SIGA
Annual Report 2006

Plain-text annual report

SIGA TECHNOLOGIES INC FORM 10-K (Annual Report) Filed 03/16/07 for the Period Ending 12/31/06 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 420 LEXINGTON AVE SUITE 601 NEW YORK, NY 10170 2126729100 0001010086 SIGA 2834 - Pharmaceutical Preparations Biotechnology & Drugs Technology 12/31 http://www.edgar-online.com © Copyright 2008, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2006 Or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to Commission File No. 0-23047 SIGA Technologies, Inc. (Exact name of registrant as specified in its charter) Registrant's telephone number, including area code: (212) 672-9100 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes |_| No |X|. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act Yes |_| No |X|. Note--Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. Indicate by check mark 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. |_|. Delaware (State or other jurisdiction of 13-3864870 incorporation or organization) (IRS Employer Identification. No.) 420 Lexington Avenue, Suite 408 New York, NY 10170 (Address of principal executive offices) (zip code) Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- common stock, $.0001 par value Nasdaq Capital Market Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one): Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|. The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on March 8, 2007 as reported on the Nasdaq SmallCap Market was approximately $140,000,000. As of March 8, 2007 the registrant had outstanding 32,674,394 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE The following document is incorporated herein by reference: Document Parts Into Which Incorporated -------- ----------------------------- Proxy Statement for the Company's 2007 Annual Part III Meeting of Stockholders ================================================================================ SIGA Technologies, Inc. Form 10-K Table of Contents Page No. PART I Item 1. Business.............................................................2 Item 1A. Risk Factors........................................................11 Item 1B. Unresolved Staff Comments...........................................19 Item 2. Properties..........................................................20 Item 3. Legal Proceedings...................................................20 Item 4. Submission of Matters to a Vote of Security Holders.................20 PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities...................21 Item 6. Selected Financial Data.............................................22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........33 Item 8. Financial Statements and Supplementary Data.........................34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................56 Item 9A. Controls and Procedures.............................................56 Item 9B. Other Information...................................................56 PART III Item 10. Directors, Executive Officers and Corporate Governance..............57 Item 11. Executive Compensation..............................................57 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....................................57 Item 13. Certain Relationships and Related Transactions, and Director Independence...............................................58 Item 14. Principal Accountant Fees and Services..............................58 PART IV Item 15. Exhibits, Financial Statements and Schedules........................59 SIGNATURES....................................................................63 Item 1. Business Certain statements in this Annual Report on Form 10-K, including certain statements contained in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "can be," "expects," "may affect," "may depend," "believes," "estimate," "project" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and SIGA cautions you that any forward-looking information provided by or on behalf of SIGA is not a guarantee of future performance. SIGA's actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond SIGA's control, including (i) the risk that potential products that appear promising to SIGA or its collaborators cannot be shown to be efficacious or safe in subsequent pre-clinical or clinical trials, (ii) the risk that SIGA or its collaborators will not obtain appropriate or necessary governmental approvals to market these or other potential products, (iii) the risk that SIGA may not be able to obtain anticipated funding for its development projects or other needed funding, (iv) the risk that SIGA may not be able to secure funding from anticipated government contracts and grants, (v) the risk that SIGA may not be able to secure or enforce adequate legal protection, including patent protection for its products, (vi) the risk that regulatory approval for SIGA's products may require further or additional testing that will delay or prevent approval, (vii) the volatile and competitive nature of the biotechnology industry, (viii) changes in domestic and foreign economic and market conditions, and (ix) the effect of federal, state and foreign regulation on SIGA's businesses. All such forward-looking statements are current only as of the date on which such statements were made. SIGA does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events. Introduction SIGA Technologies, Inc. is referred to throughout this report as "SIGA," "the Company," "we" or "us." SIGA is a biotechnology corporation incorporated in Delaware on December 28, 1995. We aim to discover, develop and commercialize novel anti-infectives, antibiotics and vaccines for serious infectious diseases. The major focus of our developmental and commercialization activities is on products for use in defense against biological warfare agents such as Smallpox and Arenaviruses (hemorrhagic fevers). Our lead product, SIGA-246, is an orally administered anti-viral drug that targets the smallpox virus. In December 2005 the Food and Drug Administration (FDA) accepted our Investigational New Drug (IND) application for SIGA-246 and granted the program "Fast-Track" status. In December 2006 the FDA granted Orphan Drug designation to SIGA-246 for the prevention and treatment of smallpox. Our anti-viral programs are designed to prevent or limit the replication of the viral pathogen. Our anti-infectives programs are aimed at the increasingly serious problem of drug resistance. We are also developing a technology for the mucosal delivery of our vaccines which may allow the vaccines to activate the immune system at the mucus lined surfaces of the body -- the mouth, the nose, the lungs and the gastrointestinal and urogenital tracts -- the sites of entry for most infectious agents. As a result of the success of our efforts to develop products for use against agents of biological warfare, we have not spent significant resources to further the development of our anti-infective and vaccine technologies. Product Candidates and Market Potential SIGA Biological Warfare Defense Product Portfolio Anti-Smallpox Drug: Smallpox virus is classified as a Category A agent by the Center for Disease Control and Prevention (CDC) and is considered one of the most significant threats for use as a biowarfare agent. While deliberate introduction of any pathogenic agent would be devastating, we believe the one that holds the greatest potential for harming the general U.S. population is Smallpox. At present there is no effective drug with which to treat or prevent Smallpox infections. To address this serious risk, SIGA scientists have identified a lead drug candidate, SIGA-246, which inhibits vaccinia, cowpox, ectromelia (mousepox), monkeypox, camelpox, and variola replication in cell culture but not other unrelated viruses. Given the safety concerns with the current smallpox 2 vaccine, there should be several uses for an effective smallpox antiviral drug: prophylactically, to protect the non-immune who are at risk to exposure; therapeutically, to prevent disease or death in those exposed to smallpox; and lastly, as an adjunct treatment to the immunocompromised. SIGA scientists are also working on several other smallpox drug targets, including the viral proteinases, to develop additional drug candidates for use in combination therapy if necessary. In December 2005, the FDA approved our IND application for SIGA-246. In June 2006 we successfully completed the first human clinical safety study of SIGA-246. The trial showed the drug to be well-tolerated in healthy human volunteers at all tested orally administered doses. In addition, data from blood level exposure was sufficient to support once a day dosing. The Phase I clinical trial was performed at Advanced Biomedical Research, Inc. Clinical Research Center in Hackensack, NJ. The study was a double-blind, randomized, placebo controlled, and ascending single dose study. We started an additional Phase I clinical trial in February 2007, to assess the safety, tolerability, and pharmacokenitics of SIGA-246 administered as a single daily oral dose for 21 days in healthy human volunteers. This Phase I human trial is being performed at the Orlando Clinical Research Center in Orlando, Florida. In 2006, SIGA-246 became the first drug ever to demonstrate 100% protection against human smallpox virus in a primate trial conducted at the federal Centers for Disease Control and Prevention (CDC). Later in 2006, in two non-human primate trials the drug demonstrated 100% protection to animals injected with high doses of monkeypox virus. One study was sponsored by the National Institute of Allergy and Infectious Diseases (NIAID) at the National Institutes (NIH). The second study was conducted by the U.S. Army Medical Research Institute of Infectious Diseases (USAMRIID) and was funded by the Department of Defense's Threat Reduction Agency. In late 2006, SIGA-246 received Orphan Drug designation for both the treatment and prevention of smallpox. During 2006, SIGA received grants from the NIH totaling approximately $21 million for the continued development of the drug. Anti-Arenavirus Drug: Arenaviruses are hemorrhagic fever viruses that have been classified as Category A agents by the CDC due to the great risk that they pose to public health and national safety. Among the Category A viruses recognized by the CDC, there are four hemorrhagic fever arenaviruses (Junin, Machupo, Guanarito and Sabia viruses) for which there are no FDA approved treatments available. In order to meet this threat, SIGA scientists have identified a lead drug candidate, ST-294, which has demonstrated significant antiviral activity in cell culture assays against arenavirus pathogens. We have also demonstrated the therapeutic efficacy of ST-294 in a preliminary animal challenge study. SIGA also has programs against other hemorrhagic fever viruses including Lassa virus, Lymphocytic choriomeningitis virus (LCMV), and Ebola in development. We believe that the availability of hemorrhagic fever virus antiviral drugs will address national and global security needs by acting as a significant deterrent and defense against the use of arenaviruses as weapons of bioterrorism. In 2006, SIGA received a three year grant of $6.0 million from the NIH to support the development of antiviral drugs for Lassa fever virus. Bacterial Commensal Vectors: Our scientists have developed methods that allow essentially any gene sequence to be expressed in Generally Regarded As Safe (GRAS) gram-positive bacteria, with the foreign protein being displayed on the surface of the live recombinant organisms. Since these organisms are inexpensive to grow and are very stable, this technology affords the possibility of rapidly producing live recombinant vaccines against any variety of biological agents that might be encountered, such as Bacillus anthracis (anthrax) or Smallpox. SIGA scientists are working to develop an alternative vaccine with improved safety for use in preventing human disease caused by pathogenic orthopoxviruses such as variola virus. To accomplish this goal we are utilizing our newly-developed BCV (bacterial commensal vector) technology. BCV utilizes gram-positive commensal bacteria, such as Streptococcus gordonii, (S. Gordonii) to express heterologous antigens of interest, either in secreted form or attached to its external surface. Phase I human clinical trials indicate that this S. gordonii strain is safe and well-tolerated in humans. In several different animal model systems S. gordonii has been shown to efficiently express various antigens and elicit protective immune responses (cellular, humoral and mucosal). We believe that the delivery of selected vaccinia virus antigens via this live bacterial vector system will provide an effective and safe method for prevention of smallpox in humans. Surface Protein Expression (SPEX/PLEX) System: Our scientists have harnessed the protein expression pathways of gram-positive bacteria and turned them into protein production factories. Using our proprietary SPEX or PLEX systems, we can produce foreign proteins at high levels in the laboratory for use in subunit vaccine formulations or other therapeutic applications. Furthermore, we can envision engineering these bacteria to colonize the mucosal surfaces of soldiers and/or civilians and secrete therapeutic molecules - e.g. anti-toxins that protect against aerosolized botulism toxin. 3 Antibiotics: To combat the problems associated with emerging antibiotic resistance, our scientists are developing drugs designed to address a new target - the bacterial adhesion organelles. Specifically, by using novel enzymes required for the transport and/or assembly of the proteins and structures that bacteria require for adhesion or colonization, we are developing new classes of broad spectrum antibiotics. This may prove invaluable in providing prompt treatment to individuals encountering an unknown bacterial pathogen in the air or food supply. Market for Biological Defense Programs From 2001 through 2007, the Federal Government has allocated over $16 billion in State and local terrorism preparedness funding from the Department of Homeland Security, Health and Human Services and Justice. In 2006, approximately $5.0 billion was allocated for emergency, preparedness and response funding. A similar amount was enacted for 2007 with a slight increase projected for 2008. The Federal budget for defending against catastrophic threats funding includes not only stockpiling countermeasures that are currently available, but funding to develop new countermeasures for agents that currently have none, and next generation countermeasures that are safer and more effective than those that presently exist. Current BioShield legislation allows the Federal Government to buy critically needed vaccines and medications as soon as experts agree that they are safe and effective enough to be added to the Strategic National Stockpile (http://www.whitehouse.gov/omb/budget/ fy2008/pdf/). One of the major concerns in the field of biological warfare agents is Smallpox - although declared extinct in 1980 by the World Health Organization (WHO), there is a threat that a rogue nation or a terrorist group may have an illegal inventory of the virus that causes Smallpox. The only legal inventories of the virus are held under extremely tight security at the CDC in Atlanta, Georgia and at a laboratory in Russia. As a result of this threat, the U.S. government has announced its intent to make significant expenditures on finding a way to counteract the virus if turned loose by terrorists or on a battlefield. The Congressional Budget Office (the "CBO") reported that the DHS projects the acquisition of 60 million doses of new Smallpox vaccines over a three year period, commencing in 2005. Further the CBO reports that the DHS will spend an additional $1 billion to replace expired stocks in 2007-2013. The market opportunity for our biological warfare defense products has not been quantified as yet beyond the potential to obtain a share of the approximately $9 billion the federal government is committing to support research in the coming year. The FDA amended its regulations, effective June 30, 2002, so that certain new drug and biological products used to reduce or prevent the toxicity of chemical, biological, radiological, or nuclear substances may be approved for use in humans based on evidence of effectiveness derived only from appropriate animal studies and any additional supporting data. We believe that this change could make it possible for us to have our products which have been proven effective in animal studies to be approved for sale within a relatively short time. SIGA Antivirals Product Portfolio SIGA currently has the following antiviral programs which are in various stages of development ranging from initial research and screening to Phase I human clinical trials: Smallpox antiviral, New World Arenavirus antiviral, Old World Arenavirus antiviral, Filovirus (Ebola & Marburg) antivirals, Dengue Fever virus antiviral, and Bunyavirus antivirals. Currently there are no approved antivirals available against any of these viruses. SIGA Antibiotics Product Portfolio Our anti-infectives program is targeted principally toward drug-resistant bacteria and hospital-acquired infections. According to estimates from the CDC, approximately two million hospital-acquired infections occur each year in the United States. Our 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. We believe that, by preventing attachment, the bacteria should be readily cleared by the body's immune system. SIGA has Gram-positive, Gram-negative and broad spectrum antibiotic technologies. 4 Market for Anti-infective Programs There are currently approximately 83 million prescriptions written for antibiotics annually in the U.S (www.iatrogenic.org/library/antibioticlib.html) and it is estimated that the worldwide market for antibiotics was worth approximately 23.7 billion in 2004 (www.pharmaprojectsplus.com). Although our products are too early in development to make accurate assessments of how well they might compete, if successfully developed and marketed against other products currently existing or in development at this time, the successful capture of even a relatively small global market share could lead to a large dollar volume of sales. Some of the antivirals that SIGA is developing are for biowarfare agents and the market for that area is currently unknown, however, there is funding available to purchase these drugs in Project Bioshield as well as through the Department of Defense. Markets for the other antiviral programs at SIGA vary widely depending on the virus and where they are endemic. Each of these programs will be assessed on an individual basis as they approach the New Drug Application stage. Technology Antiviral Technology: Two Approaches SIGA has two approaches to the discovery and development of new antiviral compounds: rational drug design and high-throughput screening (HTS). For rational drug design SIGA applies advanced receptor structure-based Virtual Ligand Screening technology for ligand/inhibitor discovery. The analysis of the structure reveals potentially "drugable" pockets. The technology allows us to utilize the three-dimensional structure of the target receptor to screen large virtual compound collections as well as databases of commercially available compounds and prioritize them for subsequent experimental validation. Rational drug design is also used to develop structure activity relationships and lead optimization. For HTS SIGA uses whole cell virus inhibition assays, pseudotype virus inhibition assays, as well as validated target biochemical assays. SIGA currently has a 200,000 small molecule compound library in-house that is utilized for screening in these various assays. This strategy allows for both target specific and target neutral screening and identification of novel antiviral compounds. Compounds are also screened for toxicity in various cell lines to develop a therapeutic index (TI) which is the concentration that the compound is toxic to 50% of the cells (CC50) divided by the concentration of compound required to inhibit 50% of the virus (EC50) (TI= CC50/EC50). Once hits are identified with an acceptable TI they are selected for chemical optimization and proceed in to the antiviral drug development pipeline. Vaccine Technologies: Mucosal Immunity and Vaccine Delivery Using proprietary technology licensed from Rockefeller University (Rockefeller), SIGA has done work toward developing specific commensal bacteria ("commensals") as a means to deliver mucosal vaccines. Commensals are harmless bacteria that naturally occupy the body's surfaces with different commensals inhabiting different surfaces, particularly the mucosal surfaces. By activating a local mucosal immune response, our vaccine candidates are designed to prevent infection and disease at the earliest possible stage, as opposed to most conventional vaccines which are designed to act after infection has already occurred. We believe that mucosal vaccines developed using our proprietary commensal delivery technology could provide a number of advantages, including: o More complete protection than conventional vaccines: o Safety advantage over other live vectors: Commensals, by virtue of their substantially harmless nature, may offer a safer delivery vehicle without fear of genetic reversion to the infectious state inherent in attenuated pathogens. o Non-injection administration: Oral, nasal, rectal or vaginal administration of the vaccine eliminates the need for painful injections with their potential adverse reactions. 5 o Potential for combined vaccine delivery: The Children's Vaccine Initiative, a worldwide effort to improve vaccination of children sponsored by the WHO, 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. o Eliminating need for refrigeration: A critical consideration, especially for the delivery of vaccines in developing countries. o 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. Surface Protein Expression Systems ("SPEX" & "PLEX") The ability to overproduce many bacterial and human proteins has been made possible through the use of recombinant DNA technology. SIGA has added to this field by taking advantage of our 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 bacterial commensal mucosal vaccines, we have 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. We believe 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 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. Recent developments in the construction of these recombinant bacteria have resulted in a plasmid-based expression system (PLEX), in which engineered genetic elements (plasmids) are cloned into commensal bacteria for protein production. This system allows for higher protein production levels than the original SPEX constructs. In addition, the PLEX and SPEX systems may be used in concert, enabling greater flexibility in protein secretion for purification or for surface expression of multiple proteins - e.g. for multi-component combination vaccines. We believe this technology overcomes many of the issues encountered in more traditional bacterial expression systems - e.g. Escherichia coli - in which proteins may sometimes prove insoluble or run the risk of toxic contamination from natural bacterial products (e.g. endotoxin). Collaborative Research and Licenses We have entered into the following license agreements, collaborative research arrangements and contracts: National Institutes of Health. In October and August 2006, the NIH awarded us a $16.5 million, 3 year contract and a $4.8 million, 3 year, Small Business Innovation Research (SBIR) grant, respectively, both to advance the development of our lead drug candidate, SIGA-246. In September 2006, the NIH awarded us a $6.0 million, 3 year SBIR grant for the continued development of our arena viruses drug candidates. In August 2004, we were awarded two Phase I and two Phase II SBIR grants totaling approximately $11.1 million to support our work on Smallpox and Arenaviruses. The grants were acquired as part of our acquisition of certain assets from ViroPharma Incorporated ("Viropharma"). For the years ending December 31, 2006, 2005, and 2004, we have recognized revenue from the SBIR grants of $3,723,000, $6,596,000, and $1,415,000, respectively. In 2006, we recognized $171,000 in revenue from our October 2006 contract with the NIH. Prior to 2003, we received grants amounting to approximately $1.1 million to support our antibiotic and vaccine development programs including a Phase II SBIR grant for approximately $865,000 that began in 2002 and was completed in May 2004. SIGA receives cash payments from the NIH under its SBIR grants on a semi-monthly basis, and under its contract on a monthly basis, as the work is performed and the related revenue is recognized. SIGA's current NIH SBIR grants and contract do not include milestone payments. The agreements can be cancelled for non-performance and if cancelled, the Company will not receive additional funds under the agreements. 