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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

 

For the quarterly period ended June 30, 2024

OR

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

 

For the transition period from _________________ to _______________________

Commission file number: 001-37544

ARMATA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Washington

91-1549568

(State or other jurisdiction of

(I.R.S. Employer Identification Number)

incorporation or organization)

5005 McConnell Avenue

Los Angeles, CA

90066

(Address of principal executive offices)

(Zip Code)

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

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

ARMP

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes        No    

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

Yes        No    

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

Large accelerated filer  

Accelerated filer  

Non-accelerated filer    

Smaller reporting company  

Emerging growth company  

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

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

Yes     No

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of August 9, 2024 was 36,183,067.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

6

Condensed Consolidated Balance Sheets

6

 

Condensed Consolidated Statements of Operations

7

 

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

8

Condensed Consolidated Statements of Cash Flows

10

 

Notes to Condensed Consolidated Financial Statements

11

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II. OTHER INFORMATION

33

 

 

Item 1.

Legal Proceedings

33

 

 

Item 1A.

Risk Factors

33

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

Item 3.

Defaults upon Senior Securities

33

 

 

Item 4.

Mine Safety Disclosures

34

 

 

Item 5.

Other Information

34

 

 

Item 6.

Exhibits

34

 

 

SIGNATURES

36

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) and certain information incorporated herein by reference contain forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. These statements relate to future events, results or to our future financial performance and involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or events to be materially different from any future results, performance, or events expressed or implied by the forward-looking statements. Forward-looking statements in this Quarterly Report include, but are not limited to, statements regarding:

our estimates regarding anticipated operating losses, capital requirements and needs for additional funds;

our ability to raise additional capital when needed and to continue as a going concern;

our ability to manufacture, or otherwise secure the manufacture of, sufficient amounts of our product candidates for our preclinical studies and clinical trials;

our research and development plans, including our clinical development plans and planned clinical trials;

our ability to select combinations of phages to formulate our product candidates;

our development of bacteriophage-based therapies;

the potential use of bacteriophages to treat bacterial infections;

the potential future of antibiotic resistance;

our ability for bacteriophage therapies to disrupt and destroy biofilms and restore sensitivity to antibiotics;

our planned development strategy, presenting data to regulatory agencies and defining planned clinical studies;

the expected timing of additional clinical trials, including Phase 1b/Phase 2 or registrational clinical trials;

our ability to manufacture and secure sufficient quantities of our product candidates for clinical trials;

the drug product candidates to be supplied by us for clinical trials;

the potential for bacteriophage technology being uniquely positioned to address the global threat of antibiotic resistance;

the safety and efficacy of our product candidates;

our anticipated regulatory pathways for our product candidates;

the activities to be performed by specific parties in connection with clinical trials;

our ability to successfully complete preclinical and clinical development of, and obtain regulatory approval of our product candidates and commercialize any approved products on our expected timeframes or at all;

our pursuit of additional indications;

3

the content and timing of submissions to and decisions made by the U.S. Food and Drug Administration and other regulatory agencies;

our ability to leverage the experience of our management team and to attract and retain management and other key personnel;

the capacities and performance of our suppliers, manufacturers, contract research organizations and other third parties over whom we have limited control;

our ability to staff and maintain our Marina del Rey production facility under fully compliant current Good Manufacturing Practices;

the actions of our competitors and success of competing drugs or other therapies that are or may become available;

our expectations with respect to future growth and investments in our infrastructure, and our ability to effectively manage any such growth;

the size and potential growth of the markets for any of our product candidates, and our ability to capture share in or impact the size of those markets;

the benefits of our product candidates;

potential market growth and market and industry trends;

maintaining collaborations with third parties including our partnerships with the Cystic Fibrosis Foundation (“CFF”), and the U.S. Department of Defense (the “DoD”);

potential future collaborations with third parties and the potential markets and market opportunities for product candidates;

our ability to achieve our vision, including improvements through engineering and success of clinical trials;

our ability to meet anticipated milestones in the development and testing of the relevant product;

our ability to be a leader in the development of phage-based therapeutics;

the expected compliance with DoD grant requirements;

the effects of government regulation and regulatory developments, and our ability and the ability of the third parties with whom we engage to comply with applicable regulatory requirements;

the accuracy of our estimates regarding future expenses, revenues, capital requirements and need for additional financing;

our expectations regarding future planned expenditures;

our ability to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act;

our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of any of our products and product candidates;

4

our ability to protect our intellectual property, including pending and issued patents;

our ability to operate our business without infringing the intellectual property rights of others;

our ability to advance our clinical development programs;

the effects of the ongoing conflict between Ukraine and Russia and the recent and potential future bank failures or other geopolitical events; and

statements of belief and any statement of assumptions underlying any of the foregoing.

