Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Aridis Pharmaceuticals, Inc.tm2020497d1_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Aridis Pharmaceuticals, Inc.tm2020497d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Aridis Pharmaceuticals, Inc.tm2020497d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Aridis Pharmaceuticals, Inc.tm2020497d1_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-38630

 

 

 

Aridis Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   47-2641188
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
5941 Optical Ct.    
San Jose, California   95138
(Address of principal executive offices)   (Zip Code)

 

(408) 385-1742

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

Title of each class:   Trading Symbol(s)   Name of each exchange on which registered:
Common Stock   ARDS   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
     
Non-accelerated filer x   Small reporting company x
     
    Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares of the registrant’s common stock, $0.0001 par value per share, outstanding at July 31, 2020 was 8,923,374.

 

 

 

 

 

Table of Contents

 

      Page
       
PART I - FINANCIAL INFORMATION
       
Item 1. Condensed Consolidated Financial Statements (unaudited)    
       
  Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019   3
       
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)   4
       
  Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2020 and 2019 (unaudited)   5
       
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)   6
       
  Notes to Condensed Consolidated Financial Statements (unaudited)   7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
       
Item 4. Controls and Procedures   32
       
PART II OTHER INFORMATION
       
Item 1. Legal Proceedings   33
       
Item 1A. Risk Factors   33
       
Item 6. Exhibits   33
       
Signatures   34

 

2

 

 

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

   June 30,   December 31, 
   2020   2019 
Assets   (unaudited)      
Current assets:          
Cash and cash equivalents  $11,812   $20,897 
Accounts receivable   1,000     
Other receivables   352    413 
Contract costs   1,543    1,537 
Prepaid expenses   1,441    2,990 
Total current assets   16,148   25,837 
Property and equipment, net   845    1,006 
Intangible assets, net   30    32 
Equity method investment       9 
Contract costs   520    526 
Other assets   572    557 
Total assets  $18,115   $27,967 
Liabilities and Stockholders' Equity (Deficit)          
Current liabilities:          
Accounts payable  $1,696   $1,755 
Accrued liabilities   2,175    2,974 
Deferred revenue, current   14,661    14,602 
Note payable, current   277     
Total current liabilities   18,809    19,331 
Deferred revenue   4,941    5,000 
Note payable   438     
Other liabilities   1     
Total liabilities   24,189    24,331 
Commitments and contingencies (Note 12)          
Stockholders’ equity (deficit):          
Preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)        
Common stock (par value $0.0001; 100,000,000 shares authorized; shares issued and outstanding: 8,923,374 and 8,918,461 as of June 30, 2020 and December 31, 2019, respectively)   1    1 
Additional paid-in capital   105,418    104,404 
Accumulated deficit   (111,493)   (100,769)
Total stockholders' equity (deficit)   (6,074)   3,636 
Total liabilities and stockholders’ equity (deficit)  $18,115   $27,967 

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

3

 

 

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2020   2019   2020   2019 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
Revenue:                    
Grant revenue  $1,000   $   $1,000   $1,022 
Operating expenses:                    
Research and development   3,647    6,653    8,564    13,771 
General and administrative   1,583    1,613    3,222    3,254 
Total operating expenses   5,230    8,266    11,786    17,025 
Loss from operations   (4,230)   (8,266)   (10,786)   (16,003)
Other income (expense):                    
Interest income, net   10    69    71    185 
Share of loss from equity method investment       (186)   (9)   (628)
Net loss  $(4,220)  $(8,383)  $(10,724)  $(16,446)
Weighted-average common shares outstanding used in computing net loss, basic and diluted   8,923,374    8,107,290   8,921,383   8,106,484 
Net loss per share, basic and diluted  $(0.47)  $(1.03)  $(1.20)  $(2.03)

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

4

 

 

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

 

   Three Months Ended June 30, 2020 (unaudited) 
               Additional       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders' 
   Shares   Amount   Shares   Dollars   Capital   Deficit   Equity (Deficit) 
Balances as of March 31, 2020      $    8,923,374   $1   $104,895   $(107,273)  $(2,377)
Stock-based compensation                   523        523 
Net loss                       (4,220)   (4,220)
Balances as of June 30, 2020      $    8,923,374   $1   $105,418   $(111,493)  $(6,074)

 

   Three Months Ended June 30, 2019 (unaudited) 
               Additional       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders' 
   Shares   Amount   Shares   Dollars   Capital   Deficit   Equity 
Balances at March 31, 2019      $    8,107,290   $1   $97,859   $(79,151)  $18,709 
Stock-based compensation                   536        536 
Net loss                       (8,383)   (8,383)
Balances as of June 30, 2019      $    8,107,290   $1   $98,395   $(87,534)  $10,862 

 

   Six Months Ended June 30, 2020 (unaudited) 
               Additional       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders' 
   Shares   Amount   Shares   Dollars   Capital   Deficit   Equity (Deficit) 
Balances at December 31, 2019      $    8,918,461   $1   $104,404   $(100,769)  $3,636 
Exercise of stock options           4,913        14        14 
Stock-based compensation                   1,000        1,000 
Net loss                       (10,724)   (10,724)
Balances as of June 30, 2020      $    8,923,374   $1   $105,418   $(111,493)  $(6,074)

 

   Six Months Ended June 30, 2019 (unaudited) 
               Additional       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders' 
   Shares   Amount   Shares   Dollars   Capital   Deficit   Equity 
Balances at December 31, 2018      $    8,104,757   $1   $97,401   $(71,088)  $26,314 
Exercise of stock options           2,533        8        8 
Stock-based compensation                   986        986 
Net loss                       (16,446)   (16,446)
Balances as of June 30, 2019      $    8,107,290   $1   $98,395   $(87,534)  $10,862 

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

5

 

 

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

   Six Months Ended
June 30,
 
   2020   2019 
   (unaudited)   (unaudited) 
Cash flows from operating activities:          
Net loss  $(10,724)  $(16,446)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   167    166 
Stock-based compensation expense   1,000    986 
Share of loss from equity method investment   9    628 
Changes in operating assets and liabilities:          
Accounts receivable   (1,000)   660 
Other receivables   61    (1,010)
Prepaid expenses   1,548    (833)
Contract costs   (488)    
Other assets   (15)   (20)
Accounts payable   (44)   (787)
Accrued liabilities and other   (311)   979 
Deferred revenue       (22)
Net cash used in operating activities   (9,797)   (15,699)
Cash flows from investing activities:          
Purchase of property and equipment   (17)   (27)
Net cash used in investing activities   (17)   (27)
Cash flows from financing activities:          
Proceeds from note payable   715     
Proceeds from stock option exercises   14    8 
Net cash provided by financing activities   729    8 
Net decrease in cash and cash equivalents   (9,085)   (15,718)
Cash and cash equivalents at:          
Beginning of period   20,897    24,237 
End of period  $11,812   $8,519 
Supplemental cash flow disclosures:          
Cash paid for taxes  $2   $2 
Supplemental noncash investing and financing activities:          
Property and equipment additions  $   $ 

 

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

6

 

 

 

Aridis Pharmaceuticals. Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. Description of Business and Basis of Presentation

 

Organization

 

Aridis Pharmaceuticals, Inc. (the “Company” or “we” or “our”) was established as a California limited liability corporation in 2003. The Company converted to a Delaware C corporation on May 21, 2014. Our principal place of business is in San Jose, California. We are a late-stage biopharmaceutical company focused on developing new breakthrough therapies for infectious diseases and addressing the growing problem of antibiotic resistance. The Company has a deep, diversified portfolio of clinical and pre-clinical stage non-antibiotic anti-infective product candidates that are complimented by a fully human monoclonal antibody discovery platform technology. The Company’s suite of anti-infective product candidates offers opportunities to profoundly alter the current trajectory of increasing antibiotic resistance and improve the health outcome of many of the most serious life-threatening infections particularly in hospital settings.

