 130"), which required the
presentation of the components of comprehensive income in the company's
financial statement for reporting periods beginning subsequent to December
15, 1997. Comprehensive income is defined as the change in the company's
equity during a financial reporting period from transactions and other
circumstances from non-owner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available for sale securities).
Effective January 1, 1998 the Company adopted Financial Accounting
Standards No. 131, "disclosure about Segments of an enterprise and Related
Information" ("FAS 131"), which requires disclosure of information about
operating segments in annual financial statements for reporting period
beginning subsequent to December 15, 1997. Operating segments are defined
as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The adoption of FAS 131 did not have a material impact on the Company's
financial statements.
F-9
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
3. Equipment
Equipment consisted of the following at December 31, 1998 and 1997
December 31,
1998 1997
Laboratory equipment $ 865,053 $ --
Leasehold improvements 618,315 --
Computer equipment 159,380 45,768
Furniture & fixture 291,637 507
----------- -----------
1,934,385 46,275
Less - Accumulated depreciation (237,981) (16,461)
----------- -----------
Equipment, net $ 1,696,404 $ 29,814
----------- -----------
At December 31, 1998 laboratory equipment, computer equipment and furniture
includes approximately $730,500, $117,000 and $291,600, respectively, of
equipment acquired under capital leases. Accumulated depreciation related
to such equipment approximated $100,000, $275,000 and $24,200,
respectively, for laboratory equipment, computer equipment and furniture.
4. Stockholders' Equity
In September and October 1997, The Company completed an initial public
offering of 2,875,000 shares of its common stock at an offering price of
$5.00 per share. The Company realized gross proceeds of $14,375,000 and net
proceeds, after deducting underwriting discounts and commissions, and other
offering expenses payable by the Company, of $12,179,609.
Stock option plan and warrants
In January 1996, the Company implemented its 1996 Incentive and
Non-Qualified Stock Option Plan (the "Plan") whereby options to purchase up
to 333,333 shares of the Company's common stock may be granted to
employees, consultants and outside directors of the Company. In October
1998, the Company increased the number of options to purchase the Company's
common shares available for grant under the plan to 833,333. The exercise
period for options granted under the Plan, except those granted to outside
directors, is determined by a committee of the Board of Directors. Stock
options granted to outside directors pursuant to the Plan must have an
exercise price equal to or in excess of the fair market value of the
Company's common stock at the date of grant and become exercisable over a
period of three years with a third of the grant being exercisable at the
completion of each year of service subsequent to the grant. The fair market
value of the Company's common stock before its initial public offering in
September 1997, was determined by a committee of the Board of Directors.
The committee was comprised entirely of employees who receive stock options
under the Plan.
F-10
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Transactions under the Plan are summarized as follows:
Weighted
Average
Number of Exercise
Shares Price
Outstanding at December 31, 1995 -- --
Granted 50,001 $2.00
-------- -----
Outstanding at December 31, 1996 50,001 2.00
Granted 67,060 5.03
-------- -----
Outstanding at December 31, 1997 117,061 3.74
Granted 556,834 3.98
Forfeited (133,334) 4.14
-------- -----
Total outstanding at December 31, 1998 540,561 $3.88
-------- -----
Options available for future grant 292,772
--------
Weighted average fair value of options granted during 1997 $ 2.18
--------
Weighted average fair value of options granted during 1998 $ 2.45
--------
The following table summarizes information about options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Price 31, 1998 Life (Years) Price 31, 1998 Price
$ 1.50 33,334 7.00 $ 1.50 33,334 $ 1.50
2.00-4.66 306,834 9.46 3.41 46,334 4.14
5.00-5.50 200,393 5.56 5.01 120,393 5.01
----------- ---------
540,561 200,061
----------- ---------
In May 1998, the Company granted a consultant options to purchase 5,000
shares of the Company's common stock, at an exercise price of $4.25. The
Company recognized non-cash compensation expense of $15,655 for the year
ended December 31, 1998 based upon the fair value of such options on the
date of the grant.
On June 1998 the Company granted a consultant options to purchase 150,000
shares of the Company's common stock at an exercise price of $5.00 per
share. 50,000 options vested
F-11
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
immediately, and the remaining 100,000 vest pro rata over a period of ten
quarters. The Company recognized non-cash compensation expense of $102,340
for the year ended December 31, 1998 based upon the fair value of the
options on the date of the grant.
