What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-18 · 108 added, 59 removed, 153 unchanged (52% of the section changed)

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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 below under Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Our actual results could differ materially from those

anticipated in these forward-looking statements as a result of various factors, including those set forth below under Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

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.

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We are a leading developer of phage therapeutics which are uniquely positioned to address the growing worldwide threat of antibiotic-resistant bacterial infections .

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 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 P.

On October 14, 2020, Armata received the approval to proceed from the FDA for its Investigational New Drug application for AP-PA02.

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 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 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 S.

aureus for the treatment of S.

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 Cystic Fibrosis Foundation (“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 will receive a $15.0 million grant and entered into a three-year program administered by the 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 COVID-19 disease 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 in 2021, using our phage-based candidate, AP-SA02, for the treatment of adults with complicated S.

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.

In addition to our more advanced pipeline programs, we have phage development efforts underway to target other indications including non-cystic fibrosis bronchiectasis (“NCFB”), prosthetic joint infections (“PJI”) and hospitalized pneumonia.

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

These attributes 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 bacterial infections.

We are committed to conducting randomized controlled clinical trials required for FDA approval in order to move toward the 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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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.

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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 spreads 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.

In March 2020, the World Health Organization (“WHO”) declared COVID-19 a global pandemic and the United States declared a national emergency with respect to COVID-19.

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 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 response efforts may have a future impact on our third-party suppliers and partners.

It is possible that due to the increasing emphasis on the development 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 vaccines and our ability to obtain these materials for our development activities could be negatively impacted.

We have experienced some delays of this nature in the fourth quarter of 2020.

The full extent of the COVID-19 pandemic impact will depend on future developments that are 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 development and distribution of vaccines and the economic impact on local, regional, national and international markets.

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.

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 during 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 and the Omicron variants, 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 continuing evolution of the COVID-19 outbreak and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021 or 2022.

Any recovery from negative impacts to our business and related economic impact due to the COVID-19 outbreak may also be slowed or reversed by a number of factors, including the current widespread resurgence in COVID-19 infections, combined with the seasonal flu.

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 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 recent widespread resurgence in COVID-19 infections attributable to the Omicron variant, combined with the seasonal flu.

Recent Events

On January 26, 2021, we entered into the 2021 Securities Purchase Agreement in connection with the 2021 Private Placement.

See the section entitled “Business—Recent Developments” for a description of the 2021 Private Placement, which is incorporated herein by reference.

The Company received aggregate gross proceeds from the 2021 Private Placement of approximately $20.0 million, before deducting transaction expenses, and excluding proceeds (if any) received in connection with the exercise of any warrants.

NCFB Investigational New Drug (“IND”) Approval

On February 22, 2022, we announced that the U.S.

FDA has cleared Armata's IND application to initiate a clinical trial of its optimized lead therapeutic candidate, AP-PA02, in a second indication, NCFB.

The company plans to initiate a Phase 2 trial in 2022.

February 2022 Private Placement

On February 9, 2022, we entered into a securities purchase agreement to sell our common stock and warrants to Innoviva Strategic Opportunities LLC, a wholly ‐ owned subsidiary of Innoviva, Inc.

INVA) (collectively, "Innoviva"), our largest shareholder.

The gross proceeds from the transaction are expected to be $45 million, before deducting estimated offering expenses.

Pursuant and subject to the terms and conditions of the securities purchase agreement and related agreements, Innoviva will purchase 9,000,000 newly issued shares of our common stock, at a price of $5.00 per share, and warrants to purchase up to 4,500,000 additional shares of our common stock, with an exercise price of $5.00 per share.

The stock purchases are expected to occur in two tranches.

Upon execution, Innoviva purchased approximately 3,614,792 shares of common stock and warrants to purchase approximately 1,807,396 shares of common stock for an aggregate purchase price of approximately $18.1 million.

At the closing of the second tranche, upon our stockholders voting in

favor of the transaction, Innoviva will purchase approximately 5,385,208 shares of common stock and warrants to purchase approximately 2,692,604 shares of common stock for an aggregate purchase price of $26.9 million.

Subject to the satisfaction of certain closing conditions, including the approval of our stockholders, the second closing contemplated by the securities purchase agreement is expected to occur near the end of the first quarter of 2022.

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/2a clinical development program, and Innoviva for the private placement of newly issued shares of our 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 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 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 $7.3 million.

Selected Financial Data

The selected consolidated financial data set forth below as of December 31, 2021 and 2020, and for the years ended December 31, 2021 and 2020, are derived from our audited consolidated financial statements included elsewhere in this report.

This information should be read in conjunction with those consolidated financial statements, the notes thereto, and with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations .”