6 As part of our operational strategy we routinely submit grants to the NIH. However, there is no assurance that we will receive additional grants. United States Army Medical Research and Material Command. In September 2005, we entered into a $3.2 million, one year contract with the United States Army Medical Research and Material Command (USAMRMC). The agreement, for the rapid identification and treatment of anti-viral diseases, is funded through the United States Air Force (USAF). It is anticipated that our efforts will aid the USAF Special Operations Command in its use of computational biology to design and develop specific countermeasures against biological threat agents Smallpox and Adenovirus. As of December 31, 2006, SIGA received cash payments of $3.2 million under this contract and recognized total revenue of approximately $3.1 million. SIGA completed its work under the contract under-budget and will repay the USAF approximately $92,000 which was not recognized as revenue by the Company. United States Air Force. In November 2006, we received a $1.4 million, one year contract with the Air Force Medical Service for the development of counter-measures against Dengue viruses and other water-related viral agents. In November 2006 we also received a one-year, $900,000 contract to aid the USAF Special Operations Command (USAFSOC) in its development of specific anti-viral agents. For the year ended December 31, 2006 we recognized revenues of $247,000 from these contracts. SIGA receives cash payments from the USAF on a monthly basis, as the work is performed and the related revenue is recognized. SIGA's current contracts with the USAF do not include milestone payments. The agreements can be cancelled for non-performance and if cancelled, the Company will not receive additional funds under the agreements. United States Army Medical Research Acquisition Activity. In December 2002, we entered into a four year contract with the U.S. Army Medical Research Acquisition Activity (USAMRAA) to develop a drug to treat Smallpox. The contract start date was January 1, 2003 for the total amount of $1.6 million. Annual payments over the term of the agreement were approximately $400,000. In the years ended December 31, 2006, 2005, and 2004 we recognized revenue of $412,000, $427,000, and $425,000, respectively. SIGA received cash payments from USAMRAA under this contract on a monthly basis, as the work is performed and the related revenue was recognized. The agreement with USAMRAA did not include milestone payments. As of December 31, 2006, SIGA completed its obligations under this agreement and expects to receive all of the related funding. Saint Louis University. On September 1, 2005, we entered into an agreement with Saint Louis University for the continued development of one of our Smallpox drugs. The agreement is funded through the NIH. Under the agreement, SIGA received $1.0 million during the term of September 1, 2005 to February 28, 2006. Revenues were recognized as services were performed. In 2006 and 2005, we recognized revenues of $225,000 and $775,000 from the agreement. Oregon State University. Oregon State University (OSU) is also a party to our license agreement with Rockefeller (discussed below), whereby we have 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 OSU, we provided funding for sponsored research through December 31, 1999, with exclusive license rights to all inventions and discoveries resulting from this research. At this time, no additional funding is contemplated under this agreement, however, we retain the exclusive licensing rights to the inventions and discoveries that may arise from this collaboration. The term of the agreement is for the duration of the patents licensed. As we do not currently know when any patents pending or future patents will expire, we cannot at this time determine the term of this agreement. The agreement can be terminated earlier if we are in breach of the provisions of the agreement and do not cure the breach in the allowed cure period. We are compliant in all our obligations under the agreement. Regents of the University of California. In December 2000, we entered into an exclusive license agreement and a sponsored research agreement with the Regents of the University of California ("Regents"). Under the license agreement we obtained rights for the exclusive commercial development, use and sale of products related to certain inventions in exchange for a non-refundable license issuance fee of $15,000 and an annual maintenance fee of $10,000. As of December 31, 2006 we have made payments of approximately $111,000 under the license. In the event that we sub-license our rights, we must pay Regents 15% of all royalty payments made to SIGA. We have 7 currently met all our obligations under this agreement. SIGA does not expect receipt or disbursement of funds under the agreement with the Regents of the University of California for the next three to five years. Rockefeller University. In accordance with an exclusive worldwide license agreement with Rockefeller, we have 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 eight issued U.S. patents and three issued European patents, as well as one pending U.S. patent application and one pending European application. The issued United States patents expire in 2008, 2014 (4), 2015 (2), and 2016, respectively. The agreement generally requires us to pay royalties on sales of products developed from the licensed technologies, and fees on revenues from sub-licensees, where applicable, and we are responsible for the costs of filing and prosecuting patent applications. Under the agreement, we paid Rockefeller approximately $850,000 to support research at Rockefeller. The agreement to fund research has ended and no payments have been made to the university since the year ended December 31, 1999. Under the agreement we are obligated to pay Rockefeller a royalty on net sales by SIGA at rates between 2.5% and 5% depending on product and amount of sales. On sales by any sub-licensee, we will pay Rockefeller a royalty of 15% of anything we receive. The term of the agreement is for the duration of the patents licensed. As we do not currently know when any patents pending or future patents will expire, we cannot at this time determine the term of this agreement. At the end of that term of the agreement, we have the right to continue to practice the then existing technical information as a fully paid, perpetual license. The agreement can be terminated earlier if we are in breach of the provisions of the agreement and do not cure the breach in the allowed cure period. We are compliant in all our obligations under the agreement. SIGA does not expect receipt or disbursement of funds under the agreement with Rockefeller University for the next three to five years. TransTech Pharma, Inc. In October 2002, we entered into a drug discovery collaboration agreement with TransTech Pharma, Inc., a related party ("TransTech Pharma"). Under the agreement, SIGA and TransTech Pharma collaborate on the discovery, optimization and development of lead compounds to certain therapeutic agents. The costs of development are shared. SIGA and TransTech Pharma would share revenues generated from licensing and profits from any commercialized product sales. The agreement will be in effect until terminated by the parties or upon cessation of research or sales of all products developed under the agreement. If the agreement is terminated, relinquished or expires for any reason certain rights and benefits will survive the termination. Obligations not expressly indicated to survive the agreement will terminate with the agreement. No revenues were recognized in 2006, 2005, and 2004 from this collaboration. SIGA does not expect receipt or disbursement of funds under the agreement with TransTech Pharma for the next three to five years. Intellectual Property and Proprietary Rights Our commercial success will depend in part on our and our collaborators' ability to obtain and maintain patent protection for our proprietary technologies, drug targets and potential products and to effectively preserve our trade secrets. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory clearance processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the type and breadth of claims allowed in these patents. We have licensed the rights to eight issued U.S. patents and three issued European patents. These patents have varying lives and they are related to the technology licensed from Rockefeller for the strep and Gram-positive products. We have one additional patent application in the U.S. and one application in Europe relating to this technology. We are joint owner with Washington University of seven issued patents in the U.S. and one in Europe. In addition, there are four co-owned U.S. patent applications. These patents are for the technology used for the Gram-negative product opportunities. We are also exclusive owner of two U.S. patent and two U.S. utility patent applications. One of these U.S. utility applications relates to our DegP product opportunities. We are also exclusive owner of three U.S. provisional patent applications. 8 The following are our patent positions as of December 31, 2006. We also rely upon trade secret protection for our confidential and proprietary information. No assurance can be given that other companies will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. 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 biopharmaceutical products that we may develop. The nature and the extent to which such regulations may apply to us will vary depending on the nature of any such products. Virtually all of our potential biopharmaceutical products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical and clinical testing and other approval procedures by the FDA and similar health authorities in foreign countries. Various federal 9 -------------------------------------------------------------------------------------------------------------------------------- Number Number Number Exclusively Co-Exclusively Exclusively Number Licensed Licensed Licensed Exclusively Number PATENTS from with from Oregon Licensed Owned by Patent Expiration Dates Rockefeller Washington State from UCLA SIGA Univ. Univ. University -------------------------------------------------------------------------------------------------------------------------------- 2008, 2013(2), 2014 (6), U.S. 8 7 1 2 2015 (2), 2016 (2), 2017, 2019, 2020 (2) -------------------------------------------------------------------------------------------------------------------------------- Australia 5 2 1 2009, 2013, 2014 (2), 2015, 2016, 2019,2020 -------------------------------------------------------------------------------------------------------------------------------- Canada 2 2010, 2019 -------------------------------------------------------------------------------------------------------------------------------- Europe 3 1 1 2009, 2010, 2013, 2019, 2020 -------------------------------------------------------------------------------------------------------------------------------- Hungary 1 2013 -------------------------------------------------------------------------------------------------------------------------------- Japan 2 2010, 2012 -------------------------------------------------------------------------------------------------------------------------------- Mexico 1 2016 -------------------------------------------------------------------------------------------------------------------------------- New Zealand 1 2016 -------------------------------------------------------------------------------------------------------------------------------- China 1 2016 -------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- Number Number Number Exclusively Co-Exclusively Exclusively Number Licensed Licensed Licensed Exclusively Number APPLICATIONS from with from Oregon Licensed Owned by Rockefeller Washington State from UCLA SIGA Univ. Univ. University ----------------------------------------------------------------------------------------------- U.S. applications 1 4 2 2 ----------------------------------------------------------------------------------------------- U.S. provisionals 3 ----------------------------------------------------------------------------------------------- PCT 3 ----------------------------------------------------------------------------------------------- Australia 1 1 2 ----------------------------------------------------------------------------------------------- Canada 3 2 2 1 2 ----------------------------------------------------------------------------------------------- Europe 1 1 1 1 3 ----------------------------------------------------------------------------------------------- Finland 1 ----------------------------------------------------------------------------------------------- Japan 3 2 1 1 3 ----------------------------------------------------------------------------------------------- Hungary 1 ----------------------------------------------------------------------------------------------- statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations requires the expenditure of substantial resources. In order to test clinically, produce and market products for diagnostic or therapeutic use, a company must comply with mandatory procedures and safety standards established by the FDA and comparable agencies in foreign countries. Before beginning human clinical testing of a potential new drug in the United States, a company must file an IND and receive clearance from the FDA. This application is a summary of the pre-clinical studies that were conducted to characterize the drug, including toxicity and safety studies, as well as an in-depth discussion of the human clinical studies that are being proposed. The pre-marketing program required for approval by the FDA of a new drug typically involves a time-consuming and costly three-phase process. In Phase I, trials are conducted with a small number of healthy patients to determine the early safety profile, the pattern of drug distribution and metabolism. In Phase II, trials are conducted with small groups of patients afflicted with a target disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multi-center comparative trials are conducted with patients afflicted with a target disease in order to provide enough data for statistical proof of efficacy and safety required by the FDA and others. The FDA amended its regulations, effective June 30, 2002, so that certain new drug and biological products used to reduce or prevent the toxicity of chemical, biological, radiological, or nuclear substances may be approved for use in humans based on evidence of effectiveness derived only from appropriate animal studies and any additional supporting data. The FDA closely monitors the progress of each of the three phases of clinical testing and may, in its discretion, reevaluate, alter, suspend or terminate the testing based on the data that have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Estimates of the total time required for carrying out such clinical testing vary between two and ten years. Upon completion of such clinical testing, a company typically submits a New Drug Application ("NDA") or Product License Application ("PLA") to the FDA that summarizes the results and observations of the drug during the clinical testing. Based on its review of the NDA or PLA, the FDA will decide whether to approve the drug. This review process can be quite lengthy, and approval for the production and marketing of a new pharmaceutical product can require a number of years and substantial funding; there can be no assurance that any approvals will be granted on a timely basis, if at all. Once the product is approved for sale, FDA regulations govern the production process and marketing activities, and a post-marketing testing and surveillance program may be required to monitor continuously a product's usage and its effects. Product approvals may be withdrawn if compliance with regulatory standards is not maintained. Other countries in which any products developed by us may be marketed could impose a similar regulatory process. Competition The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. Our competitors include most of the major pharmaceutical companies, which have financial, technical and marketing resources significantly greater than ours. Biotechnology and other pharmaceutical competitors include Acambis, Achillion Pharmaceuticals, Arrow Therapeutics, Avant Immuno-therapeutics, Inc., Bavarian Nordic AS, Chimerix Inc., Bioport, Pharmathene and Vaxgen. 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 is a possibility that our competitors will succeed in developing products that are more effective or less costly than any which are being developed by us or which would render our technology and future products obsolete and noncompetitive. Human Resources and Facilities As of March 8, 2007 we had 44 full time employees. None of our employees are covered by a collective bargaining agreement and we consider our employee relations to be good. 10 Availability of Reports and Other Information We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov. In addition, our company website can be found on the Internet at www.siga.com. The website contains information about us and our operations. Copies of each of our filings with the SEC on Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB and Form 8-K, and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. To view the reports, access www.siga.com/investor.html and click on "SEC Filing". The following corporate governance related documents are also available on our website: o Code of Ethics and Business Conduct o Amended and Restated Audit Committee Charter o Compensation Committee Charter o Nominating and Corporate Governance Committee Charter o Procedure for Sending Communications to the Board of Directors o Procedures for Security Holder Submission of Nominating Recommendations o 2004 Policy on Confidentiality of Information and Securities Trading To review these documents, access www.siga.com/investor.html and click on "Corporate Governance." Any of the above documents can also be obtained in print by any shareholder upon request to the Secretary, SIGA Technologies, Inc., 420 Lexington Avenue, Suite 408, New York, New York 10170. Item 1A. Risk Factors This report contains forward-looking statements and other prospective information relating to future events. These forward-looking statements and other information are subject to risks and uncertainties that could cause our actual results to differ materially from our historical results or currently anticipated results including the following: We have incurred operating losses since our inception and expect to incur net losses and negative cash flow for the foreseeable future. We incurred net losses of approximately $9.9 million, $2.3 million, and $9.4 million for the years ended December 31, 2006, 2005, and 2004, respectively. As of December 31, 2006, 2005, and 2004, our accumulated deficit was approximately $56.4 million, $46.5 million, and $44.2 million, respectively. We expect to continue to incur significant operating expenditures. We will need to generate significant revenues to achieve and maintain profitability. We cannot guarantee that we will achieve sufficient revenues for profitability. Even if we do achieve profitability, we cannot guarantee that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, then our business, results of operations, financial condition and cash flows will be materially and adversely affected. Because our strategy might include acquisitions of other businesses, acquisition expenses and any cash used to make these acquisitions will reduce our available cash. 11 Our business will suffer if we are unable to raise additional equity funding. We continue to be dependent on our ability to raise money in the equity markets. There is no guarantee that we will continue to be successful in raising such funds. If we are unable to raise additional equity funds, we may be forced to discontinue or cease certain operations. We currently have sufficient operating capital to finance our operations beyond the next twelve months. Our annual operating needs vary from year to year depending upon the amount of revenue generated through grants, contracts and licenses and the amount of projects we undertake, as well as the amount of resources we expend, in connection with acquisitions all of which may materially differ from year to year and may adversely affect our business. Our stock price is, and we expect it to remain, volatile, which could limit investors' ability to sell stock at a profit. The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to: o publicity regarding actual or potential clinical results relating to products under development by our competitors or us; o delay or failure in initiating, completing or analyzing pre-clinical or clinical trials or the unsatisfactory design or results of these trials; o achievement or rejection of regulatory approvals by our competitors or us; o announcements of technological innovations or new commercial products by our competitors or us; o developments concerning proprietary rights, including patents; o developments concerning our collaborations; o regulatory developments in the United States and foreign countries; o economic or other crises and other external factors; o period-to-period fluctuations in our revenues and other results of operations; o changes in financial estimates by securities analysts; and o sales and short selling activity of our common stock. Additionally, because there is not a high volume of trading in our stock, any information about SIGA in the media may result in significant volatility in our stock price. We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance. In addition, the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. We are in various stages of product development and there can be no assurance of successful commercialization. In general, our research and development programs are at an early stage of development. To obtain FDA approval for our biological warfare defense products we will be required to perform at least two animal models and provide animal and human safety data. Our other products will be subject to the approval guidelines under FDA regulatory requirements which include a number of phases of testing in humans. 