What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-18 compared with 2020-03-19 · 281 added, 276 removed, 446 unchanged (56% of the section changed)

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Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations a nd Comprehensive Loss for the Years Ended December 31, 2019 and 2018

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2019 and 2018

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

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We have audited the accompanying consolidated balance sheets of Armata Pharmaceuticals, Inc.

(the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, stockholders’

equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S.

generally accepted accounting principles.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.

Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Adoption of ASU No.

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842), and the related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Valuation of in-process research and development intangible assets

Description of the Matter

At December 31, 2020, the Company’s in-process research and development (“IPR&D”) intangible assets were $10.3 million.

As discussed in Note 3 to the consolidated financial statements, IPR&D assets are intangible assets with indefinite lives and are not subject to amortization.

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.

The Company tests IPR&D assets for impairment as of December 31 of each year or more frequently if indicators of impairment are present.

Auditing the impairment test was complex and highly judgmental due to the significant estimation required to determine the fair value of the IPR&D intangible assets.

In particular, the fair value estimates required the use of valuation methodologies that were sensitive to significant assumptions such as changes in the discount rate, timing of clinical studies and regulatory approvals, the probability of success of research and development programs and forecasted sales and anticipated growth rates.

How We Addressed the Matter in Our Audit

To test the estimated fair value of the Company’s IPR&D intangible assets, we performed audit procedures that included, among others, assessing the Company’s use of appropriate valuation methodologies with the assistance of a valuation specialist, performing sensitivity analyses to determine which assumptions had the greatest impact on the overall determination of fair value, and testing the completeness and accuracy of the underlying data.

Our audit procedures over the most significant assumptions included comparing the assumptions to current industry, market and economic trends, to historical results of the Company’s business and other guideline companies within the same industry and to other relevant factors.

For example, to evaluate the probability of success of research and development programs, we considered the phase of development of the IPR&D project and third-party data regarding clinical trial success rates.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2019.

San Diego, California

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Cash and cash equivalents

Awards receivable

Prepaid expenses and other current assets

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In-process research and development

Liabilities and stockholders’

Liabilities and stockholders’ equity

Current liabilities

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Current portion of operating lease liabilities

Deferred rent

Total current liabilities

Deferred rent, net of current portion

Operating lease liabilities, net of current portion

Deferred asset acquisition consideration, net of current portion

Asset acquisition derivative liability

Deferred tax liability

Total liabilities

Stockholders’

Stockholders’ equity

Common stock, $0.01 par value;

217,000,000 shares authorized;

9,922,758 and 5,069,633 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively.

18,688,461 and 9,922,758 shares issued and outstanding at December 31, 2020 and 2019, respectively

Additional paid-in capital

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(157,521,000)

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

Armata Pharmaceuticals Inc.

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations

Grant revenue

Operating expenses

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Loss on sale of assets (Note 6)

Acquired in-process research and development

Total operating expenses

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Total other income (expense), net

Unrealized gain on investments

Comprehensive loss

Per share information:

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Armata Pharmaceuticals Inc.

Consolidated Statements of Stockholders’

Stockholders’

Accumulated Other

Comprehensive

Stockholders’

Income/(Loss)

Consolidated Statements of Stockholders’ Equity

Stockholders’ Equity

Stockholders’

Balances, December 31, 2018

(138,042,000)

Grant of restricted stock awards

Forfeiture of restricted stock awards

Issuance of common stock and conversion of deferred consideration for asset acquisition

Issuance of common stock in connection with reverse merger

Sale of common stock, net of issuance costs

Stock-based compensation

Unrealized gain on available-for-sale securities

Balances, December 31, 2019

(157,521,000)

Forfeiture of restricted stock awards

Issuance of common stock and conversion of deferred consideration for asset acquisition

Issuance of common stock in connection with reverse merger

Stockholders’ Equity

Stockholders’

Balances, December 31, 2019

(157,521,000)

Sale of common stock, net of issuance costs

Exercises of warrants

Return of restricted stock awards for tax withholdings

Forfeiture of restricted stock awards

Exercise of stock options

Issuance of stock awards, net of tax withholding

Stock-based compensation

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

Acquired in-process research and development

Stock-based compensation

Non-cash interest expense

Payment of accreted interest for deferred consideration for asset acquisition

Change in fair value of derivative liability

Loss on sale of assets (Note 6)

Amortization of premiums of available-for-sale securities

Changes in operating assets and liabilities:

Award receivable

Accounts payable and accrued liabilities

Accrued compensation

Deferred rent and lease liabilities, net

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

Prepaid expenses and other current assets

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Investing activities:

Purchases of available-for-sale securities

Proceeds from sales and maturities of available-for-sale securities

Purchases of property and equipment

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Cash acquired in reverse merger transaction

Net cash provided by investing activities

Net cash (used in) provided by investing activities

Financing activities:

Payment of deferred consideration for asset acquisition

Principal payment of deferred consideration for asset acquisition

Proceeds from Paycheck Protection Program Loan

Proceeds from sale of common stock, net of offering costs

Proceeds from exercise of employee stock options

Proceeds from exercise of warrants

Net cash provided by financing activities

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Supplemental schedule of non-cash investing and financing activities:

Unpaid offering costs

Property and equipment included in accounts payable

Issuance of common stock in reverse merger transaction

Conversion of deferred asset acquisition consideration upon reverse merger

Property and equipment included in accounts payable

Unpaid offering costs

Year Ended December 31,

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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 infections using its proprietary bacteriophage-based technology.

