Armata Pharmaceuticals, Inc. annual report, FY2017

Business context and reporting period

The filing is AmpliPhi Biosciences Corporation’s Form 10-K for the fiscal year ended December 31, 2017, filed March 14, 2018. The supplied company metadata names Armata Pharmaceuticals, but the filing itself identifies AmpliPhi as the registrant. AmpliPhi was a clinical-stage biotechnology company developing bacteriophage therapies for antibiotic-resistant infections; it had no commercial product sales.

Its lead candidates were AB-SA01 for Staphylococcus aureus infections and AB-PA01 for Pseudomonas aeruginosa infections. In 2017, the company shifted strategic emphasis toward targeted treatment of serious or life-threatening resistant infections through single-patient expanded access. The FDA gave positive feedback on a proposed Phase 2 AB-SA01 chronic-rhinosinusitis trial, but approval and commercial development remained uncertain.

Financial performance and position

Revenue came from sublicensing agreements tied to the former gene-therapy program, not product sales. R&D expense included Australian tax incentive payments of about $2.0 million in 2017 versus $0.9 million in 2016; excluding those benefits, R&D expense was $4.9 million and $6.6 million, respectively. The company reported no meaningful product gross margin because it had no product revenue.

At December 31, 2017, current assets were $5.385 million and current liabilities were $1.968 million; total assets were $11.138 million, total liabilities $3.407 million, and stockholders’ equity $7.731 million. The note payable outstanding at the prior year-end ($0.803 million) was repaid during 2017. Operating cash use remained substantial despite improving year over year. Financing provided $8.671 million net cash in 2017, mainly from the May equity offering. In January 2018, a further offering raised $4.0 million gross and approximately $3.5 million net.

Material changes and notable items

• Operating loss narrowed by about 31% and net loss by about 32% versus 2016; the comparisons include significant non-cash impairment and derivative fair-value items.
• 2017 included a $5.8 million impairment charge against acquired in-process R&D assets for the Staphylococcal and Pseudomonas programs. The company reported no further IPR&D impairment at year-end. In 2016, it wrote off all $7.6 million of goodwill and recorded a $2.0 million IPR&D impairment.
• Derivative-liability fair-value gains were $2.010 million in 2017, down from $4.538 million in 2016; these accounting gains were not operating cash inflows.
• Common shares outstanding increased from 1.65 million at 2016 year-end to 9.50 million at 2017 year-end, reflecting financings and other issuances. At year-end, 8.53 million warrants were outstanding, with a weighted-average exercise price of $2.87; the May 2017 financing included 8.0 million warrants at $1.50.
• The company completed a 1-for-10 reverse stock split in April 2017. It also issued 523,210 shares under an amended stock issuance agreement, recording a $0.519 million expense.

Outlook, risks and contingencies

Management and the independent auditor 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 that cash available after the January 2018 offering would fund planned operations into the third quarter of 2018, but said further capital was required. If financing were unavailable on acceptable terms, the company could reduce or discontinue programs, relinquish rights, pursue a sale, or cease operations.

Management planned to continue expanded access treatment in the first half of 2018, potentially treat up to 20 additional patients, present data to the FDA around mid-2018, and potentially begin a Phase 2 or registrational trial as early as the second half of 2018. These were plans, not assured milestones. In December 2017, the company engaged Ladenburg Thalmann to explore strategic alternatives; it gave no completion timetable or assurance of a transaction.

In January 2018, the company reported interim results for seven severely ill expanded-access patients: six of seven had treatment success by physician assessment, and all treatments were reported as well tolerated with no treatment-related serious adverse events. One patient died during surgery after three days of treatment; the physician considered the death unrelated to phage therapy. The small, uncontrolled patient group received concurrent antibiotics, so the results do not establish efficacy or predict trial outcomes.

Principal risks include financing needs and dilution; clinical, regulatory, and manufacturing uncertainty for a novel therapy with no approved phage products; reliance on expanded-access observations that may not support approval; competition, intellectual-property challenges, and dependence on third parties. The Army research agreement was due to expire in June 2018. The filing reported no material pending legal proceedings. Management said disclosure controls and internal control over financial reporting were effective at year-end and that a previously reported material weakness had been remediated.

Investor verification priorities

• Verify the registrant and corporate-name continuity: this 2017 filing is for AmpliPhi Biosciences Corporation, notwithstanding the Armata metadata.
• Check subsequent cash balances, cash burn, financings, and the actual runway against management’s estimate of funding into Q3 2018.
• Track whether expanded-access data were submitted to regulators and whether planned clinical trials began, enrolled, and produced controlled safety and efficacy results.
• Review subsequent strategic-alternative announcements and any resulting transaction, partnership, or program changes.
• Assess dilution from outstanding warrants, options, and additional equity financing, including the effect of warrant repricing provisions.
• Review the assumptions supporting the IPR&D impairment valuation and the company’s subsequent financial statements and going-concern disclosures.