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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-16 · 184 added, 200 removed, 61 unchanged (86% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes contained elsewhere in this Annual Report.

Some of the information contained in this discussion and analysis are set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.

See “Special Note Regarding Forward-Looking Statements.” Our actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled “Risk Factors” and elsewhere in this Annual Report.

On May 9, 2019, our predecessor company, C3J Therapeutics, Inc.

(“C3J”) completed a reverse merger with AmpliPhi Biosciences Corporation, a bacteriophage development stage company (“AmpliPhi”), where Ceres Merger Sub, Inc., a wholly-owned subsidiary of AmpliPhi, merged with and into C3J (the “Merger”).

Immediately prior to the Merger, AmpliPhi changed its name to Armata Pharmaceuticals, Inc.

Our common stock is traded on the NYSE American exchange under the symbol “ARMP.” We are headquartered in Marina del Rey, CA, in a 35,000 square-foot research and development facility built for product development with capabilities spanning from bench to clinic.

In addition to microbiology, synthetic biology, formulation, chemistry and analytical laboratories, the facility is equipped with two licensed current good manufacturing practice (“cGMP”) drug manufacturing suites enabling the production, testing and release of clinical material.

Statements contained in this Annual Report that are not statements of historical fact are forward-looking statements within the meaning of the U.S.

Private Securities Litigation Reform Act of 1995.

Such forward-looking statements include, without limitation, statements concerning product development plans, commercialization of our products, the

expected market opportunity for our products, the use of bacteriophages and synthetic phages to kill bacterial pathogens, having resources sufficient to fund our operations into the thrid quarter of 2023, future funding sources, general and administrative expenses, clinical trial and other research and development expenses, costs of manufacturing, costs relating to our intellectual property, capital expenditures, the expected benefits of our targeted phage therapies strategy, the potential market for our products, tax credits and carry-forwards, and litigation-related matters.

Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “will,” “goal,” “potential” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements necessarily contain these identifying words.

These statements are subject to risks and uncertainties.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth 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.

Some of the information contained in this discussion and analysis are set forth elsewhere in this Annual Report on Form 10-K , including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.

We are a clinical-stage biotechnology company focused on the development of pathogen-specific bacteriophage therapeutics for the treatment of antibiotic-resistant and difficult-to-treat bacterial infections using our proprietary bacteriophage-based technology.

Bacteriophages or “phages” have a powerful and highly differentiated mechanism of action that enables binding to and killing specific bacteria, in contrast to traditional broad-spectrum antibiotics.

We believe that phages represent a promising means to treat bacterial infections, especially those that have developed resistance to current standard of care therapies, including the so-called multidrug-resistant or “superbug” strains of bacteria.

We see bacteriophages as an alternative to antibiotics and an essential response to growing bacterial resistance to current classes of antibiotics.

Bacteriophages or “phages” have a powerful and highly differentiated mechanism of action that enables binding to and killing of targeted bacteria while uniquely preserving the human microbiome.

This is in direct contrast to traditional broad-spectrum antibiotics which can alter the human microbiome increasing susceptibility to opportunistic pathogens, such as C.

We believe that phages represent a promising means to effectively treat bacterial infections as an alternative to broad- spectrum antibiotics, especially for patients with bacterial infections resistant to current standard of care therapies, including the multidrug-resistant or “superbug” strains of bacteria.

We are a leading developer of phage therapeutics and 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 current good manufacturing price regulations compliant (“cGMP”) manufacturing capabilities to advance a broad pipeline of high-quality bacteriophage product candidates.

We are developing and advancing our lead clinical phage candidate for Pseudomonas aeruginosa ( “ P.

We are completing two critical Phase 2 trials to ensure a pathway towards pivotal Phase 3 trials.

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 host-engineered

current good manufacturing practice (“cGMP”) manufacturing capabilities to advance a target pipeline of high-quality bacteriophage product candidates for advanced development.

We are uniquely advancing two lead candidates to address both chronic and acute bacterial infections.

Our first lead candidate focused primarily on chronic bacterial infections is the clinical phage candidate for Pseudomonas aeruginosa (“P.

aeruginosa”).

On October 14, 2020, we received the approval to proceed from the FDA for our IND application for AP-PA02.

In the first quarter of 2023, Armata announced positive topline results from the completed “SWARM- P.a.

On October 14, 2020, we received the approval to proceed from the U.S.

Food and Drug Administration (the “FDA”) for our Investigational New Drug (“IND”) application for AP-PA02.

In the first quarter of 2023, we announced positive topline results from the completed “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 cystic fibrosis (“CF”) and chronic pulmonary P.

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Data indicate that AP-PA02 was well-tolerated with a treatment emergent adverse event profile similar to placebo.

Pharmacokinetcs (PK) findings confirm that AP-PA02 can be effectively delivered to the lungs through nebulization with minimal systemic exposure, with single ascending doses and multiple ascending doses resulting in a proportional increase in exposure as measured in induced sputum and exposure achievement relatively consistent across patient subjects.