12 The FDA has not approved any of our biopharmaceutical product candidates. Any drug candidates developed by us will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial sale. We cannot be sure our approach to drug discovery will be effective or will result in the development of any drug. We cannot expect that any drugs resulting from our research and development efforts will be commercially available for many years, if at all. We have limited experience in conducting pre-clinical testing and clinical trials. Even if we receive initially positive pre-clinical or clinical results, such results do not mean that similar results will be obtained in the later stages of drug development, such as additional pre-clinical testing or human clinical trials. All of our potential drug candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that none of our drug candidates will or can: o be safe, non-toxic and effective; o otherwise meet applicable regulatory standards; o receive the necessary regulatory approvals; o develop into commercially viable drugs; o be manufactured or produced economically and on a large scale; o be successfully marketed; o be reimbursed by government and private insurers; and o achieve customer acceptance. In addition, third parties may preclude us from marketing our drugs through enforcement of their proprietary rights that we are not aware of, or third parties may succeed in marketing equivalent or superior drug products. Our failure to develop safe, commercially viable drugs would have a material adverse effect on our business, financial condition and results of operations. Most of our immediately foreseeable future revenues are contingent upon grants and contracts from the United States government and collaborative and license agreements and we may not achieve sufficient revenues from these agreements to attain profitability. Until and unless we successfully make a product, our ability to generate revenues will largely depend on our ability to enter into additional research grants, collaborative agreements, strategic alliances, contracts and license agreements with third parties and maintain the agreements we currently have in place. Substantially all of our revenues for the years ended December 31, 2006, 2005, and 2004, respectively, were derived from revenues related to grants, contracts and license agreements. Our current revenue is derived from contract work being performed for the NIH under two major grants and a contract which are scheduled to expire in September 2009 and contracts with the U.S. Air force which expire in October and November 2007. These agreements are for specific work to be performed under the agreements and could only be canceled by the other party thereto for non-performance. We may not earn significant milestone payments under our existing collaborative agreements until our collaborators have advanced products into clinical testing, which may not occur for many years, if at all. We have material agreements with the following collaborators: o National Institutes of Health. In October 2006 we received a 3 year, $16.5 million contract from the NIH to advance the development of our lead drug SIGA-246. In September 2006, we received a $6.0 million, 3 year SBIR grant from the NIH to develop antiviral drugs for the Lassa fever virus. In August 2006, the NIH awarded us a 3 year SBIR grant for $4.8 million to continue the development of our smallpox drug candidate, SIGA-246. In 2004, we have received SBIR Grants totaling 13 approximately $11.1 million which expired in 2006. SIGA receives cash payments from the NIH on a monthly or semi-monthly basis, as the work is performed and the related revenue is recognized. SIGA's current NIH contract and SBIR grants do not include milestone payments. As of December 31, 2006, SIGA recognized approximately $11.0 million from these grants for work it had performed. The agreements can be cancelled for non-performance and if cancelled, the Company will not receive additional funds under the agreements. SIGA also has an agreement whereby the NIH is required to conduct and pay for the clinical trials of our strep vaccine product through phase II human trials. The NIH can terminate the agreement on 60 days written notice. If terminated, we receive copies of all data, reports and other information related to the trials. If terminated, we would have to find another source of funds to continue to conduct the trials. As of December 31, 2006, SIGA has not performed any clinical trials related to its strep vaccine program and does not expect to perform any during the next three to five years. o United States Air Force. In November 2006, we received a $1.4 million, one year contract with the Air Force Medical Service for the development of counter-measures against Dengue viruses and other water-related viral agents. In November 2006 we also received a one-year, $900,000 contract to aid the USAF Special Operations Command (USAFSOC) in its development of specific anti-viral agents. For the year ended December 31, 2006 we recognized revenues of $247,000 from these contracts. SIGA receives cash payments from the USAF on a monthly basis, as the work is performed and the related revenue is recognized. SIGA's current contracts with the USAF do not include milestone payments. The agreements can be cancelled for non-performance and if cancelled, the Company will not receive additional funds under the agreements. o United States Army Medical Research and Material Command. In September 2005 we entered into a $3.2 million, one year contract with the USAMRMC. The agreement, for the rapid identification and treatment of anti-viral diseases, is funded through the USAF. It is anticipated that our efforts will aid the USAF Special Operations Command in its use of computational biology to design and develop specific countermeasures against biological threat agents Smallpox and Adenovirus. As of December 31, 2006, SIGA received cash payments of $3.2 million under this contract and recognized total revenue of approximately $3.1 million. SIGA completed its work under the contract under-budget and will repay the USAF approximately $92,000 which was not recognized as revenue by the Company. o Saint Louis University. On September 1, 2005, we entered into an agreement with Saint Louis University for the continued development of one of our Smallpox drugs. The agreement is funded through the NIH. Under the agreement, SIGA received approximately $1.0 million during the term of September 1, 2005 to February 28, 2006 for work performed under the agreement. o United States Army Medical Research Acquisition Activity. In December 2002, we entered into a four year contract with USAMRAA to develop a drug to treat Smallpox. SIGA received cash payments from USAMRAA under this contract on a monthly basis, as the work was performed and the related revenue was recognized. The agreement with USAMRAA did not include milestone payments. As of December 31, 2006, SIGA completed its obligations under this agreement. o Rockefeller University. The term of our agreement with Rockefeller is for the duration of the patents and a number of pending patents. As we do not currently know when any patents pending or future patents will expire, we cannot at this time definitively determine the term of this agreement. The agreement can be terminated earlier if we are in breach of the provisions of the agreement and do not cure the breach in the allowed cure period. We are current in all obligations under the contract. SIGA does not expect receipt or disbursement of funds under the agreement with Rockefeller for the next three to five years. o Oregon State University. OSU is a signatory of our agreement with Rockefeller. The term of this agreement is for the duration of the patents and a number of pending patents. As we do not currently know when any patents pending or future patents will expire, we cannot at this time definitively determine the term of this agreement. The agreement can be terminated earlier if we are in breach of 14 the provisions of the agreement and do not cure the breach in the allowed cure period. We are current in all obligations under the contract. SIGA does not expect receipt or disbursement of funds under the agreement with OSU for the next three to five years. o Washington University. We have licensed certain technology from Washington under a non-exclusive license agreement. The term of our agreement with Washington is for the duration of the patents and a number of pending patents. As we do not currently know when any patents pending or future patents will expire, we cannot at this time definitively determine the term of this agreement. The agreement cannot be terminated unless we fail to pay our share of the joint patent costs for the technology licensed. SIGA does not expect receipt or disbursement of funds under the agreement with Washington University for the next three to five years. o Regents of the University of California. We have licensed certain technology from Regents under an exclusive license agreement. We are required to pay minimum royalties under this agreement. SIGA does not expect receipt or disbursement of funds under the agreement with the Regents of the University of California for the next three to five years. o TransTech Pharma, Inc. Under our collaborative agreement with TransTech Pharma, a related party, TransTech Pharma is collaborating with us on the discovery, optimization and development of lead compounds to certain therapeutic agents. We and TransTech Pharma have agreed to share the costs of development and revenues generated from licensing and profits from any commercialized products sales. The agreement will be in effect until terminated by the parties or upon cessation of research or sales of all products developed under the agreement. SIGA does not expect receipt or disbursement of funds under the agreement with TransTech Pharma for the next three to five years. The biopharmaceutical market in which we compete and will compete is highly competitive. The biopharmaceutical industry is characterized by rapid and significant technological change. Our success will depend on our ability to develop and apply our technologies in the design and development of our product candidates and to establish and maintain a market for our product candidates. There also are many companies, both public and private, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions engaged in developing pharmaceutical and biotechnology products. Many of these companies have substantially greater financial, technical, research and development, and human resources than us. Competitors may develop products or other technologies that are more effective than any that are being developed by us or may obtain FDA approval for products more rapidly than us. If we commence commercial sales of products, we still must compete in the manufacturing and marketing of such products, areas in which we have no experience. Many of these companies also have manufacturing facilities and established marketing capabilities that would enable such companies to market competing products through existing channels of distribution. Two companies with similar profiles are VaxGen, Inc., which is developing vaccines against anthrax, Smallpox and HIV/AIDS; and Avant Immunotherapeutics, Inc., which has vaccine programs for agents of biological warfare. Because we must obtain regulatory clearance to test and market our products in the United States, we cannot predict whether or when we will be permitted to commercialize our products. A pharmaceutical product cannot be marketed in the U.S. until it has completed rigorous pre-clinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Pharmaceutical products typically take many years to satisfy regulatory requirements and require the expenditure of substantial resources depending on the type, complexity and novelty of the product. Before commencing clinical trials in humans, we must submit and receive clearance from the FDA by means of an IND application. Institutional review boards and the FDA oversee clinical trials and such trials: o must be conducted in conformance with the FDA's good laboratory practice regulations; o must meet requirements for institutional review board oversight; 15 o must meet requirements for informed consent; o must meet requirements for good clinical and manufacturing practices; o are subject to continuing FDA oversight; o may require large numbers of test subjects; and o may be suspended by us or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in any of the Company's IND applications or the conduct of these trials. Before receiving FDA clearance to market a product, we must demonstrate that the product is safe and effective on the patient population that will be treated. Data we obtain from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances. Additionally, we have limited experience in conducting and managing the clinical trials and manufacturing processes necessary to obtain regulatory clearance. If regulatory clearance of a product is granted, this clearance will be limited only to those states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance. If our technologies or those of our collaborators are alleged or found to infringe the patents or proprietary rights of others, we may be sued or have to license those rights from others on unfavorable terms. Our commercial success will depend significantly on our ability to operate without infringing the patents and proprietary rights of third parties. Our technologies, along with our licensors' and our collaborators' technologies, may infringe the patents or proprietary rights of others. If there is an adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office, then we, or our collaborators and licensors, could be subjected to significant liabilities, required to license disputed rights from or to other parties and/or required to cease using a technology necessary to carry out research, development and commercialization. At present we are unaware of any or potential infringement claims against our patent portfolio. The costs to establish the validity of patents, to defend against patent infringement claims of others and to assert infringement claims against others can be expensive and time consuming, even if the outcome is favorable. An outcome of any patent prosecution or litigation that is unfavorable to us or one of our licensors or collaborators may have a material adverse effect on us. We could incur substantial costs if we are required to defend ourselves in patent suits brought by third parties, if we participate in patent suits brought against or initiated by our licensors or collaborators or if we initiate such suits. We may not have sufficient funds or resources in the event of litigation. Additionally, we may not prevail in any such action. Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to us or our collaborators and limit our ability or that of our collaborators to obtain meaningful patent protection. If patents are issued to third parties that contain competitive or conflicting claims, we, our licensors or our collaborators may be legally prohibited from researching, developing or commercializing of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. We, our licensors and/or our collaborators may be legally prohibited from using patented technology, may not be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or may not be able to obtain or develop alternative technologies. In addition, like many biopharmaceutical companies, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us. We and/or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. 16 Our ability to compete may decrease if we do not adequately protect our intellectual property rights. Our commercial success will depend in part on our and our collaborators' ability to obtain and maintain patent protection for our proprietary technologies, drug targets and potential products and to effectively preserve our trade secrets. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory clearance processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the type and breadth of claims allowed in these patents. We have licensed the rights to eight issued U.S. patents and three issued European patents. These patents have varying lives and they are related to the technology licensed from Rockefeller University for the Strep and Gram-positive products. We have one additional patent application in the U.S. and one application in Europe relating to this technology. We are joint owner with Washington University of seven issued patents in the U.S. and one in Europe. In addition, there are four co-owned U.S. patent applications. These patents are for the technology used for the Gram-negative product opportunities. We are also exclusive owner of one U.S. patent and three U.S. patent applications. One of these U.S. patent applications relates to our DegP product opportunities. We included a summary of our patent positions as of December 31, 2006 in Part I, Item 1 of this document. We also rely on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of trade secrets and proprietary information, we require our employees, consultants and some collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with us. These agreements may not provide meaningful protection for our trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information, and adequate remedies may not exist in the event of such unauthorized use or disclosure. We may have difficulty managing our growth. We expect to experience growth in the number of our employees and the scope of our operations. This future growth could place a significant strain on our management and operations. Our ability to manage this growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems and to hire, train and manage our employees. Our activities involve hazardous materials and may subject us to environmental regulatory liabilities. Our biopharmaceutical research and development involves the controlled use of hazardous and radioactive materials and biological waste. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for damages, and this liability could exceed our resources. The research and development activities of our company do not produce any unusual hazardous products. We do use small amounts of 32P, 35S and 3H, which are stored, used and disposed of in accordance with Nuclear Regulatory Commission ("NRC") regulations. We maintain liability insurance in the amount of approximately $3,000,000 and we believe this should be sufficient to cover any contingent losses. We believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material additional capital expenditures for environmental control facilities in the near term. However, we may have to incur significant costs to comply with current or future environmental laws and regulations. 17 Our potential products may not be acceptable in the market or eligible for third party reimbursement resulting in a negative impact on our future financial results. Any products successfully developed by us or our collaborative partners may not achieve market acceptance. The antibiotic products which we are attempting to develop will compete with a number of well-established traditional antibiotic drugs manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any of our products will depend on a number of factors, including: o the establishment and demonstration in the medical community of the clinical efficacy and safety of such products, o the potential advantage of such products over existing treatment methods, and o reimbursement policies of government and third-party payors. Physicians, patients or the medical community in general may not accept or utilize any products that we or our collaborative partners may develop. Our ability to receive revenues and income with respect to drugs, if any, developed through the use of our technology will depend, in part, upon the extent to which reimbursement for the cost of such drugs will be available from third-party payors, such as government health administration authorities, private health care insurers, health maintenance organizations, pharmacy benefits management companies and other organizations. Third-party payors are increasingly disputing the prices charged for pharmaceutical products. If third-party reimbursement was not available or sufficient to allow profitable price levels to be maintained for drugs developed by us or our collaborative partners, it could adversely affect our business. If our products harm people, we may experience product liability claims that may not be covered by insurance. We face an inherent business risk of exposure to potential product liability claims in the event that drugs we develop are alleged to cause adverse effects on patients. Such risk exists for products being tested in human clinical trials, as well as products that receive regulatory approval for commercial sale. We may seek to obtain product liability insurance with respect to drugs we and/or our collaborative partners develop. However, we may not be able to obtain such insurance. Even if such insurance is obtainable, it may not be available at a reasonable cost or in a sufficient amount to protect us against liability. We may be required to perform additional clinical trials or change the labeling of our products if we or others identify side effects after our products are on the market, which could harm sales of the affected products. If we or others identify side effects after any of our products are on the market, or if manufacturing problems occur: o regulatory approval may be withdrawn; o reformulation of our products, additional clinical trials, changes in labeling of our products may be required; o changes to or re-approvals of our manufacturing facilities may be required; o sales of the affected products may drop significantly; o our reputation in the marketplace may suffer; and o lawsuits, including class action suits, may be brought against us. Any of the above occurrences could harm or prevent sales of the affected products or could increase the costs and expenses of commercializing and marketing these products. 18 The manufacture of biotechnology products can be a time-consuming and complex process which may delay or prevent commercialization of our products, or may prevent our ability to produce an adequate volume for the successful commercialization of our products. Our management believes that we have the ability to acquire or produce quantities of products sufficient to support our present needs for research and our projected needs for our initial clinical development programs. The manufacture of all of our products will be subject to current Good Manufacturing Practices (GMP) requirements prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that we will be able to manufacture products, or have products manufactured for us, in a timely fashion at acceptable quality and prices, that we or third party manufacturers can comply with GMP, or that we or third party manufacturers will be able to manufacture an adequate supply of product. Healthcare reform and controls on healthcare spending may limit the price we charge for any products and the amounts thereof that we can sell. The U.S. federal government and private insurers have considered ways to change, and have changed, the manner in which healthcare services are provided in the U.S. Potential approaches and changes in recent years include controls on healthcare spending and the creation of large purchasing groups. In the future, the U.S. government may institute further controls and limits on Medicare and Medicaid spending. These controls and limits might affect the payments we could collect from sales of any products. Uncertainties regarding future healthcare reform and private market practices could adversely affect our ability to sell any products profitably in the U.S. At present, we do not foresee any changes in FDA regulatory policies that would adversely affect our development programs. The future issuance of preferred stock may adversely affect the rights of the holders of our common stock. Our certificate of incorporation allows our Board of Directors to issue up to 10,000,000 shares of preferred stock and to fix the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of these shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and could be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control. Concentration of ownership of our capital stock could delay or prevent change of control. Our directors, executive officers and principal stockholders beneficially own a significant percentage of our common stock. They also have, through the exercise or conversion of certain securities, the right to acquire additional common stock. As a result, these stockholders, if acting together, have the ability to significantly influence the outcome of corporate actions requiring shareholder approval. Additionally, this concentration of ownership may have the effect of delaying or preventing a change in control of SIGA. At December 31, 2006, Directors, Officers and principal stockholders beneficially owned approximately 41.5% of our stock. Item 1B. Unresolved Staff Comments Not applicable. 19 Item 2. Properties Our headquarters are located in New York City and our research and development facilities are located in Corvallis, Oregon. In New York, we lease approximately 3,000 square feet under a lease that expires in November 2007. In Corvallis, we lease approximately 18,100 square feet under an amended lease agreement signed in January 2007, which expires in December 2011. Our facility in Oregon has been improved to meet the special requirements necessary for the operation of our research and development activities. In the opinion of the management, these facilities are sufficient to meet the current and anticipated future requirements of SIGA. Item 3. Legal Proceedings On December 20, 2006, PharmAthene, Inc. ("PharmAthene") filed an action against us in the Court of Chancery in the State of Delaware, captioned PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-N. In its Complaint, PharmAthene asks the Court to order the Company to enter into a license agreement with PharmAthene with respect to SIGA-246, as well as issue a declaration that we are obliged to execute such a license agreement, and award damages resulting from our supposed breach of that obligation. PharmAthene also alleges that we breached an obligation to negotiate such a license agreement in good faith, as well as seeks damages for promissory estoppel and unjust enrichment based on supposed information, capital and assistance that PharmAthene allegedly provided to us during the negotiation process. On January 9, 2007, we filed a motion to dismiss the Complaint in its entirety for failure to state a claim upon which relief can be granted. The Court approved the parties' briefing schedule, with all briefing to be completed by April 13, 2007. SIGA believes that the claims are without merit and plans to defend itself vigorously. Item 4. Submission of Matters to a Vote of Security Holders At our Annual Meeting of Stockholders held on December 19, 2006, our stockholders elected our Board of Directors and ratified our selection of independent registered public accounting firm: The following nominees were elected to our Board of Directors upon the following votes: Our stockholders ratified the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006 by casting 26,340,016 votes in favor of this proposal, 617,171 votes against the proposal and 6,110 abstained. 