(“Armata”, and together with its subsidiaries referred to herein as, the “Company”) is a clinical-stage biotechnology company focused on the development of pathogen-specific bacteriophage therapeutics for the treatment of antibiotic-resistant infections using its proprietary bacteriophage-based technology.

The Company was created as a result of a business combination between C3J Therapeutics, Inc.

(“C3J”) 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.

(“C3J”) 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.

In the Merger, each share of C3J common stock outstanding immediately prior to the Merger was converted into the right to receive approximately .6906 shares of AmpliPhi common stock.

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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.”

Immediately following the Merger, certain existing C3J shareholders purchased $10.0 million in Armata common stock.

After the Merger and such concurrent private placement, the former C3J security holders owned approximately 76% of the aggregate number of shares of Armata’s common stock and the security holders of AmpliPhi as of immediately prior to the Merger owned approximately 24% of the aggregate number of shares of Armata’s common stock.

In addition, upon closing of the Merger, five of the seven members of the board of directors were appointed by C3J.

In connection with the Merger, C3J was considered the accounting acquirer of AmpliPhi because C3J’s shareholders retained a majority control of ownership of the Company subsequent to the Merger.

In addition, the seven-member board of directors of the combined company include five members established by C3J.

Therefore, the historical financial statements presented herein prior to the closing of the Merger are the historical financial statements of C3J.

C3J’s 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.

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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.

As of December 31, 2019, the Company had cash and cash equivalents of $6.0 million.

On January 27, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Innoviva, Inc.

(“Innoviva”), pursuant to which the Company agreed to issue and sell to Innoviva, in a private placement, up to 8,710,800 newly issued shares of common stock of the Company and warrants to purchase up to 8,710,800 shares of common stock, with an exercise price per share of $2.87 (the “Private Placement”).

Each share of common stock is sold together with one common warrant (collectively, a “Common Unit”), and the per Common Unit purchase price was

The Private Placement will be completed in two separate closings, with the first closing completed in February 2020, raising gross proceeds of $2.8 million, and the second closing for additional gross proceeds of $22.2 million is expected to be completed following shareholder approval at a meeting scheduled on March 26, 2020.

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 may not be able to secure additional financing in a timely manner or on favorable terms, if at all.

Considering the Company’s current cash resources, management believes the Company’s existing cash resources plus the proceeds expected to be raised in the Private Placement, will be sufficient to fund the Company’s planned operations into the second quarter of 2021.

For the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional capital.

These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.

On March 27, 2020, the Company completed a private placement transaction and sold to Innoviva Inc.

(“Innoviva”) 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”).

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.

On January 26, 2021, the Company entered into a securities purchase agreement (the “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, par value $0.01 per share (the “Shares”), and warrants (the “Common Warrants”) to purchase up to 6,153,847 shares of our common stock, with an exercise price per share of $3.25 (the “2021 Private Placement”).

The 2021 Private Placement closed in two tranches.

On January 26, 2021 and concurrently with entering into the Securities Purchase Agreement, the Company completed the first tranche (the “First Closing”) of the 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.

Management plans to raise additional capital through equity offerings, debt financings, or other capital sources, including potential collaborations, licenses and other similar arrangements.

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.

For the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional capital.

Significant Accounting Policies

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The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including C3J, Biocontrol Limited and AmpliPhi Australia Pty Ltd.

As described in more details in Note 6, on December 5, 2019, the Company disposed 100% of its ownership interest in AmpliPhi Biotehnološke Raziskave in Razvoj d.o.o.

to an independent third party.

Results of operations of AmpliPhi Biotehnološke Raziskave were included in the consolidated statements of operations from the Merger close date of May 9, 2019 through an agreed closing date in the fourth quarter in 2019.

All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S.

GAAP”) requires management to make estimates and assumptions that affect the amounts reported in its consolidated financial statements and accompanying notes.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S.

GAAP”) 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.

Cash and Cash Equivalents

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No impairment losses on long-lived assets have been recorded through December 31, 2020.

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

and Acquired IPR&D)

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

IPR&D assets are intangible assets with indefinite lives and are not subject to amortization.

The Company’s IPR&D assets represent a capitalized in-process bacteriophage development programs for S.

aureus infections that the Company acquired through the Merger.

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The fair value measurements utilized to perform the impairment analysis are categorized within Level 3 of the fair value hierarchy.

Significant management judgment is required in the forecast of future operating results that are used in the Company’s impairment analysis.

The estimates the Company uses are consistent with the plans and estimates that it uses to manage its business.

Significant assumptions utilized in the Company’s income approach model include the timing of clinical studies and

regulatory approvals, the probability of success of its research and development programs, timing of commercialization of these programs, forecasted sales, gross margin, selling, general and administrative expenses, capital expenditures, as well as anticipated growth rates.

Significant assumptions utilized in the Company’s income approach model include the discount rate, timing of clinical studies and regulatory approvals, the probability of success of its research and development programs, timing of

commercialization of these programs, forecasted sales, gross margin, selling, general and administrative expenses, capital expenditures, as well as anticipated growth rates.

During the fourth quarter ended December 31, 2020, the Company performed the annual evaluation of its IPR&D assets for impairment.

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Consequently, no impairment was noted for the IPR&D asset.

The Company expenses acquired IPR&D in connection with an asset acquisition when there is no alterative future use.

Acquired IPR&D expense of $6.8 million for the year ended December 31, 2018 consists of the estimated fair value of the assets acquired and consideration given in connection with the acquisition of certain synthetic phage assets in 2018 from Synthetic Genomics, Inc.