Pharmacokinetics (PK) findings confirm AP-PA02 can be effectively delivered to the lungs through nebulization with minimal systemic exposure, with single ascending doses and multiple ascending doses resulting in a proportional increase in exposure as measured in induced sputum and exposure achievement relatively consistent across patient subjects.

Additionally, bacterial levels of P.

aeruginosa in the sputum measured at several timepoints suggest improvement in bacterial load reduction for subjects treated with AP-PA02 at the end of treatment as compared to placebo after ten days of dosing.

This study is supported by the Cystic Fibrosis Foundation (“CFF”), which granted Armata a Therapeutics Development Award of up to $5.0 million.

We are also developing a phage product candidate for Staphylococcus aureus (“ S.

aureus ” ) for the treatment of S.

aureus bacteremia, AP-SA02.

In addition, a correlation was seen between increasing phage dose and reduction in the bacterial load supporting the biologic plausibility of a bacterial specific mechanism of action and creating the opportunity for phage as a therapeutic alternative to inhaled antibiotics.

This study is supported by the Cystic Fibrosis Foundation (“CFF”), which granted us a Therapeutics Development Award of $5.0 million.

Following the promising Phase 1b/2a results of favorable safety and tolerability profile and plausible mechanism of action, an additional confirmatory Phase 2 trial was initiated in NCFB patients with similar chronic pulmonary infections due to Pseudomonas aeruginosa .

On February 22, 2022, we announced that we had received from the FDA the approval to proceed for our IND application for AP-PA02, in a second indication, non-cystic fibrosis bronchiectasis (“NCFB”).

We initiated a Phase 2 trial (“Tailwind”) in NCFB in 2022 and reported first patient dosing in the first quarter of 2023.

The “Tailwind” study is a Phase 2, multicenter, double-blind, randomized, placebo-controlled study to evaluate the safety, phage kinetics, and efficacy of inhaled AP-PA02 phage therapeutic in subjects with NCFB and chronic pulmonary Pseudomonas aeruginosa infection.

We are actively accelerating enrollment and increasing phage dosing with the goal of defining a safe and promising biologic correlation for a Phase 3 definitive trial in 2025 which will evaluate phage as an alternative to antibiotics in chronic pulmonary infections.

In parallel, we have an acute bacterial infection clinical development plan focused on Staphylococcus aureus bacteremia, a difficult-to-treat and often life-threatening human infections that can result in high morbidity and mortality and for which bacterial resistance to antibiotics is growing.

A key advantage of our phage manufacturing expertise is the purity profiles of our phage products, including AP-SA02, our phage product candidate for Staphylococcus aureus (“ S.

this has enabled us to pursue treatment of complicated S.

aureus bacteremia, where repetitive intravenous dosing is required.

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 (the “DoD”) through MTEC with funding from the Defense Health Agency and Joint Warfighter Medical Research Program.

On September 29, 2022, the MTEC Agreement was modified to increase the total award by $1.3 million to $16.3 million and extend the term into the third quarter of 2024.

We expect to use the grant to partially fund a Phase 1/2, multi-center, randomized, double-blind, placebo- controlled dose escalation study that will assess the safety, tolerability, and efficacy of our phage-based candidate, AP-SA02, for the treatment of adults with S.

On September 29, 2022, the MTEC Agreement was modified to increase the total award by $1.3 million to $16.3 million and extend the term into the second half of 2024.

The grant is being used to partially fund a Phase 1/2, multi-center, randomized, double-blind, placebo- controlled dose escalation study that will assess the safety, tolerability, and efficacy of our phage-based candidate, AP-SA02, for the treatment of adults with S.

aureus bacteremia.

On November 17, 2021, Armata announced that it had received from the FDA the approval to proceed for our Investigational New Drug application for AP-SA02.

We plan to continue to advance the “diSArm” study provided that the impacts of COVID-19 do not impede our ability to enroll subjects in this clinical trial.

On February 22, 2022, Armata announced that it had received from the FDA the approval to proceed for our IND application for AP-PA02, in a second indication, NCFB.

The Company initiated a Phase 2 trial (“Tailwind”) in NCFB in 2022 and reported first patient dosing in the first quarter of 2023.

The "Tailwind” study is a Phase 2, multicenter, double-blind, randomized, placebo-controlled study to evaluate the safety, phage kinetics, and efficacy of inhaled AP-PA02 phage therapeutic in subjects with NCFB and chronic pulmonary Pseudomonas aeruginosa infection.

On August 1, 2022, Armata announced that it had received from the FDA the approval to proceed for our IND application for AP-SA02, in a second indication, PJI.

The Company plans to initiate a Phase 1b/2a trial in 2023, which will assess the safety and tolerability of intravenous and intra-articular AP-SA02 as an adjunct to standard of care antibiotics in adults undergoing debridement, antibiotics, and implant retention for the treatment of periprosthetic joint infections caused by S.

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.

On November 17, 2021, we announced that we had received from the FDA the approval to proceed for our IND application for AP-SA02.