20 Director Votes For Withheld -------- --------- -------- Donald G. Drapkin 26,158,641 804,656 Thomas E. Constance 26,907,435 55,862 Adnan M. Mjalli, Ph.D. 26,904,336 58,961 Mehmet C. Oz, M.D. 26,164,681 798,616 Eric A. Rose, M.D. 26,176,331 786,966 Paul G. Savas 26,899,776 63,521 Michael A. Weiner, M.D. 26,266,481 696,816 Judy S. Slotkin 26,896,786 66,511 James J. Antal 26,910,076 53,221 Scott M. Hammer, M.D. 26,197,261 766,036 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock has been traded on the Nasdaq Capital Market since September 9, 1997 and trades under the symbol "SIGA." Prior to that time there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low closing sales prices for the common stock, as reported on the Nasdaq Capital Market. The following line graph compares the cumulative total stockholder return through December 31, 2006, assuming reinvestment of dividends, by an investor who invested $100 on December 31, 2001 in each of (i) the Common Stock, (ii) the NASDAQ National Market-US; and (iii) the NASDAQ Pharmaceutical Index. [LINE CHART OMITTED] 21 Price Range 2005 High Low First Quarter ...................................... $ 1.69 $ 1.28 Second Quarter ..................................... $ 1.44 $ 0.99 Third Quarter ...................................... $ 1.10 $ 0.70 Fourth Quarter ..................................... $ 1.35 $ 0.87 2006 High Low First Quarter ...................................... $ 1.56 $ 0.90 Second Quarter ..................................... $ 1.65 $ 1.22 Third Quarter ...................................... $ 1.63 $ 1.01 Fourth Quarter ..................................... $ 4.95 $ 1.49  As of March 8, 2007, the closing bid price of our common stock was $4.28 per share. There were 75 holders of record as of March 8, 2007. We believe that the number of beneficial owners of our common stock is substantially greater than the number of record holders, because a large portion of common stock is held in broker "street names." We have paid no dividends on our common stock and we do not expect to pay cash dividends in the foreseeable future. We are not under any restriction as to our present or future ability to pay dividends. We currently intend to retain any future earnings to finance the growth and development of our business. Item 6. Selected Financial Data (in thousands, except share and per share data) The following table sets forth selected financial information derived from our audited consolidated financial statements as of and for the years ended December 31, 2006, 2005, 2004, 2003, and 2002. 22 Value of Initial Investment 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- SIGA Technologies, Inc. $ 100.00 $ 49.31 $ 78.97 $ 57.24 $ 32.76 $ 129.31 NASDAQ Composite Index $ 100.00 $ 68.47 $ 102.72 $ 111.54 $ 113.07 $ 123.84 NASDAQ Biotech Composite Index $ 100.00 $ 54.67 $ 79.68 $ 84.57 $ 86.96 $ 87.85 The year In-process ended Selling, general Research and Patent research and Impairment of December 31, Revenues & administrative development preparation fees development intangible assets ------------ --------------- ------------------ --------------- ------------------ ---------------- ------------------- 2006 $ 7,258 $ 4,624 $ 9,149 $ 295 $ -- $ -- 2005 $ 8,477 $ 2,481 $ 8,295 $ 232 $ -- $ -- 2004 $ 1,839 $ 4,042 $ 4,166 $ 393 $ 568 $ 2,118 2003 $ 732 $ 2,646 $ 2,943 $ 300 $ -- $ 137 2002 $ 344 $ 1,838 $ 1,766 $ 105 $ -- $ -- Weighted average The year ended Net loss per share: shares outstanding: December 31, Operating loss Net loss basic & diluted basic and diluted ---------------- -------------- -------------------- --------------------- 2006 $ (6,810) $ (9,899) $ (0.35) 28,200,130 2005 $ (2,532) $ (2,288) $ (0.09) 24,824,824 2004 $ (9,448) $ (9,373) $ (0.40) 23,724,026 2003 $ (5,296) $ (5,277) $ (0.34) 15,717,138 2002 $ (3,365) $ (3,331) $ (0.32) 10,450,529 As of and for the year ended Cash & cash Long term Total stockholders' Net cash used in December 31, Total assets equivalents obligations equity operating activities -------------- --------------- --------------- --------------------- ---------------------- 2006 $ 14,028 $ 10,640 $ 4,696 $ 7,282 $ (4,438) 2005 $ 6,132 $ 1,772 $ 642 $ 3,231 $ (1,392) 2004 $ 6,111 $ 2,021 $ 4,559 $ (4,890) 2003 $ 6,100 $ 1,441 $ 5,551 $ (5,332) 2002 $ 2,830 $ 2,069 $ 2,173 $ (2,648) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements and other financial information appearing elsewhere in this Annual Report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties. Overview Since our inception in December 1995, SIGA has pursued the research and development of novel products for the prevention and treatment of serious infectious diseases, including products for use in the defense against biological warfare agents such as Smallpox and Arenaviruses. During the third quarter of 2006 we were awarded a 3 year, $16.5 million contract from the NIH and an additional 3 year, $4.8 million SBIR Phase II continuation grant from the NIH. Both awards support the continuing development of our smallpox drug candidate, SIGA-246. Our efforts to develop SIGA-246 were also supported by previous SBIR grants from the NIH totaling $5.8 million, a $1.0 million agreement with Saint Louis University, and a $1.6 million contract with the U.S. Army. Our initiative to advance SIGA's Arenavirus programs is supported by a 3 year, $6.0 million SBIR grant from the NIH, received in September 2006 and previous SBIR grants from the NIH totaling $6.3 million. Our anti-viral programs are designed to prevent or limit the replication of the viral pathogen. Our anti-infectives programs are aimed at the increasingly serious problem of drug resistance. These programs are designed to block the ability of bacteria to attach to human tissue, the first step in the infection process. We are also developing a technology for the mucosal delivery of our vaccines which may allow the vaccines to activate the immune system at the mucus lined surfaces of the body -- the mouth, the nose, the lungs and the gastrointestinal and urogenital tracts -- the sites of entry for most infectious agents. We do not have commercial biomedical products, and we do not expect to have such products for one to three years, if at all. We believe that we will need additional funds to complete the development of our biomedical products. Our plans with regard to these matters include continued development of our products as well as seeking additional research support funds and financial arrangements. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining future financing on terms acceptable to us. Management believes it has sufficient funds and projected cash flows to support operations beyond the next twelve months. Our biotechnology operations are based in our research facility in Corvallis, Oregon. We continue to seek to fund a major portion of our ongoing antiviral, antibiotic and vaccine programs through a combination of government grants, contracts and strategic alliances. While we have had success in obtaining strategic alliances, contracts and grants, there is no assurance that we will continue to be successful in obtaining funds from these sources. Until additional relationships are established, we expect to continue to incur significant research and development costs and costs associated with the manufacturing of product for use in clinical trials and pre-clinical testing. It is expected that general and administrative costs, including patent and regulatory costs, necessary to support clinical trials and research and development will continue to be significant in the future. To date, we have not marketed, or generated revenues from the commercial sale of any products. Our biopharmaceutical product candidates are not expected to be commercially available for several years, if at all. Accordingly, we expect to incur operating losses for the foreseeable future. There can be no assurance that we will ever achieve profitable operations. Critical Accounting Estimates The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our consolidated financial statements, which we discuss under the heading "Results of Operations" following this section of our Management's Discussion and Analysis. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the assessment of recoverability of goodwill, 23 which could impact goodwill impairments; the assessment of recoverability of long-lived assets, which primarily impacts operating income if impairment exists. Below, we discuss these policies further, as well as the estimates and judgments involved. Other key accounting policies, including revenue recognition, are less subjective and involve a far lower degree of estimates and judgment. Significant Accounting Policies The following is a brief discussion of the more significant accounting policies and methods used by us in the preparation of our consolidated financial statements. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of all of the significant accounting policies. Share-based Compensation On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan ("employee stock purchases") based on estimated fair values. SFAS 123(R) supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for periods beginning on January 1, 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year 2006. The Company's Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company's Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation related to stock options expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $470,892. No share-based compensation expense related to employee stock options was recognized during the year ended December 31, 2005. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the grant-date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's Statements of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic value method, no share-based compensation expense related to stock options had been recognized in the Company's Statements of Operations when the exercise price of the Company's stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant-date. Share-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company's Statements of Operations for the year ended December 31, 2006 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company utilizes the Black-Scholes options pricing model for the valuation of share-based awards. Determining the fair value of these awards at the grant date requires judgment. It is reasonably likely that forfeiture rates will change in the future and impact future compensation expense. It is also reasonably likely that the variables used in the Black Scholes option pricing model will change in the future and impact the fair value of future options at the grant date and future compensation expense. 24 Fair value of financial instruments The carrying value of cash and cash equivalents, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. Common stock rights and warrants which are classified as assets or liabilities under the provisions of EITF 00-19 are recorded at their fair market value as of each reporting period. The Company applies the Black-Scholes pricing model to calculate the fair values of common stock rights and warrants using the contracted term of the instruments and expected volatility that is calculated as a combination of the Company's historical volatility and the volatility of a group of comparable companies. Revenue Recognition The Company recognizes revenue from contract research and development and research progress payments in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, collectibility is reasonably assured, contractual obligations have been satisfied and title and risk of loss have been transferred to the customer. The Company recognizes revenue from non-refundable up-front payments, not tied to achieving a specific performance milestone, over the period which the Company is obligated to perform services or based on the percentage of costs incurred to date, estimated costs to complete and total expected contract revenue. Payments for development activities are recognized as revenue is earned, over the period of effort. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, providing there is no future service obligation associated with that milestone. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. Goodwill Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company evaluates goodwill for impairment annually, in the fourth quarter of each year. In addition, the Company would test goodwill for recoverability between annual evaluations whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Examples of such events could include a significant adverse change in legal matters, liquidity or in the business climate, an adverse action or assessment by a regulator or government organization, loss of key personnel, or new circumstances that would cause an expectation that it is more likely than not that we would sell or otherwise dispose of a reporting unit. Goodwill impairment is determined using a two-step approach in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In 2006, the Company operated as one business and one reporting unit. Therefore, the goodwill impairment analysis was performed on the basis of the Company as a whole using the market capitalization of the Company as an estimate of its fair value. In the past, our market capitalization has been significantly in excess of the Company's carrying value. It is reasonably likely that the future market capitalization of SIGA may exceed or fall short of our current market capitalization, in which case a different amount for potential impairment would result. The use of the discounted expected future cash flows to evaluate the fair value of the Company as a whole is reasonably likely to produce different results than the Company's market capitalization. Intangible Assets Acquisition-related intangibles include acquired technology, customer contracts, grants and covenants not to compete, and are amortized on a straight line basis over periods ranging from 2-4 years. In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company performs a review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Our 25 estimates of projected cash flows are dependent on many factors, including general economic trends, technological developments and projected future contracts and government grants. It is reasonably likely that future cash flows associated with our intangible assets may exceed or fall short of our current projections, in which case a different amount for impairment would result. If our actual cash flows exceed our estimates of future cash flows, any impairment charge would be greater than needed. If our actual cash flows are less than our estimated cash flows, we may need to recognize additional impairment charges in future periods, which would be limited to the carrying amount of the intangible assets. Recent accounting pronouncements In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires an entity to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal year 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Early application of FIN 48 is encouraged. The Company is evaluating the timing of its adoption of FIN 48 and the potential effects of implementing this Interpretation on its financial condition and results of operations. In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities and requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the adoption of SFAS No. 157. Results of Operations The following table sets forth certain consolidated statements of income data as a percentage of net revenue for the periods indicated: Years ended December 31, 2006, 2005, and 2004 Revenues from research and development contracts and grants for the years ended December 31, 2006 and 2005 were $7.3 million and $8.5 million, respectively. Revenues recorded for the year ended December 31, 2006 declined $1.2 million or 14% from the prior year. For the year ended December 31, 2006 we recorded $3.7 million from an NIH contract, NIH SBIR grants and an agreement with Saint Louis University, supporting two of our lead programs. Revenues from NIH SBIR grants supporting these programs during the year ended December 31, 2005 were $7.2 million. The decline of $3.5 million was partially offset by a $1.8 million increase in revenues recognized from our $3.2 million, one year contract with USAMRMC for the rapid identification and treatment of anti-viral diseases. The agreement was signed in September 2005 and was funded through the USAF. Revenue recognized in connection with this agreement increased from $653,000 in 2005 to $2.5 million in 2006. The decline in revenues supporting our two lead programs was also offset by $409,000 recorded in connection with a $500,000, one year, 26 2006 2005 2004 ---------- ---------- ---------- Revenue 100% 100% 100% ---------- ---------- ---------- Selling, general and administrative 64% 29% 220% Research and development 126% 98% 227% Patent preparation fees 4% 3% 21% In-process research and development 0% 0% 31% Impairment of intangible assets 0% 0% 115% ---------- ---------- ---------- Operating loss 94% 30% 514% Phase I SBIR grant from the NIH to support the development of our Bacterial Commensal Vector technology for the delivery of smallpox vaccine, ending on February 28, 2007. In November 2006, we received a $1.4 million, one year contract with the Air Force Medical Service for the development of counter-measures against Dengue viruses and other water-related viral agents. In November 2006 we also received a one-year, $900,000 contract to aid the USAF Special Operations Command (USAFSOC) in its development of specific anti-viral agents. For the year ended December 31, 2006 we recognized revenues of $247,000 from these contracts. In August 2006, we received a three year, $6.0 million award from the NIH to support the development of our antiviral drugs for Lassa fever virus, and a three year, $4.8 million SBIR Phase II continuation grant from the NIH to support the development of our smallpox drug candidate, SIGA-246. In September 2006, we entered into a three year, $16.5 million contract with the National Institute of Allergy and Infectious Diseases of the NIH, to further advance the development of our smallpox drug candidate. Revenues from these new grants and contracts are recognized as services are performed. Revenues for the years ended December 31, 2005 and 2004 were $8.5 million and $1.8 million, respectively. The increase of $6.6 million or 361% from the year ended December 31, 2004 related to the award of two Phase I and two Phase II SBIR grants by the NIH during the third quarter of 2004, an agreement with Saint Louis University entered into in September 2005, and an agreement with USAMRMC entered into in September 2005. The grants awarded by the NIH during the third quarter of 2004 for a total amount of $11.1 million, supported our Smallpox and Arenaviruses programs and expired in the third quarter of 2006. For the years ended December 31, 2005 and 2004 we recorded revenues of $6.4 million and $1.0 million, respectively, from these grants, mainly reflecting the continued development of our Smallpox oral antiviral drug. In 2004, we also received a one year SBIR grant from the NIH for $252,000 to support our Strep vaccine program. In 2005 and 2004 we recorded revenue of $156,000 and $86,000, respectively, from this grant. In September 2005, we entered into an agreement with Saint Louis University for the continued development of one of our Smallpox drugs. The agreement was funded through the NIH. Under the agreement, SIGA received approximately $1.0 million during the term of September 1, 2005 to February 28, 2006. Revenues were recognized as services were performed. In 2005, we recognized revenues of $775,000 from the agreement. In September 2005, we also entered into a $3.2 million, one year contract with USAMRMC and for the year ended December 31, 2005, recognized revenues of $653,000 from this agreement. For the years ended December 31, 2005 and 2004 revenue from our contract with the U.S. Army was $427,000 and $425,000. In 2004 we recognized revenue of $255,000 from an SBIR grant for our DegP anti infective that we completed in the second quarter of 2004. Selling, general and administrative expenses ("SG&A") for the years ended December 31, 2006 and 2005 were $4.6 million and $2.5 million, respectively. The increase of $2.1 million or 84% is mainly attributed to $1.2 million of professional fees and $530,000 of non-cash share base compensation and consulting charges recorded for the year ended December 31, 2006, and a credit of $303,000 in legal expenses recorded in 2005. During the year ended December 31, 2006 we recorded legal, accounting and consulting expenses of $861,000, $183,000 and $132,000, respectively, for due diligence services, fairness opinion and legal advice related to our proposed merger with PharmAthene, Inc. ("PHTN"), which was terminated in October 2006. In 2006, we recorded $156,000 of non-cash consulting charge reflecting the fair market value of 400,000 warrants issued under a February 2003 consulting agreement. For the year ended December 31, 2006, we also recorded a $376,000 non-cash charge for share based compensation following the adoption of FAS 123(R) on January 1, 2006. SG&A were $2.5 million and $4.0 million for the years ended December 31, 2005 and 2004. SG&A declined $1.6 million or 39% primarily due to $1.0 million decline in legal fees and $401,000 decline in consulting fees. In 2005, upon the re-negotiation of certain legal invoices, we received and recorded credits of $303,000 in legal expenses. In addition to the credits received by SIGA, legal fees declined by approximately $711,000 from the year ended December 31, 2004 reflecting higher legal fees during the 2004 period due to the acquisition of certain assets from ViroPharma, the review and amendment of our corporate governance policies and procedures to ensure compliance with Sarbanes Oxley Act of 2002 and NASDAQ requirements. Legal expenses in 2004 were also incurred in connection with the sale of certain non-core vaccine assets and a legal action that the Company initiated against a former founder. In 2004, we incurred higher consulting expenses in connection with our efforts to secure certain government contracts. Our agreement with the consulting group was terminated in October 2004. 