(“SGI”).

As the assets acquired were in the research and development phase and were determined to not have any alternative future use, it was expensed as acquired IPR&D.

Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over the fair value of net assets acquired.

The Company’s goodwill as of December 31, 2019 is associated with AmpliPhi’s business prior to the Merger.

The Company’s goodwill as of December 31, 2020 is associated with AmpliPhi’s business prior to the Merger.

Goodwill is not subject to amortization and is required to be tested for impairment at least on an annual basis.

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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.

There was no impairment of goodwill during the year ended December 31, 2020.

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At contract inception, the Company assesses the goods or services agreed upon within each contract and assess whether each good or service is distinct and determine those that are performance obligations.

The Company then recognizes as revenue the amount of the transaction price that is allocated

to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

During the years ended December 31, 2020 and 2019 the company did not recognize revenue or deferred revenue from contracts with customers.

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 Costs

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.

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Judgments and estimates are made in determining the accrued balances at the end of the reporting period.

Research and development expenses are partially offset by the benefit of tax incentive payments for qualified research and development expenditures from the Australian tax authority (“AU Tax Rebates”).

The Company does not record AU Tax Rebates until payment is received due to the uncertainty of receipt.

The Company received AU Tax Rebates of approximately $1.3 million during the year ended December 31, 2019, and such rebates have been recorded as an offset to research and development expense in the Company’s consolidated statements of operations.

There was no AU Tax Rebates received in 2018.

During the year ended December 31, 2019, the Company received AU Tax Rebates of approximately $1.3 million related to calendar year 2018, and such rebates have been recorded as an offset to research and development expense in the Company’s consolidated statements of operations.

During the year ended December 31, 2020, the Company applied for AU Tax Rebates for the calendar year 2019 and received $0.7 million in January 2021 which will be recognized in the first quarter of 2021 as an offset to research and development expenses.

The Company utilizes the asset and liability method of accounting for income taxes.

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Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities.

In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations.

The Company recognizes liabilities for uncertain tax positions based on a two-step process.

The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.

resolution of related appeals or litigation processes, if any.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Derivative Liabilities

Derivative liabilities are accounted for in accordance with the applicable accounting guidance provided in ASC 815 –

Derivatives and Hedging based on the specific terms of the agreements.

Derivative liabilities are recorded at fair value at each reporting period with any change in fair value recognized as a component of change in fair value of asset acquisition derivative liability in the consolidated statements of operations and comprehensive loss.

The Company has a zero derivative liability balance at December 31, 2019 as the liability of $1.1 million at December 31, 2018 was settled upon the Merger.

Derivative liabilities are accounted for in accordance with the applicable accounting guidance provided in ASC 815 – Derivatives and Hedging based on the specific terms of the agreements.

The Company has a zero derivative liability balance at December 31, 2020 as the liability of $1.1 million at December 31, 2018 was settled upon the Merger in May 2019.

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.

Basic EPS is calculated by dividing net income or loss by the weighted-average number of common shares outstanding.

Diluted net loss per share is computed in accordance with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common stock were

exercised or converted to common stock.

Diluted net loss per share is computed in accordance with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock.

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 the 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.

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

Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income (loss).

Other comprehensive income (loss) includes cumulative foreign currency translation adjustments and unrealized gains or losses on the Company’s investments in marketable securities.

Settlement of Zero-coupon Debt Instrument

The Company’s deferred purchase consideration arrangement with Synthetic Genomics (Note 12) 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.

Recent Accounting Pronouncements Not Yet Adopted

In November 2018, FASB issued ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606 .

The objective of the standard is to clarify the interaction between Topic 808, Collaborative Arrangements , and Topic 606, Revenue from Contracts with Customers .

Currently, Topic 808 does not provide comprehensive recognition or measurement guidance for collaborative arrangements, and the accounting for those arrangements is often based on an analogy to other accounting literature or an accounting policy election.

Similarly, aspects of Topic 606 have resulted in uncertainty in practice about the effect of the revenue standard and credit loss standard on the accounting for collaborative arrangements.

The standard will become effective beginning on January 1, 2020, with early adoption permitted.

The Company does not expect adoption of this new guidance will have an impact on its consolidated financial statements and related disclosures.

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.

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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 and related disclosures.

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.

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Early adoption is permitted.

The Company does not expect adoption of this new guidance will have a material impact on its consolidated financial statements and related disclosures .

The Company does not expect adoption of this new guidance 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 202-06 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 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

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 February 2016, the FASB issued ASU No.

2016‑02, Leases (Topic 842) , which amends the FASB Accounting Standards Codification and creates Topic 842, "Leases." The new topic supersedes Topic 840, "Leases," and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements.

The Company adopted ASU 2016‑02 retrospectively at January 1, 2019 using a simplified transition option that allows companies to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings or accumulated deficit.

The Company also elected to adopt the package of practical expedients permitted in ASC Topic 842.

Accordingly, the Company continues to account for its existing operating lease as an operating lease

under the new guidance, without reassessing whether the agreements contain a lease under ASC 842.

All of the Company’s leases at the adoption date were operating leases for facilities and did not include any non-lease components.

As a result of the adoption of ASU 2016‑02, on January 1, 2019 the Company recognized (i) a lease liability of approximately $3.8 million, which represents the present value of the Company’s remaining lease payments using an estimated incremental borrowing rate of 15%, and (ii) a right-of-use asset of approximately $2.7 million.

There was no cumulative-effect adjustment to accumulated deficit.