We are focused on accelerating enrollment of the Phase 2a segment of the “diSArm” study, evaluating safety with higher intravenous doses, which is possible due to the high purity of our phage product candidates.

We are committed to developing a definitive efficacy trial in 2025 focused on phage as an alternative to broad-spectrum antibiotics and/or antibiotic sparing to decrease the utilize of broad-spectrum antibiotics and their detrimental impact of the normal human microbiome.

On August 1, 2022, we announced that we had received from the FDA the approval to proceed for our IND application for AP-SA02, in a second indication, prosthetic joint infections (“PJI”).

We had planned to initiate a Phase 1b/2a trial in 2023, however in light of the growing concerns of both PJI and wound infection, we are revising the protocol to include both indications.

Driven by data from the bacteremia study, and with sufficient funding, we may in the future initiate a Phase 1b/2a trial to assess the safety and tolerability of intravenous and intra-articular AP-SA02 as an adjunct to standard of care antibiotics in adults undergoing treatment of periprosthetic joint infections and/or wound infections caused by S.

We remain committed to conducting randomized controlled clinical trials required for FDA approval in order to move toward the commercialization of its phage products as alternatives to traditional antibiotics, providing 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.

We have generally incurred net losses since our inception and our operations to date have been primarily limited to research and development and raising capital.

We have incurred net losses since our inception and our operations to date have been primarily limited to research and development and raising capital.

As of December 31, 2023, we had an accumulated deficit of $308.8 million.

We currently expect to use our existing cash and cash equivalents for the focused research and development of our current product candidates and for working capital and other general corporate purposes.

We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and seeking to obtain regulatory approval of our product candidates.

We currently expect to use our existing cash and cash equivalents for the continued research and development of our product candidates and for working capital and other general corporate purposes.

We expect to continue to incur significant and increasing operating losses at least for the next several years.

We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for at least one of our product candidates.

We may also use a portion of our existing cash and cash equivalents for the potential acquisition of, or investment in, product candidates, technologies, formulations or companies that complement our business, although we have no current understandings, commitments or agreements to do so.

Our existing cash and cash equivalents will not be sufficient to enable us to complete all necessary development of any potential product candidates.

Our existing cash and cash equivalents together with the $35.0 million loan proceeds received in March 2024 will not be sufficient to enable us to complete all necessary development of any potential product candidates.

Accordingly, we will be required to obtain further funding through one or more other public or private equity offerings, debt financings, collaboration, strategic financing, grants or government contract awards, licensing arrangements or other sources.

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Adequate additional funding may not be available to us on acceptable terms, or at all.

If we are unable to raise capital when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of assets, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for

bankruptcy or cease operations altogether.

Any of these events could have a material adverse effect on our business, financial condition and results of operations and result in a loss of investment by our stockholders.

Impact of COVID-19

The healthcare challenge and other impacts surrounding the COVID-19 pandemic that emerged in late 2019 have presented significant business uncertainty and had a dramatic impact on businesses globally, including ours.

As the COVID-19 pandemic reaches an endemic state, the extent to which it may affect our clinical trials, business operations, financial condition and results of operations remains dependent on future developments, which are highly uncertain and cannot be predicted at this time.

Although COVID-19 infection rates and severity have decreased recently, the occurrence, spread, severity and duration of any new outbreaks or resurgences, including the emergence and spread of new variants of COVID-19, actions taken to contain the resurgences or variants, and economic repercussions of the virus remain uncertain.

We continue to evaluate the nature and extent to which COVID-19 may impact our business and operations .

Recent Events

2024 Credit Agreement

On January 10, 2023, we entered into, as borrower, a secured convertible credit and security agreement (the “Credit Agreement”) with Innoviva Strategic Opportunities LLC (“Innoviva SO”), a wholly owned subsidiary of Innoviva, Inc.

INVA) (collectively, “Innoviva”), a principal stockholder of us.

On March 4, 2024, we entered into a credit and security agreement (the “2024 Credit Agreement”) for a loan in an aggregate amount of $35.0 million with Innoviva Strategic Opportunities LLC (“Innoviva SO”), a wholly owned subsidiary of Innoviva, Inc.

INVA) (collectively, “Innoviva”), our principal stockholder and a related party.

The 2024 loan bears interest at an annual rate of 14% and matures on June 4, 2025.

Principal and accrued interest are payable at maturity.

Repayment of the Loan is guaranteed by our domestic subsidiaries, and the loan is secured by substantially all of our assets and our subsidiary guarantors .

Concurrently with the execution of the 2024 loan, we amended certain provisions of the Convertible Loan and Credit Agreement to, among other things, conform certain terms relating to permitted indebtedness and permitted liens.

2023 Credit Agreement

On July 10, 2023, we entered into the Credit Agreement with Innoviva,.

The Credit Agreement provides for a secured term loan facility in an aggregate amount of $25.0 million (the “Loan”) at an interest rate of 14.0% per annum and has a maturity date of January 10, 2025.