In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of those terms, and similar expressions. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report and are subject to risks and uncertainties. We discuss many of these risks in greater detail in the section hereof entitled “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2023. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain. Given these uncertainties, you should not place undue reliance on any of the forward-looking statements included in this Quarterly Report. In addition, this Quarterly Report also contains estimates, projections, and other information concerning our industry, our business, and the markets for our product candidates, as well as data regarding market research, estimates, and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events, or otherwise.

This Quarterly Report includes trademarks and registered trademarks of Armata Pharmaceuticals, Inc. Products or service names of other companies mentioned in this Quarterly Report may be trademarks or registered trademarks of their respective owners.

As used in this Quarterly Report, unless the context requires otherwise, the “Company,” “we,” “us,” and “our” refer to Armata Pharmaceuticals, Inc. and its wholly owned subsidiaries.

5

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Armata Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share data)

    

June 30, 2024

    

December 31, 2023

Assets

Current assets

Cash and cash equivalents

$

26,405

$

13,523

Prepaid expenses and other current assets

 

3,256

 

2,265

Other receivables

1,242

3,363

Total current assets

 

30,903

 

19,151

Restricted cash

5,480

5,720

Property and equipment, net

 

13,474

 

12,559

Operating lease right-of-use asset

 

43,671

 

44,717

In-process research and development

10,256

10,256

Goodwill

3,490

3,490

Other assets

 

1,039

 

2,470

Total assets

$

108,313

$

98,363

Liabilities and stockholders’ deficit

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable and accrued liabilities

$

3,851

$

5,689

Accrued compensation

1,222

768

Convertible debt

48,261

Term debt, current

63,127

Current portion of operating lease liabilities

6,596

9,481

Other current liabilities

124

523

Total current liabilities

 

123,181

 

16,461

Operating lease liabilities, net of current portion

28,156

28,583

Convertible debt

58,633

Term debt, non-current

23,674

Deferred tax liability

3,077

3,077

Total liabilities

 

154,414

 

130,428

Commitments and contingencies (Note 12)

 

  

 

  

Stockholders’ deficit

 

  

 

  

Common stock, $0.01 par value; 217,000,000 shares authorized; 36,155,992 and 36,122,932 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively

 

362

 

361

Additional paid-in capital

 

278,391

 

276,393

Accumulated deficit

 

(324,854)

 

(308,819)

Total stockholders’ deficit

 

(46,101)

 

(32,065)

Total liabilities and stockholders’ deficit

$

108,313

$

98,363

See accompanying notes to condensed consolidated financial statements.

6

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except share and per share data)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2024

    

2023

    

2024

    

2023

Grant revenue

$

$

980

$

966

$

1,776

Operating expenses

Research and development

 

8,475

8,259

 

16,491

17,863

General and administrative

 

3,439

2,350

 

6,617

4,888

Total operating expenses

11,914

10,609

23,108

22,751

Operating loss

 

(11,914)

 

(9,629)

 

(22,142)

 

(20,975)

Other income (expense)

 

  

 

 

 

  

Interest income

 

221

46

273

64

Interest expense

(2,718)

(4,538)

Change in fair value of convertible debt

23,397

6,036

10,372

2,874

Total other income (expense), net

 

20,900

 

6,082

 

6,107

 

2,938

Net income (loss)

$

8,986

$

(3,547)

$

(16,035)

$

(18,037)

Per share information:

Net income (loss) per share, basic

$

0.25

$

(0.10)

$

(0.44)

$

(0.50)

Weighted average shares outstanding, basic

36,154,521

36,068,130

36,139,873

36,056,649

Net loss per share, diluted

$

(0.25)

$

(0.17)

$

(0.45)

$

(0.50)

Weighted average shares outstanding, diluted

58,246,626

56,544,698

58,231,978

36,056,649

See accompanying notes to condensed consolidated financial statements.