27 Research and Development (R&D) expenses for the years ended December 31, 2006 and 2005 were $9.1 million and $8.3 million, respectively. On April 1, 2006, we completed the renovation of a new laboratory space in Corvallis, Oregon. Depreciation expense, lab supplies expenditures and rent expense for the year ended December 31, 2006, increased by $637,000, $354,000, and $381,000, respectively, from the same period in 2005. During the year ended December 31, 2006, we expanded our R&D work force from 35 full time employees to 41 full time employees. R&D payroll and related expenses increased by $743,000 as a result of this expansion and bonuses paid in 2006 to our R&D employees. In addition, R&D expenditures related to our contract with USAMRMC and two contracts with the U.S. Air Force received in 2006 increased $646,000 from $249,000 in 2005 to $895,000 in 2006. These increases were partially offset by a decline of $1.9 million in R&D expenditures related to two of our lead programs. During the years ended December 31, 2006, and 2005 we spent $2.3 million and $3.9 million, respectively, on the development of our lead drug candidate, SIGA-246, an orally administered anti-viral drug that targets the smallpox virus. For the year ended December 31, 2006, we spent $716,000 on internal human resources and $1.6 million mainly on clinical testing. For the year ended December 31, 2005, we spent $708,000 on internal human resources and $3.2 million on pre-clinical testing of SIGA-246. From inception of the SIGA-246 development program to-date, we expended a total of $6.5 million related to the program, of which $1.6 million and $4.9 million were spent on internal human resources, and clinical and pre-clinical work, respectively. These resources reflect SIGA's research and development expenses directly related to the program. They exclude additional expenditures such as the cost to acquire the program, patent costs, allocation of indirect expenses, and the value of other services received from the NIH and the DoD. R&D expenses of $1.0 million and $1.6 million during the year ended December 31, 2006 and 2005, respectively, were used to support the development of ST-294, a drug candidate which has demonstrated significant antiviral activity in cell culture assays against arenavirus pathogens, as well as other drug candidates for hemorrhagic fevers. For the year ended December 31, 2006, we spent $536,000 on internal human resources and $484,000 mainly on pre-clinical testing. For the year ended December 31, 2005, we spent $777,000 on internal human resources and $787,000 on pre-clinical testing of ST-294. From inception of our program to develop ST-294 and other drug candidates for hemorrhagic fevers, to-date, we spent a total of $3.1 million related to the program, of which $1.5 million and $1.3 million were expended on internal human resources and pre-clinical work, respectively. These resources reflect SIGA's research and development expenses directly related to the program. They exclude additional expenditures such as the cost to acquire the program, patent costs, allocation of indirect expenses, and the value of other services received from the NIH and the DoD. R&D expenses related to our USAF Agreements were $548,000 and $895,000 for internal human resources and external R&D services, respectively, during the year ended December 31, 2006. During the same period in 2005, we spent $132,000 and $249,000 on internal human resources and external R&D services, respectively. Costs related to our work on the USAF Agreements, during the term of the agreements to-date were $2.0 million, of which we spent $825,000 and $1.1 million on internal human resources and external R&D services, respectively. These resources reflect SIGA's research and development expenses directly related to this agreement. They exclude additional expenditures such as patent costs and allocation of indirect expenses. Research and development (R&D) expenses for the years ended December 31, 2005 and 2004 were $8.3 million and 4.2 million, respectively. R&D expenses increased $4.1 million or 99% primarily due to preclinical development work in connection with our two lead product programs, work performed to support our recent agreements with Saint Louis University and the USAF, the hiring of new employees and the increase in amortization expense. In 2005, we incurred approximately $3.0 million to support preclinical development work in connection with our Smallpox and Arenaviruses programs. Our research staff increased from 23 scientists at December 31, 2004 to 33 scientists at December 31, 2005, resulting in an increase of $705,000 in payroll and related expenses. Amortization of intangible assets in the amount of $1,097,000 and $636,000 for the years ended December 31, 2005 and 2004, respectively, represented approximately 11% of the increase. During the years ended December 31, 2005 and 2004, we spent approximately $3.9 million and $363,000, respectively, on the development of our lead drug candidate, SIGA-246, an orally administered anti-viral drug that targets the smallpox virus. For the year ended December 31, 2005, we spent approximately $708,000 on internal 28 human resources and $3.2 million mainly on pre-clinical testing. For the year ended December 31, 2004, we spent approximately $136,000 on internal human resources and $227,000 on pre-clinical testing of SIGA-246. R&D expenses of $1.6 million and $431,000 during the years ended December 31, 2005 and 2004, respectively, were used to support the development of ST-294, a drug candidate which has demonstrated significant antiviral activity in cell culture assays against arenavirus pathogens, as well as other drug candidates for hemorrhagic fevers. For the year ended December 31, 2005, we spent approximately $777,000 on internal human resources and $787,000 mainly on pre-clinical testing. For the year ended December 31, 2004, we spent approximately $258,000 on internal human resources and $173,000 on pre-clinical testing of ST-294. We incurred no costs related to this program during the year ended December 31, 2003. R&D expenses related to our USAF Agreement were approximately $132,000 and $249,000 for internal human resources and external R&D services, respectively, during the year ended December 31, 2005. We incurred no costs related to this program during the years ended December 31, 2004 and 2003. Our product programs are in the early stage of development. At this stage of development, we cannot make reasonable estimates of the potential cost for most of our programs to be completed or the time it will take to complete the project. Our lead product, SIGA-246, is an orally administered anti-viral drug that targets the smallpox virus. In December 2005 the FDA accepted our IND application for SIGA-246 and granted it Fast-Track status. In December 2006, the FDA granted Orphan Drug designation to SIGA-246, for the prevention and treatment of smallpox. We expect that costs to complete the program will approximate $15 million to $20 million, and that the project could be completed in 24 months to 36 months. There is a high risk of non-completion of any program, including SIGA-246, because of the lead time to program completion and uncertainty of the costs. Net cash inflows from any products developed from our programs is at least one to three years away. However, we could receive additional grants, contracts or technology licenses in the short-term. The potential cash and timing is not known and we cannot be certain if they will ever occur. The risk of failure to complete any program is high, as each, other than our smallpox program which began phase I clinical trials in 2006, is in the relatively early stage of development. Products for the biological warfare defense market, such as the SIGA-246 Smallpox anti-viral, could generate revenues in one to three years. We believe the products directed toward this market are on schedule. We expect the future research and development cost of our biological warfare defense programs to increase as the potential products enter animal studies and safety testing, including human safety trials. Funds for future development will be partially paid for by NIH contracts and SBIR grants, additional government funding and from future financing. If we are unable to obtain additional federal grants and contracts or funding in the required amounts, the development timeline for these products would slow or possibly be suspended. Delay or suspension of any of our programs could have an adverse impact on our ability to raise funds in the future, enter into collaborations with corporate partners or obtain additional federal funding from contracts or grants. Patent preparation expenses for the year ended December 31, 2006 were $295,000 compared to $232,000 for the year ended December 31, 2005. The increase of 63,000 or 27% is mainly due to a refund of $83,000 received in 2005 from our patent legal counsel. Patent preparation expenses for the years ended December 31, 2005 and 2004 were $232,000 and $393,000, respectively. The decline of $161,000 or 41% relates to the termination of our relations with Plexus and Pecos Labs Inc. (Pecos), and the reduction in the number of patents supported by SIGA, in addition to a refund of $83,000 received in 2005 from our patent legal counsel. For the year ended December 31, 2004, as a result of the acquisition of certain government grants and two early stage antiviral programs, Smallpox and Arenavirus, targeting certain agents of biological warfare, from ViroPharma, $568,329 was immediately expensed as purchased in-process research and development ("IPRD"). The amount expensed as IPRD was attributed to technology that has not reached technological feasibility and has no alternate future use. The value allocated to IPRD was determined using the income approach that included an excess earnings analysis reflecting the appropriate costs of capital for the purchase. Estimates of future cash flows related to the IPRD were made for both the Smallpox and Arenavirus programs. The aggregate discount rate of approximately 55% utilized to discount the programs' cash flows were based on consideration of the Company's 29 weighted average cost of capital, as well as other factors, including the stage of completion and the uncertainty of technology advances for these programs. If the programs are not successful or completed in a timely manner, the Company's product pricing and growth rates may not be achieved and the Company may not realize the financial benefits expected from the programs. For the year ended December 31, 2004 we recorded a $2,118,200 non-cash loss on impairment of assets. In December 2004, upon completion of the ViroPharma transaction, integration of the related acquired programs into the Company's operations, and the demonstrated antiviral activity of the Company's lead smallpox compound against several mouse models of poxvirus disease, we commenced an application process for additional government grants to support our continued efforts under the Smallpox and Arenavirus antiviral programs. We determined that significant efforts and resources will be necessary to successfully continue the development efforts under these programs and decided to allocate the necessary resources to support its commitment. As a result, limited resources were available for the development of future product candidates that utilize the technology acquired from Plexus in May 2003. These factors resulted in a significant reduction in forecasted revenues related to that technology and a reduction in the future remaining useful life, and triggered the related intangible asset impairment. The amount of impairment recorded by us in December 2004 was determined using the two-step process impairment review as required by SFAS 144. In the first step, we compared the projected undiscounted net cash flows associated with the technology acquired from Plexus over its remaining life against its carrying amount. We determined that the carrying amount of the technology acquired from Plexus exceeded its projected undiscounted cash flows. In the second step, we estimated the fair value of the technology using the income method of valuation, which included the use of estimated discounted cash flows. Based on our assessment, we recorded a non-cash impairment charge of approximately $1.5 million in December 2004, which was included as a component of our operating loss. In May 2004, we performed an impairment review of our intangible assets in accordance with SFAS 144 in connection with the sale of certain intangible assets from our immunological bioinformatics technology and certain non-core vaccine development to a privately-held company, Pecos. We recorded an impairment charge of $307,000 to the grants transferred to Pecos and $303,000 to the covenant not to compete with our President who was terminated during the current year period. Total operating loss for the year ended December 31, 2006 was $6.8 million compared with $2.5 million for 2005. The increase of $4.2 million in operating loss relates mainly to $1.2 million of professional fees incurred in connection with our merger agreement with PHTN, which was terminated in October 2006, a decline of $1.2 million in revenues generated in 2006, and an increase of $870,000 in non-cash expenses recorded for depreciation, amortization and non-cash compensation. Total operating loss for the years ended December 31, 2005 and 2004 was $2,532,000 and $9,448,000, respectively. Operating loss in 2004, excluding non-cash charges recorded for the impairment of assets and recognition of in-process R&D was $6,763,000. The decline in total operating loss is primarily related to the increase in revenues generated during 2005 and the decline in our SG&A expenses which was partially off-set by the increase in R&D expenses to support our programs. A loss of $3.1 million from the increase in fair market value of common stock rights and common stock warrants was recorded in connection with the sale of common stock and warrants in October 2006, and the sale of common stock, warrants and rights in November 2005. The warrants and rights to purchase common stock of SIGA were recorded at fair market value and classified as liabilities at the time of the transaction. In 2006 we recorded losses for the increase in the fair value of the warrants sold in October 2006, during the period from October 19, 2006 to December 31, 2006. We also recorded losses reflecting the increase in the fair value of warrants and rights sold in November 2005, during the period of January 1, 2006 to December 31, 2006. A gain from the decrease in common stock rights and common stock warrants was recorded in connection with the sale and issuance of common stock, warrants and rights in 2005. The warrants and rights to purchase additional common stock of SIGA were recorded at fair market value and classified as liabilities at the time of the transaction. A gain of $253,000 was recorded by us, reflecting the decline in the fair value of the warrants and the rights to acquire additional shares of our common stock, from the time of the transaction to December 31, 2005. Other income for the years ended December 31, 2006, 2005, and 2004 was $1,600, $9,000, and $75,000, respectively. Other income in 2004 was higher than 2006 and 2005 mainly due to net interest income received on 30 higher cash balances during that year. In 2004 we also received other income of $15,000 as the result of the settlement of a legal action with a former founder. For the year ended December 31, 2006, we recorded interest charges of $114,000 relating to loans payable in the amount of $3.0 million which we paid in full in October 2006. The charges were offset by interest income of $147,000 generated from higher cash balance subsequent to the October 2006 sale of SIGA common stock and warrants. Liquidity and Capital Resources On December 31, 2006, we had $10.6 million in cash and cash equivalents. On October 18, 2006, we entered into a Securities Purchase Agreement for the issuance and sale of 2,000,000 shares of the Company's common stock at $4.54 per share and warrants to purchase 1,000,000 shares of the Company's common stock. The warrants are exercisable at $4.99 per share at any time and from time to time through and including the seventh anniversary of the closing date. With respect to the transaction, we also entered into a Finder's Agreements. The finders fee under the agreement includes cash compensation of 3% of the gross amount financed and warrants to acquire 136,200 shares of the Company's common stock at terms equal to the investors' warrants. Also in connection with the transaction, pursuant to our existing Exclusive Finder's Agreement, we paid a finder's fee consisting of cash compensation of 4% of the amount financed and warrants to acquire 136,200 shares of our common stock, at terms equal to the investors' warrants. We received net proceeds of $8.4 million from the transaction. During the forth quarter of 2006, we received net proceeds of $4.3 million from exercises of warrants and options to purchase shares of the Company's Common stock. In November 2006, we received a $1.4 million, one year contract with the Air Force Medical Service for the development of counter-measures against Dengue viruses and other water-related viral agents. In November 2006 we also received a one-year, $900,000 contract to aid the USAF Special Operations Command (USAFSOC) in its development of specific anti-viral agents. On August 30, 2006, we received a three year, $6.0 million award from the NIH to support the development of our antiviral drugs for Lassa fever virus. On August 1, 2006, we received a three year, $4.8 million SBIR Phase II continuation grant from the NIH to support the development of our smallpox drug candidate, SIGA-246. On September 26, 2006, we entered into a three year, $16.5 million contract with the National Institute of Allergy and Infectious Diseases of the NIH, to further advance the development of our smallpox drug candidate. Revenues from these new grants and contracts will be recognized as services are performed. On October 4, 2006, SIGA exercised its right, pursuant to its Agreement and Plan of Merger, dated June 8, 2006, with PHTN (the "Merger Agreement"), to terminate the transaction pursuant to which a subsidiary of SIGA was going to merge with PHTN. Pursuant to Section 12.1(a) of the Merger Agreement, SIGA had an obligation to exclusively negotiate with PHTN the terms of a license agreement relating to SIGA-246. On December 20, 2006, PharmAthene filed a complaint against us with respect to, among other matters, this provision. See "Legal Proceedings". On March 20, 2006, in connection with the transaction, we entered into a Bridge Note Purchase Agreement ("Notes Purchase Agreement") with PHTN for the sale of three 8% Notes by SIGA, for $1,000,000 each. The first, second and third Notes were issued on March 20, 2006, April 19, 2006, and June 19, 2006, respectively. The proceeds of the Notes were used by the Company for (i) expenses directly related to the development of SIGA's lead product, SIGA-246, (ii) expenses related to the Company's planned merger with PHTN and (iii) corporate overhead. Pursuant to a Security Agreement between SIGA and PHTN also entered into on March 20, 2006, the Notes were secured by a first priority security interest in the Company's assets (other than assets subject to the security interest granted to General Electric Capital Corporation). On October 23, 2006, we paid PHTN $3,114,400 in full repayment of the three notes and interest accrued thereon. We believe that our existing cash combined with anticipated cash flows, including receipt of future funding from government contracts and grants will be sufficient to support our operations beyond the next twelve months, and that sufficient cash flows will be available to meet our business objectives during that period. 31 Operating activities Net cash used in operations during the year ended December 31, 2006 was $4.4 million compared to $1.4 million used during the year ended December 31, 2005. The increase in cash used in operations is mainly due to professional fees of $1.2 million incurred in connection with the terminated merger with PHTN, development expenses of $660,000 incurred in connection with human clinical trials of SIGA-246, bonuses paid to management and employees in 2006 and supplies and materials purchased for our laboratory in Oregon. Investing activities Capital expenditures during the years ended December 31, 2006 and 2005 were $884,000 and $861,000, respectively, and mainly supported the renovation of our research facility in Oregon. Financing activities Cash provided by financing activities was $14.2 million and $2.0 million during the years ended December 31, 2006 and 2005, respectively. During the year ended December 31, 2006 we received $8.4 from the sale of common stock and warrants to acquire common stock, $4.3 million from the exercise of options and warrants to purchase shares of common stock, and $1.5 million from exercises of rights to purchase 1,500,000 shares of our common stock for $1.10 per share. During the year ended December 31, 2005 we received $276,000, net, from the issuance of a promissory note payable to General Electric Capital Corporation (GE). The note is payable in 36 monthly installments of principal and interest of 10.31% per annum. During the years ended December 31, 2006 and 2005 we made payments of $108,000 and $35,000 to GE. Other As of December 31, 2006, we do not expect receipt of up-front and milestone payments from any of our current collaborative and other agreements. We have incurred cumulative net losses and expect to incur additional losses to perform further research and development activities. We do not have commercial products and have limited capital resources. Our plans with regard to these matters include continued development of our products as well as seeking additional working capital through a combination of collaborative agreements, strategic alliances, research grants, equity and debt financing. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining future financing on commercially reasonable terms. Our working capital and capital requirements will depend upon numerous factors, including pharmaceutical research and development programs; pre-clinical and clinical testing; timing and cost of obtaining regulatory approvals; levels of resources that we devote to the development of manufacturing and marketing capabilities; technological advances; status of competitors; and our ability to establish collaborative arrangements with other organizations. Contractual Obligations, Commercial Commitments and Purchase Obligations As of December 31, 2006, our purchase obligations are not material. We lease certain facilities and office space under operating leases. Minimum future rental commitments under operating leases having non-cancelable lease terms in excess of one year, are as follows: 32 Loans and related Year ended December 31, Lease obligations interest payable Total commitments 2007 $ 576,948 $ 107,521 $ 684,469 2008 576,948 22,809 599,757 2009 579,648 -- 579,648 2010 466,448 -- 466,448 2011 443,748 -- 443,748 ------------ ------------ ------------ Total $ 2,643,740 $ 130,330 $ 2,774,070 ============ ============ ============ Off-Balance Sheet Arrangements SIGA does not have any off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk None. 33  34 Item 8. Financial Statements and Supplementary Data Index to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm.......................35 Consolidated Balance Sheets as of December 31, 2006 and 2005..................36 Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004...........................................................37 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2006, 2005 and 2004..................................38 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004...........................................................40 Notes to Consolidated Financial Statements....................................41 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of SIGA Technologies, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of SIGA Technologies, Inc. and its subsidiary at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 our opinion. As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006. 35 /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 8, 2007 SIGA TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2006 and 2005 The accompanying notes are an integral part of these financial statements. 36 December 31, December 31, 2006 2005 ------------ ------------ ASSETS Current assets Cash and cash equivalents ..................................................... $ 10,639,530 $ 1,772,489 Accounts receivable ........................................................... 617,032 883,054 Prepaid expenses .............................................................. 141,032 160,144 ------------ ------------ Total current assets ........................................................ 11,397,594 2,815,687 Property, plant and equipment, net ............................................ 1,320,315 1,224,147 Goodwill ...................................................................... 898,334 898,334 Intangible assets, net ........................................................ 165,243 932,735 Other assets .................................................................. 246,201 234,126 ------------ ------------ Total assets ................................................................ $ 14,027,687 $ 6,105,029 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable .............................................................. $ 1,357,906 $ 1,251,854 Accrued expenses and other .................................................... 382,679 452,082 Accrued bonuses ............................................................... 201,825 -- Deferred revenue .............................................................. -- 347,319 Common stock rights ........................................................... -- 73,400 Notes payable ................................................................. 107,520 107,520 ------------ ------------ Total current liabilities ................................................... 2,049,930 2,232,175 Non-current portion of notes payable ............................................. 22,809 106,705 Common stock warrants ............................................................ 4,673,098 535,119 ------------ ------------ Total liabilities ........................................................... 6,745,837 2,873,999 Commitments and contingencies .................................................... -- -- Stockholders' equity Series A convertible preferred stock ($.0001 par value, 10,000,000 shares authorized, none and 68,038 issued and outstanding at December 31, 2006 and December 31, 2005, respectively) ............................... -- 58,672 Common stock ($.0001 par value, 50,000,000 shares authorized, 32,452,210 and 26,500,648 issued and outstanding at December 31, 2006 and December 31, 2005, respectively) ........................................ 3,245 2,650 Additional paid-in capital .................................................... 63,646,224 49,638,619 Accumulated deficit ........................................................... (56,367,619) (46,468,911) ------------ ------------ Total stockholders' equity .................................................. 7,281,850 3,231,030 ------------ ------------ Total liabilities and stockholders' equity .................................. $ 14,027,687 $ 6,105,029 ============ ============ SIGA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2006, 2005 and 2004 The accompanying notes are an integral part of these financial statements. 37 2006 2005 2004 ------------ ------------ ------------ Revenues Research and development .......................................... $ 7,257,532 $ 8,476,741 $ 1,839,182 ------------ ------------ ------------ Operating expenses Selling, general and administrative (include $376,295 of non-cash share based compensation for the year ended December 31, 2006) .............................. 4,623,577 2,481,489 4,041,973 Research and development (include $94,597 of non-cash share based compensation for the year ended December 31, 2006) .............................. 