Repayment of the Loan is required to be guaranteed by our domestic subsidiaries and foreign material subsidiaries, and the Loan is secured by substantially all of our assets and the subsidiary guarantors.

The Credit Agreement provides that if a Qualified Financing, as defined in the Credit Agreement, occurs, the outstanding principal amount of, and all accrued and unpaid interest on, the Loan shall be converted into shares of our common stock, at a price per share equal to a 15.0% discount to the lowest price per share for our common stock paid by investors in a Qualified Financing (which price paid by investors in a Qualified Financing may not be less than a 15.0% discount to the closing price of our common stock immediately prior to the consummation of a Qualified Financing event).

The Credit Agreement also requires us to file a registration statement (the “Registration Statement”) for the resale of all securities issued to the lender in connection with any conversion under the Credit Agreement.

After the Registration Statement has been declared effective by the U.S.

Securities and Exchange Commission, any outstanding Loan amount, including all accrued and unpaid interest thereon, may be converted at the lender’s option, into shares of our common stock at a price per share equal to the greater of book value or market value per share of common stock on the date immediately preceding the effective date of the Credit Agreement, which is $1.52 (as may be appropriately adjusted for any stock split, combination or similar act).

PJI IND Approval

On August 1, 2022, we announced that the FDA has cleared Armata’s IND application for AP-SA02, in a second indication, PJI.

The Company plans to initiate a Phase 1b/2 trial in PJI in 2023.

NCFB IND Approval

On February 22, 2022, we announced that the 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.

We initiated a Phase 2 trial in NCFB in 2022 and announced first patient dosing in the first quarter of 2023.

February 2022 Private Placement

On February 9, 2022, we entered into a securities purchase agreement to sell our common stock and warrants to Innoviva SO, a wholly‐owned subsidiary of Innoviva, Inc., a principal stockholder of us.

Pursuant and subject to the terms and conditions of the securities purchase agreement and related agreements, Innoviva agreed to 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 were completed in two tranches.

On February 9, 2022, Innoviva purchased 3,614,792 shares of common stock and warrants to purchase 1,807,396 shares of common stock for an aggregate purchase price of approximately $18.1 million.

On March 31, 2022, upon our stockholders voting in favor of the transaction, Innoviva purchased 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.

Executive Transition

On June 30, 2022, Steve R.

Martin retired as our Chief Financial Officer and Senior Vice President (and Principal Financial and Accounting Officer).

Martin has agreed to continue his employment with us as an advisor to his successor in the Principal Financial and Accounting Officer role from July 1, 2022 through December 31, 2022.

On March 25, 2022, the Board of Directors appointed Erin Butler to serve as (i) Vice President of Finance and Administration of the Company, effective April 1, 2022, and (ii) Principal Financial and Accounting Officer of the Company, effective July 1, 2022.

Selected Financial Data

The selected consolidated financial data set forth below as of December 31, 2022 and 2021, and for the years ended December 31, 2022 and 2021, 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

(239,774,000)

(202,857,000)

Total stockholders’ equity

Principal and accrued interest are payable at maturity.

Repayment of the Loan is guaranteed by our domestic subsidiaries, and the Loan is secured by substantially all of our assets and our subsidiary guarantors.

The Credit Agreement contains customary affirmative and negative covenants and representations and warranties, including financial reporting obligations and certain limitations on indebtedness, liens, investments, distributions (including dividends), collateral, investments, mergers or acquisitions and fundamental corporate changes.

The Credit Agreement also includes customary events of default, including payment defaults, breaches of provisions under the loan documents, certain losses or impairment of collateral and related security interests, the occurrence of certain events that could reasonably be expected to have a “material adverse effect” as set forth in the Credit Agreement, certain bankruptcy or insolvency events, and a material deviation from our operating budget.

The Loan was initially recognized at fair value of $21.2 million and subsequently accounted for at the amortized cost net of debt issuance costs and debt discount.

We amortized $0.9 million of debt issuance costs and debt discount during the year ended December 31, 2023 using the effective interest method.

The Loan’s annual effective interest rate was 27.3% as of December 31, 2023.

2023 Convertible Credit Agreement

On January 10, 2023, we entered into the Convertible Credit Agreement with Innoviva.

The Convertible Credit Agreement provides for a secured term loan facility in an aggregate amount of $30.0 million (the “Convertible Loan”) which bears interest at a rate of 8.0% per annum, and was scheduled to mature on January 10, 2024.

Concurrently with the execution of the Credit Agreement, we amended certain provisions of the Convertible Credit Agreement, to, among other changes, extend the maturity of the Convertible Loan to January 10, 2025.

Repayment of the Convertible Loan is guaranteed by our domestic subsidiaries and foreign material subsidiaries, and the Convertible Loan is secured by substantially all of our assets and the subsidiary guarantors.