7

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

Three and Six Months Ended June 30, 2024 and 2023

(unaudited)

(in thousands, except share data)

Stockholders’ Equity

Common Stock

Additional

Total

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances, March 31, 2023

 

36,144,706

$

361

$

276,350

$

(254,264)

$

22,447

Forfeiture of restricted stock awards

 

(3,699)

Withholdings for taxes related to net share settlement of equity awards

(13,701)

(18)

(18)

Share-based compensation expense

 

261

261

Net loss

 

(3,547)

(3,547)

Balances, June 30, 2023

 

36,127,306

$

361

$

276,593

$

(257,811)

$

19,143

Stockholders’ Deficit

Common Stock

Additional

Total

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

Balances, March 31, 2024

 

36,132,117

$

361

$

276,969

$

(333,840)

$

(56,510)

Exercise of stock options

23,875

1

87

88

Share-based compensation expense

 

1,335

1,335

Net income

 

8,986

8,986

Balances, June 30, 2024

 

36,155,992

$

362

$

278,391

$

(324,854)

$

(46,101)

8

Stockholders’ Equity

Common Stock

Additional

Total

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances, December 31, 2022

 

36,144,706

$

361

$

275,493

$

(239,774)

$

36,080

Forfeiture of restricted stock awards

(3,699)

Withholdings for taxes related to net share settlement of equity awards

(13,701)

(18)

(18)

Stock-based compensation expense

 

1,118

 

1,118

Net loss

 

(18,037)

 

(18,037)

Balances, June 30, 2023

 

36,127,306

$

361

$

276,593

$

(257,811)

$

19,143

Stockholders’ Deficit

Common Stock

Additional

Total

Paid-in

Accumulated

Stockholders’

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

Balances, December 31, 2023

 

36,122,932

$

361

$

276,393

$

(308,819)

$

(32,065)

Exercise of stock options

37,282

1

129

130

Withholdings for taxes related to net share settlement of equity awards

(4,222)

Stock-based compensation expense

1,869

1,869

Net loss

 

(16,035)

(16,035)

Balances, June 30, 2024

 

36,155,992

$

362

$

278,391

$

(324,854)

$

(46,101)

See accompanying notes to condensed consolidated financial statements.

9

Armata Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

Six Months Ended June 30, 

    

2024

    

2023

Operating activities:

Net loss

$

(16,035)

$

(18,037)

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

Depreciation and amortization expense

 

632

 

458

Stock-based compensation expense

1,869

1,118

Change in fair value of convertible debt

(10,372)

(2,874)

Non-cash interest expense

4,538

Change in right-of-use asset

960

Changes in operating assets and liabilities:

 

 

Prepaid expenses and other assets

 

2,561

 

(2,207)

Accounts payable and accrued liabilities

 

(2,142)

 

116

Accrued compensation

454

(730)

Operating lease liability

(3,226)

(7,474)

Net cash used in operating activities

 

(20,761)

 

(29,630)

Investing activities:

 

  

 

  

Purchases of property and equipment

(1,616)

(2,232)

Net cash used in investing activities

 

(1,616)

 

(2,232)

Financing activities:

 

  

 

  

Proceeds from issuance of convertible debt, net of issuance costs

29,226

Proceeds from issuance of long-term debt, net of issuance costs

34,889

Proceeds from exercise of stock options

130

Net cash provided by financing activities

 

35,019

 

29,226

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

 

12,642

 

(2,636)

Cash, cash equivalents and restricted cash, beginning of period

 

19,243

 

20,812

Cash, cash equivalents and restricted cash, end of period

$

31,885

$

18,176

Supplemental disclosure of cash flow information:

 

  

 

  

Property and equipment included in accounts payable and accrued liabilities

$

148

$

3,416

Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet:

Six Months Ended June 30, 

2024

    

2023

Cash and cash equivalents

$

26,405

$

12,456

Restricted cash

5,480

5,720

Cash, cash equivalents and restricted cash

$

31,885

$

18,176

See accompanying notes to condensed consolidated financial statements.

10

Armata Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of the Business

Armata Pharmaceuticals, Inc. (“Armata”) together with its subsidiaries (the “Company”), is 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 its proprietary bacteriophage-based technology.

