Armata Pharmaceuticals, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report, and our audited financial statements and notes thereto as of and for the year ended December 31, 2023 included in our Annual Report on Form 10-K filed on March 21, 2024 with the U.S. Securities and Exchange Commission (the “SEC”).

Our common stock, par value $0.01 per share (the “Common Stock”) is traded on the NYSE American exchange under the symbol “ARMP.” We are currently headquartered in Los Angeles, CA, and we have a research and development facility for product development to support advancing phage products from the bench to the clinic. In addition to microbiology, synthetic biology, formulation, chemistry and analytical laboratories, the facility is equipped with two licensed current good manufacturing practice (“cGMP”) drug manufacturing suites enabling the production, testing and release of clinical trial material.

Statements contained in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements concerning product development plans, commercialization of our products, the expected market opportunity for our products, the use of bacteriophages and synthetic phages to kill bacterial pathogens, having resources sufficient to fund our operations into the first quarter of 2025, future funding sources, general and administrative expenses, clinical trial and other research and development expenses, costs of manufacturing, costs relating to our intellectual property, capital expenditures, the expected benefits of our targeted phage therapies strategy, the potential market for our products, tax credits and carry-forwards, and litigation-related matters. Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “will,” “goal,” “potential” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements necessarily contain these identifying words. These statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 21, 2024 with the SEC, and under Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. These forward-looking statements speak only as of the date on which they were made, and we undertake no obligation to update any forward-looking statements.

Overview

We are a clinical-stage biotechnology company focused on the development of high purity, pathogen-specific bacteriophage therapeutics for the treatment of chronic pulmonary diseases exacerbated by concurrent bacterial infection with antibiotic-resistant and difficult-to-treat bacteria using our proprietary bacteriophage-based technology. We see bacteriophages as a potentially safer and effective alternative to antibiotics and an essential response to the growing bacterial resistance to current classes of antibiotics. Bacteriophages or “phages” have a powerful and highly differentiated mechanism of action that enables binding to and killing of specific targeted bacteria while uniquely preserving the normal human microbiome or “healthy bacteria”. This is in direct contrast to traditional broad-spectrum antibiotics which can alter the human microbiome increasing susceptibility to opportunistic pathogens, such as C. difficile. We believe that phages represent a promising means to effectively treat bacterial infections as an alternative to broad-spectrum antibiotics, especially for patients with bacterial infections resistant to current standard of care therapies, including the multidrug-resistant or “superbug” strains of bacteria. We are a leading developer of clinical-stage phage therapeutics of high purity, and believe we are uniquely positioned to address the growing worldwide threat of antibiotic-resistant bacterial infections. We have completed three critical Phase 2 trials, two of which were completed this year, utilizing two distinct phage cocktails against two different pathogens with the potential to treat chronic pulmonary disease complicated by bacterial infection, as well as acute systemic bacterial infections. We believe we are on a critical pathway towards pivotal Phase 3 clinical studies.

We are combining our proprietary approach and expertise in identifying, characterizing and developing both naturally occurring and engineered (synthetic) bacteriophages with our proprietary phage-specific host-engineered cGMP manufacturing capabilities to advance a target pipeline of high-quality bacteriophage product candidates for late-stage clinical development. We have improved our manufacturing processes by significantly increasing phage titers and improving production efficiency with the goal of ensuring commercial viability. We believe that we are uniquely advancing two lead candidates to address both chronic and acute bacterial infections.