The Convertible Credit Agreement provides that if there is a financing from new investors of at least $30.0 million (a “Qualified Financing”), the outstanding principal amount of, and all accrued and unpaid interest on, the Convertible Loan shall be converted into shares of our common stock at a price per share equal to a 15.0% discount to the lowest price per share for common stock paid by investors in a Qualified Financing (which price paid by investors in a Qualified Financing may not be less than a 15.0% discount to the closing price of common stock immediately prior to the consummation of a Qualified Financing event).

The Convertible Credit Agreement also required us to file a registration statement (the “Registration Statement”) for the resale of all securities issued to the lender in connection with any conversion under the Convertible Credit Agreement, which we originally filed on February 13, 2023 and which was declared effective by the SEC on April 6, 2023.

The Convertible Credit Agreement also confers upon the lender the option to convert any outstanding Convertible Loan amount, including all accrued and unpaid interest thereon, at the lender’s option, into shares of common stock at a price per share equal to the greater of book value or market value per share of common stock on the date immediately preceding the effective date of the Convertible Credit Agreement, which was $1.52 (as may be appropriately adjusted for any stock split, combination or similar act).

On July 10, 2023, in connection with the Credit Agreement with Innoviva, we amended the terms of the Convertible Loan, to, among other changes, extend the maturity of the Convertible Loan to January 10, 2025.

We concluded that the amendment is an extinguishment for accounting purposes.

We recognized a $1.8 million gain as the change in fair value of the convertible debt before the extinguishment date, July 10, 2023.

We estimated fair value of the combined Loan and the Convertible Loan before and after modification and recognized an extinguishment loss of $3.9 million in the consolidated statements of operations for the year ended December 31, 2023.

We recognized a $23.6 million loss as the change in fair value of the Convertible Loan from July 10, 2023 to December 31, 2023.

Results of Operations

Comparison of year ended December 31, 2022 and 2021

Comparison of years ended December 31, 2023 and 2022

The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (dollars in thousands):

Year Ended December 31,

Grant revenue

We recognized $5.5 million and $4.5 million of grant revenue during the year ended December 31, 2022 and 2021, respectively, which represents the MTEC’s share of the costs incurred for the Company’s AP-SA02 program for the treatment of Staphylococcus aureus bacteremia infections.

Operating expenses

Research and development

Research and development expenses for the year ended December 31, 2022 and 2021 were $35.0 million and $20.0 million, respectively.

The net increase of $15.0 million was primarily related to an increase of $7.6 million related to increased clinical trial activities and laboratory supplies expenses, $1.8 million in personnel costs, and $3.2 million in lease expenses, and a $2.2 million reduction in credits to research and development expenses related to CFF awards and Australian tax credits.

General and administrative

General and administrative expenses for the year ended December 31, 2022 were $7.4 million compared with $8.3 million for the same period in 2021.

T he net decrease of $0.9 million was primarily related to a decrease of $1.2 million of salary and personnel related expenses, offset by an increase of $0.4 million of lease expenses.

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.

Total operating expenses

Loss from operations

Other income (expense)

For the year ended December 31, 2022 and 2021, we recorded noncash interest expense of $0 and $0.1 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, 2022 or December 31, 2021.

Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was $32.5 million, as compared to $23.6 million for the year ended December 31, 2021.

The increase of $8.9 million was due to a $13.8 million increase in net loss, $1.2 million net increase in non-cash adjustments to cash used in operating activities, offset by a $3.7 million net decrease in operating assets and liabilities.

Investing Activities

Net cash used in investing activities of $2.2 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively, was related to purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was $44.0 million for the year ended December 31, 2022, which was comprised of $44.4 million of net proceeds raised from the February 2022 private placement transactions with Innoviva, $0.1 million of proceeds for exercise of stock options, and a payment of $0.5 million for offering costs associated with a planned equity issuance in 2023.

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.

Interest income

Interest expense

Change in fair value of convertible debt

Loss on convertible debt extinguishment

Total other (expense) income, net

*Not meaningful

Grant Revenue

We recognized $4.5 million and $5.5 million of grant revenue for the years ended December 31, 2023 and 2022, respectively, which represents MTEC’s share of the clinical development costs incurred for our AP-SA02 program for the treatment of Staphylococcus aureus bacteremia.

Research and Development

The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022 (dollars in thousands):

Year Ended December 31,

External costs:

Clinical trial expenses

Other research and development costs, including consulting, laboratory supplies and other

Total external costs

Internal costs:

Personnel-related costs

Facilities and overhead costs

Total research and development expense:

Research and development expenses decreased by $1.2 million, from $35.0 million for the year ended December 31, 2022 to $33.8 million for the year ended December 31, 2023.

Clinical trial costs decreased by $0.8 million, from $10.8 million for the year ended December 31, 2022, to $9.9 million for the year ended December 31, 2023.

The decrease is primarily due to a decrease in clinical trial expenses for AP-PA02 Cystic Fibrosis study and AP-SA02 Prosthetic Joint Infection study, offset by an increase in clinical trial expenses for AP-PA02 Non-Cystic Fibrosis Bronchiectasis study and AP-SA02 Bacteremia study, based on the progress of our clinical trials.