In November 1996, the Company entered into an employment agreement with its
former President and Chief Executive Officer. Under the terms of the
agreement, the employee received warrants to purchase 461,016 shares of
common stock at $3.00 per share. Warrants to purchase 25% of such shares
were exercisable upon issuance and the remaining warrants are exercisable
on a pro rata basis on the first, second and third anniversaries of the
agreement (see Note 10). These warrants expire on November 18, 2006. Upon
termination of the employment agreement on April 21, 1998, 230,508 warrants
were surrendered to the Company.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for warrants issued to employees and stock options granted under the Plan.
During the years ended December 31, 1998 and 1997, compensation expense of
$14,407 and $57,627, respectively, has been recognized for warrants issued
to employees. During the year ended December 31, 1997 the Company
recognized compensation expense of $3,452 for options issued pursuant to
its stock-based compensation plan. Compensation expense was calculated
based upon the difference between the exercise price of the warrant or
option and the fair market value of the Company's common stock on the date
of grant. Had compensation cost for warrants issued and stock options
granted been determined based upon the fair value at the grant date for
awards consistent with the methodology prescribed under SFAS 123 the
Company's net loss and loss per share have been increased by approximately
$199,000, or $.03 per share for the year ended December 31, 1998, and
approximately $146,000, or $0.3 per share for the year ended December 31,
1997.
In connection with the issuance of bridge notes (the "Bridge Notes") in the
aggregate principal amount of $1,000,000 in January and February 1997, the
Company issued the holders of the Bridge Notes five-year warrants to
purchase an aggregate of 100,000 shares of common stock at an exercise
price of $5.00 per share, pursuant to warrant agreements entered into by
the Company and the investors. The warrants are not exercisable until
September 1998. The fair value of the warrants, in the amount of $133,000,
issued by the Company in connection with the bridge financing, was recorded
as debt discount and was amortized over the six month term of the Bridge
Notes.
In September 1997, the Company issued two of its directors warrants to
purchase an aggregate of 3,000 shares of its common stock, at an exercise
price of $5.00 per share. The warrants are exercisable on the first and
second anniversaries of the agreements, on a pro rata basis. The Company
has recognized non-cash compensation expense of $7,503 for the year ended
December 31, 1997, based upon the fair value of such warrants on the date
of grant.
In September 1997, in connection with the Company's IPO, the Company issued
the underwriters warrants to purchase 225,000 shares of common stock at an
exercise price of $8.25 per share. All the warrants, which have a term of
five years, are exercisable at December 31, 1998.
F-12
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
In January 1998 the Company issued warrants to purchase 16,216 shares of
the Company's common stock, at an exercise price of $4.60 per share. The
Company recognized non-cash compensation expense of $57,875 for the year
ended December 31, 1998 based upon the fair value of such warrants on the
date the grant.
The fair value of the options and warrants granted to employees and
consultants during 1998 and 1997 ranged from $.81 to $3.47 on the date of
the respective grant using the Black-Scholes option-pricing model assuming
(a) no dividend yield, (b) a risk-free interest rate ranging from 5.06% to
6.26% based on the date of the respective grant, (c) no forfeitures, (d) an
expected life of three to five years and (e) a volatility factor of 0%
prior to the date of initial filing of the Company's IPO, 65% for the
remainder of 1997 and 100% for 1998.
5. Income Taxes
The Company has incurred losses since inception which have generated net
operating loss carryforwards of approximately $5,800,000 and $2,000,000,
respectively, at December 31, 1998 and 1997 for federal and state income
tax purposes. These carryforwards are available to offset future taxable
income and expire in 2011 and 2013 for federal income tax purposes. As a
result of a previous change in stock ownership, the annual utilization of
the net operating loss carryforwards is subject to limitation.
The net operating loss carryforwards and temporary differences, arising
primarily from deferred research and development expenses, and noncash
compensation expense, result in a noncurrent deferred tax asset at December
31, 1998 and December 31, 1997 of approximately $4,343,000 and $1,662,000
respectively. In consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize this deferred tax asset in the
future, the Company has recorded a valuation allowance of an equal amount
on such date to fully offset the deferred tax asset.
For the year ended December 31, 1998 and December 31, 1997, the Company's
effective tax rate differs from the federal statutory rate principally due
to net operating losses and other temporary differences for which no
benefit was recorded, state taxes and other permanent differences.
F-13
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
6. Related Parties
Consulting agreements
The Company entered into a consulting agreement, which expired on January
15, 1998, with CSO Ventures LLC ("CSO") under which CSO provided the
Company with business development, operations and other advisory services.
Pursuant to the agreement CSO was paid an annual consulting fee of
$120,000. Two Executive Vice Presidents of the Company are principals of
CSO. During the year ended December 31, 1997 the Company incurred expense
of $120,000 pursuant to the agreement.
