Armata Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company is a clinical-stage biotechnology business developing bacteriophage therapies for antibiotic-resistant infections. On May 9, 2019, C3J Therapeutics merged with AmpliPhi; C3J was the accounting acquirer, so prior-period financial statements principally reflect C3J. AmpliPhi’s results are included only from the merger closing.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $3.1 million | $2.3 million | $5.1 million | $4.5 million |
| General and administrative | $2.1 million | $0.6 million | $3.5 million | $1.2 million |
| Operating loss | $5.2 million | $2.8 million | $8.6 million | $12.4 million |
| Net loss | $4.2 million | $3.2 million | $7.9 million | $12.8 million |
| Net loss per share, basic | $0.56 | $0.68 | $1.30 | $2.76 |
At June 30, 2019, cash and cash equivalents were $13.2 million, with a further $0.7 million in restricted cash. Total assets were $34.9 million, total liabilities $12.3 million, and stockholders’ equity $22.6 million. Current assets of $14.2 million exceeded current liabilities of $5.6 million by $8.6 million. The filing reports no revenue, so operating margins are not meaningful.
Six-month operating cash use was $8.3 million, compared with $5.4 million in 2018. Investing activities provided $2.7 million, including $3.0 million of cash acquired in the merger; financing activities provided $9.0 million, principally from a $10.0 million stock sale, partly offset by a $1.0 million SGI payment. Cash, cash equivalents and restricted cash increased by $3.4 million to $13.9 million.
The filing reports no conventional borrowings. Balance-sheet obligations include $1.9 million of deferred SGI asset-acquisition consideration and $3.7 million of operating lease liabilities. The SGI consideration includes potential milestone payments of up to $39.5 million, contingent on development and regulatory milestones; the filing does not record these as current liabilities.
Changes versus prior comparable periods
- Q2 operating expenses rose by $2.3 million year over year, primarily reflecting merger-related professional fees and increases in personnel and stock compensation. R&D increased by $0.8 million and G&A by $1.5 million.
- Six-month net loss narrowed by $4.9 million, largely because the 2018 period included $6.8 million of acquired in-process R&D expense for synthetic phage assets. Excluding that item, the reported loss comparison is affected by merger timing and other noncash items.
- Six-month operating cash use increased by $2.9 million. The company ended the period with more cash than at year-end 2018, supported by the merger financing and acquired cash.
- Common shares outstanding increased from 5.1 million at December 31, 2018 to 10.0 million at June 30, 2019, reflecting merger-related issuance, the SGI share issuance and the concurrent private placement.
Outlook, risks and unusual items
- Management estimated existing resources would fund planned operations through the first quarter of 2020. The company has recurring losses and negative operating cash flows, and the filing states these conditions raise substantial doubt about its ability to continue as a going concern. Additional capital is required; availability and terms are uncertain.
- The company expects significant operating losses for the foreseeable future and no product revenue unless and until a candidate is developed and receives marketing approval. It may need to reduce or defer programs if financing is unavailable, and future equity financing could dilute shareholders.
- AP-SA01 is in development for Staphylococcus aureus infections. Management reported FDA feedback that no additional nonclinical data were required to proceed with proposed randomized trials, and was seeking non-dilutive funding or collaborations to support them. A pre-IND meeting for Pseudomonas programs was planned for late 2019. No formal financial guidance was provided.
- Key development risks include clinical-trial outcomes and enrollment, regulatory approval, manufacturing scale-up and cGMP compliance, and the need to fund development. The company noted that no bacteriophage product had been approved by the FDA or elsewhere.
- A $1.2 million noncash gain in Q2 2019 resulted from reducing the SGI-related derivative liability to zero upon the merger; it improved reported net loss but was not operating cash generation. Merger-related costs of approximately $1.1 million were expensed in the first half.
- Three merger-related shareholder class actions were dismissed after the company amended its proxy disclosure. Management said other ordinary-course matters were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- Management stated disclosure controls were effective at a reasonable-assurance level. Integration-related internal-control changes were still being evaluated.
Important facts for investors to verify
- Whether additional financing, grants or collaborations are secured before the stated cash runway ends, and whether actual spending tracks management’s assumptions.
- Clinical and regulatory progress for AP-SA01 and the Pseudomonas programs, including trial funding, design, timing and any updated FDA feedback.
- Manufacturing readiness and compliance at the company’s facilities, and the funding needed to support planned clinical work.
- The status and potential amount of SGI milestone obligations, along with the remaining deferred consideration and lease commitments.
- Merger accounting, dilution and share overhang, including outstanding options and warrants, and any changes to internal controls during integration.