Our first lead phage candidate, inhaled AP-PA02, is focused primarily on the treatment of chronic pulmonary infections with P. aeruginosa. On October 14, 2020, we received the approval to proceed from the U.S. Food and Drug Administration (the “FDA”) for our Investigational New Drug (“IND”) application for AP-PA02. In the first quarter of 2023, we announced positive topline results from the completed “SWARM-P.a.” study – a Phase 1b/2a, multicenter, double-blind, randomized, placebo-controlled, single ascending dose and multiple ascending dose clinical trial to evaluate the safety and tolerability of inhaled AP-PA02 in subjects with cystic fibrosis and chronic pulmonary P. aeruginosa infection. Data indicate that AP-PA02 was well-tolerated with a treatment emergent adverse event profile similar to placebo. Pharmacokinetics findings confirm that AP-PA02 can be effectively delivered to the lungs through nebulization with minimal systemic exposure, with single ascending doses and multiple ascending doses resulting in a proportional increase in exposure as measured in induced sputum. AP-PA02 exposures were generally consistent across subjects. Additionally, bacterial levels of P. aeruginosa in the sputum measured at several timepoints suggest improvement in bacterial load reduction for subjects treated with AP-PA02 at the end of treatment as compared to placebo after ten days of dosing. In addition, a correlation was seen between increasing phage dose (higher AP-PA02 exposures) and reduction in the bacterial load, supporting the biologic plausibility of a bacterial specific mechanism of action and creating the opportunity for phage as a therapeutic alternative to inhaled antibiotics. This study was supported by the CFF, which granted us a Therapeutics Development Award of $5.0 million. As of September 30, 2024, we received the full award’s amount, including the final payment of $0.3 million in January 2024. Following the promising Phase 1b/2a results of favorable safety and tolerability profile and plausible mechanism of action, an additional confirmatory Phase 2 trial was initiated in non-cystic fibrosis Bronchiectasis (“NCFB”) patients with similar chronic pulmonary disease with infections due to P. aeruginosa.

On February 22, 2022, we announced FDA approval to proceed with our IND application for inhaled AP-PA02, in a second indication, NCFB. We initiated a Phase 2 trial (“Tailwind”) in NCFB in 2022 and reported first patient dosing in the first quarter of 2023. The “Tailwind” study is a Phase 2, multicenter, double-blind, randomized, placebo-controlled study to evaluate the safety, phage kinetics, and efficacy of inhaled AP-PA02 phage therapeutic in subjects with NCFB and chronic pulmonary P. aeruginosa infection. The trial design included two cohorts in order to analyze AP-PA02 as monotherapy as well as AP-PA02 in combination with inhaled antibiotics. One cohort enrolled subjects not on chronic inhaled antibiotics, randomized to receive either inhaled AP-PA02 or placebo. The other cohort enrolled subjects on chronic inhaled antibiotics, randomized to receive either inhaled AP-PA02 plus their chronic inhaled antibiotic or placebo plus their chronic inhaled antibiotic. The aim of the study is to define a safe dose and dosing duration with promising biologic correlation in anticipation for a definitive Phase 3 trial in 2025. On July 11, 2024, we announced completion of enrollment of the Phase 2 Tailwind Study. The last patient final follow-up visit took place on August 7, 2024. We anticipate topline data from the Tailwind study by the end of 2024, followed by potential initiation of a pivotal bronchiectasis trial in 2025 in which we plan to evaluate inhaled AP-PA02 as an alternative to inhaled antibiotics in chronic pulmonary P. aeruginosa infections in subjects with NCFB. As there are no FDA approved anti-infective treatments for NCFB, a definitive pivotal placebo-controlled trial is plausible, providing a pathway to commercialization for chronic pulmonary diseases with concurrent chronic bacterial infection, pending positive clinical trial results.

In parallel, we have an acute bacterial infection clinical development plan focused on Staphylococcus aureus (“S. aureus”) bacteremia, a difficult-to-treat and often life-threatening human infection that can result in high morbidity and mortality and for which bacterial resistance to antibiotics is growing.

A key advantage of our phage manufacturing expertise is the purity profiles of our phage products, including AP-SA02, our phage product candidate for S. aureus; this has enabled us to pursue treatment of complicated S. aureus bacteremia, where repetitive intravenous dosing is required. On June 15, 2020, we entered into an agreement (the “MTEC Agreement”) with the Medical Technology Enterprise Consortium (“MTEC”), pursuant to which we received a $15.0 million grant and entered into a multi-year program administered by the U.S Department of Defense through MTEC and managed by the Naval Medical Research Command (NMRC) – Naval Advanced Medical Development (NAMD) with funding from the Defense Health Agency and Joint Warfighter Medical Research Program. On September

29, 2022, the MTEC Agreement was modified to increase the total award by $1.3 million to $16.3 million and extend the term into the second half of 2024. In July 2024, the MTEC Agreement was modified to increase the total award by $5.3 million to $21.6 million and extend the term into the third quarter of 2025. The grant is being used to partially fund a Phase 1b/2a, multi center, randomized, double-blind, placebo-controlled dose escalation study that will assess the safety, tolerability and efficacy of our phage-based candidate, AP-SA02, for the treatment of adults with *S. aureus (“*diSArm” study).

