0001558370-21-015483.txt : 20211110 0001558370-21-015483.hdr.sgml : 20211110 20211110160703 ACCESSION NUMBER: 0001558370-21-015483 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 58 CONFORMED PERIOD OF REPORT: 20210930 FILED AS OF DATE: 20211110 DATE AS OF CHANGE: 20211110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Armata Pharmaceuticals, Inc. CENTRAL INDEX KEY: 0000921114 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 911549568 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37544 FILM NUMBER: 211396565 BUSINESS ADDRESS: STREET 1: 4503 GLENCOE AVENUE CITY: MARINA DEL REY STATE: CA ZIP: 90292 BUSINESS PHONE: 310-665-2928 MAIL ADDRESS: STREET 1: 4503 GLENCOE AVENUE CITY: MARINA DEL REY STATE: CA ZIP: 90292 FORMER COMPANY: FORMER CONFORMED NAME: AmpliPhi Biosciences Corp DATE OF NAME CHANGE: 20130222 FORMER COMPANY: FORMER CONFORMED NAME: TARGETED GENETICS CORP /WA/ DATE OF NAME CHANGE: 19940331 10-Q 1 armp-20210930x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

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 number: 001-37544

ARMATA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Washington

91-1549568

(State or other jurisdiction of

(I.R.S. Employer Identification Number)

incorporation or organization)

4503 Glencoe Avenue

Marina del Rey, CA

90292

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (310) 665-2928

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

ARMP

NYSE American

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        No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes        No    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company as defined in Rule 12b-2 of the Exchange Act. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  

Accelerated filer  

Non-accelerated filer    

Smaller reporting company  

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     No

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of November 5, 2021 was 27,086,299.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

PART II. OTHER INFORMATION

27

 

 

Item 1.

Legal Proceedings

27

 

 

Item 1A.

Risk Factors

27

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

Item 3.

Defaults upon Senior Securities

52

 

 

Item 4.

Mine Safety Disclosures

52

 

 

Item 5.

Other Information

52

 

 

Item 6.

Exhibits

53

 

 

SIGNATURES

55

Armata Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

    

September 30, 2021

    

December 31, 2020

    

(unaudited)

Assets

Current assets

Cash and cash equivalents

$

12,076,000

$

9,649,000

Awards receivable

1,251,000

561,000

Prepaid expenses and other current assets

 

851,000

 

636,000

Total current assets

 

14,178,000

 

10,846,000

Restricted cash

1,200,000

1,200,000

Property and equipment, net

 

2,107,000

 

2,047,000

Operating lease right-of-use asset

 

10,531,000

 

10,790,000

In-process research and development

10,256,000

10,256,000

Goodwill

3,490,000

3,490,000

Other assets

 

909,000

 

887,000

Total assets

$

42,671,000

$

39,516,000

Liabilities and stockholders’ equity

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable and accrued liabilities

$

1,811,000

$

1,929,000

Accrued compensation

1,714,000

563,000

Current portion of operating lease liabilities

1,729,000

1,551,000

Paycheck Protection Program Loan

722,000

Deferred asset acquisition consideration

1,940,000

Total current liabilities

 

5,254,000

 

6,705,000

Operating lease liabilities, net of current portion

10,585,000

10,877,000

Deferred tax liability

3,077,000

3,077,000

Total liabilities

 

18,916,000

 

20,659,000

Stockholders’ equity

 

  

 

  

Common stock, $0.01 par value; 217,000,000 shares authorized; 24,965,086 and 18,688,461 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

 

249,000

 

187,000

Additional paid-in capital

 

220,316,000

 

198,372,000

Accumulated deficit

 

(196,810,000)

 

(179,702,000)

Total stockholders’ equity

 

23,755,000

 

18,857,000

Total liabilities and stockholders’ equity

$

42,671,000

$

39,516,000

See accompanying notes to condensed consolidated financial statements.

3

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Grant revenue

$

1,251,000

$

288,000

$

3,485,000

$

319,000

Operating expenses

Research and development

 

5,626,000

4,066,000

 

15,201,000

 

9,464,000

General and administrative

 

1,768,000

1,845,000

 

6,058,000

 

5,989,000

Total operating expenses

7,394,000

5,911,000

21,259,000

15,453,000

Loss from operations

 

(6,143,000)

 

(5,623,000)

 

(17,774,000)

 

(15,134,000)

Other income (expense)

 

  

 

  

 

  

 

  

Gain upon extinguishment of Paycheck Protection Program loan

726,000

726,000

Interest income

 

4,000

4,000

 

28,000

Interest expense

(2,000)

(150,000)

(64,000)

(451,000)

Total other income (expense), net

 

724,000

 

(146,000)

 

666,000

 

(423,000)

Net loss

$

(5,419,000)

$

(5,769,000)

$

(17,108,000)

$

(15,557,000)

Per share information:

 

  

 

  

 

  

 

  

Net loss per share, basic and diluted

$

(0.22)

$

(0.31)

$

(0.73)

$

(0.99)

Weighted average shares outstanding, basic and diluted

24,820,233

18,394,614

23,363,113

15,740,858

See accompanying notes to condensed consolidated financial statements.

4

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended September 30, 2021 and 2020

Stockholders’ Equity

Common Stock

Additional

Total

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances, June 30, 2020

 

18,641,501

$

186,000

$

196,761,000

$

(167,309,000)

$

29,638,000

Exercise of employee stock options

27,382

1,000

86,000

87,000

Stock-based compensation

 

663,000

 

663,000

Net loss

 

(5,769,000)

 

(5,769,000)

Balances, September 30, 2020

 

18,668,883

$

187,000

$

197,510,000

$

(173,078,000)

$

24,619,000

Balances, June 30, 2021

 

24,937,826

$

249,000

$

219,761,000

$

(191,391,000)

$

28,619,000

Sale of common stock, net of issuance costs

Exercises of stock options

27,383

86,000

86,000

Forfeiture of restricted stock awards

(123)

Stock-based compensation

469,000

469,000

Net loss

 

(5,419,000)

 

(5,419,000)

Balances, September 30, 2021

 

24,965,086

$

249,000

$

220,316,000

$

(196,810,000)

$

23,755,000

See accompanying notes to condensed consolidated financial statements.

5

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Nine months ended September 30, 2021 and 2020

Stockholders’ Equity

Common Stock

Additional

Total

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances, December 31, 2019

 

9,922,758

$

99,000

$

172,015,000

$

(157,521,000)

$

14,593,000

Sale of common stock, net of issuance costs

8,710,800

87,000

22,723,000

22,810,000

Exercise of warrants

14,464

81,000

81,000

Return of restricted stock awards for tax withholdings

(2,511)

(8,000)

(8,000)

Forfeiture of restricted stock awards

 

(4,010)

 

Exercise of employee stock options

27,382

1,000

86,000

87,000

Stock-based compensation

 

2,613,000

 

2,613,000

Net loss

 

(15,557,000)

 

(15,557,000)

Balances, September 30, 2020

 

18,668,883

$

187,000

$

197,510,000

$

(173,078,000)

$

24,619,000

Balances, December 31, 2020

 

18,688,461

$

187,000

$

198,372,000

$

(179,702,000)

$

18,857,000

Sale of common stock, net of issuance costs

6,153,847

61,000

19,302,000

19,363,000

Exercises of warrants

52,000

1,000

290,000

291,000

Return of restricted stock awards for tax withholdings

(25,424)

(106,000)

(106,000)

Forfeiture of restricted stock awards

(1,047)

Exercise of stock options

73,517

240,000

240,000

Issuance of inducement stock awards

23,732

Stock-based compensation

2,218,000

2,218,000

Net loss

 

(17,108,000)

 

(17,108,000)

Balances, September 30, 2021

 

24,965,086

$

249,000

$

220,316,000

$

(196,810,000)

$

23,755,000

6

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 

    

2021

    

2020

(unaudited)

(unaudited)

Operating activities:

Net loss

$

(17,108,000)

$

(15,557,000)

Adjustments required to reconcile net loss to net cash used in operating activities:

Depreciation

 

892,000

 

840,000

Gain upon extinguishment of Paycheck Protection Program loan

(722,000)

Stock-based compensation

2,218,000

2,613,000

Non-cash interest expense

 

60,000

 

457,000

Payment of accreted interest for deferred consideration for asset acquisition

(586,000)

Changes in operating assets and liabilities:

 

 

Award receivable

(690,000)

(241,000)

Accounts payable and accrued liabilities

 

(100,000)

 

492,000

Accrued compensation

1,151,000

(21,000)

Operating lease right-of-use asset and liability, net

145,000

611,000

Prepaid expenses and other current assets

 

(237,000)

 

(1,162,000)

Net cash used in operating activities

 

(14,977,000)

 

(11,968,000)

Investing activities:

 

  

 

  

Purchases of property and equipment

(1,076,000)

(458,000)

Net cash used in investing activities

 

(1,076,000)

 

(458,000)

Financing activities:

 

  

 

  

Principal payment of deferred consideration for asset acquisition

(1,414,000)

(1,000,000)

Proceeds from Paycheck Protection Program Loan

717,000

Proceeds from sale of common stock, net of offering costs

19,363,000

22,893,000

Proceeds from exercise of warrants and stock options

531,000

168,000

Net cash provided by financing activities

 

18,480,000

 

22,778,000

Net increase in cash, cash equivalents and restricted cash

 

2,427,000

 

10,352,000

Cash, cash equivalents and restricted cash, beginning of period

 

10,849,000

 

6,733,000

Cash, cash equivalents and restricted cash, end of period

$

13,276,000

$

17,085,000

Supplemental disclosure of cash flow information:

 

  

 

  

Paycheck Protection Program loan forgiveness

$

722,000

$

Unpaid offering costs

$

$

65,000

Property and equipment included in accounts payable

$

124,000

$

145,000

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:

Nine Months Ended September 30, 

2021

    

2020

Cash and cash equivalents

$

12,076,000

$

15,885,000

Restricted cash

1,200,000

1,200,000

Cash, cash equivalents and restricted cash

$

13,276,000

$

17,085,000

See accompanying notes to condensed consolidated financial statements.