 

Basis of Presentation and Consolidation

 

The accompanying condensed consolidated financial statements (unaudited) include the amounts of the Company and our wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements (unaudited) have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements (unaudited) reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These condensed consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes thereto for the preceding fiscal year included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on April 8, 2020.

 

The condensed consolidated financial statements (unaudited) include the accounts of the Company and its two wholly-owned subsidiaries, Aridis Biopharmaceuticals, Inc. and Aridis Pharmaceuticals, C.V. All intercompany balances and transactions have been eliminated in consolidation. The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported condensed consolidated balance sheet, net loss, stockholders’ equity (deficit) or cash flow activities.

 

COVID-19

 

The COVID-19 outbreak in the United States has caused business disruption. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and impact on the Company’s clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact the Company’s financial condition or results of operations is uncertain.

 

Going Concern

 

The Company has had recurring losses from operations since inception and negative cash flows from operating activities during the six months ended June 30, 2020. Management expects to incur additional operating losses and negative cash flows from operations in the foreseeable future as the Company continues its product development programs. At June 30, 2020, the Company had cash and cash equivalents of $11.8 million.

 

The Company’s research and development expenses and resulting cash burn during the six months ended June 30, 2020, were largely due to costs associated with the Phase 3 study of AR-301 for the treatment of ventilator associated pneumonia (“VAP”) caused by the Staphylococcus aureus bacteria and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis. Current clinical development activities are focused on AR-301 and AR-501. We expect our expenses to continue to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our therapeutic candidates.

 

7

 

 

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s operations and those of third parties on which the Company relies, including by causing disruptions in the supply of the product candidates and the conduct of current and future clinical trials. Additionally, as the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity. These effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.

 

The Company plans to fund its losses from operations through current cash on hand and future debt and equity financings which we may obtain through one or more public or private equity offerings, debt financings, government or other third-party funding, strategic alliances and licensing or collaboration arrangements. The Company may be unable to secure additional financing or other sources of funding on acceptable terms, or at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs or future commercialization efforts, which could adversely affect its future business prospects and its ability to continue as a going concern. The Company believes that its current available cash and cash equivalents will not be sufficient to fund its planned expenditures and meet the Company’s obligations for at least the one-year period following its condensed consolidated financial statement issuance date.

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in their normal course of business. There is substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these condensed consolidated financial statements are issued. These condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Such estimates include those related to the evaluation of our ability to continue as a going concern, best estimate of standalone selling price of revenue deliverables, allowance for doubtful accounts, long-lived assets, classification of deferred revenue, income taxes, assumptions used in the Black-Scholes-Merton (“BSM”) model to calculate the fair value of stock-based compensation, deferred tax asset valuation allowances, preclinical study and clinical trial accruals. Actual results could differ from those estimates.

 

Concentration of Risk

 

Credit Risk

 

The Company’s cash and cash equivalents are maintained at financial institutions in the United States of America. Deposits held by these institutions may exceed the amount of insurance provided on such deposits.

 

Customer Risk

 

For the three and six months ended June 30, 2020 and 2019, one customer accounted for 100% of total revenue. This customer is located in the United States. As of June 30, 2020, one customer accounted for 100% of accounts receivable. As of December 31, 2019, there were no accounts receivable.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of checking account and money market account balances.

 

8

 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company considers the credit worthiness of its customers but does not require collateral in advance of a sale. The Company evaluates collectability and maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio when necessary. The allowance is based on the Company’s best estimate of the amount of losses in the Company’s existing accounts receivable, which is based on customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2020 and December 31, 2019, there were no allowances for doubtful accounts.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the condensed consolidated balance sheet and any resulting gain or loss is reflected in the condensed consolidated statement of operations in the period realized.

 

Intangible Assets

 

Intangible assets are recorded at cost and amortized over the estimated useful life of the asset. Intangible assets consist of licenses with various institutions whereby the Company has rights to use intangible property obtained from such institutions.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment is measured by the excess of the carrying amount of the assets over fair value less the costs to sell the assets, generally determined using the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets as of June 30, 2020 and December 31, 2019.

 

Revenue Recognition

 

The Company recognizes revenue based on Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), which applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. See Note 6 for details of the development and license agreements.

 

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as the entity satisfies performance obligations. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

As part of the accounting for customer arrangements, the Company must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the standalone selling price for each performance obligation identified in the contract for the allocation of the transaction price in step (iv) above. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price.

 

9

 

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. In developing the standalone price for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. The Company receives payments from its customers based on payment schedules established in each contract. The Company records any amounts received prior to satisfying the revenue recognition criteria as deferred revenue on its condensed consolidated balance sheets. Amounts recognized as revenue, but not yet received or invoiced are recorded within other receivables on the condensed consolidated balance sheet. Amounts are recorded as other receivables on the condensed consolidated balance sheet when our right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of a majority of the promised goods or services to the customer will be one year or less.

 

Contract Assets

 

The incremental costs of obtaining a contract under ASC 606 (i.e. costs that would not have been incurred if the contract had not been obtained) are recognized as an asset in the Company’s condensed consolidated balance sheets if the Company expects to recover them (see Note 6). Capitalized costs will be amortized to the respective expenses using a systematic basis that mirrors the pattern in which the Company transfers control of the goods and service to the customer. At each reporting date, the Company determines whether or not the capitalized costs to obtain a contract are impaired by comparing the carrying amount of the asset to the remaining amount of consideration that the Company received and expects to receive less the costs that relate to providing services under the relevant contract. For the six months ended June 30, 2020, there was no amortization of the contract assets and there have been no impairments as of June 30, 2020.

 

Deferred Revenue

 

Amounts received prior to satisfying the above revenue recognition criteria, or in which the Company has an unconditional right to payment, are recorded as deferred revenue in the Company’s condensed consolidated balance sheets. The Company has estimated the classification between current and noncurrent deferred revenue related to the respective license agreement within its condensed consolidated balance sheets at June 30, 2020 (see Note 6) and December 31, 2019.

 

Research and Development

 

Research and development costs are expensed to operations as incurred. Our research and development expenses consist primarily of:

 

·salaries and related overhead expenses, which include stock-based compensation and benefits for personnel in research and development functions;

 

·fees paid to consultants and contract research organizations, or CROs, including in connection with our preclinical studies and clinical trials and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial material management and statistical compilation and analyses;

 

·costs related to acquiring and manufacturing clinical trial materials;

 

·costs related to compliance with regulatory requirements; and

 

·payments related to licensed products and technologies.

 

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and clinical sites. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered or when the services are performed.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for all stock-based awards based on the grant-date estimated fair values, which the Company determines using the BSM option pricing model, on a straight-line basis over the requisite service period for the award. The Company accounts for forfeitures as they occur.