Armata’s common stock, par value $0.01 per share (the “Common Stock”) is traded on the NYSE American exchange under the ticker symbol “ARMP.”

2. Liquidity and Going Concern

The Company has incurred significant operating losses since inception and has primarily relied on equity, debt financing and grants to fund its operations. As of June 30, 2024, the Company had an accumulated deficit of $324.9 million. The Company expects to continue to incur substantial losses, and its transition to profitability will depend on the successful development, approval and commercialization of product candidates and on the achievement of sufficient revenues to support its cost structure. The Company may never achieve profitability, and unless and until then, the Company will need to continue to raise additional capital. Existing cash and cash equivalents of $26.4 million as of June 30, 2024 will not be sufficient to fund the Company’s operations for the next 12 months from the date of these condensed consolidated financial statements. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has prepared its condensed consolidated financial statements on a going concern basis, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.

Recent Financing:

2024 Credit Agreement

On March 4, 2024, the Company entered into a credit and security agreement (the “2024 Credit Agreement”) for a loan in an aggregate amount of $35.0 million (the “2024 Loan”) with Innoviva Strategic Opportunities LLC, a wholly owned subsidiary of Innoviva, Inc. (NASDAQ: INVA), our principal stockholder and a related party (collectively, “Innoviva”). 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 2024 Loan is guaranteed by the Company’s domestic subsidiaries, and the loan is secured by substantially all of the assets of the Company and the subsidiary guarantors. Concurrently with the execution of the 2024 Credit Agreement, the Company amended certain provisions of its existing convertible loan (the “Convertible Loan”) (see Note 7) and secured credit and security agreement, dated January 10, 2023, with Innoviva (the “Convertible Credit Agreement”) and its existing secured term loan facility (the “2023 Loan”) and credit and security agreement, dated July 10, 2023, with Innoviva (the “2023 Credit Agreement”) to, among other things, conform certain terms relating to permitted indebtedness and permitted liens (see Note 8).

The Company plans to raise additional capital through equity offerings, debt financings, or other capital sources, including potential collaborations, licenses and other similar arrangements. While the Company believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, these plans are not entirely within its control and cannot be assessed as being probable of occurring. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide. The Company may not be able to secure additional financing in a timely manner or on favorable terms, if at all. Furthermore,

11

if the Company issues equity securities to raise additional funds, its existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products on terms that are not favorable to the Company. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate its research and development programs or other operations. If any of these events occur, the Company’s ability to achieve the development and commercialization goals would be adversely affected.

3. Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes thereto as of and for the year ended December 31, 2023 included in the Company’s Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2024. The information as of December 31, 2023 included in the condensed consolidated balance sheets was derived from the Company’s audited financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the requirements of the SEC for interim reporting. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments that are of a normal and recurring nature and that are necessary for the fair presentation of the Company’s financial position and the results of its operations and cash flows for the periods presented. Interim results are not necessarily indicative of results for the full year or any future period.

Any reference in the condensed consolidated financial statements to applicable guidance is meant to refer to authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Significant Accounting Policies

The significant accounting policies used in preparation of the condensed consolidated financial statements for the three and six months ended June 30, 2024 and 2023 are consistent with those discussed in Note 3 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2023, filed with the SEC on March 21, 2024, except as noted below and within the “Recently Adopted Accounting Pronouncements” section.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates estimates and assumptions, including but not limited to those related to convertible debt, stock-based compensation expense, accruals for research and development costs, the valuation of deferred tax assets, impairment of goodwill and intangible assets and impairment of long-lived assets. Management bases its estimates on historical experience and on various other assumptions that are believed to be 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. Actual results may differ materially from those estimates.

12

Segments

The Company operates and manages its business as one reportable operating segment, which is the business of developing pathogen-specific bacteriophage therapeutics for the treatment of antibiotic-resistant and difficult-to-treat acute and chronic bacterial infections using its proprietary bacteriophage-based technology. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for allocating resources and evaluating financial performance. The long-lived assets of $13.3 million, which represent 99.1% of the Company’s total long-lived assets, are maintained in the United States.

Concentration of Credit Risks and Certain Other Risks

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and restricted cash. As of June 30, 2024, cash equivalents and restricted cash was invested primarily in money market funds and U.S. treasury securities through highly rated financial institutions in accordance with the Company’s investment policy, to a concentration limit per issuer or sector. These are investment assets and are classified as cash equivalents in the condensed consolidated balance sheets as their original maturities are less than three months.