9,149,327 8,295,262 4,165,849 Patent preparation fees ........................................... 295,006 232,329 393,100 In-process research and development ............................... -- -- 568,329 Impairment of intangible assets ................................... -- -- 2,118,219 ------------ ------------ ------------ Total operating expenses ........................................ 14,067,910 11,009,080 11,287,470 ------------ ------------ ------------ Operating loss .................................................. (6,810,378) (2,532,339) (9,448,288) Decrease (increase) in fair market value of common stock rights and common stock warrants ......................................... (3,089,997) 235,730 -- Other income (expense), net ......................................... 1,667 9,059 74,969 ------------ ------------ ------------ Net loss ........................................................ $ (9,898,708) $ (2,287,550) $ (9,373,319) ============ ============ ============ Weighted average shares outstanding: basic and diluted .............. 28,200,130 24,824,824 23,724,026 ============ ============ ============ Net loss per share: basic and diluted ............................... $ (0.35) $ (0.09) $ (0.40) ============ ============ ============ SIGA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 2006, 2005 and 2004 The accompanying notes are an integral part of these financial statements. (Continued) 38 Series A Convertible Preferred Stock Common Stock --------------------------- -------------------------- Shares Amount Shares Amount Balance at January 1, 2004 81,366 $ 72,666 18,676,851 $ 1,868 Net proceeds from issuance of common stock ($1.44 per share) 4,750,413 475 Issuance of common stock upon exercise of stock options and warrants 70,994 7 Conversion of preferred stock for common stock (13,328) (13,994) 13,328 1 Stock issued in acquisition of intangible assets 1,000,000 100 Common stock retired upon settlement agreement with former founder (40,938) (4) Stock issued for services 30,000 3 Net loss ----------- ----------- ----------- ----------- Balance at December 31, 2004 68,038 $ 58,672 24,500,648 $ 2,450 ----------- ----------- ----------- ----------- Net proceeds allocated to the issuance of common stock ($1.00 per share) 2,000,000 $ 200 Stock options issued to members of the Board of Directors Net loss ----------- ----------- ----------- ----------- Balance at December 31, 2005 68,038 $ 58,672 26,500,648 $ 2,650 ----------- ----------- ----------- ----------- Net proceeds allocated to the issuance of common stock ($4.54 per share) 2,000,000 $ 200 Conversion of preferred stock for common stock (68,038) (58,672) 68,038 7 Stock based compensation Stock issued for services Issuance of common stock upon exercise of stock options and warrants 2,383,524 238 Issuance of common stock upon exercise of common stock rights 1,500,000 150 Fair value of exercised common stock rights and warrants Net loss ----------- ----------- ----------- ----------- Balance at December 31, 2006 -- $ -- 32,452,210 $ 3,245 =========== =========== =========== =========== SIGA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 2006, 2005 and 2004 The accompanying notes are an integral part of these financial statements. 39 Total Additional Accumulated Stockholders' Paid-in Capital Deficit Equity --------------- ------------- ------------- Balance at January 1, 2004 $ 40,284,856 $ (34,808,042) $ 5,551,348 Net proceeds from issuance of common stock ($1.44 per share) 6,784,131 6,784,606 Issuance of common stock upon exercise of stock options and warrants 69,369 69,376 Conversion of preferred stock for common stock 13,993 -- Stock issued in acquisition of intangible assets 1,479,900 1,480,000 Common stock retired upon settlement agreement with former founder 4 -- Stock issued for services 47,397 47,400 Net loss (9,373,319) (9,373,319) ------------- ------------- ------------- Balance at December 31, 2004 $ 48,679,650 $ (44,181,361) $ 4,559,411 ------------- ------------- ------------- Net proceeds allocated to the issuance of common stock ($1.00 per share) $ 947,269 947,469 Stock options issued to members of the Board of Directors 11,700 11,700 Net loss (2,287,550) (2,287,550) ------------- ------------- ------------- Balance at December 31, 2005 $ 49,638,619 $ (46,468,911) $ 3,231,030 ------------- ------------- ------------- Net proceeds allocated to the issuance of common stock ($4.54 per share) $ 5,948,328 5,948,528 Conversion of preferred stock for common stock 58,665 -- Stock based compensation 470,892 470,892 Stock issued for services 156,470 156,470 Issuance of common stock upon exercise of stock options and warrants 4,337,604 4,337,842 Issuance of common stock upon exercise of common stock rights 1,534,350 1,534,500 Fair value of exercised common stock rights and warrants 1,501,296 1,501,296 Net loss (9,898,708) (9,898,708) ------------- ------------- ------------- Balance at December 31, 2006 $ 63,646,224 $ (56,367,619) $ 7,281,850 ============= ============= ============= SIGA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2006, 2005 and 2004 The accompanying notes are an integral part of these financial statements. 40 2006 2005 2004 ------------ ------------ ------------ Cash flows from operating activities: Net loss ................................................................ $ (9,898,708) $ (2,287,550) $ (9,373,319) Adjustments to reconcile net loss to net cash used in operating activities: Purchase of in-process research & development ........................ -- -- 568,329 Loss on impairment of intangible assets .............................. -- -- 2,118,219 Depreciation ......................................................... 788,014 145,809 221,719 Amortization of intangible assets .................................... 767,492 1,181,562 832,534 Decrease (increase) in fair market value of rights and warrants ...... 3,089,997 (235,730) -- Stock based compensation ............................................. 470,892 11,700 47,400 Non-cash stock based consulting expense .............................. 156,470 -- -- Loss on impairment of investments .................................... -- 15,000 -- Loss on write-off of prepaid investments ............................. -- 116,243 -- Changes in assets and liabilities: Accounts receivable ............................................... 266,022 (774,150) (70,118) Prepaid expenses .................................................. 19,112 2,160 (231,210) Other assets ...................................................... (12,075) (67,401) (6,729) Deferred revenue .................................................. (347,319) 347,319 -- Accounts payable and accrued expenses ............................. 262,098 152,587 1,003,117 ------------ ------------ ------------ Net cash used in operating activities ............................. (4,438,005) (1,392,451) (4,890,058) ------------ ------------ ------------ Cash flows from investing activities: Acquisition of intangible assets ..................................... -- -- (1,033,022) Capital expenditures ................................................. (884,182) (861,941) (350,688) ------------ ------------ ------------ Net cash used in investing activities ............................. (884,182) (861,941) (1,383,710) ------------ ------------ ------------ Cash flows from financing activities: Net proceeds from issuance of common stock and derivatives ........... 8,424,406 1,791,718 6,784,606 Proceeds from issuance of notes payable .............................. 3,000,000 276,434 -- Net proceeds from exercise of common stock rights .................... 1,534,500 -- -- Net proceeds from exercise of warrants and options ................... 4,337,842 -- 69,376 Repayment of notes payable ........................................... (3,107,520) (62,209) -- ------------ ------------ ------------ Net cash provided by financing activities ......................... 14,189,228 2,005,943 6,853,982 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents .................... 8,867,041 (248,449) 580,214 Cash and cash equivalents at beginning of period ........................ 1,772,489 2,020,938 1,440,724 ------------ ------------ ------------ Cash and cash equivalents at end of period .............................. $ 10,639,530 $ 1,772,489 $ 2,020,938 ============ ============ ============ Cash paid for interest on notes payable ................................. $ 135,055 11,105 $ -- Non-cash supplemental information: Conversion of preferred stock to common stock ........................ $ 58,672 -- $ 13,994 Transfer of intangible assets for investment in Pecos Labs, Inc. ..... $ -- -- $ 15,000 Shares issued for acquisition of assets from ViroPharma Inc. ......... $ -- -- $ 1,480,000 SIGA TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation Organization SIGA Technologies, Inc. ("SIGA" or the "Company") is a bio-defense company engaged in the discovery, development and commercialization of products for use in defense against biological warfare agents such as Smallpox and Arenaviruses. The Company is also engaged in the discovery and development of other novel anti-infectives, vaccines, and antibiotics for the prevention and treatment of serious infectious diseases. The Company's anti-viral programs are designed to prevent or limit the replication of viral pathogens. SIGA's anti-infectives programs target the increasingly serious problem of drug resistant bacteria and emerging pathogens. Basis of presentation The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred cumulative net losses and expects to incur additional losses to perform further research and development activities. The Company does not have commercial products and has limited capital resources. Management's plans with regard to these matters include continued development of its products as well as seeking additional research support funds and future financial arrangements. Although management will continue to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient future financing on commercially reasonable terms or that the Company will be able to secure funding from anticipated government contracts and grants. Management believes that existing cash balances combined with anticipated cash flows will be sufficient to support its operations beyond the next twelve months, and will fund the Company's business objectives during that period. 2. Summary of Significant Accounting Policies Use of Estimates The consolidated financial statements and related disclosures are prepared in conformity with accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. These estimates include the realization of deferred tax assets, useful lives and impairment of tangible and intangible assets, and the value of options and warrants granted or issued by the Company. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. Actual results could differ from these estimates. Cash and cash equivalents Cash and cash equivalents consist of short term, highly liquid investments, with original maturities of less than three months when purchased and are stated at cost. Interest is accrued as earned. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the various asset classes. Estimated lives are 5 years for laboratory equipment; 3 years for computer equipment; 7 years for furniture and fixtures; and the life of the lease for leasehold improvements. Maintenance, repairs and minor replacements are charged to expense as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the Balance Sheet and any gain or loss is reflected in the Statement of Operations. Revenue Recognition The Company recognizes revenue from contract research and development and research payments in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or 41 determinable, collectibility is reasonably assured, contractual obligations have been satisfied and title and risk of loss have been transferred to the customer. The Company recognizes revenue from non-refundable up-front payments, not tied to achieving a specific performance milestone, over the period which the Company is obligated to perform services or based on the percentage of costs incurred to date, estimated costs to complete and total expected contract revenue. Payments for development activities are recognized as revenue as earned, over the period of effort. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, providing there is no future service obligation associated with that milestone. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. For the years ended December 31, 2006, 2005, and 2004, revenues from National Institutes of Health ("NIH") contracts and Small Business Innovation Research ("SBIR") grants was 53%, 87%, and 77%, respectively, of total revenues recognized by the Company. Accounts Receivable Accounts receivable are recorded net of provisions for doubtful accounts. An allowance for doubtful accounts is based on specific analysis of the receivables. At December 31, 2006, 2005, and 2004, the Company had no allowance for doubtful accounts. Research and development Research and development expenses include costs directly attributable to the conduct of research and development programs, including employee related costs, materials, supplies, depreciation on and maintenance of research equipment, the cost of services provided by outside contractors, and facility costs, such as rent, utilities, and general support services. All costs associated with research and development are expensed as incurred. Costs related to the acquisition of technology rights, for which development work is still in process, and that have no alternative future uses, are expensed as incurred. Goodwill Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company evaluates goodwill for impairment annually, in the fourth quarter of each year. In addition, the Company would test goodwill for recoverability between annual evaluations whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Examples of such events could include a significant adverse change in legal matters, liquidity or in the business climate, an adverse action or assessment by a regulator or government organization, loss of key personnel, or new circumstances that would cause an expectation that it is more likely than not that we would sell or otherwise dispose of a reporting unit. Goodwill impairment is determined using a two-step approach in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In 2006, the Company operated as one business and one reporting unit. Therefore, the goodwill impairment analysis was performed on the basis of the Company as a whole using the market capitalization of the Company as an estimate of its fair value. Identified Intangible Assets Acquisition-related intangibles include acquired technology, customer contracts, grants and covenants not to compete, and are amortized on a straight line basis over periods ranging from 2-4 years. In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company performs a review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Our estimates of projected cash flows are dependent on many factors, including general economic trends, technological 42 developments and projected future contracts and government grants. It is reasonably likely that future cash flows associated with our intangible assets may exceed or fall short of our current projections, in which case a different amount for impairment would result. 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 the entire deferred tax asset will not be realized. Net loss per common share The Company computes, presents and discloses earnings per share in accordance with SFAS 128 "Earnings Per Share" ("EPS") which specifies the computation, presentation and disclosure requirements for earnings per share of entities with publicly held common stock or potential common stock. The statement defines two earnings per share calculations, basic and diluted. The objective of basic EPS is to measure the performance of an entity over the reporting period by dividing income (loss) by the weighted average shares outstanding. The objective of diluted EPS is consistent with that of basic EPS, that is to measure the performance of an entity over the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period. The calculation of diluted EPS is similar to basic EPS except the denominator is increased for the conversion of potential common shares. The Company incurred losses for the years ended December 31, 2006, 2005, and 2004, and as a result, certain equity instruments are excluded from the calculation of diluted loss per share. At December 31, 2005, 68,038 shares of the Company's Series A convertible preferred stock have been excluded from the computation of diluted loss per share as they were anti-dilutive. These shares were converted into shares of the Company's common stock in 2006. At December 31, 2006, 2005, and 2004, outstanding options to purchase 7,736,145, 9,399,561, and 9,762,061, shares, respectively, of the Company's common stock with exercise prices ranging from $0.94 to $5.50 have been excluded from the computation of diluted loss per share as they are anti-dilutive. At December 31, 2006, 2005, and 2004, outstanding warrants to purchase 9,441,915, 9,378,794, and 8,469,594, shares, respectively, of the Company's common stock, with exercise prices ranging from $1.18 to $4.99 have been excluded from the computation of diluted loss per share as they are anti-dilutive. Fair value of financial instruments The carrying value of cash and cash equivalents, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. Common stock rights and warrants which are classified as assets or liabilities under the provisions of EITF 00-19, are recorded at their fair market value as of each reporting period. Concentration of credit risk The Company has cash in bank accounts that exceed the Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses on its cash accounts. No allowance has been provided for potential credit losses because management believes that any such losses would be minimal. Share-based Compensation On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan ("employee stock purchases") based on estimated fair values. SFAS 123(R) supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for periods beginning on January 1, 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). 43 The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year 2006. The Company's Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company's Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation related to stock options expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $470,892. No share-based compensation expense related to employee stock options was recognized during the year ended December 31, 2005. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the grant-date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's Statements of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic value method, no share-based compensation expense related to stock options had been recognized in the Company's Statements of Operations when the exercise price of the Company's stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant-date. Share-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company's Statements of Operations for the year ended December 31, 2006 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company utilizes the Black-Scholes options pricing model for the valuation of share-based awards. Determining the fair value of these awards at the grant date requires judgment. Share-based compensation expense reduced the Company's results of operations for the year ended December 31, 2006 by $470,893, or $0.02 per share, and had no impact on the Company's cash flow. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosures" ("SFAS 148") during the years ended December 31, 2005 and 2004. 44 Year Ended December 31, 2005 2004 -------------- -------------- Net loss available to common stockholders, as reported ........ ($2,287,550) ($9,373,319) ============== ============== Add: Stock-based employee compensation expense included in reported net loss ........................................ 11,700 -- Deduct: Total stock based compensation expense determined under the fair value based method ........................... (709,285) (1,105,330) -------------- -------------- Net loss available to common stockholders, pro forma .......... ($2,985,135) ($10,478,649) ============== ============== Loss per common share - basic and diluted: As reported ................................................. $ (0.09) $ (0.40) Pro forma ................................................... $ (0.12) $ (0.44) Segment information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location and only has one reportable segment as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Recent accounting pronouncements In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires an entity to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal year 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Early application of FIN 48 is encouraged. The Company is evaluating the timing of its adoption of FIN 48 and the potential effects of implementing this Interpretation on its financial condition and results of operations. In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities and requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the adoption of SFAS No. 157. 3. Research Agreements On August 30, 2006, the Company received a three-year, $6.0 million award from the NIH to support the development of its antiviral drugs for the Lassa fever virus. Revenues will be recognized as services are performed. On August 1, 2006, SIGA received a three-year, $4.8 million SBIR Phase II continuation grant from the NIH to support the Company's development of its smallpox drug candidate, SIGA-246. Revenues will be recognized as services are performed. On September 26, 2006, the Company entered into a three-year, $16.5 million contract with the National Institute of Allergy and Infectious Diseases of the NIH, to further advance the development of SIGA-246, the Company's smallpox drug candidate. Revenues will be recognized as services are performed. In November 2006, SIGA received a $1.4 million, one year contract with the Air Force Medical Service for the development of counter-measures against Dengue viruses and other water-related viral agents. In November 2006 SIGA also received a one-year, $900,000 contract to aid the USAF Special Operations Command (USAFSOC) in its development of specific anti-viral agents. Revenues from these contracts will be recognized as services are performed. 4. Business Acquisitions and Other Transactions Purchase of Intangible Assets In August 2004, the Company acquired certain government grants and two early stage antiviral programs, Smallpox and Arenavirus, targeting certain agenda of biological warfare for a purchase price of $1,000,000 in cash and 1,000,000 shares of the Company's common stock from ViroPharma Incorporated ("ViroPharma") (the "ViroPharma Transaction"). The shares issued to ViroPharma were valued at the closing date price. The total purchase price of approximately $2.5 million was allocated to the acquired government grants ($1.9 million) and to purchased in-process research and development ($464,000 allocated to the Smallpox program and 45 approximately $104,000 to the Arenavirus program) ("IPRD"). The grants were amortized over 2 years, the contractual life of each. The amount expensed as IPRD was attributed to technology that has not reached technological feasibility and has no alternate future use. The value allocated to IPRD was determined using the income approach that included an excess earnings analysis reflecting the appropriate costs of capital for the purchase. Estimates of future cash flows related to the IPRD were made for both the Smallpox and Arenavirus programs. The aggregate discount rate of approximately 55% utilized to discount the programs' cash flows were based on consideration of the Company's weighted average cost of capital as well as other factors, including the stage of completion and the uncertainty of technology advances for these programs. If the programs are not successful or completed in a timely manner, the Company's product pricing and growth rates may not be achieved and the Company may not realize the financial benefits expected from the programs. 