7

Armata Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of the Business

Armata Pharmaceuticals, Inc. (“Armata”, and together with its subsidiaries referred to herein as, the “Company”) is a clinical-stage biotechnology company focused on the development of precisely targeted bacteriophage therapeutics for the treatment of antibiotic-resistant and difficult-to-treat bacterial infections using its proprietary bacteriophage-based technology. The Company was created as a result of a business combination between C3J Therapeutics, Inc. (“C3J”), a Washington corporation, and AmpliPhi Biosciences Corporation (“AmpliPhi”) that closed on May 9, 2019, where Ceres Merger Sub, Inc., a wholly owned subsidiary of AmpliPhi, merged with and into C3J (the ”Merger”), with C3J surviving the Merger as a wholly owned subsidiary of AmpliPhi. Immediately prior to the closing of the Merger, AmpliPhi changed its name to Armata Pharmaceuticals, Inc. Armata’s common stock is traded on the NYSE American exchange under the ticker symbol “ARMP”.

2. Liquidity

The Company has prepared its consolidated financial statements on a going concern basis, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business. However, the Company has incurred net losses since its inception and has negative operating cash flows. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.

On October 28, 2021, the Company entered into a securities purchase agreement (the “October 2021 Securities Purchase Agreement”) with the Cystic Fibrosis Foundation, a Delaware corporation (“CFF”), the Company’s partner for its lead Phase 1b/2 clinical development program, and Innoviva Strategic Opportunities LLC, a wholly-owned subsidiary of Innoviva, Inc. (Nasdaq: INVA) (collectively, “Innoviva”) for the private placement of newly issued shares of common stock, par value $0.01 per share, of the Company (“Common Stock”). Pursuant to the October 2021 Securities Purchase Agreement, the Company issued and sold 909,091 shares to CFF and 1,212,122 shares to Innoviva, each at a per share price of $3.30 (the “October 2021 Private Placements”). The Company received aggregate gross proceeds from the October 2021 Private Placements of approximately $7.0 million, before deducting transaction expenses.

On January 26, 2021, the Company entered into a securities purchase agreement (the “January 2021 Securities Purchase Agreement”) with Innoviva, pursuant to which the Company agreed to issue and sell to Innoviva, in a private placement, up to 6,153,847 newly issued shares of Common Stock, and warrants (the “Common Warrants”) to purchase up to 6,153,847 shares of Common Stock, with an exercise price per share of $3.25 (the “January 2021 Private Placement”).

 

The January 2021 Private Placement closed in two tranches. On January 26, 2021 and concurrently with entering into the January 2021 Securities Purchase Agreement, the Company completed the first tranche (the “First Closing”) of the January 2021 Private Placement. At the First Closing, Innoviva purchased 1,867,912 shares of Common Stock and Common Warrants to purchase 1,867,912 shares of common stock, for an aggregate purchase price of approximately $6.1 million.

 

At the closing of the second tranche (the “Second Closing”), which was approved by the Company’s stockholders, Innoviva purchased 4,285,935 shares of Common Stock and Common Warrants to purchase 4,285,935 shares of Common Stock for an aggregate purchase price of $13.9 million. The Second Closing was completed on March 17, 2021.

On March 27, 2020, the Company completed a private placement transaction and sold to Innoviva Inc. 8,710,800 newly issued shares of Common Stock and warrants to purchase 8,710,800 shares of common stock, with an exercise

8

price per share of $2.87 (the “2020 Private Placement”). Each share of common stock was sold together with one common warrant granting the warrant holder the right to purchase an additional share of common stock at $2.87 per share. The 2020 Private Placement was closed in two tranches raising total gross proceeds of $25.0 million.

As of September 30, 2021, the Company had cash and cash equivalents of $12.1 million. Considering the Company’s current cash resources, management believes the Company’s existing resources will be sufficient to fund the Company’s planned operations into the first quarter of 2022. For the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional capital.

Management plans to raise additional capital through equity offerings, debt financings, or other capital sources, including potential collaborations, licenses and other similar arrangements. While management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are not entirely within its control and cannot be assessed as being probable of occurring. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. The Company may not be able to secure additional financing in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity securities to raise additional funds, its existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products on terms that are not favorable to the Company. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate its research and development programs or other operations. If any of these events occur, the Company’s ability to achieve the development and commercialization goals would be adversely affected.

3. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Armata and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements of the Company should be read in conjunction with the audited financial statements and accompanying notes thereto as of and for the year ended December 31, 2020 included in the Company’s Form 10-K, filed with the U.S. Securities and Exchange Commission on March 18, 2021. The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements. Any reference in the Notes to applicable guidance is meant to refer to authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

 

In the opinion of management, the accompanying consolidated financial statements include all adjustments that are of a normal and recurring nature and that are necessary for the fair presentation of the Company’s financial position and the results of its operations and cash flows for the periods presented. Interim results are not necessarily indicative of results for the full year or any future period.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in its consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates and judgments, which are based on historical and anticipated results and trends, and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.

9

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, other current assets, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments.

In-Process Research and Development (“IPR&D”)

IPR&D assets are intangible assets with indefinite lives and are not subject to amortization. The Company’s IPR&D assets represent capitalized incomplete research projects that the Company acquired through the Merger, which is related to the development of AP-SA01, a phage combination for the treatment of Staphylococcus aureus infections (“S. aureus”). Such assets are initially measured at their acquisition-date fair values and are subject to impairment testing at least annually until completion or abandonment of research and development efforts associated with the projects. Upon successful completion of each project, the Company makes a determination as to the then remaining useful life of the intangible asset and begins amortization.

Goodwill

Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. Goodwill is not subject to amortization and is required to be tested for impairment at least on an annual basis. The Company tests goodwill for impairment as of December 31 of each year. The Company determines whether goodwill may be impaired by comparing the carrying value of the single reporting unit, including goodwill, to the fair value of the reporting unit. If the fair value is less than the carrying amount, a more detailed analysis is performed to determine whether goodwill is impaired. The impairment loss, if any, is measured as the excess of the carrying value of the goodwill over the implied fair value of the goodwill and is recorded in the Company’s consolidated statements of operations.

Settlement of Zero-coupon Debt Instrument

The Company’s deferred purchase consideration arrangement with Synthetic Genomics (Note 11) does not have a stated interest rate. Upon repayment of deferred purchase consideration, the Company classifies the portion attributable to accreted interest as a cash outflow for operating activities, and the portion relating to principal as a cash outflow for financing activities.

Basic and Diluted Net Loss per Share

Net earnings or loss per share (“EPS”) is calculated in accordance with the applicable accounting guidance provided in ASC 260, Earnings per Share. The Company uses the two-class method for the computation and presentation of net income (loss) per common share attributable to common stockholders. The two-class method is an earnings allocation formula that calculates basic and diluted net income (loss) per common share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Under the two-class method, warrants issued to Innoviva are assumed to participate in undistributed earnings on an as-exercised basis, in accordance with the warrant agreements. Undistributed net losses are allocated entirely to common shareholders since the participating security has no contractual obligation to share in the losses.

Accordingly, basic income or loss per share is calculated by dividing net income or loss by the weighted-average number of common shares outstanding, or using the two-class method, whichever is more dilutive.  Diluted net income or loss per share is computed using the more dilutive of the treasury stock method which reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock, or the two-class method.

The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of liability classified warrants, and the presumed exercise of such securities are dilutive to net loss per share for the period, an adjustment to net loss available to common stockholders used in the calculation is required to remove the change in fair value of the warrants from the numerator for the period.

10

Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method.