 

10

 

 

The BSM option pricing model incorporates various highly sensitive assumptions, including the fair value of our common stock, expected volatility, expected term and risk-free interest rates. The weighted average expected life of options was calculated using the simplified method as prescribed by the SEC’s Staff Accounting Bulletin, Topic 14 (“SAB Topic 14”). This decision was based on the lack of relevant historical data due to our limited historical experience. In addition, due to our limited historical data, the estimated volatility also reflects the application of SAB Topic 14, incorporating the historical volatility of comparable companies whose stock prices are publicly available. The risk-free interest rate for the periods within the expected term of the option is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield was zero, as we have never declared or paid dividends and have no plans to do so in the foreseeable future.

 

Income Taxes

 

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by the relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. At each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

 

Comprehensive Loss

 

The Company has no items of comprehensive income or loss other than net loss.

 

Loss Per Share

 

Basic loss per share is calculated by dividing net loss for the period by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and potentially dilutive securities outstanding for the period.

 

For the six months ended June 30, 2020 and 2019, there is no difference in the number of shares used to compute basic and diluted net loss per share due to the Company’s net loss position. The following tables presents the computation of the basic and diluted net loss per share (in thousands, except share and per share data):

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Numerator:  (unaudited)   (unaudited)   (unaudited)   (unaudited) 
Net loss (basic and diluted)  $(4,220)  $(8,383)  $(10,724)  $(16,446)
                     
Denominator:                    
Weighted-average shares of common stock (basic and diluted)   8,923,374    8,107,290    8,921,383    8,106,484 
                     
Basic and diluted net loss per share  $(0.47)  $(1.03)  $(1.20)  $(2.03)

 

The following potentially dilutive securities were excluded from the computation of diluted net loss per for the periods presented because including them would have been antidilutive:

 

   Three and Six Months Ended 
   June 30, 
   2020   2019 
   (unaudited)   (unaudited) 
Stock options to purchase common stock   1,517,301    1,250,145 
Common stock warrants   1,733,322    1,966,930 
    3,250,623    3,217,075 

 

11

 

 

JOBS Act Accounting Election

 

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to take advantage of this provision and, as a result, we will adopt the extended transition period available under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided under the JOBS Act.

 

Recently Issued Accounting Pronouncements not yet adopted as of June 30, 2020

 

Accounting Standards Update 2016-02 and 2018-11

 

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to ASC 842, Leases, which provides clarification to ASU 2016-02. These ASUs (collectively, the new lease standard) require an entity to recognize a lease liability and a right-of-use asset on the condensed consolidated balance sheet for leases with lease terms of more than twelve months. Lessor accounting is largely unchanged, while lessees will no longer be provided with a source of off-balance sheet financing. Initial guidance required the adoption of the new lease standard using the modified retrospective transition method. In July 2018, the FASB issued ASU 2018-11, Leases (ASC 842)—Targeted Improvements, which allows entities to elect an optional transition method where entities may continue to apply the existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative effect adjustment in the period of adoptions rather than in the earliest period presented. In March 2019, FASB issued ASU 2019-01, Codification improvements, which provides clarification on implementation issued associated with adopting ASU 2016-02. ASU 2019-01 enhances the guidance in ASC 842 surrounding the fair value of underlying assets for lessors, presentation of sales-type and direct financing leases on the condensed consolidated statement of cash flows, and transition guidance surrounding accounting changes and error corrections.

 

This guidance was effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In November 2019, the FASB deferred the effective date for adopting the leasing standard updates for private companies, not-for-profit organizations, and smaller reporting companies. In June 2020, the FASB issued additional deferral guidance that defers the effective date of the leasing standard updates for one year for entities in the “all other” category and public not-for-profit entities that have not yet issued financial statements adopting the standard. The deferrals of the standard are intended to provide relief to nonpublic companies and not-for-profit entities that have had their implementation efforts delayed by the COVID-19 pandemic.

 

As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, the new leasing standard updates would be effective for the Company for the year ended December 31, 2022, and all interim periods within the year ended December 31, 2023. Early adoption is permitted. While the Company continues to review its current accounting policies and practices to identify potential differences that would result from applying the new guidance, the Company expects that its non-cancellable operating lease commitments with a term of more than twelve months will be subject to the new guidance and recognized as right-of-use assets and operating lease liabilities on the Company’s condensed consolidated balance sheets upon adoption. The Company expects to elect transitional practical expedients such that the Company will not need to reassess whether contracts are leases and will retain lease classification and initial direct costs for leases existing prior to the adoption of the new lease standard.

 

Accounting Standards Update 2016-13

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (ASC 326)”, which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. For public business entities, ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2020. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-13 is effective for the Company for the fiscal year ending on December 31, 2022, and all interim periods within. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company's condensed consolidated financial statements and disclosures.

 

12

 

 

Accounting Standards Update 2019-12

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes (ASC 740)”, which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public entities, the ASU 2019-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2020. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2019-12 is effective for the Company for the fiscal year ending on December 31, 2022, and all interim periods within. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

 

3. Fair Value Disclosure

 

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

 

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, other assets, accounts payable, accrued liabilities, and note payable approximate fair value due to the short-term nature of these items. As of June 30, 2020 and December 31, 2019, the Company did not have any assets or liabilities to be measured at fair value on its condensed consolidated balance sheets.

 

4. Balance Sheet Components

 

Property and Equipment, net

 

Property and equipment, net consist of the following (in thousands):

 

   June 30,   December 31, 
   2020   2019 
   (unaudited)     
Lab equipment  $1,808   $1,804 
Computer equipment and software   25    25 
Total property and equipment   1,833    1,829 
Less: Accumulated depreciation   (988)   (823)
Property and equipment, net  $845   $1,006 

 

Depreciation expense was approximately $83,000 and $82,000 for the three months ended June 30, 2020 and 2019, and approximately $165,000 and $163,000 for the six months ended June 30, 2020 and 2019, respectively.

 

Intangible Assets, net

 

Intangible assets, net consist of the following (in thousands):

 

   June 30,   December 31, 
   2020   2019 
   (unaudited)     
Licenses  $81   $81 
Less: Accumulated amortization   (51)   (49)
Intangible assets, net  $30   $32 

 

13

 

 

Amortization expense was approximately $1,000 and $1,000 for the three month periods ended June 30, 2020 and 2019, and approximately $2,000 and $3,000 for the six months ended June 30, 2020 and 2019, respectively.

 

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   June 30,   December 31, 
   2020   2019 
   (unaudited)     
Research and development services  $1,836   $2,709 
Payroll related expenses   192    150 
Professional services   147    115 
Accrued liabilities  $2,175   $2,974 

 

5. Equity Method Investment

 

On February 11, 2018, the Company entered into a joint venture agreement (the “JV Agreement”) with Shenzhen Hepalink Pharmaceutical Group Co., Ltd., a related party, principal shareholder of the Company, and a Chinese entity (“Hepalink”), for developing and commercializing products for infectious diseases. Under the terms of the JV Agreement, the Company contributed $1.0 million and the license of its technology relating to the Company’s AR-101 and AR-301 product candidates for use in the joint venture company named Shenzhen Arimab BioPharmaceuticals Co., Ltd. (the “JV Entity”) in the territories of the Republic of China, Hong Kong, Macau and Taiwan (the “Territory”) and initially owns 49% of the JV Entity.