Other external research and development costs increased by $0.7 million from $4.0 million for the year ended December 31, 2022 to $4.7 million for the year ended December 31, 2023.

We recognized $0.3 million and $1.0 million credits to research and development expenses related to the CFF grant for the years ended December 31, 2023 and 2022, respectively.

Our spending on laboratory supplies decreased by $1.4 million, which was partially offset by a $1.2 million increase in consulting expenses.

Our external research and development expenses by project for the years ended December 31, 2023 and 2022 were as follows (in thousands):

Year Ended December 31,

Non-Cystic Fibrosis Bronchiectasis

Cystic Fibrosis

Prosthetic Joint Infection

Expenses not allocated by projects*

Total external costs

● Expenses not allocated by projects include consultants, lab supplies and outsource service expenses

Personnel-related costs, including employee payroll and related expenses, decreased by $2.0 million, from $11.6 million for the year ended December 31, 2022 to $9.7 million for the year ended December 31, 2023, largely due to a decrease in payroll and related taxes of $0.9 million and recruiting expenses of $0.3 million, as well as employee stock-based compensation expenses decrease of $0.8 million, which was primarily due to the full vesting of awards issued in prior periods.

Facilities and overheads increased by $0.8 million from $8.6 million for the year ended December 31, 2022 to $9.4 million for the year ended December 31, 2023, largely as a result of an increase in lease expense of $1.0 million, an increase of $0.2 million related to laboratory equipment maintenance costs, partially offset by a decrease of $0.4 million in expensed noncapitalizable lab equipment.

General and Administrative

General and administrative expenses were $11.6 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively.

The increase of $4.2 million is primarily related to an increase of $3.7 million in legal, accounting and other consulting expenses, a one-time expense of $0.5 million related to the prepaid financing costs , an increase of $0.3 million in other facilities and overhead expenses, an increase of $0.2 million in leases and recruiting expenses, and a net decrease in personnel-related costs of $0.6 million, including a stock-based compensation expense decrease of $1.3 million, related to the full vesting of awards issued in prior periods and a reversal of expense related to certain equity awards modifications, offset by a $0.7 million increase in severance costs payable to two former employees.

Interest Income

Interest income for the years ended December 31, 2023 and 2022 was $0.2 million and less than $0.1 million, respectively, which was related to interest income earned on our cash, cash equivalents and restricted cash balances.

Interest Expense

We recognized interest expense of $2.6 million for the year ended December 31, 2023, which relates to the interest and the amortization of debt discount and issuance costs for the Loan received from Innoviva in July 2023.

Interest expense is accrued at each period end and is payable at the Loan maturity in January 2025.

Change in Fair Value of Convertible Debt

We recognized a fair value of the convertible debt loss for the year ended December 31, 2023 of $21.9 million.

The Convertible Loan received is accounted at fair value using a weighted probability of various settlement scenarios of the Convertible Loan during its term discounted to each reporting date.

Conversion option scenarios are valued using an option pricing model with significant assumptions and estimates such as volatility, expected term and risk-free interest rates.

Refer to Note 7, “ Convertible Debt ”, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

Loss on Convertible Debt Extinguishment

We recognized a loss on convertible debt extinguishment for the year ended December 31, 2023 of $3.9 million which relates to the amendment to the Convertible Loan on July 10, 2023.The loss amount was estimated as a difference between the fair value of the Convertible Loan before and after modification.

Refer to Note 7, “ Convertible Debt ”, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

Liquidity, Capital Resources and Financial Condition

We have prepared our consolidated financial statements on a going concern basis, which assumes that we will realize our assets and satisfy our liabilities in the normal course of business.

However, we have incurred net losses since our inception and have negative operating cash flows.

We have incurred net losses since our inception and have negative operating cash flows.

Our cash and cash equivalents of $13.5 million as of December 31, 2023, together with the loan proceeds of $35.0 million received in March 2024, will not be sufficient to fund our operations for the next 12 months from the date of this Annual Report.

We plan to control our expenses and to raise additional capital through a combination of public and private equity, debt financings, strategic alliances, and grant arrangements.

These circumstances raise substantial doubt about our ability to continue as a going concern.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning our ability to continue as a going concern.

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

While management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are not entirely within its control and cannot be assessed as being probable of occurring.

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

On January 26, 2021 and October 28, 2021, we entered into a securities purchase agreement in connection with the January and October 2021 Private Placements.

On February 9, 2022, we entered into a securities purchase agreement in connection with the February 2022 Private Placement.

On January 10, 2023, we entered into, as borrower, a secured convertible credit and security agreement (the “Credit Agreement”) with Innoviva SO, a wholly owned subsidiary of Innoviva, Inc., a principal stockholder of us.

The Credit Agreement provides for a secured term loan facility in an aggregate amount of $30 million (the “Loan”) at an interest rate of 8.0% per annum, and has a maturity date of January 10, 2024.