Grants and Awards

In applying the provisions of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), Armata has determined that grants and awards are out of the scope of ASC 606 because the funding entities do not meet the definition of a “customer”, as defined by ASC 606, as there is not considered to be a transfer of control of goods or services. With respect to each grant or award, the Company determines if it has a collaboration in accordance with ASC Topic 808, Collaborative Arrangements (“ASC 808”). To the extent the grant or award is within the scope of ASC 808, the Company recognizes amounts received as a contra-expense or grant revenue on the consolidated statement of operations when the related research and development expenses are incurred. For grant and awards outside the scope of ASC 808, the Company applies ASC 606 or International Accounting Standards No. 20, Accounting for Government Grants and Disclosure of Government Assistance, by analogy, and revenue is recognized when the Company incurs expenses related to the grants for the amount the Company is entitled to under the provisions of the contract.

Armata also considers the guidance in ASC Topic 730, Research and Development (“ASC 730”), which requires an assessment, at the inception of the grant or award, of whether the agreement is a liability. If Armata is obligated to repay funds received regardless of the outcome of the related research and development activities, then Armata is required to estimate and recognize that liability. Alternatively, if Armata is not required to repay the funds, then payments received are recorded as revenue or contra-expense as the expenses are incurred.

Deferred grant or award liability represents award funds received or receivable for which the allowable expenses have not yet been incurred as of the balance sheet date.

Research and Development Expenses

Research and development (“R&D”) costs consist primarily of direct and allocated salaries, incentive compensation, stock-based compensation and other personnel-related costs, facility costs, and third-party services. Third-party services include studies and clinical trials conducted by clinical research organizations. R&D activities are expensed as incurred. The Company records accruals for estimated ongoing clinical trial expenses. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Judgments and estimates are made in determining the accrued balances at the end of the reporting period.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This new guidance is effective for calendar-year smaller reporting public entities in the first quarter of 2023. The Company is currently evaluating the impact of this ASU and does not expect that adoption of this standard will have a material impact on its consolidated financial statements or related disclosures.

In August 2020, the FASB issued ​ASU No. 2020-06​, ​Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)​ (“ASU 2020-06”). ​ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in ASU

11

2020-06 are effective for the Company as of January 1, 2024. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements and does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Income Taxes (“ASC 740”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance became effective for the Company on January 1, 2021 and the adoption did not have a material impact on its consolidated financial statements or related disclosures.

4. Net Loss per Share

The following outstanding securities as of September 30, 2021 and 2020 have been excluded from the computation of diluted weighted average shares outstanding, as they would have been anti-dilutive:

    

September 30, 2021

    

September 30, 2020

Options

2,439,651

 

1,446,614

Unvested restricted stock units

30,000

Restricted stock awards

 

124,018

 

262,558

Warrants

16,647,219

10,547,618

Total

 

19,240,888

 

12,256,790

5. Balance Sheet Details

Property and Equipment

Property and equipment as of September 30, 2021 and December 31, 2020 consisted of the following:

    

September 30, 2021

    

December 31, 2020

Laboratory equipment

$

7,362,000

$

6,547,000

Furniture and fixtures

817,000

719,000

Office and computer equipment

 

451,000

 

413,000

Leasehold improvements

 

3,423,000

 

3,423,000

Total

12,053,000

11,102,000

Less: accumulated depreciation

 

(9,946,000)

 

(9,055,000)

Property and equipment, net

$

2,107,000

$

2,047,000

Depreciation expense totaled $0.3 million for each of the three months ended September 30, 2021 and 2020, respectively. Depreciation expense totaled $0.9 million and $0.8 million for the nine months ended September 30, 2021 and 2020, respectively.

6. Paycheck Protection Program Loan

In April 2020, the Company received loan proceeds of $717,000 (“PPP Loan”) under the Paycheck Protection Program (“PPP”).  The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business, calculated as provided under the PPP. The PPP Loan was unsecured, evidenced by a promissory note (the “Note”) given by the Company as borrower through its bank, serving as the lender.  The interest rate on the Note was 1.0% per annum.

12

In July 2021, the Company received notification of forgiveness of the full loan amount and associated interest from the Small Business Administration. The Company recorded a gain of $0.7 million from the PPP loan extinguishment in the statement of operations during the three months ended September 30, 2021.

7. Stockholders’ Equity

Private Investment

October 2021 Private Placement

On October 28, 2021, the Company entered into the October 2021 Securities Purchase Agreement with CFF and Innoviva for the private placement of newly issued shares of the Company’s common stock. Pursuant to the October 2021 Securities Purchase Agreement, the Company issued and sold 909,091 shares to CFF and 1,212,122 shares to Innoviva, each at a per share price of $3.30. The Company received aggregate gross proceeds from the October 2021 Private Placements of approximately $7.0 million, before deducting transaction expenses.

January 2021 Private Placement

On January 26, 2021, the Company entered into the January 2021 Securities Purchase Agreement with Innoviva, pursuant to which the Company agreed to issue and sell to Innoviva, in a private placement, up to 6,153,847 newly issued shares of common stock, and Common Warrants to purchase up to 6,153,847 shares of common stock, with an exercise price per share of $3.25.

 

The January 2021 Private Placement closed in two tranches. On January 26, 2021 and concurrently with entering into the January 2021 Securities Purchase Agreement, the Company completed the first tranche (the “First Closing”) of the January 2021 Private Placement. At the First Closing, Innoviva purchased 1,867,912 shares and Common Warrants to purchase 1,867,912 shares of common stock, for an aggregate purchase price of approximately $6.1 million.

 

At the closing of the second tranche (the “Second Closing”), which was approved by the Company’s stockholders, Innoviva purchased 4,285,935 shares and Common Warrants to purchase 4,285,935 shares of common stock for an aggregate purchase price of $13.9 million. The Second Closing was completed on March 17, 2021.

On January 27, 2020, the Company entered into a securities purchase agreement with Innoviva, pursuant to which the Company agreed to issue and sell to Innoviva, in the 2020 Private Placement, 8,710,800 newly issued shares of the Company’s common stock and warrants to purchase 8,710,800 shares of common stock, with an exercise price per share of $2.87. Each share of common stock was sold together as a unit with one common warrant granting the warrant holder the right to purchase an additional share of common stock at $2.87 per share. The 2020 Private Placement occurred in two tranches. The first closing occurred on February 12, 2020, at which time Innoviva purchased 993,139 units in exchange for an aggregate gross cash payment of approximately $2.8 million. On March 27, 2020, the second closing occurred subsequent to shareholder approval, at which time Innoviva purchased 7,717,661 units in exchange for aggregate gross proceeds of $22.2 million.

The warrants issued to Innoviva during 2021 and 2020 expire five years from the respective issuance date. The Company reviewed the authoritative accounting guidance and determined that the warrants meet the criteria to be accounted for as permanent equity.

13

Warrants

On September 30, 2021, outstanding warrants to purchase shares of common stock are as follows:

Shares Underlying Outstanding Warrants

    

Exercise Price

    

Expiration Date

597,881

$

21.00

May 10, 2022

1,183,491

$

5.60

October 16, 2023

993,139

$

2.87

February 11, 2025

7,717,661

$

2.87

March 27, 2025

1,867,912

$

3.25

January 26, 2026

4,285,935

$

3.25

March 16, 2026

1,200

$

1,680.00

None

16,647,219

 

  

  

8. Equity Incentive Plans

Stock Award Plans

The Company maintains a 2016 Equity Incentive Plan (the “2016 Plan”), which provides for the issuance of incentive share awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance-based stock awards. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. Stock options expire no later than ten years from the date of grant and generally vest and typically become exercisable over a four-year period following the date of grant. Under the 2016 Plan, the number of shares authorized for issuance automatically increases annually beginning January 1, 2017 and through January 1, 2026.

In connection with the Merger, the Company assumed the C3J Jian, Inc. Amended 2006 Stock Option Plan (the “Assumed 2006 Plan”) and the C3J Therapeutics, Inc. 2016 Stock Plan (the “Assumed 2016 Plan”). These plans provided for stock option and restricted stock awards (“RSAs”) to C3J employees in years prior to the merger with AmpliPhi. The number of shares subject to each outstanding stock option and RSA under those assumed plans, along with the exercise price of stock options, were equitably adjusted pursuant to the terms of the plans to reflect the impact of the Merger and the one-for-fourteen reverse stock split, in each case in a manner intended to preserve the then-current intrinsic value of the awards. No additional awards will be made under either plan. The assumed C3J stock options were substantially vested and expensed as of the merger date. Vesting of the assumed C3J RSAs is based on the occurrence of a public liquidity event, or a change in control. In the event of a public liquidity event, service or milestone based vesting schedules begins. Service periods are generally two to four years. In the event of a change in control, 100% vesting occurs upon the closing of such an event. The merger with AmpliPhi constituted a public liquidity event and triggered the start of vesting of RSAs.

Stock-based Compensation

The Company estimates the fair value of stock options with performance and service conditions using the Black-Scholes valuation model. Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on the accelerated attribution method over the requisite service period.