Lease expense is not expected to change materially as a result of the adoption of ASU 2016‑02.

In June 2018, the FASB issued ASU No.

2018‑07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting , which amends the FASB Accounting Standards Codification in order to simplify the accounting for share-based payments granted to nonemployees for goods and services.

Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees.

The guidance mandates the modified retrospective approach and is effective for annual and interim reporting periods beginning after December 31, 2018, with early adoption permitted.

The Company elected to early adopt this ASU as of June 30, 2018 and the adoption did not have an impact on the Company’s consolidated financial statements.

Fair Value of Financial Assets and Liabilities –

Derivative Instruments

In November 2018, FASB issued ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606 .

The objective of the standard is to clarify the interaction between Topic 808, Collaborative Arrangements , and Topic 606, Revenue from Contracts with Customers .

Similarly, aspects of Topic 606 have resulted in uncertainty in practice about the effect of the revenue standard and credit loss standard on the accounting for collaborative arrangements.

The standard became effective for the Company for fiscal periods beginning on January 1, 2020.

The adoption of this ASU did not have an impact on the Company’s financial condition, results of operations, cash flows, or financial statement disclosures.

Fair Value of Financial Assets and Liabilities – Derivative Instruments

The guidance regarding fair value measurements prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

● Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

● Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

● Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company estimates the fair values of derivative liabilities utilizing Level 3 inputs.

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Estimating the fair values of derivative liabilities requires the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

There were no assets or liabilities that require recurring fair value measurements as of December 31, 2019.

The recurring fair value measurements of the Company at December 31, 2018 consisted of the following:

Quoted Prices in

Active Markets

Significant Other

for Identical

Observable Inputs

Items (Level 1)

Inputs (Level 3)

December 31, 2018

Money market funds

Asset acquisition derivative liability

Total liabilities

The following table sets forth a summary of changes in the fair value of the Company’s derivative liabilities during the year ended December 31, 2019:

There were no assets or liabilities that require recurring fair value measurements as of December 31, 2020 or 2019.

The following table sets forth a summary of changes in the fair value of the Company’s derivative liabilities during the year ended December 31, 2019:

Asset Acquisition

Derivative Liability

Balance, December 31, 2018

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Balance, December 31, 2019

The Company estimated the fair value of this derivative by forecasting the timing and likelihood of the events occurring and discounting the probability adjusted payments using an appropriate discount based on market interest rates and its own non-performance risk as required by ASC 820 –

Fair Value Measurement .

There is no longer a potential payment requirement associated with the derivative liability subsequent to the Merger.

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On the date of the Merger, AmpliPhi had, and the Company currently has, IPR&D related to the S.

aureus development program, a phage product candidate for the treatment of Staphylococcus aureus infections.

aureus development program, a phage product candidate for the treatment of S.

aureus infections.

The product candidate was utilized in clinical applications through single-patient expanded access guidelines established by U.S.

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Further, AmpliPhi provided a workforce that is considered to have the necessary skills, knowledge, and experience to perform a process, that when applied to IPR&D is critical to the ability to convert it into outputs.

Based on this evaluation, the Company determined that the Merger should be accounted for as a business combination pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”).

In connection with the Merger, the Company allocated the total purchase consideration of $10.7 million in stock to the net assets and liabilities acquired, including identifiable intangible assets and related deferred tax liability, based on their respective fair values at the acquisition date.

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Purchase price

(1) IPR&D relates to a bacteriophage product candidate for the treatment of Staphylococcus aureus infections in patients with bacteremia.

The valuation of this asset was prepared by an independent third party based on estimated discounted cash flows based on probability-weighted future development expenditures and revenue streams provided by the Company’s management.

(1) IPR&D relates to a bacteriophage product candidate for the treatment of S.

aureus infections in patients with bacteremia.

(2) Goodwill represents the excess of the purchase price over the valuation of the fair value of tangible and identified intangible assets, less liabilities, acquired.

In addition, the Company incurred and expensed costs directly related to the Merger totaling approximately $1.1 million which are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss.

Since the closing date of the Merger, the results of AmpliPhi’s operations have been included in the Company’s consolidated financial statements.

Selected amounts related to AmpliPhi’s business included in the Company’s consolidated statements of operations from the period of May 9, 2019, the date of the Merger, to December 31, 2019 are summarized in the table below.

Amounts show do not include the offset to research and development expenses related to AU Tax rebates discussed in Note 3.

Since the closing date of the Merger, the results of AmpliPhi’s operations have been included in the Company’s consolidated financial statements.

Selected amounts related to AmpliPhi’s business included in the Company’s consolidated statements of operations from the period of May 9, 2019, the date of the Merger, to December 31, 2019 and

for the year ended December 31, 2020 are summarized in the table below.

Amounts shown do not include the offset to research and development expenses related to AU Tax rebates discussed in Note 3.

Year Ended December 31, 2020

9 through December 31, 2019

Research and development expenses

General and administrative expenses

Sale of Slovenia (Note 6)

The unaudited pro forma information in the table below summarizes the combined results of operations of AmpliPhi with those of the Company as though these entities were combined as of January 1, 2018.

The results of operations for the year ended December 31, 2019, are based on the unaudited financial statements prepared for the year ended December 31, 2019, and for the year ended December 31, 2018, are based on the Company’s audited financial statements.

This unaudited pro forma information is summarized as follows:

Year Ended December 31,

$ (21,335,000)

$ (27,818,000)

The pro forma financial information as presented above is for informational purposes only and is not indicative of the consolidated results of operations of future periods or the results of operations that would have been achieved assuming the acquisition had taken place on January 1, 2018.