For the year ended December 31,

Statement of Operations Data:

Grant revenue

Loss from operations

Net loss per share, basic and diluted

Shares used in computing net loss per share, basic and diluted

As of December 31,

Balance Sheet Data:

Cash and cash equivalents

Working capital

Total liabilities

Accumulated deficit

(202,857,000)

(179,702,000)

Total stockholders’ equity

Results of Operations

As a result of the Merger, C3J was considered the accounting acquirer of AmpliPhi because C3J’s shareholders retained a majority control of ownership of the combined company subsequent to the Merger;

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

Comparison of year ended December 31, 2021 and 2020

Grant Revenue

We recognized $0.8 million of grant revenue during the year ended December 31, 2020, which represents MTEC’s share of the costs incurred for our AP-SA02 program for the treatment of S.

aureus bacteremia infections.

We invoice MTEC on a monthly basis for eligible costs incurred under the grant agreement.

We recognized $4.5 million and $0.8 million of grant revenue during the year ended December 31, 2021 and 2020, respectively, which represents the Medical Technology Enterprise Consortium (“MTEC’s”) share of the costs incurred for the Company’s AP-SA02 program for the treatment of Staphylococcus aureus bacteremia infections.

Research and Development

Research and development expenses for the year ended December 31, 2021 and 2020 were $20.0 million and $14.4 million, respectively.

The net increase of $4.6 million was partially due to a $2.3 million increase of clinical trial and laboratory supply expenses in connection with our clinical trial of the AP-PA02 program, a $1.6 million increase in payroll and related expenses due to increased headcount during 2020, a $0.4 million increase in regulatory costs, a $0.4 million net increase in facility and maintenance costs and a reduction of $0.3 million in research and development consulting expenses.

Also included in research and development expenses for the year ended December 31, 2020 was $1.0 million of CFF Award accounted for as offset to research and development expenses.

Research and development expenses for the year ended December 31, 2019 included a credit of $1.3 million for Australian tax rebates received in 2019.

The net increase of $5.6 million was primarily related to an increase of $5.3 million in increased contracted research costs, laboratory supplies and consulting expenses related to ongoing clinical trials and an increase of $2.7 million in personnel costs, These increases were offset by credits to research and development expenses of $2.8 million related to our award agreement with the Cystic Fibrosis Foundation (“CFF”) and a $0.6 million tax rebate from Australian tax authorities during the year ended December 31, 2021, as compared to $1.1 million received from CFF and the the National Institute of Health (“NIH”) during the year ended December 31, 2020 .

General and Administrative

General and administrative expenses for the year ended December 31, 2020 and 2019 were $8.0 million and $9.3 million, respectively.

The net decrease of $1.3 million was primarily due to a $1.2 million decrease in share-based compensation, a $1.0 million decrease of professional expenses due to merger related expenses in the year ended December 31, 2019, offset by a $0.3 million increase in insurance costs, and a $0.4 million increase in payroll, incentive compensation and related expenses.

Loss on sale of assets

Loss on sale of available-for-sale assets of $0.7 million during the year ended December 31, 2019 represented the excess of carrying value of Slovenia net assets sold over proceeds received.

The loss primarily related to fixed assets sold and accordingly, there was no impact on cash and cash equivalents from this transaction.

General and administrative expenses for the year ended December 31, 2021 were $8.3 million, which remained largely consistent with $8.0 million for the same period during 2020.

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 year ended December 31, 2021.

Other Income (Expense)

For the year ended December 31, 2020 and 2019, we recorded noncash interest expense of $0.6 million and $0.9 million as a result of interest accretion on the time-based cash payments due in connection with the SGI asset acquisition.

The decrease of $0.3 million was primarily related to a reduced balance due to SGI as a result of a cash payment of $1.0 million in January 2019 and $1.0 million in January 2020.

For the year ended December 31, 2019, we recorded a noncash gain of $1.1 million upon the settlement of the derivative liability as a result of the issuance of equity in connection with the SGI asset acquisition coinciding with the closing of the Merger.

See Note 11 to our consolidated financial statements.

For the year ended December 31, 2021 and 2020, we recorded noncash interest expense of $0.1 million and $0.6 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.

There was no income tax expense or benefit for the year ended December 31, 2021 or December 31, 2020.

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Investing Activities

Net cash used in investing activities of $0.8 million for the year ended December 31, 2020 was related to purchases of property and equipment.

Cash provided by investing activities was $2.9 million for the year ended December 31, 2019, primarily due to $3.0 million of cash acquired in connection with the Merger, offset in part by net capital equipment purchases of $0.1 million.

Net cash used in investing activities of $1.3 million and $0.8 million for the years ended December 31, 2021 and 2020 was related to purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was $25.5 million for the year ended December 31, 2021, which was primarily comprised of $19.3 million net proceeds raised from the January 2021 private placement transactions with Innoviva, $6.9 million net proceeds raised from the October 2021 private placement transaction with CFF and Innoviva, and $0.6 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 $23.2 million for the year ended December 31, 2020, which was primarily comprised of $22.9 million net proceeds raised from the 2020 Private Placement transaction with Innoviva, $0.7 million proceeds from the PPP loan, and $0.2 million proceeds received from warrant and employee stock option exercises, offset by a payment of $0.6 million in deferred consideration related to the time-based payment obligation in connection with the SGI asset acquisition.