The assumptions used in the Black-Scholes model are presented below:

Nine months ended

September 30, 2021

September 30, 2020

Risk-free interest rate

0.73% -- 1.29%

0.25% -- 1.51%

Expected volatility

84.04% -- 93.37%

90.43%

14

Expected term (in years)

5.50 - 7.00

5.50 - 7.00

Expected dividend yield

0%

0%

The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Expected volatility is based on the historical volatility of Armata and peer companies’ common stock. The expected term represents the period that the Company expects its stock options to be outstanding. The expected term assumption is estimated using the simplified method set forth in the SEC Staff Accounting Bulletin 110, which is the mid-point between the option vesting date and the expiration date. For stock options granted to parties other than employees or directors, the Company elects, on a grant by grant basis, to use the expected term or the contractual term of the option award. The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.

On August 1, 2021, Todd R. Patrick, who has served as the Company’s Chief Executive Officer (“CEO”) since May 2019, retired from day-to-day active management of the Company and resigned as CEO. On August 9, 2021, the Company and Mr. Patrick entered into a letter agreement, which among other things, provides that if Mr. Patrick provides advisory services through the end of December 31, 2022 (the “Transition Period”), one half of the outstanding and unvested Company stock options and restricted share units held by Mr. Patrick as of the last day of the Transition Period will become fully vested, and all vested stock options held by Mr. Patrick as of that date will remain exercisable for the remainder of the 10-year term from the original grant date. The Company measured the stock-based compensation expense related to the modification and pre-vesting forfeitures of Mr. Patrick’s stock options and restricted share units to be a net credit of approximately $0.3 million, which will be amortized as a credit to stock-based compensation over the remaining substantive requisite service period through December 31, 2021.

The tables below summarize the total stock-based compensation expense included in the Company’s consolidated statements of operations for the periods presented:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

Research and development

$

369,000

$

205,000

$

1,121,000

$

841,000

General and administrative

 

100,000

 

458,000

 

1,097,000

 

1,772,000

Total stock-based compensation

$

469,000

$

663,000

$

2,218,000

$

2,613,000

Stock option transactions during the nine months ended September 30, 2021 are presented below:

Options Outstanding

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Exercise

Term

Intrinsic

    

Shares

    

Price

    

(Years)

    

Value

Outstanding at December 31, 2020

 

1,668,926

$

6.30

 

8.32

Granted

 

856,150

 

4.77

 

 

Exercised

(73,517)

3.27

$

98,000

Forfeited/Cancelled

 

(11,908)

 

48.67

 

 

Outstanding at September 30, 2021

 

2,439,651

$

5.65

 

8.19

$

609,000

Vested and expected to vest at September 30, 2021

 

2,439,651

$

5.65

 

8.19

$

609,000

Exercisable at September 30, 2021

 

733,721

$

9.48

 

6.55

$

252,000

Restricted stock awards and restricted stock units during the nine months ended September 30, 2021 are presented below:

Weighted Avg

15

Grant Date

    

Shares

    

Fair Value

Outstanding at December 31, 2020

322,756

$

19.55

Granted

Forfeited/Cancelled

(1,047)

 

6.89

Vested and Issued as Common Stock

(167,691)

12.33

Outstanding at September 30, 2021

154,018

$

27.49

The aggregate intrinsic value of options at September 30, 2021 is based on the Company’s closing stock price on that date of $3.62 per share. As of September 30, 2021, there was $3.9 million of total unrecognized compensation expense related to unvested stock options and RSAs, which the Company expects to recognize over the weighted average remaining period of approximately 1.8 years.

Shares Reserved for Future Issuance

As of September 30, 2021, the Company had reserved shares of its common stock for future issuance as follows:

    

Shares Reserved

Stock options outstanding

 

2,439,651

Unvested restricted stock units

30,000

Employee stock purchase plan

 

9,748

Available for future grants under the 2016 Plan

 

227,856

Warrants outstanding

 

16,647,219

Total shares reserved

 

19,354,474

9. Commitments and Contingencies

The Company leases office and research and development space under a non-cancelable operating lease in Marina del Rey, CA. The lease commenced January 1, 2012 and in April 2020, the Company amended the lease (“Lease Amendment”) which, among other things, extended the lease term through December 31, 2031. Base annual rent for calendar year 2022, the first year under the Lease Amendment extended term, will be approximately $1.9 million, and base rent increases by 3% annually and will be $2.5 million by the end of the amended term. In addition, the Company received a six-month rent abatement in 2020. The Company is entitled to use an allowance for tenant improvements of $0.8 million during 2021, with any unused tenant improvement amount as of December 31, 2021 to offset future payments. In accordance with authoritative guidance, the Company re-measured the lease liability in April 2020 to be $11.7 million and related right of use asset of $11.0 million as of the Lease Amendment date with an incremental borrowing rate of 12.89%.

On October 28, 2021, the Company entered into a lease for office and research and development space under a non-cancellable lease in Los Angeles, CA (the “2021 Lease”). The 2021 Lease payment start date is May 1, 2022 and the total lease term is for 16 years and runs through 2038. Monthly rent for 2022 and 2023 will be fully or partially abated while the lessor and the Company complete planned tenant improvements to the facility. Base monthly rent will be approximately $0.25 million in 2024. The Company is entitled to receive an allowance for tenant improvements of up to $6.5 million.

From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of business. Any of these claims could subject the Company to costly legal expenses and, while management generally believes that there is adequate insurance to cover many different types of liabilities, the Company’s insurance carriers may deny coverage or policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. The Company is currently not a party to any legal proceedings,

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the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.

10. Grants and Awards

MTEC Grant

On June 15, 2020, the Company entered into a Research Project Award agreement (the “MTEC Agreement”) with the Medical Technology Enterprise Consortium (“MTEC”), pursuant to which the Company expects to receive a $15.0 million grant and entered into a three-year program administered by the U.S. Department of Defense through MTEC with funding from the Defense Health Agency and Joint Warfighter Medical Research Program. The MTEC funds are to partially fund a Phase 1b/2, randomized, double-blind, placebo-controlled, dose escalation clinical study of Armata's therapeutic phage-based candidate, AP-SA02, for the treatment of complicated Staphylococcus aureus bacteremia infections. The MTEC Agreement specifies that the grant will be paid to the Company through a cost reimbursable model, based on agreed upon cost share percentages, and the grant money received is not refundable to MTEC.

       Upon license or commercialization of intellectual property developed with the funding from the MTEC Agreement, additional fees will be due to MTEC.  The Company will elect whether to (a) pay a fixed royalty amount, which is subject to a cap based upon total funding received, or (b) pay an additional assessment fee, which would also be subject to a cap based upon a percentage of total funding received.

The MTEC Agreement will be effective through January 25, 2024.  The MTEC Agreement may be terminated in whole or in part, 30 calendar days following the written notice from the Company to MTEC. In addition, MTEC has the right to terminate the MTEC Agreement upon material breach by the Company.

The Company determined that the MTEC Agreement is not in the scope of ASC 808 or ASC 606. Applying ASC 606 by analogy the Company recognizes proceeds received under the MTEC Agreement as grant revenue on the statement of operations when related costs are incurred. The Company recognized $1.3 million and $3.5 million in grant revenue from the MTEC Agreement during the three and nine months ended September 30, 2021, respectively. The Company recognized $0.3 million in grant revenue from the MTEC Agreement during each of the three and nine months ended September 30, 2020.

CFF Therapeutics Development Award

On March 13, 2020, the Company entered into an award agreement (the “Agreement”) with CFF, pursuant to which the Company received a Therapeutics Development Award of up to $5.0 million (the “Award”). The Award will be used to fund a portion of the Company’s Phase 1b/2 clinical trial of the Pseudomonas aeruginosa (“P. aeruginosa”) phage candidate, AP-PA02, as a treatment for Pseudomonas airway infections in people with cystic fibrosis (“CF”).

 

The first payment under the Agreement, in the amount of $1.0 million, became due upon signing the Agreement and was received in April 2020. During the quarter ended September 30, 2021, an additional $0.8 million was received upon achievement of a milestone. The remainder of the Award will be paid to the Company incrementally in installments upon the achievement of certain milestones related to the development program and progress of the Phase 1b/2 clinical trial of AP-PA02, as set forth in the Agreement.

 

If the Company ceases to use commercially reasonable efforts directed to the development of AP-PA02, or any other Product (as defined in the Agreement), for a period of 360 days (an “Interruption”) and fails to resume the development of the Product after receiving from CFF notice of an Interruption, then the Company must either repay the amount of the Award actually received by the Company, plus interest, or grant to CFF (1) an exclusive (even as to the Company), worldwide, perpetual, sublicensable license under technology developed under the Agreement that covers the Product for use in treating infections in CF patients (the “CF Field”), and (2) a non-exclusive, worldwide, perpetual, sublicensable license under certain background intellectual property covering the Product, to the extent necessary to commercialize the Product in the CF Field.