Sale of Slovenia

Loss on Sale of Assets

The Company produces clinical quantities of each of its bacteriophage product candidates at its GMP-compliant manufacturing facilities.

The Company produces clinical quantities of each of its bacteriophage product candidates at its cGMP-compliant manufacturing facilities.

With the completion of the Merger in May 2019, the Company had two manufacturing sites, one in Marina del Rey, California and additionally in Ljubljana, Slovenia.

Each manufacturing site had clean rooms, in-use equipment and experienced manufacturing personnel.

At the time of the merger, the Company was evaluating its long-term manufacturing needs and both facilities were deemed strategic assets due to the complex nature of the bacteriophage manufacturing process.

Following an extensive evaluation and a technology transfer from the Slovenian facility to the Marina del Rey, California location, management determined the Slovenia manufacturing facility was not essential and could exit its operations in Slovenia.

The conclusion was reached in September 2019 after considering the monthly expense run rate of Solvenian facility and its location in Europe.

On November 8, 2019, the Company entered into an agreement to sell the Slovenia subsidiary to an un-related third-party buyer “Buyer”

and on December 6, 2019, the sale transaction was completed.

The agreement requires that the Buyer maintain the ability of the Slovenia facility to manufacture the Company’s products.

On November 8, 2019, the Company entered into an agreement to sell the Slovenia subsidiary to an un-related third-party buyer (“Buyer”) and on December 6, 2019, the sale transaction was completed.

The agreement requires that the Buyer maintain the ability of the Slovenia facility to manufacture the Company’s products.

If the Company requires such products, the Buyer and the Company would negotiate a supply agreement governing the purchase and sale of such products.

In addition, the Company has the right to repurchase the Slovenian subsidiary’s operations at any point in the five year period immediately following the closing.

The Company recognized a loss on sale of assets of $0.7 million,

representing the excess of the net assets sold over proceeds received, in the statement of operations and comprehensive loss for the year ended December 31, 2019.

In addition, the Company has the right to repurchase the Slovenian subsidiary’s operations at any point in the five year period immediately following the closing.

The Company recognized a loss on sale of assets of $0.7 million, representing the excess of the net assets sold over proceeds received, in the statement of operations for the year ended December 31, 2019.

Net Loss per Share

Diluted EPS for the year ended December 31, 2019 included a numerator adjustment to remove the gain related to the change in fair value of derivative liabilities $0.9 million, net of interest.

Additionally, diluted EPS for the year ended December 31, 2019 included an adjustment to the weighted-average shares outstanding to appropriately weight the 516,976 issuance of shares to SGI as discussed in Note 11.

Additionally, diluted EPS for the year ended December 31, 2019 included an adjustment to the weighted-average shares outstanding to appropriately weigh the shares issued for the Synthetic Genomics asset acquisition discussed in Note 12.

Basic and diluted net loss per share calculation:

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Property and equipment, net

Depreciation expense totaled $1.4 million for both years ended December 31, 2019 and 2018, respectively.

Depreciation expense totaled $1.1 million and $1.4 million the years ended December 31, 2020 and 2019, respectively.

Accounts Payable and Accrued Liabilities

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Accounts payable

Accrued clinical trial expenses

Other accrued expenses

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The company has not recognized any current or deferred tax expense on its US and Foreign pre-tax losses for the years ended December 31, 2020 and 2019.

The differences between the Company’s effective tax rate and the U.S.

federal statutory tax rate were as follows:

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Effective income tax rate

Significant components of the Company’s deferred tax assets and liabilities were as follows:

Deferred tax assets:

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Capitalized research and development

Deferred consideration

Stock-based compensation

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Net deferred tax liability

The Company’s net operating loss carryforwards at December 31, 2019 are $88.8 million and $63.5 million for federal and state income tax purposes, respectively.

The Company’s net operating loss carryforwards at December 31, 2020 are $110.5 million and $78.7 million for federal and state income tax purposes, respectively.

Federal and state net operating loss carryforwards are available to offset future taxable income, if any, and will begin to expire in 2026 to 2028, respectively.

The federal NOL’s generated in tax years 2018 and forward will carryforward indefinitely.

The ability of the Company to utilize net operating losses carryforwards to reduce future domestic taxable income and domestic income tax is subject to various limitations under the Internal Revenue Code (Code).

The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes during any three-year period resulting in an aggregate change of more than 50% in beneficial ownership.

As of December 31, 2019, a management does not believe that a more-than‑50% ownership change has occurred.

The Company previously determined an ownership change occurred on May 9, 2019 as a result of the merger discussed in Note 5.

The resulting limitation significantly reduced the Company’s ability to utilize its net operating loss and credit carryovers before the expire.

Accordingly, in 2019 the Company reduced its deferred tax assets for the net operating loss and credit carryforwards that were expected to expire unused with a corresponding offset to the valuation allowance recorded against such assets.

Future ownership changes under Section 382 may also limit the Company’s ability to fully utilize any remaining tax benefits.

The Company does not believe that it has experienced another more-than 50% ownership change since the date of the merger.

Future equity transactions by the Company, or by 5% of stockholders, could cause a more-than-50% ownership change and, therefore, trigger a limitation on the annual utilization of net operating losses.

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The Company did not have a liability for unrecognized tax benefits at December 31, 2020 and 2019.

The Company’s policy is to classify interest and penalties on uncertain tax positions as a component of tax expense.

