Armata Pharmaceuticals, Inc. annual report, FY2016

Business context and reporting period

This is AmpliPhi Biosciences Corporation’s Form 10-K for the fiscal year ended December 31, 2016—not a filing under the name Armata Pharmaceuticals. The company was a clinical-stage biotechnology business developing bacteriophage therapies for bacterial infections. Its lead candidate was AB-SA01 for Staphylococcus aureus infections; AB-PA01 and AB-CD01 were earlier-stage candidates for Pseudomonas aeruginosa and Clostridioides difficile, respectively.

Financial and operating performance

Revenue was legacy gene-therapy sublicensing income; the company had no commercial product sales. The 2016 net loss included a $9.547 million impairment charge, comprising a full $7.562 million goodwill write-off and a $1.985 million impairment of in-process R&D. Fair-value gains on derivative liabilities contributed $4.538 million to other income, so reported net loss was affected by significant noncash items. The filing does not report a gross margin relevant to product sales.

At year-end, current assets were $6.355 million and current liabilities were $3.580 million. The balance sheet reported an $803,000 note payable; derivative liabilities were $2.443 million. The auditor and management stated that recurring losses and negative operating cash flows raised substantial doubt about the company’s ability to continue as a going concern. Management estimated available resources would fund planned operations only through mid-April 2017.

Material changes versus the prior comparable period

• Operating loss rose from $10.227 million to $23.378 million, principally reflecting higher R&D and G&A spending and the $9.547 million impairment charge.
• R&D expense increased $1.686 million, including higher personnel and clinical costs and Novolytics asset-related expense; Australian R&D tax rebates were $0.9 million versus $0.5 million in 2015.
• Net loss widened substantially from $0.516 million. The comparison is affected by noncash fair-value gains and, in 2015, a large gain on the Series B preferred-stock liability. Series B preferred stock converted into common stock in April 2016.
• Operating cash use increased $0.808 million, while year-end cash declined $3.659 million. The company raised approximately $9.0 million gross in June and November 2016 equity offerings, but reported net financing cash inflow of $7.209 million.
• Common shares outstanding increased to 16,488,120 at December 31, 2016 from 5,883,503 a year earlier, reflecting preferred-stock conversion and equity offerings, among other issuances.

Outlook, risks and unusual items

• Management expected increasing operating losses and R&D spending, no near-term product revenue, and a need for additional financing. No specific financial guidance beyond the estimated mid-April 2017 cash runway was provided.
• AB-SA01 Phase 1 studies reported acceptable safety and tolerability. In the nine-patient chronic rhinosinusitis study, all participants had reduced sinus S. aureus quantities, with some showing complete eradication. After a February 2017 FDA meeting, the company reported positive feedback on its proposed Phase 2 trial, but said it was evaluating whether and when to proceed.
• AB-PA01 manufacturing process development and scale-up were underway, with initial batch production targeted for mid-2017. Clinical advancement remained contingent on funding, manufacturing readiness, and regulatory and trial outcomes.
• The company disclosed a material weakness in internal control over financial reporting involving complex and non-routine transactions; disclosure controls were also deemed ineffective. Remediation efforts were underway but had not been fully validated.
• A 2016 settlement with NRM involved a $2.0 million payment by the insurance carrier. The company agreed to repay the carrier approximately $914,000, with $803,000 recorded as a note payable at year-end and installments scheduled through 2017.
• The Common Stock Issuance Agreement could require additional shares for no consideration after dilutive financings. The company reported a possible claim for 2,224,078 shares tied to the November offering, while NYSE MKT rules then permitted issuance of only 286,846 shares without further approval.
• Other central risks include uncertain efficacy and regulatory pathways for phage therapies, clinical and manufacturing execution, reliance on additional capital, potential dilution, and competition. The filing also reports that the University of Leicester collaboration was given termination notice in March 2017.

Important facts for investors to verify

1. Whether subsequent financing was obtained and how it changed the stated mid-April 2017 runway, dilution, and going-concern outlook.
2. The status and resolution of the CSIA share obligation, including any stockholder approval, settlement, or further claims.
3. Whether internal-control remediation was completed and whether later filings reported effective controls or additional corrections.
4. Follow-up clinical and regulatory developments for AB-SA01, and manufacturing and development progress for AB-PA01 and AB-CD01.
5. The composition and cash impact of remaining liabilities, including the insurance repayment schedule, and the assumptions underlying the 2016 impairment valuations.