On November 17, 2021, we announced that we had received approval from the FDA to proceed with our IND application for AP-SA02. Since dosing the first patient in the Phase 2a portion of the study on September 26, 2023, we have focused on accelerating enrollment of the diSArm study, evaluating safety with higher intravenous doses, which is possible due to the high purity of our phage product candidates. The high purity of our phages has allowed us to dose escalate to 5E10 PFU every six hours (2E11 PFU every 24 hours) for five days without clinically significant adverse events. In parallel with dose escalation, the evolution of two distinct blinded subsets of subjects receiving phage has been observed. One subset, comprising approximately half of the treated group, has evidence of persistence of detectable phage in the blood providing early evidence of in vivo phage amplification and resultant release of phage progeny. On November 12, 2024, we announced the completion of enrollment of the Phase 1b/2a diSArm study. We anticipate topline data from the diSArm study in the first quarter of 2025 where we can explore the two aforementioned subsets in an unblinded manner. We are committed to developing a pivotal S. aureus bacteremia trial in 2025 to evaluate the intravenous phage product candidate, AP-SA02, as an adjunct to standard of care broad-spectrum antibiotics and/or potentially as an alternative to broad-spectrum antibiotics, which would decrease the utilization of broad-spectrum antibiotics and their detrimental impact on the healthy human microbiome.

On August 1, 2022, we announced FDA approval to proceed with our IND application for AP-SA02 in a second indication, prosthetic joint infections (“PJI”) with S. aureus. We had planned to initiate a Phase 1b/2a trial in 2023; however, in light of the growing concerns of both PJI and wound infection, we are planning to revise the protocol to include both indications. Driven by data from the bacteremia study, and with sufficient funding, we may in the future initiate a Phase 1b/2a trial to assess the safety and tolerability of intravenous and intra-articular AP-SA02 as an adjunct to standard of care antibiotics in adults undergoing treatment of periprosthetic joint infections and/or wound infections caused by S. aureus.

We remain committed to conducting randomized controlled clinical trials required for FDA approval in order to move towards the commercialization of our phage products as alternatives and/or reinforcements to traditional antibiotics, providing a potential safe and effective method of treating patients suffering from drug-resistant and difficult-to-treat bacterial infections.

The following chart summarizes the status of our phage product candidate development programs and partners.

We have incurred net losses since our inception and our operations to date have been primarily limited to research and development and raising capital. As of September 30, 2024, we had an accumulated deficit of $330.3 million. We currently expect to use our existing cash and cash equivalents for the focused research and development of our current product candidates and for working capital and other general corporate purposes. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development of and seeking to obtain regulatory approval for our product candidates. We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for at least one of our product candidates. We may also use a portion of our existing cash and cash equivalents for the potential acquisition of, or investment in, product candidates, technologies, formulations or companies that complement our business, although we have no current understandings, commitments or agreements to do so.

Our existing cash and cash equivalents of $17.1 million as of September 30, 2024 will not be sufficient to enable us to complete all necessary development of any potential product candidates. Accordingly, we will be required to obtain further funding through one or more other public or private equity offerings, debt financings, collaboration, strategic financing, grants or government contract awards, licensing arrangements or other sources. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and potential disruptions to, and volatility in, financial markets in the United States and worldwide. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of assets, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations and result in a loss of investment by our stockholders.

Recent Events

MTEC Agreement Modification

In July 2024, we amended the MTEC Agreement and increased the amount of the award by $5.3 million to a total of $21.6 million. We will recognize an increase in grant revenue from the third quarter of 2024 until the full amount of the amended award is utilized.