In 1998 the Company entered into a two year consulting agreement, expiring
January 15, 2000, with Prism Ventures LLC ("Prism") under which Prism is to
provide the Company business development, operations and other advisory
services. Pursuant to the agreement Prism is to receive an annual
consulting fee of $150,000 and an annual stock option grant to purchase
16,667 of the Company's common shares. The Chief Executive Officer and
Chairman of the Company are principals of Prism. In October 1998 the
Company and Prism agreed to suspend the agreement for as long as the two
principals are employed by the Company under the provisions of their
amended employment agreements. During the year ended December 31, 1998, the
Company incurred expense of $112,500 pursuant to the agreement.
In connection with the development of its licensed technologies the Company
has entered into a consulting agreement with the scientist who developed
such technologies, under which the consultant serves as the Company's Chief
Scientific Advisor. The scientist, who is a stockholder, shall be paid an
annual consulting fee of $75,000. The agreement, which commenced in January
1996 and is only cancelable by the Company for cause, as defined in the
agreement, has an initial term of two years and provides for automatic
renewals of three additional one year periods unless either party notifies
the other of its intention not to renew. Research and development expense
incurred under the agreement amounted to $81,570 and $77,831 for the years
ended December 31, 1998 and 1997, respectively.
Employment agreements
The Company had employment agreements, expiring in December, Chief
Executive Officer and Chairman ("EVPs"), who are principal shareholders of
the Company, CSO and Prism, under which the EVPs were each paid minimum
annual compensation of $150,000. In addition, the Company granted each of
the EVPs options to purchase 16,667 shares of the Company's common stock,
at an exercise price of $1.50 per share, upon execution of the respective
agreements. During the term of the agreements the EVPs are each to receive
annual stock option grants to purchase 16,667 common shares exercisable at
the fair market value at the date of grant. Under the provisions of the
agreements the EVPs will each receive a cash payment equal to 1.5% of the
total consideration received by the Company in a transaction resulting in a
greater than 50% change in ownership of the outstanding common stock of the
Company.
In September 1998 the Company and the EVPs entered into amended employment
agreements commencing October 1, 1998 and expiring on December 31, 2000.
Under the amended agreements, the EVPs are each to be paid an annual
minimum compensation of $225,000, and to be granted a minimum of 16,666
options to purchase shares of the Company's common stock per
F-14
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
annum. In addition, one EVP was appointed as the Company's Chairman and the
other was appointed as the Chief Executive Officer. The Company incurred
$352,002 and $309,231 of expense for the years ended December 31, 1998 and
1997, respectively, pursuant to these agreements.
7. Technology Purchase Agreement
In February 1998, the Company entered into an agreement with a third party
pursuant to which the Company acquired the third party's right to certain
technology, intellectual property and related rights in the field of gram
negative antibiotics in exchange for 335,530 share of the Company's common
stock . Research and development expense related to this agreement amounted
to $1,457,458 for the year ended December 31, 1998.
8. Collaborative Research and License Agreement
In July 1997, the Company entered into a collaborative research and license
agreement with a pharmaceutical company. Under the terms of the agreement,
the Company has granted the pharmaceutical company an exclusive worldwide
license to develop, make, use and sell products derived from specified
technologies. The agreement requires the pharmaceutical company to sponsor
further research by the Company for the development of the licensed
technologies for a period of two years from the effective date of the
agreement, in return for payments totaling $1,200,000. In consideration of
the license grant the Company is entitled to receive royalties equal to
specified percentages of net sales of products incorporating the licensed
technologies. The royalty percentages increase as certain cumulative and
annual net sales amounts are attained. The Company could receive milestone
payments, under the terms of the agreement of up to $13,750,000 for the
initial product and $3,250,000 for the second product developed from a
single compound derived from the licensed technologies. Such milestone
payments are contingent upon the Company making project milestones set
forth in the agreement, and, accordingly, if the Company is unable to make
such milestones, the Company will not receive such milestone payments.
During 1998 and 1997, the Company recognized $450,000 and $675,000,
respectively, in revenue related to this agreement.
9. License and Research Support Agreements
In February 1998, the Company entered into a research collaboration and
license agreement with a third party. Under the terms of the agreement, the
Company has been granted an exclusive world-wide license to make, use and
sell products derived from the licensed technology, in exchange for royalty
payments equal to a certain percentage of net sales of products
incorporating the licensed technology, and certain milestone payments. In
addition, the Company agreed to sponsor further research by the third party
for the development of the licensed technologies in the amounts of
approximately $187,000, $387,000 and $403,000, for the years ending
December 31, 1998, 1999 and 2000. The Company incurred sponsored research
expense of approximately $187,000 during the year ended December 31, 1998.