Other receivables represent amounts due from the Medical Technology Enterprise Consortium (“MTEC”) (Note 13) and reimbursement for tenant improvements (Note 12).

Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings (loss) per share (“EPS”) computation. The Company adopted this ASU as of January 1, 2024, which did not have an impact on its consolidated financial statements or related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU aligns the requirements in the ASC to the removal of certain disclosure requirements set out in Regulation S-X and Regulation S-K, announced by the SEC. The effective date for each amended topic in the ASC is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirements by that date. Early adoption is prohibited. The Company is currently evaluating the impact of adopting ASU 2023-06 on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07 on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09 on its consolidated financial statements.

13

4. Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following three levels:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The financial assets and liabilities measured and recognized at fair value were as follows as of June 30, 2024 and December 31, 2023 (in thousands):

June 30, 2024

Total

Level 1

Level 2

Level 3

Investments in money market fund – financial assets, included in cash and cash equivalents

$

21,102

$

21,102

$

$

Convertible debt– financial liabilities

48,261

48,261

December 31, 2023

Total

Level 1

Level 2

Level 3

Convertible debt– financial liabilities

$

58,633

$

$

$

58,633

The Company’s convertible debt (Note 7) is measured at fair value and remeasured at each quarter end, with changes in fair value recorded as other income (expense) in the condensed consolidated statement of operations. The Company estimates the fair value of its convertible debt using a weighted probability model of various debt settlement scenarios during its term discounted to the reporting date. Conversion option scenarios are valued using option pricing models with assumptions and estimates such as volatility, expected term and risk-free interest rates. Level 3 fair value inputs include probability and timing of various settlement scenarios and selection of comparable companies.

The Company estimated the fair value of its convertible debt using the following inputs as of June 30, 2024 and December 31, 2023:

June 30, 2024

December 31, 2023

Discount rate

28.28%

21.01%

Probabilities of settlement scenarios

0%-75%

0%-75%

Volatility

111.6%

120.3%

Expected term (in years)

0.26-0.54

0.16-1.04

Risk-free rate

5.18%-5.33%

4.66%-5.36%

14

The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial liabilities (in thousands):

Six months ended

June 30, 2024

June 30, 2023

Convertible debt opening balance

$

58,633

$

Issuance of the convertible debt

29,226

Change in fair value

 

(10,372)

(2,874)

Convertible debt closing balance

$

48,261

$

26,352

5. Net Income (Loss) per Share

The computation of basic EPS is based on the weighted-average number of the Company’s Common Stock outstanding. The computation of diluted EPS is based on the weighted-average number of the Company’s Common Stock outstanding and potential dilutive common stock, which primarily includes conversion of convertible debt. Diluted EPS is computed using the more dilutive of the treasury stock method, which reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to the Company’s Common Stock. Common Stock options, warrants and unvested restricted stock units were not included in dilutive EPS as their impact would be antidilutive.

The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders for the periods presented (in thousands, except share and per share data):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2024

    

2023

    

2024

    

2023

    

Numerator:

 

  

 

  

 

  

 

  

 

Net income (loss) attributable to common stockholders, basic

$

8,986

$

(3,547)

$

(16,035)

$

(18,037)

Gain from change in fair value of convertible debt

(23,397)

(6,036)

(10,372)

Net loss attributable to common stockholders, diluted

$

(14,411)

$

(9,583)

$

(26,407)

$

(18,037)

Denominator:

Weighted average shares outstanding, basic

36,154,521

36,068,130

36,139,873

36,056,649

Shares issuable upon the conversion of the convertible debt

22,092,105

20,476,568

22,092,105

Weighted average shares outstanding, diluted

 

58,246,626

 

56,544,698

 

58,231,978

 

36,056,649

Net income (loss) per share, basic

$

0.25

$

(0.10)

$

(0.44)

$

(0.50)

Net loss per share, diluted

$

(0.25)

$

(0.17)

$

(0.45)

$

(0.50)

The following outstanding securities as of June 30, 2024 and December 31, 2023 have been excluded from the computation of dilutive weighted average shares outstanding, as they would have been anti-dilutive:

    