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Upon commercialization by the Company of any Product, the Company will owe a fixed royalty amount to CFF, which is to be paid in installments determined, in part, based on commercial sales volumes of the Product. The Company will be obligated to make an additional fixed royalty payment upon achieving specified sales milestones. The Company may also be obligated to make a payment to CFF if the Company transfers, sells or licenses the Product in the CF Field, or if the Company enters into a change of control transaction.

 The term of the Agreement commenced on March 10, 2020 and expires on the earlier of the date on which the Company has paid CFF all of the fixed royalty payments set forth therein, the effective date of any license granted to CFF following an Interruption, or upon earlier termination of the Agreement. Either CFF or the Company may terminate the agreement for cause, which includes the Company’s material failure to achieve certain development milestones. The Company’s payment obligations survive the termination of the Agreement.

The Company concluded that the CFF award is in the scope of ASC 808. Accordingly, as discussed in Note 3, award amounts received from CFF upon achievement of certain milestones are recognized as credits to research and development expenses in the period the expenses are incurred. During the three months ended September 30, 2021 and 2020, the Company did not recognize any credits to research and development expenses related to the CFF award. During the nine months ended September 30, 2021 and 2020, the Company recognized $0.8 million and $1.0 million in credits to research and development expenses related to the CFF award, respectively. In addition, the Company concluded under the guidance in ASC 730 that it does not have an obligation to repay funds received once related research and development expenses are incurred.

11. Synthetic Genomics Asset Acquisition

On February 28, 2018, C3J completed an acquisition of certain synthetic phage assets (the “synthetic phage assets”) from Synthetic Genomics, Inc. (“SGI”) for consideration consisting of $8.0 million in cash and $27.0 million in equity. The cash payments consisted of: $1.0 million paid at closing on February 28, 2018, $1.0 million at one year from closing, $1.0 million at two years from closing, and $5.0 million at three years from closing (the payments due on the one, two, three year anniversary are collectively the “time-based payment obligation”). The equity payment (the “equity payment” and, together with the time-based payment obligation, the “deferred purchase price arrangement”) was due upon the earlier of the initial public offering of shares of C3J’s common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, the sale of all or substantially all of C3J’s assets to a third party, or a consolidation or merger into a third party. On December 20, 2018, in contemplation of the Merger (see Note 1), the deferred purchase price arrangement was amended. Under the amended agreement, the purchase consideration consisted of (i) closing consideration of $1.0 million paid on February 28, 2018, (ii) cash payments of $1.0 million on January 31, 2019, $1.0 million on January 31, 2020, and $2.0 million on January 31, 2021, (iii) an issuance of that number of shares of C3J’s common stock equal to ten percent of C3J’s fully-diluted capitalization, excluding options and restricted stock awards, immediately prior to the closing of the Merger, and (iv) potential milestone payments of up to $39.5 million related to the development and relevant regulatory approval of products utilizing bacteriophage from the synthetic phage assets acquired from SGI (the “milestone payment obligation”).

The equity payment was settled on May 9, 2019, the date of the Merger (Note 1).

The present value of the time-based payment obligations was included in the Company’s balance sheet, with interest accreted to the maturity date. The Company paid the last installment of the time-based payment obligation in the amount of $2.0 million during the three months ended March 31, 2021. For the nine months ended September 30, 2021 and 2020, the Company recognized $0.1 million and $0.5 million of interest expense related to the time-based payment obligations, respectively.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, and our audited financial statements and notes thereto as of and for the year ended December 31, 2020 included in our Form 10-K filed on March 18, 2021 with the U.S. Securities and Exchange Commission (the “SEC”).

Our predecessor, C3 Jian, Inc., was incorporated under the laws of the State of California on November 4, 2005. On February 26, 2016, as part of a reorganization transaction, C3 Jian, Inc. merged with a wholly owned subsidiary of C3J Therapeutics, Inc. (“C3J”), and as part of this process, C3 Jian, Inc. was converted to a limited liability company organized under the laws of the State of California named C3 Jian, LLC. On May 9, 2019, C3J completed a reverse merger with AmpliPhi Biosciences Corporation, a bacteriophage development stage company (“AmpliPhi”), where Ceres Merger Sub, Inc., a wholly-owned subsidiary of AmpliPhi, merged with and into C3J (the “Merger”). Following the completion of the Merger, and a $10.0 million concurrent private placement financing, the former C3J shareholders owned approximately 76% of our common stock and the former AmpliPhi shareholders owned approximately 24% of our common stock.

Immediately prior to the Merger, AmpliPhi completed a 1-for-14 reverse stock split and changed its name to Armata Pharmaceuticals, Inc. Our common stock is traded on the NYSE American exchange under the symbol “ARMP.” We are headquartered in Marina del Rey, CA, in a 35,000 square-foot research and development facility built for product development with capabilities spanning from bench to clinic. In addition to microbiology, synthetic biology, formulation, chemistry and analytical laboratories, the facility is equipped with two licensed GMP drug manufacturing suites enabling the production, testing and release of clinical material.

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements concerning product development plans, commercialization of our products, the expected market opportunity for our products, the use of bacteriophages and synthetic phages to kill bacterial pathogens, having resources sufficient to fund our operations into the first quarter of 2022, future funding sources, general and administrative expenses, clinical trial and other research and development expenses, costs of manufacturing, costs relating to our intellectual property, capital expenditures, the expected benefits of our targeted phage therapies strategy, the potential market for our products, tax credits and carry-forwards, and litigation-related matters. Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “will,” “goal,” “potential” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements necessarily contain these identifying words. These statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2020, filed on March 18, 2021 with the SEC, and under Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date on which they were made, and we undertake no obligation to update any forward-looking statements.

Overview

We are a clinical-stage biotechnology company focused on the development of pathogen-specific bacteriophage therapeutics for the treatment of antibiotic-resistant and difficult-to-treat bacterial infections using our proprietary bacteriophage-based technology. Bacteriophages or “phages” have a powerful and highly differentiated mechanism of action that enables binding to and killing specific bacteria, in contrast to traditional broad-spectrum antibiotics. We believe that phages represent a promising means to treat bacterial infections, especially those that have developed resistance to current standard of care therapies, including the so-called multidrug-resistant or “superbug” strains of bacteria. We are a leading developer of phage therapeutics which are uniquely positioned to address the growing worldwide threat of antibiotic-resistant bacterial infections.

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We are combining our proprietary approach and expertise in identifying, characterizing and developing both naturally-occurring and engineered (synthetic) bacteriophages with our proprietary phage-specific current good manufacturing practice regulation (“cGMP”) manufacturing capabilities to advance a broad pipeline of high-quality bacteriophage product candidates. We believe that synthetic phage, engineered using advances in sequencing and synthetic biology techniques, represent a promising means to advance phage therapy, including phage-based diagnostics and improving upon the ability of natural phage to treat bacterial infections, especially those that have developed resistance to current antibiotic therapies, including the multidrug-resistant or “superbug” bacterial pathogens.

We are developing and advancing our lead clinical phage candidate for Pseudomonas aeruginosa. On October 14, 2020, Armata received the approval to proceed from the U.S. Food and Drug Administration (“FDA”) for its Investigational New Drug application for AP-PA02. We plan to continue to advance the “SWARM-P.a.” study – a Phase 1b/2a, multicenter, double-blind, randomized, placebo-controlled, single ascending dose (SAD) and multiple ascending dose (MAD) clinical trial to evaluate the safety and tolerability of inhaled AP-PA02 in subjects with CF and chronic pulmonary P. aeruginosa infection, provided that the impacts of COVID-19 do not further impede our ability to enroll subjects in this clinical trial. This study is supported by the CFF, which granted us a Therapeutics Development Award of up to $5.0 million.

We are also developing a phage product candidate for Staphylococcus aureus for the treatment of S. aureus bacteremia. On June 15, 2020, we entered into an agreement (the “MTEC Agreement”) with the Medical Technology Enterprise Consortium (“MTEC”), pursuant to which we expect to receive a $15.0 million grant and entered into a three-year program administered by the U.S Department of Defense (“DoD”) through MTEC with funding from the Defense Health Agency and Joint Warfighter Medical Research Program. We expect to use the grant to partially fund a Phase 1/2, multi-center, randomized, double-blind, placebo- controlled dose escalation study, provided that the COVID-19 pandemic has been reduced to the point that clinical trials in patients are enrolling, that will assess the safety, tolerability, and efficacy of this development program, using our phage-based candidate, AP-SA02, for the treatment of adults with S. aureus bacteremia.

In partnership with Merck & Co., known as Merck Sharp & Dohme outside of the United States and Canada (“Merck”), we are developing proprietary synthetic phage candidates to target undisclosed infectious disease agents.

Our proprietary phage engineering platform serves to enhance the clinical and commercial prospects of phage therapy.

Attributes of engineered phages can include expanded host range, improved potency which is a fundamental drug property that can translate into improved clinical efficacy, and importantly, biofilm disruption, which is a critical aspect of serious infections that needs to be addressed.