5. Intangible Assets The following table presents the components of the Company's acquired intangible assets with finite lives: Amortization expense for intangible assets and costs included the following: The Company anticipates amortization expense to approximate $82,600 for each of the years ending December 31, 2007, and 2008. Impairment of Intangible Assets In December 2004, upon completion of the ViroPharma Transaction, integration of the related acquired programs into the Company's operations, and the demonstrated antiviral activity of the Company's lead smallpox compound against several mouse models of poxvirus disease; management commenced an application process for additional government grants to support its continued efforts under the Smallpox and Arenavirus antiviral programs. Management determined that significant efforts and resources will be necessary to successfully continue the development efforts under these programs and decided to allocate the necessary resources to support its commitment. As a result, limited resources will be available for the development of future product candidates that utilize the technology acquired from Plexus in May 2003. These factors resulted in a significant reduction in forecasted revenues related to that technology and a reduction in the future remaining useful life, and triggered the related intangible asset impairment. The amount of impairment recorded by management in December 2004 was determined using the two-step process impairment review as required by SFAS 144. In the first step, management compared the projected undiscounted net cash flows associated with the technology acquired from Plexus over its 46 December 31, 2006 December 31, 2005 --------------------------------------------- --------------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Net Amount Amortization Net -------------- ------------ ------------ -------------- ------------ ------------ Acquired Grants $ 1,962,693 $ 1,962,693 $ -- $ 1,962,693 $ 1,308,465 $ 654,228 Customer contract and grants 83,571 83,571 -- 83,571 52,927 30,644 Covenants not to compete 202,000 202,000 -- 202,000 202,000 -- Acquired technology 330,483 165,240 165,243 330,483 82,620 247,863 ------------ ------------ ------------ ------------ ------------ ------------ $ 2,578,747 $ 2,413,504 $ 165,243 $ 2,578,747 $ 1,646,012 $ 932,735 ------------ ------------ ------------ ------------ ------------ ------------ Year Ended December 31, 2006 2005 ------------ ------------ Amortization of acquired grants $ 654,228 $ 981,347 Amortization of customer contract and grants 30,644 33,428 Amortization of covenants not to compete -- 84,167 Amortization of acquired technology 82,620 82,620 ------------ ------------ $ 767,492 $ 1,181,562 ------------ ------------ remaining life against its carrying amount. Management determined that the carrying amount of the technology acquired from Plexus exceeded its projected undiscounted cash flows. In the second step, management estimated the fair value of the technology using the income method of valuation, which included the use of estimated discounted cash flows using a discount rate of 28.5%. Based on management's assessment, the Company recorded a non-cash impairment charge of approximately $1.5 million in December 2004, which was included as a component of the Company's operating loss. Transfer of Intangible Assets to Pecos Labs, Inc. In May 2004, the Company sold intangible assets from its immunological bioinformatics technology and certain non-core vaccine development assets to a privately-held company, Pecos Labs, Inc. ("Pecos") in exchange for 150,000 shares of Pecos common stock. In addition, concurrent with the asset transfer, the Company terminated its employment agreement with the President of the Company. The Company paid approximately $270,000 in severance to the President as well as accelerated vesting on 100,000 stock options that were due to vest in May 2004. No compensation charge was recorded as the exercise price of the options was above the fair value market price on the date of termination. In addition, the Company reduced the covenant not to compete with the President to one year from the date of termination. As a result of the Pecos transaction in the second quarter of 2004, the Company performed an impairment review of the intangible assets in accordance with SFAS 144. The impairment of intangible assets consists of $322,063 of impairments to unamortized intangible assets related to the grants transferred to Pecos and $303,000 of impairment to the unamortized covenant not to compete with the President of the Company due to the reduction of the covenant to one year from the date of termination. During the year ended December 31, 2005, Pecos terminated its operations. As a result, the Company recorded a loss of $15,000 to write-off its investment in Pecos. 6. Stockholders' Equity At December 31, 2006, the Company's authorized share capital consisted of 60,000,000 shares, of which 50,000,000 are designated common shares and 10,000,000 are designated preferred shares. The Company's Board of Directors is authorized to issue preferred shares in series with rights, privileges and qualifications of each series determined by the Board. 2006 Placement On October 19, 2006, the Company entered into a Securities Purchase Agreement for the issuance and sale of 2,000,000 shares of the Company's common stock at $4.54 per share and warrants to purchase 1,000,000 shares of the Company's common stock. The warrants are exercisable at $4.99 per share at any time and from time to time through and including the seventh anniversary of the closing date. With respect to the transaction, the Company also entered into a Finders Agreement. The Company paid finders' fee of 3% of the amount financed, or $272,400, and issued the finders warrants to acquire 136,200 shares of the Company's common stock at terms equal to the investors' warrants. Also in connection with the transaction, pursuant to the Company's existing Exclusive Finders Agreement, the Company paid finders fee consisting of cash consideration of 4% of the amount financed, or $363,200, and issued warrants acquiring 136,200 shares of the Company's common stock at terms equal to the investors' warrants. The Company received net proceeds of $8.4 million from the transaction. The Company accounted for the transaction under the provisions of EITF 00-19 which requires that free standing derivative financial instruments that require net cash settlement be classified as assets or liabilities at the time of the transaction, and recorded at their fair value. On October 19, 2006, the Company recorded the warrants to acquire common stock as liabilities with an estimated fair value of $2.5 million. EITF 00-19 also requires that any changes in the fair value of the derivative instruments be reported in earnings or loss as long as the derivative contracts are classified as assets or liabilities. At December 31, 2006, the fair market value of the warrants to acquire common stock was $2.4 million. The Company applied the Black-Scholes model to calculate the fair values of the respective derivative instruments using the contracted term of the warrants. Management estimates the expected volatility using a combination of the Company's historical volatility and the volatility of a group of comparable companies. SIGA recorded a gain of $100,000 for the decline in the instruments' fair value from the date of the transaction to December 31, 2006. 47 2005 Placement In November 2005, the Company entered into a Securities Purchase Agreement for the issuance and sale of 2,000,000 shares of the Company's common stock at $1.00 per share and warrants to purchase 1,000,000 shares of the Company's common stock. The warrants are initially exercisable at 110% of the closing price on the closing date of the transaction ($1.18 per share) at any time and from time to time through and including the seventh anniversary of the closing date. The investors are also entitled to purchase additional shares of the Company's common stock for a gross amount of $2.0 million at an initial price of $1.10 per share for a period of 90 trading days following the effectiveness of a registration statement. An initial registration statement relating to the common stock sold and the stock underlying the warrants became effective on December 2, 2005. With respect to the transaction, the Company entered into an Exclusive Finder's Agreement. Finder's fees under the agreement include cash compensation of 7% of the gross amount financed and a warrant to acquire 60,000 shares of the Company's common stock at terms equal to the investors' warrants. The Company received gross proceeds of $2.0 million from the transaction on November 3, 2005. Net proceeds from were $1.8 million. The Company accounted for the transaction under the provisions of EITF 00-19. On November 2, 2005, the Company recorded the warrants to acquire common stock and the option to acquire common stock as liabilities with estimated fair value of $631,000 and $213,000, respectively. At December 31, 2005, the fair market value of the warrants to acquire common stock and the option to acquire additional shares of common stock was $535,000 and $73,000, respectively. SIGA recorded a gain of $236,000 for the decline in the instruments' fair value from the date of the transaction to December 31, 2005. In 2006, holders of 275,000 warrants and 1,500,000 rights to acquire shares of the Company's common stock exercised their warrants and rights. Net proceeds from the exercise of the warrants and rights were $324,000 and $1,534,500, respectively. On August 25, 2006, 500,000 rights to acquire common stock expired unexercised. At December 31, 2006, the fair market value of the outstanding 725,000 warrants to acquire common stock was $2.4 million. In 2006, management recognized non-cash loss of $3.2 million related to changes in the instruments' fair market value from December 31, 2005 to December 31, 2006. 2004 Placements In August 2003, the Company entered into a securities purchase agreement with MacAndrews & Forbes Holdings Inc. ("MacAndrews & Forbes"). Pursuant to the agreement, the Company raised gross proceeds of $1.0 million from MacAndrews & Forbes and certain of its employees, in exchange for 694,444 shares of the Company's common stock at a price of $1.44 per share and warrants to purchase 347,222 shares of the Company's common stock at an exercise price of $2.00 per share. In addition, MacAndrews & Forbes and certain of its employees were granted an option, exercisable through October 13, 2003, to invest up to an additional $9.0 million in the Company on the same terms. In October 2003, MacAndrews & Forbes, certain of its employees and TransTech Pharma, Inc., a related party to the Company and an affiliate of MacAndrews & Forbes ("TransTech Pharma"), exercised their option to invest $9.0 million in the Company, in exchange for an aggregate of 6,250,000 shares of common stock of the Company's common stock, and warrants to purchase up to an aggregate of 3,125,000 shares of the Company's common stock at an exercise price of $2.00 per share. Immediately prior to the exercise of such option, MacAndrews & Forbes assigned the right to invest up to $5.0 million in the Company to TransTech Pharma. The Company and TransTech Pharma are parties to a drug discovery collaboration agreement signed in October 2002. In accordance with and subject to the terms and conditions of the securities purchase agreement, MacAndrews & Forbes and certain of its employees invested $2.2 million in exchange for 1,499,587 shares of the Company's common stock at a price of $1.44 per share and received warrants to purchase up to an additional 749,794 shares of common stock at an exercise price of $2.00 per share. In January 2004, following the approval of the Company's stockholders, MacAndrews & Forbes and TransTech Pharma completed the final portion of their investment. MacAndrews & Forbes invested $1,840,595 in exchange for 1,278,191 shares of common stock at a price of $1.44 per share, and warrants to purchase up to an additional 639,095 shares of common stock at an exercise price of $2.00 per share; and TransTech Pharma invested $5,000,000 in exchange for 3,472,222 shares of common stock and warrants to purchase up to an additional 1,736,111 shares of common stock on the same terms. In addition, as part of the investment, MacAndrews & Forbes and TransTech Pharma each were given the right to appoint one board member to the Board of Directors, subject to certain terms 48 and conditions. On January 8, 2004, in accordance with the terms of the investment, the respective designees of MacAndrews & Forbes and TransTech Pharma were appointed to serve on SIGA's board of directors. Other Transactions In 2004, the Company reached a settlement agreement for breach of contract with a founder of the Company, whereby the founder returned 40,938 common shares, 150,000 warrants and $15,000 to the Company. The common shares were retired by the Company. The Company recorded the settlement amount as other income. Preferred Stock Holders of the Series A Convertible Preferred Stock are entitled to (i) cumulative dividends at an annual rate of 6% payable when and if declared by the Company's board of directors; (ii) in the event of liquidation of the Company, each holder is entitled to receive $1.4375 per share (subject to certain adjustments) plus all accrued but unpaid dividends; (iii) convert each share of Series A to a number of fully paid and non-assessable shares of common stock as calculated by dividing $1.4375 by the Series A Conversion Price (shall initially be $1.4375); and (iv) vote with the holders of other classes of shares on an as-converted basis. During the years ended December 31, 2006 and 2004 certain preferred stockholders converted 68,038 and 13,328 Series A convertible preferred stock, respectively, into 68,038 and 13,328 shares of common stock. On December 31, 2006, no shares of Series A Convertible Preferred Stock were outstanding. 7. Stock option plan and warrants Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan In January 1996, the Company implemented its 1996 Incentive and Non-Qualified Stock Option Plan (the "Plan"). The Plan as amended provides for the granting of up to 11,000,000 shares of the Company's common stock to employees, consultants and outside directors of the Company. 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. For the year ended December 31, 2006, the Company recorded compensation expense of $470,892 related to stock options. The total fair value of options vested during the year was $782,157. The total compensation cost not yet recognized related to non-vested awards at December 31, 2006 is $332,651. The weighted average period over which total compensation cost is expected to be recognized is 2.50 years. SIGA calculated the fair value of options awarded during the three years ended December 31, 2006, 2005 and 2004 using the Black-Scholes model with the following weighted average assumptions: The Company calculates the expected volatility using a combination of SIGA's historical volatility and the volatility of a group of comparable companies. The risk-free interest rate assumption is based upon observed interest rate appropriate for the term of the Company's employee stock options. The dividend yield assumption is based on the Company's intent not to issue a dividend in the foreseeable future. The expected holding period assumption was estimated based on historical experience and expectation of employee exercise behavior in the future giving consideration to the contractual terms of the award. 49 Weighted Average Assumptions 2006 2005 2004 ------------ ------------- ------------- Expected volatility 59.91% 60% - 75% 74% - 107% Dividend Yield 0.00% 0.00% 0.00% Risk-free interest rate 4.49% 3.00% - 4.00% 2.75% - 3.80% Expected holding period 5 Yrs 2 - 5 Yrs 2 - 5 Yrs Stock options activity of the Company is summarized as follows: The following table summarizes information about options outstanding at December 31, 2006: In February 2003, the Company entered into an agreement with an outside consultant for its support in obtaining certain government contracts. Under the terms of the agreement, upon meeting certain criteria, the Company was obligated to issue 400,000 fully vested warrants with an exercise price of $1.32 and a 3 year term. In 2006, upon meeting such criteria, SIGA recorded a non-cash consulting charge of $156,470 representing the fair market value of the warrants on the issuance date. 50 Number of Average Exercise Shares Price ($) Options outstanding at December 31, 2004 9,767,061 $ 1.99 Granted 90,000 1.22 Forfeited (452,500) 1.60 Exercised -- -- ------------ Options outstanding at December 31, 2005 9,404,561 2.00 Granted 337,500 2.26 Forfeited (1,265,167) 1.30 Expired (33,334) 1.50 Exercised (897,415) 1.74 ------------ ------------ Options outstanding at December 31, 2006 7,546,145 $ 2.07 ============ Weighted Number of Average Intrinsic Shares Value ($) Nonvested options at December 31, 2005 1,987,500 -- Nonvested options at December 31, 2006 343,982 1.92 Options vested during 2006 730,733 2.03 Options available for future grant at December 31, 2006 2,341,399 Weighted average fair value of options granted during 2006 $ 1.24 Weighted average fair value of options granted during 2005 $ 0.64 Weighted average fair value of options granted during 2004 $ 0.98 Weighted average fair value of options forfeited during 2006 $ 1.02 Number of Weighted Number Fully Options Average Vested & Aggregate Range of Outstanding at Remaining Weighted Exercisable at Weighted Intrinsic Value at Exercise December 31, Contractual Life Average Exercise December 31, Average Exercise December 31, Price($) 2006 (Years) Price ($) 2006 Price ($) 2006 0.94 - 1.85 2,670,668 7.29 1.38 2,426,686 1.40 $ 5,709,344 2.00 - 2.75 4,437,250 4.47 2.36 4,437,250 2.36 5,838,038 3.94 - 5.50 438,227 3.95 3.36 338,227 4.36 -- ------------- ------------- ------------- 7,546,145 7,202,163 $ 11,547,382 ============= ============= ============= The following tables summarize information about warrants outstanding at December 31, 2006: Number of Warrants 8. Related Parties In January 2004, TransTech Pharma invested $5.0 million in SIGA (See Note 5). Furthermore, four directors of the Company are also directors of TransTech Pharma. During the year ended December 31, 2006, the Company incurred costs of $148,000 related to work performed by an affiliate of TransTech Pharma, Inc., a related party, in connection with one of the Company's lead product programs. On December 31, 2006, the Company's outstanding payables included $62,109 payable to the related party and its affiliates. Accounts receivable as of December 31, 2006, included $46,883 outstanding from TransTech Pharma, Inc. Additionally, a director of the Company is a member of the Company's outside counsel. 51 Weighted Average Number of Warrants Exercise Price Expiration Dates ------------------ --------------- Outstanding at January 1, 2004 6,389,844 $ 2.50 Granted 2,375,206 2.00 08/10/2010 Exercised (85,228) 1.08 Canceled / Expired (150,000) 1.50 ------------------ --------------- Outstanding at December 31, 2004 8,529,822 $ 2.39 Granted 1,060,000 1.18 11/2/2012 Exercised -- -- Canceled / Expired (150,800) 2.38 ------------------ --------------- Outstanding at December 31, 2005 9,439,022 $ 2.26 Granted 1,949,002 3.81 10/19/2013 Exercised (1,421,109) 1.88 Canceled / Expired (525,000) 3.60 ------------------ --------------- Outstanding at December 31, 2006 9,441,915 $ 2.52 ------------------ --------------- Outstanding Exercise Price 5,204,262 1.18 - 1.90 1,660,458 2.00 - 3.00 2,577,195 3.00 - 4.99 -------------- 9,441,915 ============== 9. Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31, 2006 and 2005: 10. Notes Payable On March 20, 2006, SIGA entered into a Bridge Note Purchase Agreement ("Note Purchase Agreement") with PHTN for the sale of three 8% Notes by SIGA, for $1,000,000 each. The first, second and third Notes were issued on March 20, 2006, April 19, 2006, and June 19, 2006, respectively. The proceeds of the Notes were used by the Company for (i) expenses directly related to the development of SIGA's lead product, SIGA-246, (ii) expenses related to the Company's planned merger with PHTN and (iii) corporate overhead. Pursuant to a Security Agreement between the Company and PHTN, also entered into on March 20, 2006, the Notes were secured by a first priority security interest in the Company's assets (other than assets subject to the security interest granted to General Electric Capital Corporation). On October 23, 2006, the Company paid PHTN $3,114,400 in full repayment of the three notes and interest accrued thereon. On May 20, 2005, the Company borrowed approximately $276,000 under a Promissory Note payable to General Electric Capital Corporation. The note is payable in 36 monthly installments of principal and interest of 10.31% per annum. The note is collateralized by a master security agreement dated as of April 29, 2005 and by specific property listed under the master security agreement. Total balance outstanding at December 31, 2006 was $130,329. Scheduled payments for 2007 and 2008 are $107,520 and $22,809, respectively. 11. Income Taxes The Company has incurred losses since inception, which have generated net operating loss carryforwards of approximately $34,286,000 at December 31, 2006 for federal and state income tax purposes. These carryforwards are available to offset future taxable income and begin expiring in 2010 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 differences in the treatment of intangible assets, result in a noncurrent deferred tax asset at December 31, 2006 and 2005 of approximately 19,057,000 and $16,411,000, 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. 52 Laboratory equipment $ 1,555,763 $ 1,358,489 Leasehold improvements 2,089,293 649,211 Computer equipment 357,949 306,527 Furniture and fixtures 205,628 205,628 Construction in-progress -- 804,596 ------------ ------------ 4,208,633 3,324,451 Less - accumulated depreciation (2,888,318) (2,100,304) ------------ ------------ Property, plant and equipment, net $ 1,320,315 $ 1,224,147 ============ ============ At December 31, 2005 and 2004, the Company's deferred tax assets are comprised of the following: Following is a summary of changes in our valuation allowance for deferred tax assets as of and for the years ended December 31, 2006, 2005 and 2004 (in thousands): For the years ended December 31, 2006 and 2005, 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. The Company's effective tax rate differs from the U.S. Federal Statutory income tax rate of 34% as follows: Operating lease commitments As of December 31, 2006, our purchase obligations are not material. The Company leases certain facilities and office space under operating leases. Minimum future rental commitments under operating leases having non-cancelable lease terms in excess of one year and future minimum payments under notes payable are as follows: 53 2006 2005 Net Operating Losses 13,372 12,121 Deferred Research and Development Costs 4,195 3,455 Amortization of Acquired Assets 818 623 Stock Based Compensation 184 -- Depreciation of Property Plant and Equipment 488 212 ---------- ---------- Total Deferred Tax Asset 19,057 16,411 Valuation Allowance (19,057) (16,411) ---------- ---------- Net Deferred Tax Assets $ -- $ -- ========== ========== Additions Charged Balance at to Costs and Balance at End of December 31, Beginning of Year Expenses Deductions Year ------------------- ------------------- -------------- ------------------- 2006 $ 16,411 $ 2,646 $ -- $ 19,057 2005 $ 16,090 $ 321 $ -- $ 16,411 2004 $ 13,030 $ 3,060 $ -- $ 16,090 2003 $ 11,144 $ 1,886 $ -- $ 13,030 2006 2005 Statutory federal income tax rate -34.00% -34.00% State tax benefit, net of federal taxes -3.91% -5.52% Other 10.61% -3.50% Valuation allowance on deferred tax assets 27.30% 43.02% ------------ ------------ Effective tax rate 0.00% 0.00% ============ ============ 12. Commitments and Contingencies  Other On October 4, 2006, SIGA exercised its right, pursuant to its Agreement and Plan of Merger, dated June 8, 2006, with PharmAthene, Inc. ("PHTN") (the "Merger Agreement"), to terminate the transaction pursuant to which a subsidiary of SIGA was going to merge with PHTN. Pursuant to Section 12.1(a) of the Merger Agreement, SIGA had an obligation to exclusively negotiate with PHTN the terms of a license agreement relating to SIGA-246. On December 20, 2006, PHTN filed an action against the Company with respect to, among other matters, this contract provision. In its Complaint, PHTN asks the Court to order SIGA to enter into a license agreement with PHTN with respect to SIGA-246, as well as issue a declaration that SIGA is obliged to execute such a license agreement, and award damages resulting from SIGA's supposed breach of that obligation. PHTN also alleges that SIGA breached an obligation to negotiate such a license agreement in good faith, as well as seeks damages for promissory estoppel and unjust enrichment based on supposed information, capital and assistance that PHTN allegedly provided to SIGA during the negotiation process. On January 9, 2007, SIGA filed a motion to dismiss the Complaint in its entirety for failure to state a claim upon which relief can be granted. The Court approved the parties' briefing schedule, with all briefing to be completed by April 13, 2007. From time to time, the Company is involved in disputes or legal proceedings arising in the ordinary course of business. The Company believes that there is no dispute or litigation pending that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows. 54 Loans and related Year ended December 31, Lease obligations interest payable Total commitments 2007 $ 576,948 $ 107,521 $ 684,469 2008 576,948 22,809 599,757 2009 579,648 -- 579,648 2010 466,448 -- 466,448 2011 443,748 -- 443,748 ------------ ------------ ------------ Total $ 2,643,740 $ 130,330 $ 2,774,070 ============ ============ ============ 13. Financial Information By Quarter (Unaudited) (in thousands, except for per share data) 55 2006 For The Quarter Ended March 31, June 30, September 30, December 31, Total ------------- ------------- --------------- -------------- ------------- Revenues $ 1,394 $ 1,459 $ 2,036 $ 2,369 $ 7,258 Selling, general & administrative $ 942 $ 1,493 $ 802 $ 1,387 $ 4,624 Research and development $ 1,658 $ 2,431 $ 2,156 $ 2,904 $ 9,149 Patent preparation fees $ 109 $ 113 $ 36 $ 37 $ 295 Operating loss $ (1,314) $ (2,579) $ (960) $ (1,957) $ (6,810) Net loss $ (2,834) $ (2,157) $ (657) $ (4,251) $ (9,899) Net loss per share: basic and diluted $ (0.11) $ (0.08) $ (0.02) $ (0.14) $ (0.35) Market price range for common stock High $ 1.56 $ 1.65 $ 1.63 $ 4.95 $ 4.95 Low $ 0.90 $ 1.22 $ 1.01 $ 1.49 $ 0.90 2005 For The Quarter Ended March 31, June 30, September 30, December 31, Total ------------- ------------- --------------- -------------- ------------- Revenues $ 1,459 $ 1,864 $ 2,910 $ 2,244 $ 8,477 Selling, general & administrative $ 845 $ 811 $ 415 $ 410 $ 2,481 Research and development $ 1,552 $ 2,583 $ 1,765 $ 2,395 $ 8,295 Patent preparation fees $ 175 $ 91 $ 8 $ (42) $ 232 Operating income (loss) $ (1,113) $ (1,621) $ 722 $ (520) $ (2,532) Net income (loss) $ (1,107) $ (1,630) $ 724 $ (275) $ (2,288) Net loss per share: basic and diluted $ (0.05) $ (0.07) $ 0.03 $ (0.00) $ (0.09) Market price range for common stock High $ 1.69 $ 1.44 $ 1.10 $ 1.35 $ 1.69 Low $ 1.28 $ 0.99 $ 0.70 $ 0.87 $ 0.70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, the Company's management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. There have been no changes in the Company's internal controls over financial reporting identified in connection with the evaluation by the Chief Executive Officer and Chief Financial Officer that occurred during the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information None. 56 PART III Item 10. Directors and Executive Officers of the Registrant Information required by this item is incorporated by reference from our Proxy Statement for the 2007 Annual Meeting of Shareholders. Item 11. Executive Compensation Information required by this item is incorporated by reference from our Proxy Statement for the 2007 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from our Proxy Statement for the 2007 Annual Meeting of Shareholders. Equity Compensation Plan Information The following table sets forth certain compensation plan information with respect to both equity compensation plans approved by security holders and equity compensation plans not approved by security holders as of December 31, 2006: (1) SIGA Technologies, inc., Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan. On December 31, 2006, options awarded outside of the Company's equity compensation plan included 125,000 options awarded to an employee and 65,000 options awarded to consultants. In May 2000, the Company awarded its Chief Scientific Officer options to acquire 125,000 shares of the Company's common stock at an exercise price of $2.00 per share. In July 2000, the Company entered into an agreement with a consultant to serve as the Company's public relations agent and awarded the consultant options to acquire shares of the Company's common stock. On December 31, 2006, the consultant holds 27,500 options and 37,500 options with an exercise price of $1.50 per share and $1.75 per share, respectively. 