 

On August 6, 2018, the Company entered into an amendment to the JV Agreement with Hepalink whereby the Company agreed to additionally contribute an exclusive, revocable, and royalty-free right and license to its AR-105 product candidate in the Territory. Pursuant to the JV Agreement and the amendment, Hepalink initially owns 51% of the JV Entity and is obligated to contribute the equivalent of $7.2 million to the JV Entity. Additionally, Hepalink is obligated to make an additional equity investment of $10.8 million or more at the time of the JV Entity’s first future financing. It was agreed by the parties that the Company shall be reimbursed for certain legal and contract manufacturing expenses related to the clinical drug supply for a Phase 3 clinical study of AR-301 and the clinical drug supply for a clinical study of AR-105 (see Note 11).

 

The Company accounted for its investment in the JV Entity as an equity method investment. The Company recorded the equity method investment at $1.0 million which represents the Company’s contribution into the JV Entity. The Company’s license contributed to the JV Entity was recorded at its carryover basis of $0. The Company recognized losses from the operations of the JV Entity of approximately $0 and $9,000 for the three and six months ended June 30, 2020, respectively, and approximately $186,000 and $628,000 for the three and six months ended June 30, 2019, respectively. As of June 30, 2020 and December 31, 2019, the Company’s equity method investment in the JV Entity was approximately $0 and $9,000, respectively.

 

6. Development and License Agreements

 

Cystic Fibrosis Foundation Development Agreement

 

In December 2016, the Company received an award from the Cystic Fibrosis Foundation (“CFF”), or the Development Program Letter Agreement (the “CFF Agreement”), for approximately $2.9 million. Under the CFF Agreement, CFF made an upfront payment of $200,000 and will make milestone payments to the Company as certain milestones defined in the agreement are met. The milestones relate to pre-clinical and clinical research activities. The agreement also specifies that we are obligated to cumulatively spend on the development program at least an equal amount as it receives from the non-profit organization. In the event that we do not spend as much as we received under the agreement, we are obligated to return any overage to the non-profit organization. In November 2018, the CF Foundation increased the award to approximately $7.5 million.

 

The Company determined that the CFF Agreement was under the scope of ASC 606 and that the clinical research activities are considered one performance obligation. Hence, the entire estimated transaction price is allocated to this combined performance obligation and is recognized as revenue by measuring progress using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the CFF Agreement. The remaining milestones at June 30, 2020 of approximately $3.8 million related to clinical research activities are constrained and evaluated at every reporting period.

 

14

 

 

For the three and six months ended June 30, 2020, the Company recognized $1.0 million in revenue from the CFF Agreement due to the achievement and recognition of a milestone during the second quarter of 2020. For the three and six months ended June 30, 2019, the Company recognized approximately $1.0 million in revenue from the CFF Agreement as the Company determined the achievement of a milestone was probable during the first quarter of 2019. The Company calculates the amount of revenue recognizable under ASC 606 from the CFF Agreement in any given period by accumulating the total related costs incurred under the CFF Agreement through the end of the reporting period using the input (cost-to-cost) method, and then determines the amount of revenue that can be recognized in the period based on a limit equal to the amount of accumulated milestones achieved or that were probable of being achieved through the end of the reporting period.

 

Serum License Agreement

 

In July 2019, the Company and Serum International B.V. (“SIBV”), an affiliate of Serum Institute of India Private Limited, entered into an option agreement which granted SIBV the option to license multiple programs from the Company and access the Company’s MabIgX® platform technology for asset identification and selection. The Company received an upfront cash payment of $5 million upon execution of this option agreement. In connection with the option agreement, SIBV made an equity investment whereby the Company issued 801,820 shares of its restricted common stock in a private placement to SIBV for total gross proceeds of $10 million. As a result of this transaction, SIBV and its affiliates, are considered related parties to the Company.

 

In September 2019, the Company and Serum AMR Products (“SAMR”), a party under common ownership of SIBV, entered into a License, Development and Commercialization Agreement (the “License Agreement”). Under the License Agreement, the Company received upfront payments totaling $15 million, of which $5 million was received in July 2019 through the option agreement referred to above. Pursuant to the License Agreement, the Company granted to SAMR exclusive licenses, and rights to sublicense, certain patent rights and technology related know-how to the Company’s products AR-301, AR-105, AR-101 and AR-201 in certain territories as defined in the License Agreement (the “licenses and know-how”), and granted SAMR an option for the Company to provide research services using its MabIgX® platform technology for the identification of up to five (5) candidates including product development of these identified candidates and an exclusive license of these products in certain territories (the “research and development option”). Further, under the License Agreement the Company will provide development support related to the licensed products in order to assist SAMR in its efforts around the licensed products in SAMR’s authorized territories which will be performed under the direction of a Joint Steering Committee (“JSC”) which the Company will participate in (collectively “development support services”). In addition, under the License Agreement, SAMR was granted an exclusive manufacturing license option as the initial license granted above does not allow for manufacturing of certain products. This manufacturing option provides incremental rights related to these products beyond what is granted as part of the licensing discussed above (the “manufacturing rights option”). If a third party sublicensee of AR-301, AR-105 and AR-101 wishes to manufacture these products by itself for the territory for which it has a license from the Company, then the Company shall have the right to buy back the manufacturing rights for all territories outside of the certain territories by paying to SAMR $5 million.

 

Given the equity investment by SIBV was negotiated in conjunction with the option agreement, which resulted in the execution of the License Agreement, all arrangements were evaluated as a single agreement and amounts were allocated to the elements of the arrangement based on their fair value. The Company recorded approximately $5.0 million, which represented the fair value of the restricted common stock issued of $5.4 million, net of $441,000 of issuance costs, to stockholders’ equity within the Company’s consolidated balance sheet. The Company allocated the net $4.6 million from the equity investment, after deducting commissions and offering costs, to the License Agreement. Therefore, the Company recorded approximately $19.6 million to deferred revenue based on the $15 million from upfront payments under the License Agreement and approximately $4.6 million from the equity allocation.

 

The License Agreement is determined to be within the scope of ASC 606, as the transaction represents a contract with a customer where the participants function in a customer/vendor relationship and are not exposed equally to the risks and rewards of the activities contemplated under the License Agreement. Using the concepts of ASC 606, the Company identified the following performance obligations under the License Agreement: 1) the transfer of licenses of the intellectual property for AR-301, AR-101, AR-105 and AR-201, inclusive of the related technology know-how conveyance (referred to as the license and know-how above); and 2) the Company to deliver ongoing development support services related to the licensed products and the Company’s participation in the JSC (referred to as the development support services above); and identified the following material promises under the License Agreement: 3) SAMR was granted a research and development option of up to five identified product candidates for the Company to perform including specific development services (the research and development option referred to above); and 4) SAMR was granted an exclusive manufacturing license option which would provide for incremental manufacturing rights related to AR-301, AR-105 and AR-101 beyond what is granted in the License Agreement (the manufacturing rights option referred to above). The Company concluded that the performance obligations and material promises identified are separate and distinct from each other.

 

The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of specified milestones related to completion of certain trials and regulatory approvals as defined in the License Agreement. Further, the Company may receive additional royalty-based payments from SAMR if certain sales levels on licensed products are achieved as defined in the License Agreement. The Company concluded that these milestones and royalty payments each contain a significant uncertainty associated with a future event. As such, these milestone and royalty payments are constrained at contract inception and are not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these payments. At the end of each reporting period, the Company will update its assessment of whether the milestone and royalty payments are constrained by considering both the likelihood and magnitude of the potential revenue reversal. At June 30, 2020 and December 31, 2019, the Company performed an assessment and determined that these milestone and royalty payments are constrained.