In addition to our more advanced pipeline programs, we have phage discovery efforts underway to target other major pathogens of infectious disease (including ESKAPE pathogens) and preventable infectious disease of the microbiome.

We are committed to conducting randomized controlled clinical trials required for FDA approval in order to move toward commercialization of alternatives to traditional antibiotics and provide a potential method of treating patients suffering from drug-resistant and difficult-to-treat bacterial infections.

The following chart summarizes the status of our phage product candidate development programs and partners.

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Graphic

We have generally incurred net losses since our inception and our operations to date have been primarily limited to research and development and raising capital. As of September 30, 2021, we had an accumulated deficit of $196.8 million. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and seeking to obtain regulatory approval of our product candidates.

We currently expect to use our existing cash and cash equivalents for the continued research and development of our product candidates, including through our targeted phage therapies strategy, and for working capital and other general corporate purposes. We expect to continue to incur significant and increasing operating losses at least for the next several years. We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for at least one of our product candidates.

We may also use a portion of our existing cash and cash equivalents for the potential acquisition of, or investment in, product candidates, technologies, formulations or companies that complement our business, although we have no current understandings, commitments or agreements to do so. Our existing cash and cash equivalents will not be sufficient to enable us to complete all necessary development of any potential product candidates. Accordingly, we will be required to obtain further funding through one or more other public or private equity offerings, debt financings, collaboration, strategic financing, grants or government contract awards, licensing arrangements or other sources. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of assets, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations and result in a loss of investment by our stockholders.

Business Update Regarding COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The COVID-19 pandemic has directly and indirectly impacted our business, results of operations and financial condition and is expected to continue to impact our business. For example, the COVID-19 pandemic has resulted in

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delays in our clinical trials due to the implementation of COVID-19 protocols at investigator sites, which resulted in longer than anticipated site identification and initiation activities. In addition, while we currently do not anticipate any interruptions in our supply chain, it is possible that the COVID-19 pandemic and the continuing response efforts may have a future impact on our third-party suppliers and partners. It is possible that due to the continued development and manufacturing of vaccines for COVID-19, certain basic supply chain materials such as resins, vessels, vials and stoppers may be in high demand by the pharmaceutical companies developing and manufacturing vaccines and our ability to obtain these materials for our development activities could be negatively impacted. Although we have experienced some delays of this nature in 2021, such delays have not had a material adverse impact on our business, results of operations or financial condition.

The full extent of the COVID-19 pandemic impact continues to depend on future developments that remain highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, the identification and spread of COVID-19 variants such as the Delta variant, the distribution of vaccines, the acceptance of vaccines and the implementation of vaccine mandates, and the economic impact on local, regional, national and international markets. Management continues to actively monitor the developments regarding the pandemic and the impact that the pandemic could have on our financial condition, liquidity, ability to enroll patients in our contemplated clinical trials, manufacturing and research and development operations, suppliers to our operations and suppliers to our outside clinical trial organizations, biotech industry overall, and importantly the health and safety of our workforce. Given the continued volatility of the COVID-19 pandemic and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for the remainder of fiscal year 2021 or 2022. Any recovery from negative impacts to our business and related economic impact due to the COVID-19 pandemic may also be slowed or reversed by a number of factors, including the current widespread resurgence in COVID-19 infections attributable to the Delta variant, combined with the seasonal flu.

Recent Events

October 2021 Private Placements

On October 28, 2021, we entered into a securities purchase agreement (the “October 2021 Securities Purchase Agreement”) with the Cystic Fibrosis Foundation, a Delaware corporation (“CFF”), our partner for the lead Phase 1b/2 clinical development program, and Innoviva Strategic Opportunities LLC, a wholly-owned subsidiary of Innoviva, Inc. (Nasdaq: INVA) (collectively, “Innoviva”) for the private placement of newly issued shares of our common stock, par value $0.01 per share (“Common Stock”). Pursuant to the October 2021 Securities Purchase Agreement, we issued and sold 909,091 shares to CFF and 1,212,122 shares to Innoviva, each at a per share price of $3.30 (the “October 2021 Private Placements”). We received aggregate gross proceeds from the October 2021 Private Placements of approximately $7.0 million, before deducting transaction expenses.

2021 Lease Agreement

On October 28, 2021, we entered into a lease for office and research and development space under a non-cancellable lease in Los Angeles, CA (the “2021 Lease”). The leased space comprises approximately 56,000 square feet. The 2021 Lease commencement date is May 1, 2022 and the total lease term is for 16 years and runs through 2038. Monthly rent for 2022 and 2023 will be fully or partially abated while we and the lessor complete planned tenant improvements to the facility. Base monthly rent will be approximately $0.25 million in 2024. We are entitled to receive an allowance for tenant improvements of up to $6.5 million.

Executive Transition

On August 1, 2021, Todd R. Patrick, who has served as the Company’s Chief Executive Officer (“CEO”) since May 2019, retired from day-to-day active management of the Company and resigned as CEO. Mr. Patrick will continue to serve as an advisor to the Company’s CEO through December 31, 2022 and will continue to serve as a member of the Board of Directors (the “Board”) until at least the Company’s next Annual Meeting of Shareholders. In connection with

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Mr. Patrick’s retirement, Brian Varnum, Ph.D. was appointed to serve as CEO of the Company and as a member of the Company’s Board.

On August 1, 2021, the Company and Dr. Varnum entered into an amended employment agreement, which sets forth the terms and conditions of his new position with the Company as previously disclosed in the Form 8-K filed on August 4, 2021. 

On August 9, 2021, the Company and Mr. Patrick entered into a letter agreement, which amends his employment agreement and sets forth the terms and conditions of his continuing relationship with the Company as previously disclosed in the Form 8-K filed on August 4, 2021.  The letter agreement also provides that if the Company terminates Mr. Patrick’s employment other than for cause prior to December 31, 2022, he will continue to receive his salary, bonus, subsidized health insurance premiums and equity vesting from the date of termination through December 31, 2022.

Results of Operations

Comparison of three and nine months ended September 30, 2021 and 2020

Grant revenue

The Company recognized $1.3 million and $0.3 million of grant revenue during the three months ended September 30, 2021 and 2020, respectively, and $3.5 million and $0.3 million of grant revenue during the nine months ended September 30, 2021 and 2020 respectively, which represents MTEC’s share of the costs incurred for the Company’s AP-SA02 program for the treatment of Staphylococcus aureus bacteremia. These amounts have been invoiced to MTEC.

Research and Development

Research and development expenses for the three months ended September 30, 2021 and 2020 were $5.6 million and $4.1 million, respectively. The net increase of $1.5 million was primarily related to an increase of $0.7 million related to increased clinical trial activities and trial-related outsourcing expenses, $0.6 million in personnel costs, and a $0.2 million increase in professional services expenses.

Research and development expenses for the nine months ended September 30, 2021 and 2020 were $15.2 million and $9.5 million, respectively. The net increase of $5.7 million was primarily related to an increase of $2.2 million in personnel costs, an increase of $3.0 million in clinical trial and related outsourcing expenses, $0.8 million in professional service expenses, and an increase of $0.2 million related to lease expenses. These increases were offset by credits to research and development expenses of $0.8 million related to our award agreement with CFF and a $0.7 million tax rebate from Australian tax authorities during the nine months ended September 30, 2021, as compared to $1.1 million received from CFF and the NIH during the nine months ended September 30, 2020.

General and Administrative

General and administrative expenses were $1.7 million for the three months ended September 30, 2021, as compared to $1.8 million during the same period in 2020. The decrease in general and administrative expenses of $0.1 million was primarily due to a reduction of $0.4 million in stock-based compensation expenses, offset by an increase of $0.3 million related to general corporate and personnel costs.

General and administrative expenses were $6.0 million for the nine months ended September 30, 2021, which remained consistent with the amount for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, general and administrative expenses increased by $0.3 million for personnel costs, and $0.3 million in public company and insurance costs, which were offset by a reduction of $0.6 million in stock-based compensation expenses when compared to the nine months ended September 30, 2020.

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Gain upon extinguishment of Paycheck Protection Program loan

In April 2020, we received loan proceeds of $717,000 (“PPP Loan”) under the Paycheck Protection Program (“PPP”).  The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business, calculated as provided under the PPP. The PPP provides a mechanism for forgiveness of up to the full amount borrowed, and in July 2021, we received notification of forgiveness of the full loan amount and associated interest from the Small Business Administration. We recorded a gain of $0.7 million from the PPP Loan extinguishment in the statement of operations during the three and nine months ended September 30, 2021.

Other Income (Expense)

For the three and nine months ended September 30, 2021 and 2020, we recorded noncash interest expense of $0 and $0.2 million, and $0.1 million and $0.5 million, respectively, as a result of interest accretion on the time-based cash payments due in connection with the asset acquisition transaction with Synthetic Genomics, Inc. (“SGI”).

Income Taxes

There was no income tax expense or benefit for the three or nine months ended September 30, 2021 and 2020.