Debt

On November 12, 2024, we amended the Convertible Credit Agreement and the 2023 Credit Agreement, among other things, to extend the maturity dates of the Convertible debt and 2023 Loan from January 10, 2025 to January 10, 2026.

Results of Operations

Comparison of three and nine months ended September 30, 2024 and 2023 (in thousands):

*Not meaningful

*Not meaningful

Grant Revenue

Our grant revenue represents MTEC’s share of the costs incurred for our AP-SA02 program for the treatment of S. aureus. The full amount of the MTEC award of $16.3 million was utilized as of March 31, 2024. In July 2024, we amended the MTEC agreement and increased the amount of the award by $5.3 million to a total of $21.6 million. We recognized $3.0 and $1.2 million of grant revenue during the three months ended September 30, 2024 and 2023, respectively, and $3.9 million and $3.0 million during the nine months ended September 30, 2024 and 2023, respectively, related to the MTEC award.

Research and Development

The following table summarizes our research and development expenses for the three and nine months ended September 30, 2024 and 2023 (in thousands):

Research and development expenses increased by $1.5 million, from $8.0 million for the three months ended September 30, 2023 to $9.5 million for the three months ended September 30, 2024.

Research and development expenses totaled $25.8 million for the nine months ended September 30, 2024, remaining virtually unchanged compared with the same period in 2023 despite an increase in research and development activities due to increasing efficiencies.

Clinical trial costs increased by $0.7 million, from $2.5 million for the three months ended September 30, 2023, to $3.2 million for the three months ended September 30, 2024. The increase is primarily attributable to a $1.0 million increase in AP-PA02 NCFB trial costs and an additional $0.2 million increase in Bacteremia trial costs due to the increase in the number of enrolled patients, patient visits, and active sites increase in both trials since the second half of 2023. Also, the increase is due in part to achieving clinical contract research organization (“CRO”) milestones ahead of schedule, resulting increase in associated CRO expenses. The increase was partially offset by a decrease of $0.3 million in AP-PA02 CF study costs, as most activities under the trials were completed in 2023.

Clinical trial costs increased by $0.5 million, from $7.1 million for the nine months ended September 30, 2023, to $7.6 million for the nine months ended September 30, 2024. The increase is primarily due to an increase of $2.5 million in the AP-PA02 NCFB trial costs, offset by a decrease of $1.2 million in AP-PA02 CF trial costs, $0.4 million in Bacteremia trial costs and $0.2 million in AP-SA02 PJI trial costs. The AP-PA02 CF trial is substantially completed and study reconciliation is in process. The PJI trial is currently on hold, and we may in the future initiate a Phase 1b/2a trial to assess the safety and tolerability of combined intravenous and intra-articular AP-SA02. Bacteremia trial costs decreased due to a credit of $0.8 million received from a clinical research organization, offset by an increase of $0.4 million during the nine months ended September 30, 2024 compared to the same period in 2023. The AP-PA02 NCFB trial costs increased as the number of enrolled patients, patient visits, and active sites increased from the second half of 2023 through July 2024, when we completed patients’ enrollment for NCFB study.

Other external research and development costs decreased by $0.1 million from $1.1 million for the three months ended September 30, 2023, to $1.0 million for the three months ended September 30, 2024. The decrease was primarily due to a decrease of $0.1 million in consulting expenses.

Other external research and development costs decreased by $0.8 million from $3.5 million for the nine months ended September 30, 2023, to $2.7 million for the nine months ended September 30, 2024. The decrease was primarily due to a decrease of $0.5 million in consulting expenses and $0.3 million decrease in outsourced service costs.

Our expenses by product and by project for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands):

* Expenses not allocated by projects include consultants, lab supplies and outsourced services expenses.

Personnel-related costs, including employee payroll and related expenses, increased by $0.8 million, from $2.1 million for the three months ended September 30, 2023 to $2.9 million for the three months ended September 30, 2024. This increase was mainly driven by a $0.3 million increase in stock-based compensation expense, which was primarily due to options granted in March 2024, 2024 a mid-year bonus payments of $0.2 million, and an increase of $0.3 million in other personnel-related costs, offset by a $0.1 million decrease in severance costs.