 

15

 

 

The Company determined that the transaction price under the License Agreement was $19.6 million, consisting of the $15 million from upfront payments under the License Agreement and approximately $4.6 million from the equity allocation as noted above, which was allocated among the performance obligations and material promises based on their respective related standalone selling prices. The Company allocated the $19.6 million transaction price to the following: approximately $14.5 million to the licenses and know-how; approximately $79,000 to the development support services; approximately $892,000 to the research and development option; and approximately $4.1 million to the manufacturing rights option. See further disclosure related to the License Agreement in the Company’s audited consolidated financial statements and notes thereto for the preceding fiscal year included in the Company’s Annual Report on Form 10-K filed with the United States SEC on April 8, 2020.

 

The Company determined that the intellectual property licensed under the License Agreement represents functional intellectual property and it has significant standalone functionality and therefore should be recognized at a point in time upon satisfying the performance obligations. The Company will satisfy the performance obligations upon transfer of the licenses and know-how to SAMR, and expects to satisfy these performance obligations by June 30, 2021.

 

The Company determined that no performance obligations or material promises were satisfied as of June 30, 2020 and December 31, 2019. Therefore, no revenue related to the License Agreement was recognized during the six months ended June 30, 2020 and the year ended December 31, 2019.  The Company has recorded contract liabilities resulting from the License Agreement of approximately $14.7 million and $14.6 million to deferred revenue, current, and approximately $4.9 million and $5.0 million to deferred revenue, noncurrent, on its condensed consolidated balance sheets at June 30, 2020 and December 31, 2019, respectively. The Company capitalized a contract asset resulting from the License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License Agreement on its condensed consolidated balance sheets, of which approximately $1.5 million and $1.5 million is classified as current, and approximately $520,000 and $526,000 is classified as noncurrent, as of June 30, 2020 and December 31, 2019, respectively.

 

7. Paycheck Protection Program Loan

 

The Company applied for and received a loan, which is in the form of a note dated May 1, 2020, from Silicon Valley Bank (“SVB”) in the aggregate amount of approximately $715,000 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the covered period.

 

The Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments for the first six months. The Company is required to pay principal and interest on the Loan in equal monthly installments beginning on December 1, 2020 and the outstanding interest balance accrued during the deferral period to be paid on the maturity date, which is May 1, 2022. The Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Loan contain events of default (as defined in the PPP Loan agreement), in which the occurrence could result in the acceleration of all amounts due under the Loan. As of June 30, 2020, there were no events of default under the PPP Loan.

 

The Company believes in good faith that it met the eligibility requirements for the PPP Loan and expects to meet the forgiveness criteria. Since the forgiveness of the Loan is outside the Company’s control, the Company has accounted for its PPP Loan as debt. If the PPP Loan is ultimately forgiven and the Company is legally released from being the Loan’s primary obligor, the extinguishment of the liability will be recognized in the Company’s consolidated statement of operations as a gain. While the criteria for loan forgiveness is stated in the Small Business Administration (“SBA”) loan forgiveness application, the SBA also indicated that it intends to issue more guidance which could affect the conditions for forgiveness. The Company will closely monitor the PPP Loan forgiveness criteria.

 

At June 30, 2020, the Company recognized the entire amount of the PPP Loan proceeds of approximately $715,000 as a note payable, approximately $277,000 as current and $438,000 as noncurrent, in its condensed consolidated balance sheets. For the three and six months ended June 30, 2020, the Company recognized $1,000 in interest expense in its consolidated statements of operations.

 

Future payments on the Loan as of June 30, 2020 are as follows (in thousands):

 

Period ending,    
Six months ending December 31, 2020  $40 
Year ending December 31, 2021   480 
Year ending December 31, 2022   204 
Total minimum payments   724 
Less amount representing interest   (9)
Loan, gross  $715 

 

16

 

 

8. Warrants

 

Common Stock Warrant Expense

 

On December 12, 2016, the Company issued 234,860 common stock warrants at an exercise price of $14.50 per share to its former Vice Chairman of the Board of Directors. The total fair value of the award was approximately $661,000 and was being amortized over a five-year vesting period. On August 13, 2019, this board member was not up for re-election at the annual shareholder’s meeting, therefore the vesting of the common stock warrants ceased on August 13, 2019 resulting in the cancellation of 109,601 unvested warrants. For the three and six months ended June 30, 2019, the Company recorded stock-based compensation expense of approximately $33,000 and $66,000, respectively, related to these warrants. For the three and six months ended June 30, 2020, the Company did not record any stock-based compensation expense related to these warrants.

 

9. Common Stock

 

As of June 30, 2020 (unaudited), the Company had reserved the following common stock for future issuance:

 

Shares reserved for exercise of outstanding warrants to purchase common stock   1,733,322 
Shares reserved for exercise of outstanding options to purchase common stock   1,517,301 
Shares reserved for issuance of future options   617,816 
Total   3,868,439 

 

10. Stock-Based Compensation

 

Equity Incentive Plan

 

In May 2014, the Company adopted and the shareholders approved the 2014 Equity Incentive Plan (the 2014 Plan). Under the 2014 Plan, 233,722 shares of the Company’s common stock were initially reserved for the issuance of stock options to employees, directors, and consultants, under terms and provisions established by the Board of Directors. Under the terms of the 2014 Plan, options may be granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive stock options may not be less than 110% of fair market value, as determined by the Board of Directors. The terms of options granted under the 2014 Plan may not exceed ten years.

 

In addition, the 2014 Plan contains an “evergreen” provision allowing for an annual increase in the number of shares of our common stock available for issuance under the 2014 Plan on the first day of each fiscal year beginning in fiscal year 2015. The annual increase in the number of shares shall be equal to the greater of:

 

77,908 shares of our common stock; or

 

such number of shares as is equal to the number of shares sufficient to cause the option pool to equal 20% of the issued and outstanding common stock of the Company, provided, however, that if on any calculation date the number of shares equal to 20% of the total issued and outstanding shares of common stock is less than the number of shares of common stock available for issuance under the 2014 Plan, no change will be made to the aggregate number of shares of common stock issuable under the 2014 Plan for that year (such that the aggregate number of shares of common stock available for issuance under the 2014 Plan will never decrease).

 

In June 2020, the adoption of an amendment to the 2014 Plan to eliminate the evergreen provision and setting the number of shares of common stock reserved for issuance thereunder to 2,183,692 shares was approved by the Company’s stockholders. The additional shares reserved in the below stock option activity table includes 162,736 shares reserved pursuant to the evergreen provision and 400,000 shares reserved pursuant to the amendment to the 2014 Plan.

 

17

 

 

Stock Options

 

The number of shares, terms, and vesting periods are determined by the Company’s Board of Directors or a committee thereof on an option by option basis. Options generally vest ratably over service periods of up to four years and expire ten years from the date of grant.