Operating activities

Net cash used in operating activities for the nine months ended September 30, 2021 was $15.0 million, as compared to $12.0 million for the nine months ended September 30, 2020. The increase of $3.0 million was primarily due to a $1.6 million increase in net loss, a $2.0 million reduction of non-cash reconciling items from net loss to cash used in operating activities, offset by an increase of $0.6 million of cash used for operating assets and liabilities.

Investing activities

Net cash used in investing activities was $1.1 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively, and primarily related to capital equipment purchases.

Financing activities

Net cash provided by financing activities was $18.5 million for the nine months ended September 30, 2021, which was primarily comprised of $19.4 million net proceeds raised from the 2021 private placement transactions with Innoviva, and $0.5 million of proceeds received from stock option exercises, offset by a principal payment of $1.4 million in deferred consideration related to the time-based payment obligation in connection with the SGI asset acquisition.

Net cash provided by financing activities was $22.8 million for the nine months ended September 30, 2020, which was comprised of net cash proceeds of $22.9 million raised from the 2020 private placement transaction with Innoviva, $0.7 million proceeds from the Paycheck Protection Program loan, and $0.2 million of proceeds received from warrant and employee stock option exercises, offset by a payment of $1.0 million in deferred consideration related to the time-based payment obligation in connection with the SGI asset acquisition.

Liquidity, Capital Resources and Financial Condition

We have prepared our consolidated financial statements on a going concern basis, which assumes that we will realize our assets and satisfy our liabilities in the normal course of business. However, we have incurred net losses since our inception and have negative operating cash flows. These circumstances raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning our ability to continue as a going concern. While

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management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are not entirely within its control and cannot be assessed as being probable of occurring. The Company may not be able to secure additional financing in a timely manner or on favorable terms, if at all.

As of September 30, 2021, we had unrestricted cash and cash equivalents of $12.1 million. Considering our current cash resources, management believes our existing resources will be sufficient to fund our planned operations into the first quarter of 2022. For the foreseeable future, our ability to continue our operations is dependent upon our ability to obtain additional capital.

Future Capital Requirements

We will need to raise additional capital in the future to continue to fund our operations. Our future funding requirements will depend on many factors, including:

the effects of the continuing COVID-19 pandemic on our clinical programs and business, including delays or difficulties in enrolling patients in our clinical trials, shortage in supply chain materials, labor shortages impacting our ability to hire and retain qualified personnel, and changes in local, state or federal regulations as part of a response to the COVID-19 pandemic;
the costs and timing of our research and development activities;
the progress and cost of our clinical trials and other research and development activities;
manufacturing costs associated with our targeted phage therapies strategy and other research and development activities;
the terms and timing of any collaborative, licensing, acquisition or other arrangements that we may establish;
manufacturing costs associated with our targeted phage therapies strategy and other research and development activities;
the terms and timing of any collaborative, licensing, acquisition or other arrangements that we may establish;
whether and when we receive future Australian tax rebates, if any;
the costs and timing of seeking regulatory approvals;
the costs of filing, prosecuting and enforcing any patent applications, claims, patents and other intellectual property rights; and
the costs of lawsuits involving us or our product candidates.

We may seek to raise capital through a variety of sources, including:

the public equity market;
private equity financings;
collaborative arrangements, government grants or strategic financings;
licensing arrangements; and

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public or private debt.

Any additional fundraising efforts may divert our management team from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. Our ability to raise additional funds will depend, in part, on the success of our product development activities, including our targeted phage therapies strategy and any clinical trials we initiate, regulatory events, our ability to identify and enter into in-licensing or other strategic arrangements, and other events or conditions that may affect our value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. We cannot be certain that sufficient funds will be available to us when required or on acceptable terms, if at all. If we are unable to secure additional funds on a timely basis or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of technology or assets, pursue an acquisition of our company by a third party at a price that may result in a loss on investment for our stockholders, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations. Moreover, if we are unable to obtain additional funds on a timely basis, there will be substantial doubt about our ability to continue as a going concern and increased risk of insolvency and loss of investment by our stockholders. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our existing stockholders. Our ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and volatility of financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have off-balance sheet arrangements.

Recent Accounting Pronouncements

Refer to Note 3 of the condensed consolidated notes to the consolidated financial statements contained elsewhere in this report.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information required under this item.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021.

Changes in Internal Control over Financial Reporting

An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of any change in our internal control over financial

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reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are a party to certain litigation that is either judged to be not material or that arises in the ordinary course of business. We intend to vigorously defend our interests in these matters. We expect that the resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings.

Item 1A. Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report and in our other public filings in evaluating our business. If any of the following risks actually occur, our business, financial condition, results of operations, and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline. In addition, the global economic climate and effects of the COVID-19 pandemic may amplify many of the risks described below or their impact on us.

Summary of Risk Factors

Our ability to execute on our business strategy is subject to a number of risks, which are discussed more fully below in this section. You should carefully consider these risks before making an investment in our common stock. These risks include, among others, the following:

Public health crises such as pandemics or similar outbreaks could materially and adversely affect our preclinical and clinical trials, business, financial condition and results of operations;
There is substantial doubt about our ability to continue as a going concern, which may affect our ability to obtain future financing and may require us to curtail our operations.
We will need to raise additional capital to support our operations;
We have incurred losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, and our future profitability is uncertain;
We have never generated any revenue from product sales and may never be profitable,
Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members;
If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired and our public reporting may be unreliable;
If we fail to develop and maintain proper and effective processes and operating procedures as a non-traditional government contractor, our ability to adhere to the DoD and related entity standards could impact our ongoing and future development financing awards from the U.S. government;
If we are unable to obtain FDA approval of our products, we will not be able to commercialize our products in the United States;

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Results from preclinical studies and Phase 1 or 2 clinical trials of our product candidates or from single-patient expanded access treatments may not be predictive of the results of later stage clinical trials;
We are seeking to develop antibacterial agents using bacteriophage and synthetic phage technology, a novel approach, which makes it difficult to predict the time and cost of development. No bacteriophage products have been approved in the United States or elsewhere;
Delays in our clinical trials could result in us not achieving anticipated developmental milestones when expected, increased costs and delay our ability to obtain regulatory approval for and commercialize our product candidates;
We have not completed formulation development of our product candidates;
Our product candidates must undergo rigorous clinical testing, such clinical testing may fail to demonstrate safety and efficacy and any of our product candidates could cause undesirable side effects, which would substantially delay or prevent regulatory approval or commercialization;
We must continue to develop manufacturing processes for our product candidates and any delay in or our inability to do so would result in delays in our clinical trials;
We may conduct clinical trials for our products or product candidates outside the United States and the FDA may not accept data from such trials;
We are subject to significant regulatory approval requirements, which could delay, prevent or limit our ability to market our product candidates;
Failure to comply with health and data protection laws and regulations could lead to government enforcement actions (which could include civil or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business;
A variety of risks associated with our international operations could materially adversely affect our business;
We depend upon key personnel who may terminate their employment with us at any time and we may need to hire additional qualified personnel in order to obtain financing, pursue collaborations or develop and market our product candidates;
We must manage a geographically dispersed organization;
We rely on third parties to conduct our clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates;
We are dependent on patents, trade secrets and other forms of non-patent intellectual property protection. If we fail to adequately protect this intellectual property or if we otherwise do not have exclusivity for the marketing of our products, our ability to commercialize products could suffer;
If we are sued for infringing intellectual property rights of third parties or if we are forced to engage in an interference proceeding, it will be costly and time-consuming, and an unfavorable outcome in that litigation or interference would have a material adverse effect on our business;
If our competitors are able to develop and market products that are more effective, safer or more affordable than ours, or obtain marketing approval before we do, our commercial opportunities may be limited;
There is a substantial risk of product liability claims in our business. If we do not obtain sufficient liability insurance, a product liability claim could result in substantial liabilities;
Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our product candidates upon their commercial introduction, which would negatively affect our ability to achieve profitability;

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The uncertainty associated with pharmaceutical reimbursement and related matters may adversely affect our business;
Innoviva may exert a substantial influence on actions requiring stockholder vote, potentially in a manner that you do not support;
The price of our common stock has been and may continue to be volatile; and
We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Risks Related to Our Financial Condition and Need for Additional Capital

Public health crises such as pandemics or similar outbreaks could materially and adversely affect our preclinical and clinical trials, business, financial condition and results of operations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a national emergency with respect to COVID-19.  The COVID-19 pandemic continues to impinge upon the U.S. and global economies and has directly and indirectly impacted our business, results of operations and financial condition and is expected to continue to impact our business. For example, the COVID-19 pandemic has resulted in delays in our clinical trials due to the implementation of COVID-19 protocols at investigator sites, which resulted in longer than anticipated site identification and initiation activities. In addition, while we currently do not anticipate any interruptions in our supply chain, it is possible that the COVID-19 pandemic and the continuing response efforts may have a future impact on our third-party suppliers and partners and the conduct of future clinical trials. It is possible that due to the continued development and manufacturing of vaccines for COVID-19, certain basic supply chain materials such as resins, vessels, vials and stoppers may be in high demand by the pharmaceutical companies developing and manufacturing vaccines and our ability to obtain these materials for our development activities could be negatively impacted. Although we have experienced some delays of this nature in 2021, such delays have not had a material adverse impact on our business, results of operations or financial condition. Moreover, the COVID-19 pandemic may adversely affect the operations of the FDA and other health authorities, resulting in delays of reviews and approvals with respect to our product candidates. While the full scope of the economic impact brought by, and the ultimate duration of, the COVID-19 pandemic remains difficult to assess or predict, the continued impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. In addition, the loss of any of our employees as a result of COVID-19 (including as a result of vaccine mandates), or another pandemic, may adversely affect our operations. The ultimate impact of the COVID-19 pandemic remains highly uncertain, and we do not yet know the full extent of potential delays or impacts that COVID-19 may have on our business, financing or clinical trial activities.