Personnel-related costs, including employee payroll and related expenses, increased by $0.1 million, from $8.2 million for the nine months ended September 30, 2023 to $8.3 million for the nine months ended September 30, 2024. This increase was mainly driven by 2024 mid-year bonus payments of $0.2 million, severance payments of $0.2 million, and an increase of $0.2 million in other personnel-related costs offset by $0.3 million lower stock-based compensation expense (as there were no expenses related to the equity awards that fully vested after September 30, 2023) and $0.2 million payroll related costs reduction.

Facilities and overheads costs increased by $0.2 million, from $2.2 million for the three months ended September 30,2023 to $2.4 million for the three months ended September 30, 2024 mainly due to an increase in facilities maintenance costs.

Facilities and overheads costs increased by $0.1 million, from $7.2 million for the nine months ended September 30,2023 to $7.3 million for the nine months ended September 30, 2024 mainly due to an increase in facilities maintenance costs.

General and Administrative

General and administrative expenses were $3.2 million and $3.6 million for the three months ended September 30, 2024 and 2023, respectively. The decrease of $0.4 million is primarily related to a decrease of $1.0 million in professional services during the third quarter of 2024 as we continue to achieve efficiencies with in-house hires, offset by a $0.6 million increase in personnel expenses, including stock-based compensation.

General and administrative expenses were $9.9 million and $8.5 million for the nine months ended September 30, 2024 and 2023, respectively. The increase of $1.4 million is primarily related to an increase of $2.0 million in stock-based compensation expenses due to stock-based awards granted during the first quarter of 2024, increase in lease expenses of $0.3 million and an increase of $0.3 million in other facilities and overhead expenses, offset by a decrease of $1.1 million in professional and legal, accounting and other consulting expenses, and a decrease of $0.2 million in payroll and related costs.

Interest Income

Interest income for the three months ended September 30, 2024 and 2023 was $0.3 million and less than $0.1 million, respectively, and related to interest income on our money market fund investments.

Interest income for the nine months ended September 30, 2024 and 2023 was $0.6 million and $0.1 million, respectively, and related to interest income on our money market fund investments.

Interest Expense

We recognized interest expense of $2.9 million and $1.2 million for the three months ended September 30, 2024 and 2023, related to the interest expenses and the amortization of debt discount and issuance costs for the 2023 Loan and 2024 Loan received from Innoviva in July 2023 and March 2024, respectively. Stated interest is accrued and is payable at the maturity of the 2023 Loan and the 2024 Loan in 2025.

We recognized interest expense of $7.5 million and $1.2 million for the nine months ended September 30, 2024 and 2023, related to the interest expenses and the amortization of debt discount and issuance costs for the 2023 Loan and 2024 Loan received from Innoviva in July 2023 and March 2024, respectively. Stated interest is accrued and is payable at the maturity of the 2023 Loan and the 2024 Loan in 2025.

Change in Fair Value of Convertible Debt

We recognized a gain on change in the fair value of the Convertible Loan for the three months ended September 30, 2024 of $6.9 million. The gain of $6.9 million is primarily attributable to the decrease in our Common Stock price in the three months ended September 30, 2024. We recognized a loss of $15.8 million for three months ended September 30, 2023, which is primarily due to the increase in our Common Stock price in the three months ended September 30, 2023.

We recognized a gain on change in the fair value of the Convertible Loan for the nine months ended September 30, 2024 of $17.3 million and a loss of $13.0 million for the nine months ended September 30, 2023. Such fluctuations in fair values are primarily attributable to the changes in our estimated probabilities of various settlement scenarios, changes in our Common Stock price, remaining loan term and changes in volatilities. The Convertible Loan received from Innoviva in January 2023 and amended in July 2023 is accounted for at fair value using a weighted probability of various settlement scenarios of the Convertible Loan during its term discounted to each reporting date. Conversion option scenarios are valued using an option pricing model with significant assumptions and estimates such as volatility, expected term and risk-free interest rates.