Net cash of $9.0 million provided by financing activities for the year ended December 31, 2019 was comprised of net cash proceeds of $10.0 million from a common stock sale coinciding with the Merger, 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

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

On January 26, 2021, we entered into the 2021 Securities Purchase Agreement in connection with the 2021 Private Placement.

See the section entitled “Business—Recent Developments” for a description of the 2021 Private Placement, which is incorporated herein by reference.

Management believes our existing cash resources and including the proceeds from the 2021 Private Placement of $20.0 million will be sufficient to fund our planned operations into the first quarter of 2022, but not one year from the issuance of the 2020 financial statements.

On January 26, 2021 and October 28, 2021, we entered into the Securities Purchase Agreement in connection with the January and October 2021 Private Placements.

On February 9, 2022, we entered into the Securities Purchase Agreement in connection with the February 2022 Private Placement.

See the section entitled “Business—Recent Developments” for a description of the 2021 and 2022 Private Placements, which is incorporated herein by reference.

Management believes our existing cash resources and expected proceeds from the second tranche of the February 2022 Private Placement will be sufficient to fund our planned operations into the first quarter of 2023, but not one year from the issuance of the 2021 financial statements.

For the foreseeable future, our ability to continue our operations is dependent upon our ability to obtain additional capital.

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The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the related disclosure of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates and judgments, including those related to impairment assessment of our grants and awards, indefinite lived intangible

assets, and stock-based compensation.

On an on-going basis, we evaluate our estimates and judgments, including those related to impairment assessment of our grants and awards, indefinite lived intangible assets, and stock-based compensation.

We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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With respect to each grant or award, we determine 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, we recognize amounts received as a contra-expense or grant revenue in the consolidated statement of operations when the related research and development expenses are incurred.

To the extent the grant or award is within the scope of ASC 808, we recognize the award upon achievement of certain milestones as credits to

research and development expenses.

For grant and awards outside the scope of ASC 808, we apply ASC 606 or International Accounting Standards No.

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Our goodwill represents the excess of the cost over the fair value of net assets acquired from our business combination.

The determination of the value of goodwill and intangible assets arising from the business combination requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including capitalized in-process research and development, or IPR&D.

Intangible assets acquired in a business combination that are used for IPR&D activities are considered indefinite lived until the completion or abandonment of the associated research and development efforts.

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In accordance with our accounting policy, we completed the annual evaluation for impairment of goodwill as of December 31, 2021 using the qualitative method and determined that no impairment existed.

Impairment Review of In-process Research and Development (“IPR&D”)

Impairment Review of In-process Research and Development

We test our IPR&D asset for impairment as of December 31 of each year or more frequently if indicators of impairment are present.

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If and when a quantitative analysis of IPR&D assets is required based on the result of the optional qualitative assessment, the estimated fair value of IPR&D assets is calculated based on the income approach, which includes discounting expected future net cash flows associated with the assets to a net present value.

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

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 our impairment analysis.

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Our analysis indicated no impairment existed.

Research and Development

All research and development costs are expensed as incurred.

Research and development costs consist primarily of salaries, employee benefits, costs associated with preclinical studies and clinical trials (including amounts paid to clinical research organizations and other professional services) and in process research and development expenses.

Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

We record accruals for estimated research and development costs, comprising payments for work performed by third party contractors, laboratories, participating clinical trial sites, and others.

Some of these contractor’s bill monthly based on actual services performed, while others bill periodically based upon achieving certain contractual milestones.

For the latter, we accrue the expenses as goods or services are used or rendered.

Clinical trial site costs related to patient enrollment are accrued as patients enter and progress through the trial.

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

We determine if an arrangement contains a lease at inception.

We currently only have operating leases.

We recognize a right-of-use operating lease asset and associated short- and long-term operating lease liability on the consolidated balance sheet for operating leases greater than one year.

The right-of-use assets represent our right to use an underlying asset for the lease term and the lease liabilities represent our obligation to make lease payments arising from the lease arrangements.

Right-of-use operating lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments we will pay over the lease term.

We determine the lease term at the inception of each lease, which includes renewal options only if we conclude that such options are reasonably certain to be exercised.

As our leases do not provide an interest rate implicit in the lease,we use our incremental borrowing rate, based on the information available on the date of adoption of Topic 842, Leases , as of the lease inception date or at the lease option extension date in determining the present value of future payments.

We recognize rent expense for the minimum lease payments on a straight-line basis over the expected term of the leases.

We recognize period expenses, such as common area maintenance expenses, in the period such expenses are incurred.

Stock-Based Compensation

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The expected term assumption is estimated using the simplified method set forth in the U.S.

Securities and Exchange (the “SEC”) Staff Accounting Bulletin 110, which is the mid-point between the option vesting date and the expiration date.

Securities and Exchange Commission’s (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, we elect, on a grant by grant basis, to use the expected term or the contractual term of the option award.

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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 7. Management’s Discussion and Analysis