June 30, 2024

    

December 31, 2023

    

Outstanding stock options

 

4,645,737

 

3,165,216

Unvested restricted stock units

290,000

200,000

Shares issuable upon the conversion of convertible debt

21,293,861

Outstanding warrants

19,365,847

19,365,847

Total

 

24,301,584

 

44,024,924

 

15

6. Balance Sheet Details

Property and Equipment

Property and equipment as of June 30, 2024 and December 31, 2023 consisted of the following (in thousands):

    

June 30, 2024

    

December 31, 2023

Laboratory equipment

$

21,225

$

19,678

Furniture and fixtures

817

817

Office and computer equipment

 

438

 

438

Leasehold improvements

 

3,447

 

3,447

Total

25,927

24,380

Less: accumulated depreciation

 

(12,453)

 

(11,821)

Property and equipment, net

$

13,474

$

12,559

Depreciation and amortization expense totaled $0.3 million and $0.2 million for the three months ended June 30, 2024 and 2023, and $0.6 and $0.5 million for the six months ended June 30, 2024 and 2023, respectively. Construction in progress and fixed assets not in use were $9.6 million and $8.1 million as of June 30, 2024 and December 31, 2023, respectively, and are included in the laboratory equipment in the table above. These assets are not depreciated until they are placed in service.

Other receivables

Other receivables as of June 30, 2024 and December 31, 2023 consisted of the following (in thousands):

June 30, 2024

    

December 31, 2023

Tenant improvement allowance receivable (Note 12)

$

748

$

1,835

Grant and award receivable (Note 13)

494

1,528

$

1,242

$

3,363

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities as of June 30, 2024 and December 31, 2023 consisted of the following (in thousands):

June 30, 2024

    

December 31, 2023

Accounts payable

$

1,743

$

1,585

Accrued clinical trial expenses

1,680

3,021

Other accrued expenses

428

1,083

$

3,851

$

5,689

7. Convertible Debt

On January 10, 2023, the Company received the Convertible Loan in the aggregate amount of $30.0 million from Innoviva pursuant to the Convertible Credit Agreement. The Convertible Loan bears interest at a rate of 8.0% per annum and was scheduled to mature on January 10, 2024. The Convertible Credit Agreement was amended on July 10, 2023, in connection with the Company’s entry into the 2023 Credit Agreement, to, among other changes, extend the maturity of the Convertible Loan to January 10, 2025. The Convertible Loan principal and accrued interest are payable at maturity. Repayment of the Convertible Loan is guaranteed by the Company’s domestic subsidiaries and foreign material subsidiaries, and the Convertible Loan is secured by substantially all of the assets of the Company and the subsidiary guarantors.

16

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 the Company’s 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 such Qualified Financing. The Convertible Credit Agreement also required the Company to file a registration statement for the resale of all securities issued to the lender in connection with any conversion under the Convertible Credit Agreement, which the Company 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).

The Company evaluated authoritative guidance for accounting for the Convertible Loan and concluded that the Convertible Loan should be accounted for at fair value under ASC 480, Distinguish Liabilities from Equity, due to the fact that the Convertible Loan will predominately be settled with the Company’s Common Stock. Consequently, the Company recorded the Convertible Loan in its entirety at fair value on its condensed consolidated balance sheet, with changes in fair value recorded as other income (expenses) in the condensed consolidated statements of operations during each reporting period.

The Company recognized gains of $23.4 million and $6.0 million as the change in fair value of the Convertible Loan for the three months ended June 30, 2024 and 2023, and $10.4 million and $2.9 million for the six months ended June 30, 2024 and 2023, respectively.

8. Long-Term Debt

On July 10, 2023, the Company entered into the 2023 Credit Agreement. The 2023 Credit Agreement provides for the 2023 Loan, a secured term loan facility in an aggregate amount of $25.0 million at an interest rate of 14.0% per annum and has a maturity date of January 10, 2025. Principal and accrued interest are payable at maturity. Repayment of the 2023 Loan is guaranteed by the Company’s domestic subsidiaries, and the 2023 Loan is secured by substantially all of the assets of the Company and the subsidiary guarantors.