The Credit Agreement provides that if a Qualified Financing, as defined in the Credit Agreement, occurs, the outstanding principal amount of, and all accrued and unpaid interest on, the Loan shall be converted into shares of our common stock at a price per share equal to a 15.0% discount to the lowest price per share for our common stock paid by investors in a Qualified Financing (which price paid by investors in a Qualified Financing may not be less than a 15.0% discount to the closing price of our common stock immediately prior to the consummation of a Qualified Financing event).

The Credit Agreement also requires us to file a registration statement for the resale of all securities issued to the lender in connection with any conversion under the Credit Agreement.

After the Registration Statement has been declared effective by the SEC, any outstanding Loan amount, including all accrued and unpaid interest thereon, may be converted at the lender’s option, into shares of our common stock at a price per share equal to the greater of book value or market value per share of our common stock on the date immediately preceding the effective date of the Credit Agreement, which is $1.52 (as may be appropriately adjusted for any stock split, combination or similar act).

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 will be sufficient to fund our planned operations into the third quarter of 2023, but not one year from the issuance of the 2022 financial statements.

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

In light of recent bank failures, the Company decided to move cash and cash equivalents previously held at regional banks to larger financial institutions.

We do not anticipate any material impact on our financial condition or operations as a result of the recent bank failures.

In March 2024, we received a $35.0 million loan from Innoviva, which matures in June 2025 and bears interest at a rate of 14% per year.

Principal and accrued interest are payable at maturity and may be prepaid at the Company’s option.

During the year ended December 31, 2023, we received from Innoviva the Convertible Loan in the aggregate amount of $30.0 million and the Loan in the aggregate amount of $25.0 million from Innoviva.

The Convertible Loan and the Loan mature in January 2025, and principal and accrued interest are payable at maturity.

The Convertible Loan provides for various conversion and repayment options, including the conversion of principal and accrued interest into shares of our common stock upon a Qualified Financing and our option to repay the Convertible loan prior to maturity.

Future Capital Requirements

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● manufacturing costs associated with our targeted phage therapies strategy and other research and development activities;

● the terms and timing of any collaborative, licensing, acquisition or other arrangements that we may establish;

● whether and when we receive future Australian tax rebates, if any;

● the costs of completing the construction and improvements of our leased premises to be used as our new headquarters.

We expect to incur $5.4 million of additional expenses by mid-2024, which may increase or decrease as we complete the construction by mid 2024;

● the costs and timing of seeking regulatory approvals;

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● the public equity market;

● private equity financings;

● collaborative arrangements, government grants or strategic financings;

● licensing arrangements;

● public or private debt.

● private equity or debt financings;

● collaborative arrangements,

● government grants;

● strategic financings.

Any additional fundraising efforts may divert our management team from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates.

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We cannot be certain that sufficient funds will be available to us when required or on acceptable terms.

If we are unable to secure additional funds on a timely basis or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of technology or assets, pursue an acquisition of our company by a third party at a price that may result in a loss on investment for our stockholders, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether.

Any of these events could have a material adverse effect on our business, financial condition and results of operations.

Moreover, if we are unable to obtain additional funds on a timely basis, there will be substantial doubt about our ability to continue as a going concern and increased risk of insolvency and loss of investment by our stockholders.

certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether.

Any of these events could have a material adverse effect on our business, financial condition and results of operations, increase a risk of insolvency and loss of investment by our stockholders.

To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our existing stockholders.

Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide.

The following table summarizes our sources and uses of cash for the periods presented (in thousands):

Year Ended December 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Cash Flows Used in Operating Activities

Net cash used in operating activities was $47.4 million and $32.5 million for the years ended December 31, 2023 and 2022, respectively.

Cash used in operating activities in the year ended December 31, 2023 was primarily due to our net loss for the period of $69.0 million, adjusted by non-cash net expenses of $31.3 million and a net change of $9.7 million in our net operating assets and liabilities.

The non-cash items consist of $21.8 million related to a loss from change in fair value of convertible debt, $3.9 million related to the Convertible Loan extinguishment loss, $2.6 million of non-cash interest expense on the Loan, $1.0 million related to depreciation and amortization expense, $1.0 million related to change in right-of-use asset, $0.9 million related to stock-based compensation expense.

The changes in our net operating assets and liabilities were primarily due to a decrease of $13.5 million in operating lease liability, mainly related to payments for our new leased facility construction, which we expect to complete by mid-2024, and rent payments, a decrease of $1.1 million in accrued compensation, partially offset by a decrease of $4.8 million in prepaid expenses and other assets.

Cash used in operating activities in the year ended December 31, 2022 was primarily due to our net loss for the period of $36.9 million, adjusted by non-cash net expenses of $4.0 million and a net change of $0.4 million in our net operating assets and liabilities.

The non-cash amounts consisted of $3.1 million related to stock-based compensation expense and $0.9 million related to depreciation and amortization expense.