Loss on Convertible Debt Extinguishment

We recognized a loss on convertible debt extinguishment for both three and nine months ended September 30, 2023 of $3.9 million which relates to the amendment to the Convertible Loan on July 10, 2023. The amendment was accounted for as an extinguishment in the third quarter of 2023.

Liquidity, Capital Resources and Financial Condition

We have incurred net losses since our inception and have negative operating cash flows. Our cash and cash equivalents of $17.1 million as of September 30, 2024 will not be sufficient to fund our operations for the next 12 months from the date of issuance of our condensed consolidated financial statements for the nine months ended September 30, 2024. We plan to control our expenses and to raise additional capital through a combination of public and private equity, debt financings, strategic alliances, and grant arrangements. These circumstances raise substantial doubt about our ability to continue as a going concern. While management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are not entirely within its control and cannot be assessed as being probable of occurring. We may not be able to secure additional financing in a timely manner or on favorable terms, if at all.

During the year ended December 31, 2023, we received the Convertible Loan in the aggregate amount of $30.0 million and the 2023 Loan in the aggregate amount of $25.0 million from Innoviva. The Convertible Loan and the 2023 Loan mature in January 2025, and principal and accrued interest are payable at maturity. The Convertible Loan provides for various conversion and repayment options, including the conversion of principal and accrued interest into shares of our Common Stock upon a Qualified Financing and the Company’s option to repay the Convertible Loan prior to maturity.

On March 4, 2024, we entered into the 2024 Credit Agreement for the 2024 Loan in an aggregate amount of $35.0 million with Innoviva. Concurrently with the execution of the 2024 Loan, we amended certain provisions of the Convertible Credit Agreement and the 2023 Credit Agreement to, among other things, conform certain terms relating to permitted indebtedness and permitted liens. The 2024 Loan bears interest at an annual rate of 14% and matures in June 2025. Principal and accrued interest are payable at maturity.

In July 2024, we amended the MTEC Agreement and increased the amount of the award by $5.3 million to a total of $21.6 million. We will recognize grant revenue from the third quarter of 2024 until the full amount of the amended award is utilized.

On November 12, 2024, we amended the Convertible Credit Agreement and the 2023 Credit Agreement, among other things, to extend the maturity dates of the Convertible debt and 2023 Loan from January 10, 2025 to January 10, 2026.

Future Capital Requirements

We will need to raise additional capital in the future to continue to fund our operations. Our future funding requirements will depend on many factors, including:

• the costs and timing of our research and development activities;
• the progress and cost of our clinical trials and other research and development activities;
• manufacturing costs associated with our targeted phage therapies strategy and other research and development activities;
• the costs and timing of seeking regulatory approvals;
• the costs of filing, prosecuting and enforcing any patent applications, claims, patents and other intellectual property rights; and
• the costs of potential lawsuits involving us or our product candidates.

We may seek to raise capital through a variety of sources, including:

• the public equity market;
• private equity financings;
• collaborative arrangements;
• government grants; or
• strategic financing.

Any additional fundraising efforts may divert our management team from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. Our ability to raise additional funds will depend, in part, on the success of our product development activities, including our targeted phage therapies strategy and any clinical trials we initiate, regulatory events, our ability to identify and enter into in-licensing or other strategic arrangements, and other events or conditions that may affect our value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. We cannot be certain that sufficient funds will be available to us when required or on acceptable terms. If we are unable to secure additional funds on a timely basis or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our development programs or other operations, dispose of technology or assets, pursue an acquisition of our company by a third party at a price that may result in a loss on investment for our stockholders, enter into arrangements that may require us to relinquish rights to certain of our product candidates, technologies or potential markets, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations, increase the risk of insolvency and loss of investment by our stockholders. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our existing stockholders. Our 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.

Cash Flows

The following table summarizes our sources and uses of cash for the periods presented (in thousands):

Cash Flows Used in Operating Activities

Net cash used in operating activities was $29.6 million and $39.3 million for the nine months ended September 30, 2024 and 2023, respectively.