F-15
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
In October 1997, the Company entered into an agreement with a third party
for the sale and assignment of certain patent rights to the Company. In
exchange for the patent rights, the Company agreed to pay $50,000 upon the
signing of the agreement and up to $400,000 upon the achievement of certain
milestones specified in the agreement. The Company has also granted the
third party a royalty free license to use and sell products derived from
the patent rights in certain countries. In addition, the Company has agreed
to reimburse the third party, up to $50,000, for patent expenses incurred
prior to the execution of this agreement. For the year ended December 31,
1997, the Company has recorded $100,000 of patent expense related to this
agreement. The Company did not incur any expenses under this agreement
during 1998.
In January 1996, the Company entered into a license and research support
agreement with third parties. Under the terms of the agreement, the Company
has been granted an exclusive world-wide license to make, use and sell
products derived from the licensed technologies. In consideration of the
license grant the Company is obligated to pay royalties equal to a
specified percentage of net sales of products incorporating the licensed
technologies. In the event the Company sublicenses any technologies covered
by the agreement the third parties would be entitled to a significant
percentage of the sublicense revenue received by the Company. In addition,
the Company is required to make milestone payments, up to $225,000 per
product, for each product developed from the licensed technologies.
The Company has agreed to sponsor further research by the third parties for
the development of the licensed technologies for a period of two years from
the date of the agreement, in return for a payment of $725,000 to such
third parties. The agreement expired in January 1998, however, the Company
has continued its relationship with the third party under similar terms.
Sponsored research related to this third party amounted to $362,500 and
$360,000 for the years ended December 31, 1997 and 1998, respectively. In
January 1996, the Company entered into research agreements with third
parties. Under the terms of the agreements, the Company has agreed to fund
two years of research in return for annual payments of $183,320. Research
and development expense under these agreements amounted to $175,024 and
$183,322 for the years ended December 31, 1996 and 1997, respectively.
10. Commitments and Contingencies
Employment agreement
In November 1996, the Company entered into an employment agreement,
expiring in November 1999, with its former President and Chief Executive
Officer. Under the terms of the agreement, the employee is to receive
annual base compensation of $225,000 and options to purchase 16,667 shares
of the Company's common stock, exercisable at the fair market value on the
date of grant. Upon execution of the agreement, the Company granted the
employee options to purchase 16,667 shares of its common stock at an
exercise price of $3.00 per share. In addition, the employee was issued
warrants to purchase 461,016 shares of common stock at $3.00 per share (see
Note 4). During the years ended December 31, 1998 and December 31, 1997,
the Company incurred $77,050 and $231,923, respectively of expense pursuant
to the agreement. The agreement was terminated on April 21, 1998.
F-16
SIGA Pharmaceuticals, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Operating lease commitments
The Company leases certain facilities and office space under operating
leases. Minimum future rental commitments under operating leases having
noncancelable lease terms in excess of one year are as follows:
Year ended December 31,
1999 228,990
2000 231,789
2001 234,672
2002 237,640
2003 and thereafter 201,851
--------------
$ 1,134,942
--------------
Capital lease commitments
In July, August and September 1998, the Company sold certain laboratory
equipment, computer equipment and furniture to a third party for $493,329,
$385,422 and $260,333, respectively, under sale-leaseback agreements. The
leases have term of 42 months and require minimum monthly payments of
$13,171, $10,290 and $6,950, respectively. The Company has an option to
purchase the equipment at 15% of the original cost at the end of the lease
term. Future minimum lease payments for assets under capital leases at
December 31, 1998 are as follows:
Year ended December 31,
1999 364,933
2000 364,933
2001 364,933
2002 34,480
--------------
Total minimum lease payments 1,129,279
Less: amounts representing interest 109,332
--------------
Present value of future minimum lease payments 1,019,947
--------------
Less: current portion of capital lease obligations $ 369,388
--------------
Capital lease obligations, net of current portion $ 650,659
--------------
F-17
5
12-MOS
DEC-31-1998
JAN-01-1998
DEC-31-1998
3,452,916
0
550,057
0
1,727,096
6,196,350
2,514,725
(1,333,695)
8,066,670
3,909,442
0
0
45
1,193,452
272,708
8,066,670
0
1,539,941
437,713
437,713
6,109,809
0
305,390
(4,663,347)
0
(4,663,347)
0
0
0
(4,663,347)
(0.15)
(0.15)