Some examples of potential disruptions that have resulted or may result from COVID-19 include but are not limited to:

 

delays or difficulties in enrolling patients in our clinical trials;

 

delays or difficulties in initiating or expanding clinical trials, including delays or difficulties with clinical site initiation and recruiting clinical site investigators and clinical site staff;

 

increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19 or other health conditions or being forced to quarantine;

 

interruption of key clinical trial activities, such as clinical trial site data monitoring and efficacy, safety and translational data collection, processing and analyses, due to limitations on travel imposed or recommended by federal, state or local governments, employers and others or interruption of clinical trial subject visits, which may impact the collection and integrity of subject data and clinical study endpoints;

 

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

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delays or disruptions in preclinical experiments and IND-enabling studies due to restrictions of on-site staff and unforeseen circumstances at contract research organizations, or CROs, and vendors;

 

interruption or delays in the operations of the FDA and comparable foreign regulatory agencies;

 

interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

 

delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;

 

limitations on employee or other resources that would otherwise be focused on the conduct of our clinical trials and pre-clinical work, including because of sickness of employees or their families, the desire of employees to avoid travel or contact with large groups of people, an increased reliance on working from home, school closures or mass transit disruptions or a refusal to comply with vaccine mandates;

 

changes in regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;

 

delays in necessary interactions with regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government or contractor personnel; and

 

refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.

 

The COVID-19 global pandemic remains volatile. The extent to which the pandemic may affect our clinical trials, business, financial condition and results of operations remains dependent on future developments, which are highly uncertain and cannot be predicted at this time, such as the evolution and spread of COVID-19 variants, such as the Delta variant, the ultimate duration of the pandemic, business closures or business disruptions, the effectiveness of actions taken in the United States and other countries to contain and treat the disease, the acceptability, safety and effectiveness of COVID-19 vaccines, and compliance with vaccine mandates. Future developments in these and other areas present material uncertainty and risk with respect to our clinical trials, business, financial condition and results of operations.

There is substantial doubt about our ability to continue as a going concern, which may affect our ability to obtain future financing and may require us to curtail our operations. We will need to raise additional capital to support our operations.

The December 31, 2020 audited financial statements and accompanying notes thereto included disclosures and an opinion from our independent registered public accounting firm stating that our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Our financial statements as of September 30, 2021 and December 31, 2020 were prepared under the assumption that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. At September 30, 2021, we had cash and cash equivalents of $12.1 million, and we have had recurring losses from operations and negative operating cash flows since inception.

We will need to raise additional capital to support our operations and product development activities. In the near term, we expect to continue to fund our operations, if at all, primarily through equity and debt financings. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions, including the current recession, and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. We may also seek funds through arrangements with collaborators, grant agencies or others that may require us to relinquish rights to the product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to secure additional funds when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of technology or assets, pursue an acquisition of our company by

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a third party at a price that may result in a loss on investment for our stockholders, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

On March 27, 2020, we completed a private placement (the “2020 Private Placement”) transaction in which we sold to Innoviva, Inc. a total of 8,710,800 newly issued shares of the Company’s common stock and warrants to purchase 8,710,800 shares of common stock, with an exercise price per share of $2.87. The 2020 Private Placement was closed in two tranches for total aggregate gross proceeds of $25.0 million.  

On January 26, 2021, we completed a private placement (the “January 2021 Private Placement”) transaction in which we sold to Innoviva Strategic Opportunities LLC, a subsidiary of Innoviva Inc. a total of 6,153,847 newly issued shares of the Company’s common stock and warrants to purchase 6,153,847 shares of common stock with an exercise price per share of $3.25. The 2021 Private Placement was closed in two tranches for total aggregate proceeds of $20.0 million.

On October 28, 2021, we completed a private placement (the “October 2021 Private Placement”) transaction in which we sold to CFF and Innoviva Strategic Opportunities LLC, a total of 2,121,213 shares of our newly issued shares of common stock, par value $0.01 per share, for aggregate gross proceeds of approximately $7.0 million, before deducting transaction expenses.

While we believe that our existing resources including the proceeds from the January and October 2021 Private Placements will be sufficient to fund our planned operations into the first quarter of 2022, we cannot provide assurances that our estimates are accurate, that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. Developing drugs and conducting clinical trials is expensive. Our future funding requirements will depend on many factors, including:

the costs and timing of our research and development activities;
the progress and cost of our clinical trials and other research and development activities;
manufacturing costs associated with our targeted phage therapies strategy and other research and development activities;
the terms and timing of any collaborative, licensing, acquisition or other arrangements that we may establish;
whether and when we receive future Australian tax rebates, if any;
the costs and timing of seeking regulatory approvals;
the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights; and
the costs of lawsuits involving us or our product candidates.

In addition, raising additional capital through the sale of securities could cause significant dilution to our stockholders. Any additional fundraising efforts may divert our management from their day to day activities, which may adversely affect our ability to develop and commercialize our product candidates. Our ability to raise additional funds will depend, in part, on the success of our product development activities, including our targeted phage therapies strategy and any clinical trials we initiate, regulatory events, our ability to identify and enter into in-licensing or other strategic arrangements, and other events or conditions that may affect our value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. There can be no assurances that sufficient funds will be available to us when required or on acceptable terms, if at all.

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We have incurred losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, and our future profitability is uncertain.

 

As of September 30, 2021, our accumulated deficit was $196.8 million and we expect to incur losses for the foreseeable future. We have devoted, and will continue to devote for the foreseeable future, substantially all of our resources to research and development of our product candidates. For the nine months ended September 30, 2021 and the year ended December 31, 2020, we had losses from operations of $17.7 million and $21.6 million, respectively. Additional information regarding our results of operations may be found in our consolidated financial statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of Part I in this report.

We have never generated any revenue from product sales and may never be profitable.

 

Clinical trials and activities associated with discovery research are costly. We do not expect to generate any revenue from the commercial sales of our product candidates in the near term, and we expect to continue to have significant losses for the foreseeable future.

 

Our ability to generate meaningful revenue and achieve profitability depends on successfully completing the development of, and obtaining the regulatory approvals necessary to, commercialize our product candidates. If any of our product candidates fail in clinical trials or if any of our product candidates do not gain regulatory approval, or if any of our product candidates, if approved, fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our ability to generate future revenues from product sales depends heavily on our success in:

completing research and preclinical and clinical development of our product candidates;
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical trials;
developing a sustainable, scalable, reproducible, and transferable manufacturing process for our product candidates;
launching and commercializing product candidates for which we obtain regulatory and marketing approval, either by establishing a sales force, marketing and distribution infrastructure, or by collaborating with a partner;
obtaining market acceptance of any approved products;
addressing any competing technological and market developments;
implementing additional internal systems and infrastructure, as needed;
identifying and validating new product candidates;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;
maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and
attracting, hiring and retaining qualified personnel.

Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product. Our expenses could increase beyond

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expectations if we are required by the FDA, the European Medicines Agency (“EMA”), or other foreign regulatory authorities to perform clinical trials and other studies in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

 

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules of the NYSE American. The requirements of these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and place strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently.

We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud.

In accordance with NYSE American rules, we are required to maintain a majority independent board of directors. The various rules and regulations applicable to public companies make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified officers and directors will be significantly curtailed.

If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired and our public reporting may be unreliable.

 

We are required to maintain internal control over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Material weaknesses in our internal controls have been identified in the past, and we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future.

 

If we are unable to maintain effective controls and procedures, or identify any future material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports and we may experience a loss of public

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confidence, which could have an adverse effect on our business, financial condition and the market price of our common stock.

If we fail to develop and maintain proper and effective processes and operating procedures as a non-traditional government contractor, our ability to adhere to the Department of Defense and related entity standards could impact our ongoing and future development financing awards from the U.S. government.

On June 15, 2020, we entered into the “MTEC Agreement”, pursuant to which we have started to receive an up to $15 million grant and have entered into a three-year program administered by the DoD through MTEC with funding from the Defense Health Agency and Joint Warfighter Medical Research Pro