 

Stock option activity for the six months ended June 30, 2020 is represented in the following table:

 

       Options Outstanding 
  

Shares

Available

for Grant

  

Number of 

Shares

  

Weighted-

Average

Exercise Price

 
Balances at December 31, 2019   196,982    1,380,312   $10.06 
Additional shares reserved   562,736         
Options granted   (173,500)   173,500    5.67 
Options exercised       (4,913)   2.89 
Options cancelled   31,598    (31,598)   14.65 
Balances at June 30, 2020   617,816    1,517,301   $9.48 

 

The Company estimated the fair value of options using the BSM option valuation model. The fair value of options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of the options granted during the three and six months ended June 30, 2020 and 2019 were estimated using the following assumptions:

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2020   2019   2020   2019 
Expected term (in years)   6.00    6.25    6.00    6.25 
Expected volatility    94% - 96%     95%    84%  - 96%      78%  - 95%  
Risk-free interest-rate    0.43% - 0.46%     2.06%    0.43% - 1.73%      2.06% - 2.67%  
Dividend yield   0%   0%   0%   0%

 

During the three and six months ended June 30, 2020, the Company granted options to purchase 145,000 and 173,500 shares with a weighted-average grant date fair value of $4.83 and $4.63 per share, respectively. During the three and six months ended June 30, 2019, the Company granted options to purchase 40,000 and 383,875 shares with a weighted-average grant date fair value of $6.47 and $6.51 per share, respectively. There were no options exercised during the three months ended June 30, 2020 and 2019. There were 4,913 and 2,533 options exercised during the six months ended June 30, 2020 and 2019, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2020 and 2019 was approximately $17,000 and $15,000, respectively.

 

Stock-Based Compensation

 

The following table presents stock-based compensation expense related to stock options (in thousands):

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2020   2019   2020   2019 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
Research and development  $130   $198   $275   $371 
General and administrative   393    305    725    549 
Total  $523   $503   $1,000   $920 

 

As of June 30, 2020, total unrecognized stock-based compensation expenses related to unvested stock options was approximately $4.4 million, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.38 years.

 

18

 

 

11. Related Parties

 

Joint Venture

 

On February 11, 2018, the Company entered into a Joint Venture (“JV”) Agreement with Hepalink which is a related party and principal shareholder in the Company, pursuant to which the Company formed a JV Entity for developing and commercializing products for infectious diseases in the greater China territories. It was agreed by the parties that the Company shall be reimbursed for certain legal and contract manufacturing expenses related to the clinical drug supply for a Phase 3 clinical study of AR-301 and the clinical drug supply for a clinical study of AR-105. For the three months ended June 30, 2020 and 2019, the Company recorded approximately $112,000 and $232,000, respectively, and for the six months ended June 30, 2020 and 2019, the Company recorded approximately $184,000 and $935,000, respectively, as a reduction to operating expenses in the condensed consolidated statements of operations for amounts reimbursed to the Company by the JV Entity under this arrangement. As of June 30, 2020 and December 31, 2019, the Company recorded approximately $112,000 and $152,000, respectively, in other receivables on the condensed consolidated balance sheets for amounts owed to the Company by the JV Entity under this arrangement and the Company expects the amounts to be collectable and as a result, no reserve for uncollectability was established.

 

Serum International B.V.

 

In July 2019, the Company issued 801,820 shares of its restricted common stock in a private placement to Serum International B.V. (“SIBV”), an affiliate of Serum Institute of India Private Limited, for total gross proceeds of $10 million. As a result of this transaction, SIBV and its affiliates, are considered related parties to the Company. In September 2019, the Company and Serum AMR Products (“SAMR”), a party under common ownership of SIBV, entered into a License, Development and Commercialization Agreement (the “ License Agreement”) (see Note 6).

 

The Company determined that no performance obligations or material promises were satisfied as of June 30, 2020 and December 31, 2019. Therefore, no revenue related to the License Agreement was recognized during the six months ended June 30, 2020 and the year ended December 31, 2019.  The Company has recorded contract liabilities resulting from the License Agreement of approximately $14.7 million and $14.6 million to deferred revenue, current, and approximately $4.9 million and $5.0 million to deferred revenue, noncurrent, on its condensed consolidated balance sheets at June 30, 2020 and December 31, 2019, respectively. The Company capitalized a contract asset resulting from the License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License Agreement on its condensed consolidated balance sheets, of which approximately $1.5 million and $1.5 million is classified as current, and approximately $520,000 and $526,000 is classified as noncurrent, as of June 30, 2020 and December 31, 2019, respectively.

 

Cytovance Biologics, Inc.

 

On June 26, 2020, the Company entered into a Scope of Work for a Non-Exclusive License Agreement (the “Scope of Work”) with Cytovance Biologics, Inc., a wholly owned subsidiary of Hepalink which is a related party and principal shareholder of the Company. Under the Scope of Work, Cytovance will execute and deliver to the Company a non-exclusive license to certain technology in a form to be mutually agreed upon. As of June 30, 2020, nothing has been executed or delivered to the Company under the Scope of Work.

 

12. Commitments and Contingencies

 

Leases

 

The Company leases office and lab space in San Jose, California under an operating lease arrangement which can be terminated at any time with 90 days’ notice. The Company recognizes rent expense as incurred. Rent expense was approximately $113,000 and $82,000 for the three months ended June 30, 2020 and 2019, respectively, and $215,000 and $163,000 for the six months ended June 30, 2020 and 2019, respectively. The Company is planning to move into new larger premises during the second half of 2020.  On July 30, 2020, a complaint for declaratory relief was filed in Superior Court of California, City and County of San Francisco against the Company by its current landlord, San Jose Biocube II, LLC.  The complaint seeks a declaratory judgment regarding whether the defendant’s tenancy has been terminated and defendant can be evicted at the present time.  The Company believes the complaint is without merit and intends to vigorously defend itself against it.

 

19

 

 

Indemnification

 

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may incur charges in the future as a result of these indemnification obligations.

 

License Agreements

 

The Company has entered into various collaboration and licensing agreements that provide it with access to certain technology and patent rights. Under the terms of the agreements, the Company may be required to make milestone payments upon achievement of certain development and regulatory activities. See further disclosure related to these agreements in the Company’s audited consolidated financial statements and notes thereto for the preceding fiscal year included in the Company’s Annual Report on Form 10-K filed with the SEC on April 8, 2020.

 

Contingencies

 

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. As of June 30, 2020 and December 31, 2019, no accruals have been made related to commitments and contingencies.

 

From time to time, the Company may be involved in various legal proceedings, claims and litigation arising in the ordinary course of business. See below Legal Proceeding for a legal complaint filed during the six months ended June 30, 2020 and Subsequent Events Note 13 for legal complaint filed on July 30, 2020. As of December 31, 2019, there were no pending legal proceedings.

 

Legal Proceeding

 

A complaint was filed in February 2020 in the New York State Supreme Court against the Company by an investor who invested in the Company’s preferred stock in July 2017 prior to the Company’s IPO in August 2018. The complaint alleges, among other things, that the Company breached its contract and fiduciary duty, by not issuing additional securities to the investor as a result of the Company’s IPO. The plaintiff is asking for approximately $277,000 in compensatory damages. The parties are currently in fact discovery. The Company believes that the claims in this complaint are without merit and intends to defend vigorously against them.

 

Grant Income

 

The Company receives various grants that are subject to audit by the grantors or their representatives. Such audits could result in requests for reimbursement for expenditures disallowed under the terms of the grant; however, management believes that these disallowances, if any, would be immaterial.

 

Cystic Fibrosis Foundation Agreement

 

In December 2016, the Company received an award for up to $2.9 million from the CFF to advance research on potential drugs utilizing inhaled gallium citrate anti-infective. In November 2018, the CFF increased the award to $7.5 million. Under the award agreement, the CFF will make payments to the Company as certain milestones are met. The award agreement also contains a provision whereby if the Company spends less on developing a potential drug utilizing inhaled gallium citrate anti-infective than the Company actually receives under this award agreement, the Company will be required to return the excess portion of the award to the CFF. At the end of any reporting period, if the Company determines that the cumulative amount spent on this program is less than the cumulative cash received from the CFF, the Company will record the excess amount received as a liability. No liability related to this excess amount was recorded by the Company as of June 30, 2020 and December 31, 2019.