As of December 31, 2020, the Company has no accrued interest or penalties related to uncertain tax positions.

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 provides a mechanism for forgiveness of up to the full amount borrowed after twenty-four weeks as long as the borrower uses the loan proceeds during the twenty-four week period after the loan origination for eligible purposes, including payroll costs, certain benefits costs, rent and utilities costs or other permitted purposes, and maintains its payroll levels, subject to certain other requirements and limitations.

The amount of loan forgiveness is subject to reduction, among other reasons, if the borrower terminates employees or reduces salaries during the measurement period.

The Company is prepared to submit its application for loan forgiveness and anticipates that the loan will be forgiven based on the current guidelines.

The Company cannot provide any assurance that it will be eligible for loan forgiveness or that any amount of the PPP loan will ultimately be forgiven.

The PPP Loan is 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 is 1.0% per annum.

Payments of principal and interest are deferred until August 2021 (the “Deferral Period”).

Any unforgiven portion of the PPP Loan is payable over the two-year term, with payments deferred during the Deferral Period.

The Company is permitted to prepay the Note at any time without payment of any premium.

Commitments and Contingencies

Operating Leases

The Company leases office and research and development space under a noncancelable ten-year operating lease in Marina Del Rey, CA.

The lease commenced January 1, 2012 with the Company’s option to extend the lease for an additional ten years.

First year base rent under the lease was $1.3 million.

The annual base rent increases annually by 3% and will be $1.6 million by the end of the lease term.

The Company received rent abatement for the first seven months of the lease term and allowance for tenant improvements of $1.5 million.

In October 2011, concurrent with the Company’s execution of the lease agreement, an irrevocable letter of credit in the amount of $1.0 million was delivered to the landlord.

Starting on January 1, 2017, and each year thereafter until the end of the lease term, the letter of credit will be reduced by $100,000, so that the amount will remain at $500,000 until 2021, the last year of the initial lease term.

Future minimum annual lease payments under the Company’s noncancelable operating leases as of December 31, 2019, are as follows:

The Company leases office and research and development space under a noncancelable 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 under the Lease Amendment 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 rent abatement for six months starting May 1, 2020, and an allowance for tenant improvements of $0.8 million to be used during calendar

year of 2021.

In accordance with authoritative guidance, the Company remeasured the lea se liability 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 12.9% .

Concurrent with the Company’s execution of the Lease Amendment, an irrevocable letter of credit in the amount of $1.2 million was delivered to the landlord.

Starting on February 1, 2022, and each year thereafter the letter of credit will be reduced by 20% of the then outstanding amount.

Future minimum annual lease payments under the Company’s noncancelable operating leases as of December 31, 2020, are as follows:

Total minimum lease payments

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Noncurrent operating lease obligations

The remaining lease term of the Company’s operating lease is two years, and the discount rate used to calculate the Company’s right of use asset and lease liability is 15%.

Rent expense was $1.9 million and $1.5 million for the years ended December 31, 2020 and 2019, respectively.

Total cash payments for operating leases as included in the consolidated statements of cash flows during the year ended December 31, 2019 was $1.7 million.

Total cash payments for operating leases as included in the consolidated statements of cash flows during the year ended December 31, 2020 and 2019 was $1.1 million and $1.7 million, respectively.

License Agreement

The Company entered into an exclusive license agreement with The Regents of the University of California (the “Regents”) on April 24, 2007 including amendments for the use of several patents.

As part of the license agreement, the Company issued The Regents 10,540 shares of common stock.

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and 5) first commercial sale of a license product:

Upon the commercial sale of all licensed products from both fields of application, the Company is required to pay royalties to the Regents based on 1% of net sales of nonprescription licensed products and 2% of net sales of prescription licensed products.

The Company may grant exclusive or nonexclusive sublicenses to third parties and 20% of sublicensing income received by the Company is to be paid to the Regents.

There are also minimum royalties due to The Regents starting with $20,000 payable the first year of sales of a licensed product.

The minimum increases by $15,000 each year until reaching a minimum of $50,000 in the third year of sales and thereafter.

The term of the license agreement is for the life of the last-to-expire patent.

During this term, the Company agrees to diligently meet commercialization milestone goals.

Milestones goals include commencing a Phase 3 trial by 2024 and selling a commercialized product by 2027 for a Human Dental product and commencing a Phase 1 trial by 2023 for a Human Medical product.

If the Company fails to meet these milestones, the Regents have the right to convert the license agreement for a specific field to a nonexclusive license, or to terminate the license agreement for a specific field.

Total expenses incurred under the Regents license agreement was $21,000 for each of the years ended December 31, 2020 and 2019.

On October 21, 2020, the Company provided the notice to the Regents to terminate the license agreement, which would become effective 90 days from the date of the termination notice.

Legal Proceedings

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

Between April 15 and April 25, 2019, three putative class action lawsuits (captioned Midgarden v.

AmpliPhi Biosciences Corp., et al., No.

19-cv-0684 (S.D.

AmpliPhi Biosciences Corp., et al., No.

19-cv-0728 (S.D.

and Plumley v.

AmpliPhi Biosciences Corp., et al., No.

19-cv-0617 (W.D.

25, 2019)) were filed in federal court against the Company and its board of directors related to the Merger.

The lawsuits assert violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder against all defendants, and assert violations of Section 20(a) of the Securities Exchange Act of 1934 as to the individual defendants.

The plaintiffs contend that the Company’s Definitive Proxy Statement on Schedule 14A, filed on April 4, 2019 (the “April 2019 Proxy Statement”), omitted or misrepresented material information regarding the Merger.