The 2023 Loan was initially recognized at fair value of $21.2 million and subsequently recognized at the amortized cost net of debt issuance costs and debt discount. Debt issuance costs and debt discount in the amounts of $0.1 million and $3.8 million, respectively, are amortized using the effective interest method to interest expense over the term of the 2023 Loan. The 2023 Loan’s annual effective interest rate was 27.31% as of June 30, 2024.

On March 4, 2024, the Company entered into the 2024 Credit Agreement. The 2024 Credit Agreement provides for the 2024 Loan, a secured term loan facility in an aggregate amount of $35.0 million at an interest rate of 14.0% per annum and has a maturity date of June 4, 2025. Principal and accrued interest are payable at maturity. Repayment of the 2024 Loan is guaranteed by the Company’s domestic subsidiaries, and the 2024 Loan is secured by substantially all of the assets of the Company and the subsidiary guarantors.

The 2024 Loan was initially recognized at cash proceeds of $35.0 million net of debt issuance costs of $0.1 million, and subsequently is recognized at the amortized cost. Debt issuance costs are amortized using the effective interest method to interest expense over the term of the 2024 Loan. The 2024 Loan’s annual effective interest rate was 14.25% as of June 30, 2024.

The 2023 Credit Agreement and the 2024 Credit Agreement contain 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 2023 Credit Agreement and the 2024 Credit Agreement also include 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

17

adverse effect” as set forth in the 2023 Credit Agreement and the 2024 Credit Agreement, certain bankruptcy or insolvency events, and a material deviation from the Company’s operating budget.

9. Stockholders’ Deficit

Warrants

As of June 30, 2024, outstanding warrants to purchase shares of Common Stock were as follows:

Shares

    

Exercise Price

    

Expiration Date

993,139

$

2.87

February 11, 2025

7,717,661

$

2.87

March 27, 2025

1,867,912

$

3.25

January 26, 2026

4,285,935

$

3.25

March 16, 2026

1,807,396

$

5.00

February 8, 2027

2,692,604

$

5.00

March 30, 2027

1,200

$

1,680.00

None

19,365,847

 

  

  

Shares Reserved for Future Issuance

As of June 30, 2024, the Company had reserved shares of its Common Stock for future issuance as follows:

    

June 30, 2024

Stock options outstanding

 

4,645,737

Unvested restricted stock units

290,000

Shares issuable under the Employee stock purchase plan

 

11,890

Shares available for future grants under the 2016 Plan

 

2,480,159

Warrants outstanding

 

19,365,847

Shares issuable upon the conversion of convertible debt

22,092,105

Total shares reserved

 

48,885,738

10. Equity Incentive Plans

Stock Award Plans

The Company maintains a 2016 Equity Incentive Plan (the “2016 Plan”), which provides for the issuance of incentive share awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance-based stock awards. As of June 30, 2024, there were 2,480,159 shares available for issuance under the 2016 Plan.

18

Stock option transactions during the six months ended June 30, 2024 are presented below:

Options Outstanding

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Exercise

Term

Intrinsic

    

Shares

    

Price

    

(Years)

    

Value (in thousands)

Outstanding at December 31, 2023

 

3,165,216

$

5.04

 

5.9

$

429

Granted

 

1,784,054

$

3.38

 

 

Exercised

(37,282)

$

3.38

$

24

Forfeited/Cancelled/Expired

 

(266,251)

$

15.36

 

 

Outstanding at June 30, 2024

 

4,645,737

$

3.83

 

7.1

$

144

Vested and expected to vest at June 30, 2024

 

4,645,737

$

3.83

 

7.1

$

144

Exercisable at June 30, 2024

 

2,627,743

$

4.14

 

5.3

$

144

The aggregate intrinsic value of options at June 30, 2024 is based on the Company’s closing stock price on that date of $2.75 per share.

Restricted stock unit awards transactions during the six months ended June 30, 2024 are presented below:

Weighted Avg

Grant Date

    

Shares

    

Fair Value

Outstanding at December 31, 2023

200,000

$

2.39

Granted

90,000

$

3.38

Outstanding at June 30, 2024

290,000

$

2.70

Share-based Compensation

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

The assumptions used in the Black-Scholes model during the three and six months ended June 30, 2024 and 2023 are presented below.

Six Months Ended June 30, 

    

2024

2023

Risk-free interest rate

4.24% - 4.25%

3.54% - 4.2%

Expected volatility

89.4% - 92.5%