57 Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected in warrants and rights warrants and rights column (a)) Plan Category (a) (b) ( c ) Equity compensation plans approved by security holders (1) 7,546,145 $ 2.07 2,341,399 Equity compensation plans not approved by security holders 190,000 $ 2.00 -- Total 7,736,145 $ 2.07 2,341,399 Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference from our Proxy Statement for the 2007 Annual Meeting of Shareholders. Item 14. Principal Accountant Fees and Services Information required by this item is incorporated by reference from our Proxy Statement for the 2007 Annual Meeting of Shareholders. 58 PART IV Item 15. Exhibits and Financial Statement Schedules (a) (1) and (2). Financial Statements and Financial Statements Schedule. See Index to Financial Statements under Item 8 in Part II hereof where these documents are listed. (a) (3). Exhibits. The following is a list of exhibits: 59 Exhibit No. Description ------- ----------- 3(a) Restated Articles of Incorporation of the Company (Incorporated by reference to Form S-3 Registration Statement of the Company dated May 10, 2000 (No. 333-36682)). 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(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) 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)). 4(c) 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(d) Warrant Agreement between the Company and Stefan Capital, dated September 9, 1999 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 4(e) Registration Rights Agreement, dated as of May 23, 2003, between the Company and Plexus Vaccine Inc. (Incorporated by reference to Form 8-K of the Company filed June 9, 2003). 4(f) Registration Rights Agreement, dated as of August 13, 2003, between the Company and MacAndrews & Forbes Holdings Inc. (Incorporated by reference to Form 8-K of the Company filed August 18, 2003). 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)). Letter Agreement dated as of March 5, 1999 to continue the Research Support Agreement (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999).  60 10(d) Option Agreement between the Company and Oregon State University, dated as of November 30, 1999 and related Amendments to the Agreement (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(h) 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(i) 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(j) Collaborative Research and License Agreement between the Company and Wyeth, 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(k) Research Collaboration and License Agreement between the Company and The Washington 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(l) Settlement Agreement and Mutual Release between the Company and The Washington University, dated as of February 17, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(m) 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(p) Option Agreement between the Company and Ross Products Division of Abbott Laboratories, dated February 28, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(q) Agreement between the Company and Oregon State University for the Company to provide contract research services to the University dated September 24, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10(r) License and Research Agreements between the Company and the Regents of the University of California dated December 6, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10(s) Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan dated August 15, 2001 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001), as amended (as set forth in the Form 8-K of the Company filed May 27, 2005). 10(u) Research and License Agreement between the Company and TransTech Pharma, Inc. dated October 1, 2002 (Filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 initially filed with the Securities and Exchange Commission on March 31, 2003). 10(x) Contract between the Company and the Department of the US Army dated December 12, 2002 (Filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 initially filed with the Securities and Exchange Commission on March 31, 2003). 10(y) Contract between the Company and Four Star Group dated February 5, 2003 (Filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 initially filed with the Securities and Exchange Commission on March 31, 2003).  61 10(aa) Securities Purchase Agreement, dated as of August 13, 2003, between the Company and MacAndrews & Forbes Holdings Inc. (Incorporated by reference to Form 8-K of the Company filed August 18, 2003). 10(bb) Letter Agreement dated October 8, 2003 among the Company, MacAndrews & Forbes Holdings Inc. and TransTech Pharma, Inc. (Incorporated by reference to Form 8-K of the Company filed August 18, 2003). 10(dd) Non-Employee Director Compensation Summary Sheet (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005). 10(ee) Director Compensation Program, effective April 21, 2005 (as set forth in the Form 8-K of the Company filed April 26, 2005). 10(ff) Service Agreement, dated as of April 27, 2005, between the Company and TransTech Pharma, Inc. (Incorporated by reference to Form 8-K of the Company filed May 3, 2005). 10(gg) Master Security Agreement, dated as of April 29, 2005, between General Electric Capital Corporation and the Company (Incorporated by reference to Form 8-K of the Company filed May 3, 2005). 10(hh) Letter Agreement, dated as of August 5, 2005, between the Company and John Odden (Incorporated by reference to Form 8-K of the Company filed August 11, 2005). 10(ii) Agreement, dated as of September 14, 2005, between Saint Louis University and the Company (Incorporated by reference to Form 8-K of the Company filed September 20, 2005). 10(jj) Agreement, dated as of September 22, 2005, between the United States Army Medical Research and Material Command and the Company (Incorporated by reference to Form 8-K of the Company filed September 27, 2005). 10(kk) Securities Purchase Agreement, dated as of November 2, 2005, between Iroquois Master Fund Ltd., Cranshire Capital, L.P., Omicron Master Trust, Smithfield Fiduciary LLC and the Company (Incorporated by reference to Form 8-K of the Company filed November 4, 2005). 10(ll) Exclusive Finder's Agreement, dated as of November 1, 2005, between the Shemano Group, Inc. and the Company (Incorporated by reference to Form 8-K of the Company filed November 4, 2005). 10(mm) Letter Agreement, dated as of February 1, 2006, between the Company and Thomas N. Konatich (Incorporated by reference to Form 8-K of the Company filed February 7, 2006). 10(oo) Bridge Note Purchase Agreement, dated as of March 20, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed March 22, 2006). 10(pp) Security Agreement, dated as of March 20, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed March 22, 2006). 10(qq) 8% Note, dated as of March 20, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed March 22, 2006). 10(rr) Separation Agreement, dated as of March 31, 2006, between the Company and Bernard Kasten (Incorporated by reference to Form 8-K of the Company filed April 3, 2006). 10(ss) 8% Note, dated as of April 19, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed April 20, 2006). 10(tt) Voting Agreement, dated as of June 8, 2006, among the Company, TransTech Pharma, Inc., MacAndrews & Forbes, Inc., Howard Gittis, Donald G. Drapkin, James J. Antal, Thomas E. Constance, Mehmet C. Oz,  (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 an * and filed separately with the SEC with a request for Confidential Treatment. 62 Eric A. Rose and Paul G. Savas (Incorporated by reference to Form 8-K of the Company filed June 13, 2006). 10(uu) Agreement and Plan of Merger, dated as of June 8, 2006, among the Company, SIGA Acquisition Corp. and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed June 13, 2006). 10(vv) 8% Note, dated as of June 19, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed June 20, 2006). 10(ww) Agreement, dated as of September 29, 2006, between SIGA Technologies, Inc. and the National Institute of Allergy and Infectious Diseases of the National Institutes for Health (Incorporated by reference to Form 10-Q/A of the Company filed November 13, 2006). 10(xx) Finder's Agreement, dated as of October 18, 2006, between the Company and Empire Financial Group, Inc. (Incorporated by reference to Form 8-K of the Company filed October 20, 2006). 10(yy) Securities Purchase Agreement, dated as of October 18, 2006, between the Company, Iroquois Master Fund Ltd., Cranshire Capital, L.P., Omicron Master Trust, Rockmore Investment Master Fund, Ltd., and Smithfield Fiduciary LLC (Incorporated by reference to Form 8-K of the Company filed October 20, 2006). 10(zz) Amended and Restated Employment Agreement, dated as of January 22, 2007, between the Company and Dennis E. Hruby (Incorporated by reference to Form 8-K of the Company filed January 22, 2007). 10(aaa) Amended and Restated Employment Agreement, dated as of January 22, 2007, between the Company and Thomas N. Konatich (Incorporated by reference to Form 8-K of the Company filed January 22, 2007). 10(bbb) Amended and Restated Employment Agreement, dated as of January 31, 2007, between the Company and Eric A. Rose (Incorporated by reference to Form 8-K of the Company filed January 31, 2007). 14 The Company's Code of Ethics and Business Conduct (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003). 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer. 31.2 Certification pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer. ---------- 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 TECHNOLOGIES, INC. (Registrant) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 63 Date: March 15, 2007 By: /s/ Eric A. Rose ----------------------- Eric A. Rose, M.D. Chief Executive Officer Signature Title of Capacities Date /s/ Eric A. Rose, M.D Chief Executive Officer and March 13, 2007 ------------------------------ Chairman of the Board Eric A. Rose, M.D. (Principal Executive Officer) /s/ Thomas N. Konatich Chief Financial Officer March 12, 2007 ------------------------------ (Principal Financial Officer and Thomas N. Konatich Principal Accounting Officer) /s/ Donald G. Drapkin Director March 12, 2007 ------------------------------ Donald G. Drapkin /s/ James J. Antal Director March 14, 2007 ------------------------------ James J. Antal /s/ Thomas E. Constance Director March 12, 2007 ------------------------------ Thomas E. Constance /s/ Adnan M. Mjalli, Ph.D. Director March 15, 2007 ------------------------------ Adnan M. Mjalli, Ph.D. /s/ Mehmet C. Oz, M.D. Director March 13, 2007 ------------------------------ Mehmet C. Oz, M.D. /s/ Scott Hammer, M.D Director March 13, 2007 ------------------------------ Scott Hammer, M.D. /s/ Paul G. Savas Director March 13, 2007 ------------------------------ Paul G. Savas /s/ Judy S. Slotkin Director March 12, 2007 ------------------------------ Judy S. Slotkin /s/ Michael Weiner, M.D. Director March 12, 2007 ------------------------------ Michael Weiner, M.D. This Page Intentionally left Blank EXHIBIT INDEX Exhibit No. Description ------- ----------- 3(a) Restated Articles of Incorporation of the Company (Incorporated by reference to Form S-3 Registration Statement of the Company dated May 10, 2000 (No. 333-36682)). 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(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) 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)). 4(c) 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(d) Warrant Agreement between the Company and Stefan Capital, dated September 9, 1999 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 4(e) Registration Rights Agreement, dated as of May 23, 2003, between the Company and Plexus Vaccine Inc. (Incorporated by reference to Form 8-K of the Company filed June 9, 2003). 4(f) Registration Rights Agreement, dated as of August 13, 2003, between the Company and MacAndrews & Forbes Holdings Inc. (Incorporated by reference to Form 8-K of the Company filed August 18, 2003). 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)). Letter Agreement dated as of March 5, 1999 to continue the Research Support Agreement (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(d) Option Agreement between the Company and Oregon State University, dated as of November 30, 1999 and related Amendments to the Agreement (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(h) 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(i) 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(j) Collaborative Research and License Agreement between the Company and Wyeth, 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(k) Research Collaboration and License Agreement between the Company and The Washington 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(l) Settlement Agreement and Mutual Release between the Company and The Washington University, dated as of February 17, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(m) 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(p) Option Agreement between the Company and Ross Products Division of Abbott Laboratories, dated February 28, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999). 10(q) Agreement between the Company and Oregon State University for the Company to provide contract research services to the University dated September 24, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10(r) License and Research Agreements between the Company and the Regents of the University of California dated December 6, 2000 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000). 10(s) Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan dated August 15, 2001 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001), as amended (as set forth in the Form 8-K of the Company filed May 27, 2005). 10(u) Research and License Agreement between the Company and TransTech Pharma, Inc. dated October 1, 2002 (Filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 initially filed with the Securities and Exchange Commission on March 31, 2003). 10(x) Contract between the Company and the Department of the US Army dated December 12, 2002 (Filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 initially filed with the Securities and Exchange Commission on March 31, 2003). 10(y) Contract between the Company and Four Star Group dated February 5, 2003 (Filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 initially filed with the Securities and Exchange Commission on March 31, 2003). 10(aa) Securities Purchase Agreement, dated as of August 13, 2003, between the Company and MacAndrews & Forbes Holdings Inc. (Incorporated by reference to Form 8-K of the Company filed August 18, 2003). 10(bb) Letter Agreement dated October 8, 2003 among the Company, MacAndrews & Forbes Holdings Inc. and TransTech Pharma, Inc. (Incorporated by reference to Form 8-K of the Company filed August 18, 2003). 10(dd) Non-Employee Director Compensation Summary Sheet (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005). 10(ee) Director Compensation Program, effective April 21, 2005 (as set forth in the Form 8-K of the Company filed April 26, 2005). 10(ff) Service Agreement, dated as of April 27, 2005, between the Company and TransTech Pharma, Inc. (Incorporated by reference to Form 8-K of the Company filed May 3, 2005). 10(gg) Master Security Agreement, dated as of April 29, 2005, between General Electric Capital Corporation and the Company (Incorporated by reference to Form 8-K of the Company filed May 3, 2005). 10(hh) Letter Agreement, dated as of August 5, 2005, between the Company and John Odden (Incorporated by reference to Form 8-K of the Company filed August 11, 2005). 10(ii) Agreement, dated as of September 14, 2005, between Saint Louis University and the Company (Incorporated by reference to Form 8-K of the Company filed September 20, 2005). 10(jj) Agreement, dated as of September 22, 2005, between the United States Army Medical Research and Material Command and the Company (Incorporated by reference to Form 8-K of the Company filed September 27, 2005). 10(kk) Securities Purchase Agreement, dated as of November 2, 2005, between Iroquois Master Fund Ltd., Cranshire Capital, L.P., Omicron Master Trust, Smithfield Fiduciary LLC and the Company (Incorporated by reference to Form 8-K of the Company filed November 4, 2005). 10(ll) Exclusive Finder's Agreement, dated as of November 1, 2005, between the Shemano Group, Inc. and the Company (Incorporated by reference to Form 8-K of the Company filed November 4, 2005). 10(mm) Letter Agreement, dated as of February 1, 2006, between the Company and Thomas N. Konatich (Incorporated by reference to Form 8-K of the Company filed February 7, 2006). 10(oo) Bridge Note Purchase Agreement, dated as of March 20, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed March 22, 2006). 10(pp) Security Agreement, dated as of March 20, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed March 22, 2006). 10(qq) 8% Note, dated as of March 20, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed March 22, 2006). 10(rr) Separation Agreement, dated as of March 31, 2006, between the Company and Bernard Kasten (Incorporated by reference to Form 8-K of the Company filed April 3, 2006). 10(ss) 8% Note, dated as of April 19, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed April 20, 2006). 10(tt) Voting Agreement, dated as of June 8, 2006, among the Company, TransTech Pharma, Inc., MacAndrews & Forbes, Inc., Howard Gittis, Donald G. Drapkin, James J. Antal, Thomas E. Constance, Mehmet C. Oz, Eric A. Rose and Paul G. Savas (Incorporated by reference to Form 8-K of the Company filed June 13, 2006). 10(uu) Agreement and Plan of Merger, dated as of June 8, 2006, among the Company, SIGA Acquisition Corp. and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed June 13, 2006).  (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 an * and filed separately with the SEC with a request for Confidential Treatment. 10(vv) 8% Note, dated as of June 19, 2006, between the Company and PharmAthene, Inc. (Incorporated by reference to Form 8-K of the Company filed June 20, 2006). 10(ww) Agreement, dated as of September 29, 2006, between SIGA Technologies, Inc. and the National Institute of Allergy and Infectious Diseases of the National Institutes for Health (Incorporated by reference to Form 10-Q/A of the Company filed November 13, 2006). 10(xx) Finder's Agreement, dated as of October 18, 2006, between the Company and Empire Financial Group, Inc. (Incorporated by reference to Form 8-K of the Company filed October 20, 2006). 10(yy) Securities Purchase Agreement, dated as of October 18, 2006, between the Company, Iroquois Master Fund Ltd., Cranshire Capital, L.P., Omicron Master Trust, Rockmore Investment Master Fund, Ltd., and Smithfield Fiduciary LLC (Incorporated by reference to Form 8-K of the Company filed October 20, 2006). 10(zz) Amended and Restated Employment Agreement, dated as of January 22, 2007, between the Company and Dennis E. Hruby (Incorporated by reference to Form 8-K of the Company filed January 22, 2007). 10(aaa) Amended and Restated Employment Agreement, dated as of January 22, 2007, between the Company and Thomas N. Konatich (Incorporated by reference to Form 8-K of the Company filed January 22, 2007). 10(bbb) Amended and Restated Employment Agreement, dated as of January 31, 2007, between the Company and Eric A. Rose (Incorporated by reference to Form 8-K of the Company filed January 31, 2007). 14 The Company's Code of Ethics and Business Conduct (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003). 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer. 31.2 Certification pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer. ---------- Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Siga Acquisition Corp. Delaware Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-139082, 333-138796, 333-129756, 333-132886, 333-129756, 333-36682, 333-43750, 333-64414, 333-72553, 333-74390, 333-103231, 333-120742 and 333-112356) and Forms S-8 (Nos. 333-35992, 333-56216 and 333-112935) of SIGA Technologies, Inc. of our report dated March 8, 2007 relating to the financial statements, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 13, 2007 Exhibit 31.1 Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Dr. Eric A. Rose, M.D., certify that: 1. I have reviewed this annual report on Form 10-K of SIGA Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2007 /s/ Eric A. Rose ---------------------------------- Dr. Eric A. Rose, M.D. Chief Executive Officer Exhibit 31.2 Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Thomas N. Konatich, certify that: 1. I have reviewed this annual report on Form 10-K of SIGA Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2007 /s/ Thomas N. Konatich ---------------------------------- Thomas N. Konatich Chief Financial Officer Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of SIGA Technologies, Inc. (the "Company") on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. Eric A. Rose, M.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Eric A. Rose ----------------------- Dr. Eric A. Rose, M.D. Chief Executive Officer March 13, 2007 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of SIGA Technologies, Inc. (the "Company") on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas N. Konatich, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Thomas N. Konatich ----------------------- Thomas N. Konatich Chief Financial Officer March 15, 2007 

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