The complaints sought injunctive relief, rescission, or rescissory damages and an award of plaintiffs’

costs, including attorneys’

fees and expenses.

On May 1, 2019, the Company amended the April 2019 Proxy Statement to provide additional disclosure to the Company’s stockholders.

Each of the above cases have since been dismissed.

Additionally, any such claims, whether or not successful,

could damage the Company’s reputation and business.

Synthetic Genomics Asset Acquisition

On February 28, 2018, the Company completed an acquisition of certain synthetic phage assets (the “Synthetic Phage Assets Acquisition”) from “SGI”

for consideration consisting of $8.0 million in cash and $27.0 million in potential equity.

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, plus an additional $7.0 million following the (the payments due following the closing 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 the Company’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 the Company’s assets to a third party, or a consolidation or merger into a third party.

The agreement provided that the number of shares to be issued or the consideration to be paid will be determined based upon the per share price in connection with an initial public offering, the value of consideration received in a sale of the synthetic phage assets to a third party, or the value of consideration received in a consolidation or merger with a third party.

$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 5), the deferred purchase price arrangement was amended.

Under the amended agreement, the purchase consideration consisted of (i) closing consideration of $1.0 million already 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 the Company’s

common stock equal to ten percent of the Company’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”).

In January 2017, FASB issued ASU 2017‑01, Clarifying the Definition of a Business .

A key provision within ASU 2017‑01 is the single or similar asset threshold.

When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquired set is not a business.

The Company adopted this standard effective January 1, 2017.

The synthetic phage assets acquired consisted primarily of phage know-how, research program materials and the related intellectual properties that had been under development by SGI.

In connection with the SGI transaction, the Company became a party to a collaboration agreement with Merck, and a grant from National Institutes of Health, and the National Institute of Allergy and Infectious Diseases.

The Company considered the items included in the acquired synthetic phage assets and concluded that substantially all of the fair value of the assets acquired and consideration given to SGI constituted the purchase of a single asset.

Based on ASU 2017‑01, the acquisition was an asset acquisition, specifically an in process research and development asset.

Under guidance in ASC 730, in process research and development assets acquired in connection with asset acquisitions are expensed unless there is an alternative future use.

As the asset acquired from SGI does not have an alternative future use, the $6.8 million fair value of the asset and consideration transferred for the asset acquired was expensed in full in the consolidated statement of operations and comprehensive loss.

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 determined to be a derivative liability in accordance with ASC 815, Derivatives and Hedging and was initially recorded at its fair value of $2.8 million.

Throughout 2018 and until May 9, 2019, the derivative liability was adjusted to its fair value based upon a payment probability assessment and marked-to-market at the end of each period (see Note 4).

The time-based payment obligation was recorded as a liability at its amortized cost of $2.9 million and impacted interest expense based on the effective interest method based on its contractual life in accordance with ASC 835, Interest .

Following the December 20, 2018 amendment to the deferred purchase price arrangement, the Company considered the probability of the reduction to the share issuance consideration in estimating the fair value of the derivative liability.

The Company determined the changes to the deferred purchase price arrangement in December 2018 met the definition of a troubled debt restructuring under ASC 470‑60, Troubled Debt Restructurings by Debtors , as the Company was experiencing financial difficulties and SGI granted a concession.

The amendments to the terms of the equity payment resulted in an adjustment to the fair value of the derivative liability, resulting in a $2.0 million gain, which is included in the change in fair values of derivative liabilities within the consolidated statement of operations and comprehensive loss for the year ended December 31, 2018.

Other than the gain resulting from the change in fair value of a derivative liability required to be remeasured to fair value with changes in fair value recognized in earnings in accordance with ASC 815, no gain on restructuring was recorded because the future, undiscounted cash flows of the time-based payment obligation exceed the carrying amount of the liability.

The net carrying amount at the date of the restructuring did not include any contingently payable amounts.

The time-based payment obligations continued to be carried at amortized cost and impact interest expense using the effective interest method based on its contractual life in accordance with ASC 835.

Potential payments under the milestone payment obligation will be accrued once probable of being incurred in accordance with ASC 450, Contingencies .

For the year ended December 31, 2019 and 2018, the Company recognized $0.9 million and $1.0 million, respectively, of interest expense related to the time-based payment obligations.

In connection with the Merger, the Company converted its equity payment obligation to SGI by issuing 516,976 shares of the Company’s common stock in connection with the amended agreement, after considering the Merger exchange ratio and reverse stock split in the manner described above.

Through May 9, 2019, the derivative liability associated with the equity payment was updated for its estimated market value.

Upon closing of the Merger, the fair value of the derivative liability was estimated at zero as the equity payment is no longer required to be made in the future.

The change in fair value is reflected in other income.

The equity payment was settled on May 9, 2019, the date of the Merger (Note 5).

There was no interest expense related to the equity payment for the year ended December 31, 2020 or 2019.

For year ended December 31, 2020 and 2019, the Company recognized $0.6 million and $0.9 million of interest expense related to the time-based payment obligations.

Research Collaboration Arrangement

In connection with the Synthetic Phage Asset Acquisition discussed in Note 11, the Company was assigned a research collaboration agreement (“Research and Option Agreement”) with Merck.

In connection with the Synthetic Phage Asset Acquisition discussed in Note 12, the Company was assigned a research collaboration agreement (“Research and Option Agreement”) with Merck.

In May 2019, the Research and Option Agreement was amended and extended for four years.

