Form 10-Q - Quarterly report [Sections 13 or 15(d)]

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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


☐	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.

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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

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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;

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●

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;

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●

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.

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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.

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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.

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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)

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	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.

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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.

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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,

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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.

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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.

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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%

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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

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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.

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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

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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.

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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.

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