 

In the event that development efforts are successful and the Company commercialized a drug from these related development efforts, the Company will be subject to paying to CFF a one-time amount over time equal to nine times the actual net award received from CFF. Such amount shall be paid in not more than five annual installments, as follows: within ninety days of the end of the calendar year in which the first commercial sale occurs, and within ninety days of the end of each subsequent calendar year until the net amount received from CFF is repaid. The Company shall pay 15% of net sales for that calendar year up to the amount of the net award received from CFF (except that in the fifth installment, if any, the Company shall pay the remaining unpaid portion of the net award received from CFF).

 

20

 

 

In the event that Aridis licenses rights to the product in the field to a third party, sells the product, or consummates a change of control transaction prior to the first commercial sale, the Company shall pay to CFF an amount equal to 15% of the amounts received by Aridis and its shareholders in connection with such disposition (whether paid upfront or in accordance with subsequent milestones and whether paid in cash or property) up to nine times the actual net award received from CFF. The payment shall be made within sixty days after the closing of such a transaction.

 

In the event that the development efforts are delayed, which result from events within the Company’s control, for more than one hundred eighty (180) consecutive days at any time before the first commercialization of the drug from the related development efforts, the CFF may provide an interruption notice to the Company. The Company then has thirty (30) days to respond to such notice. If the Company does not respond within thirty (30) days, an interruption license shall be effective. The interruption license to the CFF is an exclusive, worldwide license under the development program technology to manufacture, have manufactured, license, use, sell, offer to sell, and support the product in the field and includes financial conditions for both parties.

 

None of these events have occurred as of June 30, 2020.

 

13. Subsequent Events

 

On July 30, 2020, a complaint for declaratory relief was filed in Superior Court of California, City and County of San Francisco against the Company by its current landlord, San Jose Biocube II, LLC.  The complaint seeks a declaratory judgment regarding whether the defendant’s tenancy has been terminated and defendant can be evicted at the present time.  The Company believes the complaint is without merit and intends to vigorously defend itself against it.

 

21

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology.

 

Our operations and business prospects are always subject to risks and uncertainties including, among others:

 

the timing of regulatory submissions;

 

our ability to obtain and maintain regulatory approval of our existing product candidates and any other product candidates we may develop, and the labeling under any approval we may obtain;

 

approvals for clinical trials may be delayed or withheld by regulatory agencies;

 

preclinical and clinical studies may not be successful or do not confirm earlier results or meet expectations or meet regulatory requirements or meet performance thresholds for commercial success;

 

risks relating to the timing and costs of clinical trials, the timing and costs of other expenses;

 

risks associated with obtaining third party funding;

 

risks associated with delays, increased costs and funding shortages caused by or resulting from the COVID-19 pandemic;

 

management and employee operations and execution risks;

 

loss of key personnel;

 

competition;

 

risks related to market acceptance of products;

 

intellectual property risks;

 

assumptions regarding the size of the available market, benefits of our products, product pricing, and timing of product launches;

 

risks associated with the uncertainty of future financial results;

 

our ability to attract collaborators and partners; and

 

risks associated with our reliance on third party organizations.

 

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

22

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The condensed consolidated financial statements (unaudited) included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2019, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K filed with the SEC on April 8, 2020. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. All amounts in this report are in U.S. dollars, unless otherwise noted.

 

Overview

 

We are a late-stage biopharmaceutical company focused on the discovery and development of non-antibiotic anti-infectives. A significant focus of ours is on targeted immunotherapy using fully human monoclonal antibodies, or mAbs, to treat life-threatening infections. mAbs represent an innovative treatment approach that harnesses the human immune system to fight infections and are designed to overcome the deficiencies associated with current therapies, such as rise in drug resistance, short duration of response, negative impact on the human microbiome, and lack of differentiation among the treatment alternatives. The majority of our product candidates are derived by employing our differentiated antibody discovery platforms. Our proprietary product pipeline is comprised of fully human mAbs targeting specific pathogens associated with life-threatening bacterial infections, primarily hospital-acquired pneumonia, or HAP, and ventilator-associated pneumonia, or VAP.

 

Recently we announced the development of a novel antibody discovery and production platform technology called ʎPEX™. This technology complements and further extends the capabilities of MabIgX® to quickly screen large number of antibody-producing B-cells from patients and generation of high mAb-producing mammalian production cell line at a speed not previously attainable. As a result, we can significantly reduce time for antibody discovery and manufacturing compared to conventional approaches. This technology is being applied to the discovery and manufacturing of COVID-19 mAbs. We also announced initiation of research and development activities of the Company’s monoclonal antibody program for COVID-19 called AR-701.

 

Our lead product candidate, AR-301 has exhibited promising preclinical data and clinical data from a Phase 1/2a clinical study in patients. AR-301 targets the alpha toxin produced by gram-positive bacteria Staphylococcus aureus, or S. aureus, a common pathogen associated with HAP and VAP. In contrast to other programs targeting S. aureus toxins, we are developing AR-301 as a treatment of pneumonia, rather than prevention of S. aureus colonized patients from progression to pneumonia. In January 2019, we initiated a Phase 3 pivotal trial evaluating AR-301 for the treatment of HAP and VAP. The on-going COVID-19 pandemic has caused an impact on patient enrollment globally and the rate of clinical site activation. We provisionally expect to report an interim data readout in the second half of 2020, and complete enrollment and top-line data in the second half of 2021.

 

To complement and diversify our portfolio of targeted mAbs, we are developing a broad spectrum small molecule non-antibiotic anti-infective agent gallium citrate (AR-501). AR-501 is being developed in collaboration with the Cystic Fibrosis Foundation (CFF) as a chronic inhaled therapy to treat lung infections in cystic fibrosis patients. In 2018, AR-501 was granted Orphan Drug, Fast Track and Qualified Infectious Disease Product (QIDP) designations by the FDA. During the third quarter of 2019, the European Medicines Agency (EMA) granted the program Orphan Drug Designation. We initiated a Phase 1/2a clinical trial in December 2018 of the inhalable formulation of gallium citrate, which is being evaluated for the treatment of chronic lung infections associated with cystic fibrosis. In June 2020, we announced positive results from the Phase 1 portion of our Phase 1/2a clinical trial of AR-501 in which healthy subjects were enrolled. The Safety Monitoring Committee (“SMC’) and Data Safety Monitoring Board (“DSMB”) from the Cystic Fibrosis Foundation supported that the study proceed at all does levels to the Phase 2a portion of the Phase 1/2a trial in adult subjects with CF. We provisionally expect to report data from the Phase 2a portion with cystic fibrosis subjects in the second half of 2021.

 

To date, we have devoted substantially all of our resources to research and development efforts relating to our therapeutic candidates, including conducting clinical trials and developing manufacturing capabilities, in-licensing related intellectual property, protecting our intellectual property and providing general and administrative support for these operations. We have generated revenue from our payments under our collaboration strategic research and development contracts and federal awards and grants, as well as awards and grants from not-for-profit entities and fee for service to third party entities. Since our inception, we have funded our operations primarily through these sources and the issuance of common stock, convertible preferred stock and debt securities. Current clinical development activities are focused on AR-301 and AR-501. Our expenses and resulting cash burn during the six months ended June 30, 2020 and the year ended December 31, 2019, were largely due to costs associated with the Phase 3 study of AR-301 for the treatment of VAP caused by the S. aureus bacteria and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis.