Cash used in operating activities in the nine months ended September 30, 2024 was primarily due to our net loss for the period of $21.5 million, adjusted by non-cash items of $4.8 million and a decrease of $3.3 million in our net operating assets and liabilities. The non-cash items consist of $17.3 million related to a gain from change in fair value of convertible debt, $7.5 million of non-cash interest expense on the 2023 Loan and the 2024 Loan, $2.5 million related to stock-based compensation expense, $1.5 million related to change in right-of-use asset and $0.9 million related to depreciation and amortization expense. The decrease in our net operating assets and liabilities was primarily due to a decrease of $4.2 million in operating lease liability related to lease payments and payments for the construction of office and laboratory and manufacturing space at our new leased facility in Los Angeles, CA, a decrease of $2.0 million in accounts payable and accrued liabilities, an increase of $0.8 million in accrued compensation, and a decrease of $2.1 million in prepaid expenses and other current assets.

Cash used in operating activities in the nine months ended September 30, 2023 was primarily due to our net loss for the period of $49.2 million, adjusted by non-cash items of $20.1 million and a decrease of $10.2 million in our net operating assets and liabilities. The non-cash items consist of $13.0 million related to a loss from change in fair value of convertible debt, $3.9 million related to a loss on convertible debt extinguishment, $1.2 million of non-cash interest expense on the 2023 Loan, $0.7 million related to stock-based compensation expense, $0.7 million related to depreciation and amortization expense and $0.7 million related to a change in right-of-use assets. The decrease in our net operating assets and liabilities was primarily due to a decrease of $9.7 million in operating lease liability, which primarily relates to payments to the construction of office and laboratory and manufacturing space at our new leased facility in Los Angeles, CA, a decrease of $0.3 million in accounts payable and accrued liabilities, a decrease of $0.1 million in accrued compensation, partially offset by an increase of $0.1 million in prepaid expenses and other current assets.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $2.0 million and $5.7 million for the nine months ended September 30, 2024 and 2023, respectively, which is attributable to purchases of laboratory and manufacturing equipment in connection with the construction of a new office, laboratory and manufacturing space at our leased facility in Los Angeles, CA.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2024 was $34.9 million, which consisted primarily of proceeds from issuance of term debt, net of issuance costs of less than $0.1 million, and proceeds from exercise of stock options of $0.1 million.

Cash provided by financing activities for the nine months ended September 30, 2023 was $54.0 million, which consisted primarily of proceeds from issuance of convertible debt, net of issuance costs of $29.1 million, proceeds from issuance of term debt, net of issuance costs of $24.9 million, and proceeds from exercise of stock options of less than $0.1 million, partially offset by less than $0.1 million of the payments for taxes related to net share settlement of equity awards.

Off-Balance Sheet Arrangements

As of September 30, 2024, we did not have off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate estimates and assumptions, including but not limited to those related to convertible debt, stock-based compensation expense, accruals for research and development costs, lease assets and liabilities, the valuation of deferred tax assets, valuation of uncertain income tax positions, impairment of goodwill and intangible assets and impairment of long-lived assets. We base our 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 from these estimates under different assumptions or conditions.

Refer to Note 3 to the consolidated financial statements and critical accounting policies and estimated included in our Form 10-K filed with the SEC on March 21, 2024. There were no material changes to our critical accounting policies from December 31, 2023.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information required under this item.

Disclosure Controls and Procedures

Under the supervision of our Chief Executive Officer (“CEO”) and Senior Vice President, Finance and Principal Financial Officer (“PFO”), we evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act (the “Exchange Act”) as of September 30, 2024. Based on that evaluation, our CEO and PFO have concluded that our disclosure controls and procedures were effective as of September 30, 2024 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and PFO, as appropriate to allow timely discussion regarding required disclosures.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined by Rules 13a-15(d) and 15d-15(d) of the Exchange Act) that occurred during the nine months ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our business is subject to a number of risks, including those identified in Item 1A of Part I of our 2023 Form 10-K. There have been no material changes to the risk factors described in our 2023 Form 10-K.