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To date, Merck has not exercised its license option nor has the Company reached any milestones or earned any revenue under the Research and Option Agreement.

Merck has the right to terminate the agreement at any time with 90 days’

Merck has the right to terminate the agreement at any time with 90 days’ notice.

Each party to the Research and Option Agreement is responsible for its costs and expenses in connection with the research program.

The Company is authorized to issue one class of shares designated as “Common Stock”.

Grants and Awards

On June 15, 2020, the Company entered into an Research Project Award agreement (the “MTEC Agreement”) with the Medical Technology Enterprise Consortium (“MTEC”), pursuant to which the Company will receive a $15.0 million grant and entered into a three-year program administered by DoD through MTEC with funding from the Defense Health Agency and Joint Warfighter Medical Research Program.

The Company plans to use the grant 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 S.

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 $0.8 million in grant revenue from the MTEC Agreement during the year ended December 31, 2020.

CFF Therapeutics Development Award

On March 13, 2020, the Company entered into an award agreement (the “Agreement”) with CFF, pursuant to which it 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 P.

aeruginosa phage candidate, AP-PA02, as a treatment for P.

aeruginosa airway infections in people with 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.

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.

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 year ended December 31, 2020, the Company recognized $1.0 million as credits to research and development expenses related to the CFF Award.

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.

Stockholders’ Equity

The Company is authorized to issue one class of shares designated as “Common Stock”.

The number of shares of common stock authorized to be issued is 217,000,000 shares.

Private Investment

On January 27, 2020, the Company entered into the 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 with one common warrant granting the warrant holder the right to purchase an additional share of common stock (“Common Unit”) 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 Common 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 Common Units in exchange for aggregate gross proceeds of $22.2 million.

The warrants expire five years from the issuance date.

The Company reviewed the authoritative accounting guidance and determined that the warrants meet the criteria to be accounted for as permanent equity.

As described in more detail in Note 2, in January 2021, the Company entered into a securities purchase agreement with Innoviva for the 2021 Private Placement.

At December 31, 2020, outstanding warrants to purchase shares of common stock are as follows:

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March 31, 2021

October 16, 2023

February 12, 2025

March 27, 2025

Stock-based Compensation

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 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.

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Under the 2016 Plan, the number of shares authorized for issuance automatically increases annually beginning January 1, 2017 and through January 1, 2026.

The 2016 Plan was most recently amended and restated by the Board of Directors effective as of May 8, 2019 to reflect (i) the name change of AmpliPhi Biosciences Corporation to “Armata Pharmaceuticals, Inc.”, and (ii) the one-for-fourteen reverse stock split.

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.

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.

No additional awards will be made under either plan.

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The merger with AmpliPhi constituted a public liquidity event and triggered the start of vesting of RSAs.

In November 2020, the Company made an inducement grant of a restricted stock unit award outside of its 2016 Plan to a new employee for 70,000 shares of the Company’s common stock, of which 40,000 shares will vest six months from the grant date and the remaining 30,000 shares will vest three years from the grant date.

In addition, the Company granted this new employee 33,000 shares of its common stock which were immediately vested upon issuance.

Stock-based Compensation

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Risk-free interest rate

1.50 to 2.23%

0.13% --1.48%

Expected volatility

89.26 to 90.43%

90.43% -- 94.0%

Expected term (in years)

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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 an analysis of the historical volatility of Armata and peer companies’

common stock.

Expected volatility is based on an analysis of 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 U.S.

Securities and Exchange Commission Staff Accounting Bulletin 110, which is the mid-point between the option vesting date and the expiration date.

Securities and Exchange Commission 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.

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Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.

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

Year Ended December 31,

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Acceleration of RSA expense in connection with executive severance

Expense related to inducement award

Expense related to vesting of stock options issued under the Company's stock plans

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Outstanding at December 31, 2019

Assumed in the Merger

Forfeited/Cancelled

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Exercisable at December 31, 2020

Restricted stock award transactions under the Assumed 2016 Plan during the year ended December 31, 2019 are presented below:

Restricted stock award transactions under the Assumed 2016 Plan and restricted stock unit award transactions during the year ended December 31, 2020 are presented below:

Outstanding at December 31, 2019

Forfeited/Cancelled

Issued as Common Stock

Vested and Issued as Common Stock

Outstanding at December 31, 2020

The aggregate intrinsic value of options at December 31, 2019 is based on the Company’s closing stock price on that date of $3.25 per share.

As of December 31, 2019, there was $7.4 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 2 years.

The aggregate intrinsic value of options at December 31, 2020 is based on the Company’s closing stock price on that date of $2.98 per share.

As of December 31, 2020, there was $3.4 million of total unrecognized compensation

expense related to unvested stock options and RSAs, excluding unvested RSAs with performance conditions deemed to be improbable for the period ended December 31, 2020, which the Company expects to recognize over the weighted average remaining period of 1.71 years.

Shares Reserved For Future Issuance

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Stock options outstanding

Unvested restricted stock units

Employee stock purchase plan

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Employee Retirement Plan

The Company’s employees participate in an employee retirement plan under Section 401(k) of the Internal Revenue Code of 1986, as amended.

All of the Company’s employees who meet minimum eligibility requirements are eligible to participate in the plan.

The Company’s employees participate in an employee retirement plan under Section 401(k) of the Internal Revenue Code of 1986, as amended.

All of the Company’s employees who meet minimum eligibility requirements are eligible to participate in the plan.

Matching contributions to the 401(k) plan are made for certain eligible employees to meet non-discrimination provisions of the plan.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data