The changes in our net operating assets and liabilities were primarily due to an increase of $3.6 million in operating lease liability, an increase of $0.8 million in accrued compensation, an increase of $3.7 million in accounts payable and accrued liabilities, partially offset by an increase of $7.7 million in prepaid expenses and other current assets.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $8.1 million and $2.2 million for the years ended December 31, 2023 and 2022, respectively, which is mostly attributable to purchases of laboratory and manufacturing equipment acquired for our new manufacturing facility.

We expect our spending for property and equipment to decrease as our manufacturing facility will be ready by mid-2024.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended December 31, 2023 was $54.0 million, which consisted primarily of net proceeds from issuance of convertible debt of $29.1 million and net proceeds from issuance of long-term debt of $24.9 million.

Cash provided by financing activities for the year ended December 31, 2022 was $44.0 million, which consisted primarily of proceeds from the sale of common stock, net of offering costs of $44.4 million, proceeds from the exercise of stock options of $0.1 million, offset by payment of deferred offering costs of $0.5 million.

Off-Balance Sheet Arrangements

As of December 31, 2023, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Use of Estimates

Our significant accounting policies are described in Note 3 to the consolidated financial statements included in this Annual Report.

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements as of December 31, 2023 and December 31, 2022, which have been prepared in accordance with U.S.

generally accepted accounting principles.

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.

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.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods.

These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates and assumptions could occur in the future.

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

Changes in estimates are reflected in reported results for the period in which they become known.

Actual results may differ from these estimates under different assumptions or conditions.

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 the award upon achievement of certain milestones as credits to research and development expenses.

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.

Impairment of Goodwill

We perform our goodwill impairment analysis at the reporting unit level.

For the years ended December 31, 2022 and 2021, our company has one reporting unit.

We perform our annual impairment analysis by either doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment, or comparing a reporting unit’s estimated fair value to its carrying amount.

If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies.

Our market capitalization is also considered as a part of this analysis.

In accordance with our accounting policy, we completed the annual evaluation for impairment of goodwill as of December 31, 2022 using the qualitative method and determined that no impairment existed.

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.

The authoritative accounting guidance provides an optional qualitative assessment for any

indicators that indefinite-lived intangible assets are impaired.

If it is determined that it is more likely than not that the indefinite-lived intangible assets, including IPR&D, are impaired, the fair value of the indefinite-lived intangible assets is compared with the carrying amount and impairment is recorded for any excess of the carrying amount over the fair value of the indefinite-lived intangible assets.

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.

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

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

Significant assumptions utilized the 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.

Our analysis indicated no impairment existed.

Research and Development

Although our significant accounting policies are described in more detail in Note 3, “ Significant Accounting Policies” , to our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Accrued Research and Development

All research and development costs are expensed as incurred.

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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.

Some of these contractors 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.

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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, including noncash 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 date of remeasurement 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

Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on an accelerated attribution method over the requisite service period.

We determine the estimated fair value of each stock option on the date of grant using the Black-Scholes valuation model which uses assumptions regarding a number of complex and subjective variables.

The risk-free interest rate is based on

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.

The expected term represents the period that we expect our stock options to be outstanding.

The expected term assumption is estimated using the simplified method set forth in the SEC’s 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.

We have never declared or paid dividends on our common stock and have no plans to do so in the foreseeable future.

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

Changes in these assumptions may lead to variability with respect to the amount of stock compensation expense we recognize related to stock options.

Stock-based compensation expense for an award with a performance condition is recognized when the achievement of such performance condition is determined to be probable.

If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously recognized compensation expense is reversed.

Fair Value Estimate of the Convertible Loan

In January 2023, we entered into the Convertible Credit Agreement with Innoviva, which was amended in July 2023.

The Convertible Loan includes various conversion and repayment options, including the conversion of principal and accrued interest into shares of our common stock upon a Qualified Financing and our option to repay the Convertible Loan prior to maturity.

Refer to Note 7, “ Convertible Debt ”, in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

We account for the Convertible Loan at fair value and changes in fair value are included in other income (expense) in the consolidated statements of operations in each reporting period.

We estimate the fair value using a weighted probability of various settlement scenarios during the Convertible Loan term discounted to each reporting date.

To estimate the fair value of the conversion option scenarios, we use an option pricing model with assumptions, such as volatility, expected term and risk-free interest rates.

Changes in the fair value of our common stock and probabilities of scenarios significantly impact the fair value of the Convertible Loan.

We expect to continue making these estimates until the Convertible Loan conversion or its maturity in January 2025.

As of December 31, 2023, we estimated the fair value of the Convertible Loan to be $58.6 million.

For the year ended December 31, 2023, we recognized a change in fair value loss of $21.8 million in the consolidated statements of operations and comprehensive loss.

Recent Accounting Pronouncements

Refer to Note 3 of the notes to the consolidated financial statements contained elsewhere in this Annual Report.

Off-Balance Sheet Arrangements

As of December 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In addition, we do not engage in trading activities involving non-exchange traded contracts.

Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Refer to Note 3, “ Significant Accounting Policies ”, of the notes to the consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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