ARMP

Business Context and Reporting Period

Company: AmpliPhi Biosciences Corporation (Note: Request metadata listed "Armata Pharmaceuticals," but the filing text identifies the registrant as AmpliPhi Biosciences Corporation).

Reporting Period: Fiscal year ended December 31, 2013.

Business Overview: AmpliPhi is a biotechnology company focused on developing bacteriophage (phage) therapeutics to treat antibiotic-resistant bacterial infections. The company pivoted from gene therapy to phage therapy following the acquisition of Biocontrol Ltd in 2011 and Special Phage Holdings Pty Ltd in 2012. Lead product candidates include AmpliPhage-001 (Cystic Fibrosis lung infections), AmpliPhage-002 (MRSA wound/skin infections), and AmpliPhage-004 (C. difficile infections).

Restatement: The 2012 financial statements were restated to reclassify $3.15 million of revenue from asset sales to a gain on discontinued operations and to reclassify goodwill to In-Process Research and Development (IPR&D) assets.

Key Financial Metrics

Debt and Liabilities: As of December 31, 2013, the company had no outstanding convertible loan notes (all converted to Series B Preferred Stock in mid-2013). However, significant long-term liabilities of $50.0 million were recorded for derivative liabilities associated with the conversion features of Series B Preferred Stock and warrants containing "down-round" provisions.

Material Changes vs. Prior Period

• Net Loss Expansion: Net loss increased significantly from $1.1 million in 2012 to $58.4 million in 2013. This was primarily driven by a $40.6 million non-cash loss on derivative liabilities (revaluation of warrants and preferred stock conversion features) and $2.6 million in amortization of note discounts.
• Operating Expenses: Research and Development (R&D) expenses rose from $1.5 million to $6.5 million due to increased clinical development planning and collaborations. General and Administrative (G&A) expenses increased from $3.2 million to $8.8 million, largely due to placement agent fees for equity financings and legal costs associated with public company compliance.
• Liquidity Position: Cash balances improved dramatically from $0.9 million to $20.4 million following a $18.0 million common stock private placement in December 2013 and a $7.0 million Series B Preferred Stock financing in June/July 2013.
• Discontinued Operations: The 2012 period included a $3.15 million gain on the sale of gene therapy assets, which was reclassified from revenue to discontinued operations in the restatement.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance: Management expects to initiate at least one new clinical study in 2014 (Phase 1 for AmpliPhage-002). The company anticipates continued significant operating losses as it advances clinical trials. Cash on hand as of December 31, 2013, is projected to fund operations into the first quarter of 2015.

Unusual Items: The $40.6 million loss on derivative liabilities is a non-cash charge resulting from the fair value adjustment of warrants and preferred stock conversion features with anti-dilution provisions. This significantly impacted the reported net loss but did not affect cash flow.

Risks and Contingencies:

• Going Concern: Auditors have expressed substantial doubt about the company's ability to continue as a going concern due to recurring losses and an accumulated deficit. Additional capital is required to continue operations beyond early 2015.
• Internal Controls: The company identified a material weakness in internal controls over financial reporting regarding the evaluation of complex and non-routine transactions, necessitating the restatement of prior periods.
• Regulatory and Clinical Risk: No phage-based therapeutics have been approved by the FDA. Success depends on the outcome of future clinical trials, which are uncertain and costly.
• Dilution: Significant dilution exists due to outstanding warrants (approx. 42.7 million shares) and options (approx. 25.7 million shares), as well as the conversion of Series B Preferred Stock.

Key Facts for Investor Verification

• Cash Runway: Verify if the company has secured additional financing to extend operations beyond the projected first quarter of 2015.
• Derivative Liability Volatility: Monitor the fair value of derivative liabilities (warrants and preferred stock features), as fluctuations in stock price will cause significant non-cash charges to the income statement.
• Clinical Milestones: Track the initiation and results of the planned 2014 Phase 1 clinical trial for AmpliPhage-002 (MRSA) and the advisory meeting with the UK MHRA for AmpliPhage-001.
• Internal Control Remediation: Confirm the effectiveness of the remediation plan for the material weakness in internal controls over financial reporting.
• Capital Structure: Assess the potential dilution impact of the 42.7 million outstanding warrants and 25.7 million stock options, many of which have low exercise prices.