 

23

 

 

We have incurred losses since our inception. Our net losses were approximately $10.7 million for the six months ended June 30, 2020 and $29.7 million for the year ended December 31, 2019. As of June 30, 2020 we had approximately $11.8 million of cash and cash equivalents and had an accumulated deficit of approximately $111.5 million. Substantially, all of our net losses have resulted from costs incurred in connection with our research and development programs, clinical trials, intellectual property matters, strengthening our manufacturing capabilities, and from general and administrative costs associated with our operations.

 

In September 2019, we entered into a Common Stock Sales Agreement (the “ATM Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) under which we may offer and sell, from time to time, at our sole discretion, shares of common stock having an aggregate offering price of up to $25 million through Cantor as our sales agent. We will pay Cantor a commission of up to three percent (3.0%) of the gross sales proceeds of any common stock sold through Cantor under the ATM Agreement, and also provided Cantor with customary indemnification rights. Our registration statement on Form S-3 contemplated under the ATM Agreement was declared effective by the SEC on September 5, 2019. The registration statement on Form S-3 includes a base prospectus covering the offering of up to $100 million in aggregate shares of securities as defined within the prospectus and a prospectus supplement of up to a maximum aggregate offering of $25 million in common stock in accordance with the ATM Agreement. As of May 14, 2020, we had not sold any securities pursuant to General Instruction I.B.6 of Form S-3. As a result of the limitations of General Instruction I.B.6, and in accordance with the terms of the ATM Agreement, the Company filed a prospectus supplement on May 14, 2020 that registered the offer and sale of shares of our common stock having an aggregate offering price of up to $22 million from time to time through Cantor. As of August 10, 2020, we have not sold any shares of common stock under the ATM Agreement.

 

In May 2020, we received a loan in the form of a note, from Silicon Valley Bank (“SVB”) in the aggregate amount of approximately $715,000 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the covered period. The Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments for the first six months. We are required to pay principal and interest on the Loan in equal monthly installments beginning on December 1, 2020 and the outstanding interest balance accrued during the deferral period to be paid on the maturity date, which is May 1, 2022. We believe in good faith that we met the eligibility requirements for the PPP Loan and expect to meet the forgiveness criteria. Since the forgiveness of the Loan is outside of our control, we have accounted for our PPP Loan as debt. If the PPP Loan is ultimately forgiven and we are legally released from being the Loan’s primary obligor, the extinguishment of the liability will be recognized in our consolidated statement of operations as a gain.

 

We have not yet achieved commercialization of our products and have a cumulative net loss from our operations. We will continue to incur net losses for the foreseeable future. Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. We will require additional capital to meet our long-term operating requirements. We expect to raise additional capital through the sale of equity and/or debt securities. Historically, our principal sources of cash have included proceeds from grant funding, fees for services performed, issuances of convertible debt and the sale of our preferred stock. Our principal uses of cash have included cash used in operations. We expect that the principal uses of cash in the future will be for continuing operations, funding of research and development including our clinical trials and general working capital requirements.

 

We anticipate that our expenses will increase substantially if and as we:

 

continue enrollment in our ongoing clinical trials;

 

initiate new clinical trials;

 

seek to identify, assess, acquire and develop other products, therapeutic candidates and technologies;

 

seek regulatory and marketing approvals in multiple jurisdictions for our therapeutic candidates that successfully complete clinical studies;

 

24

 

 

establish collaborations with third parties for the development and commercialization of our products and therapeutic candidates;

 

make milestone or other payments under our agreements, pursuant to which we have licensed or acquired rights to intellectual property and technology;

 

seek to maintain, protect, and expand our intellectual property portfolio;

 

seek to attract and retain skilled personnel;

 

incur the administrative costs associated with being a public company and related costs of compliance;

 

create additional infrastructure to support our operations as a commercial stage public company and our planned future commercialization efforts;

 

experience any delays or encounter issues with any of the above; and

 

experience protracted COVID-19 related delays.

 

We expect to continue to incur significant expenses and increasing losses for at least the next several years. Accordingly, we anticipate that we will need to raise additional capital in order to obtain regulatory approval for, and the commercialization of, our therapeutic candidates. Until such time that we can generate meaningful revenue from product sales, if ever, we expect to finance our operating activities through public or private equity or debt financings, government or other third-party funding and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any approved therapies or products or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could adversely affect our business, financial condition and results of operations.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements (unaudited), which we have prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. We believe the critical accounting policies used in the preparation of our condensed consolidated financial statements that require significant estimates and judgments are as follows:

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Such estimates include those related to the evaluation of our ability to continue as a going concern, best estimate of standalone selling price of revenue deliverables, long lived assets, classification of deferred revenue, income taxes, assumptions used in the Black Scholes Merton (“BSM”) model to calculate the fair value of stock based compensation, deferred tax asset valuation allowances, preclinical study and clinical trial accruals. Actual results could differ from those estimates.

 

25

 

 

Revenue Recognition

 

We recognize revenue based on Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), which applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

 

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as the entity satisfies performance obligations. We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

As part of the accounting for customer arrangements, we must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the standalone selling price for each performance obligation identified in the contract for the allocation of the transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration should be included in the transaction price.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. In developing the standalone price for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We recognize revenue as or when the performance obligations under the contract are satisfied. We receive payments from our customers based on payment schedules established in each contract. We record any amounts received prior to satisfying the revenue recognition criteria as deferred revenue on the condensed consolidated balance sheet. Amounts recognized as revenue, but not yet received or invoiced are recorded within other receivables on the condensed consolidated balance sheet. Amounts are recorded as other receivables on the condensed consolidated balance sheet when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of a majority of the promised goods or services to the customer will be one year or less.

 

Under the Development Program Letter Agreement with CFF (the “CFF Agreement”), entered into in December 2016 and amended in November 2018 to support funding for the development of our Inhaled Gallium Citrate Anti-Infective program, we recognized revenue of approximately $1.0 million for both three and six month periods ended June 30, 2020, and approximately $1.0 million for the six months ended June 30, 2019. We did not recognize any revenue during the three months ended June 30, 2019. We expect that any revenue we generate for the foreseeable future will fluctuate from period to period as a result of the timing of when performance obligations and variable consideration criteria under the contract are satisfied.

 

Research and Development Expenses

 

We recognize research and development expenses to operations as they are incurred. Our research and development expenses consist primarily of:

 

salaries and related overhead expenses, which include stock-based compensation and benefits for personnel in research and development functions;

 

fees paid to consultants and contract research organizations, or CROs, including in connection with our preclinical studies and clinical trials and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial material management and statistical compilation and analyses;

 

costs related to acquiring and manufacturing clinical trial materials;

 

costs related to compliance with regulatory requirements; and

 

payments related to licensed products and technologies.

 

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and clinical sites. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered or when the services are performed.

 

26

 

 

We plan to increase our research and development expenses for the foreseeable future as we continue to develop our therapeutic programs, and subject to the availability of additional funding, further advance the development of our therapeutic candidates for additional indications and begin to conduct clinical trials.

 

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our therapeutic candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our therapeutic candidates.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of costs related to executive, finance, corporate development and administrative support functions, including stock-based compensation expenses and benefits for personnel in general and administrative functions. Other significant, general and administrative expenses include rent, accounting and legal services, obtaining and maintaining patents or other intellectual property rights, the cost of various consultants, occupancy costs, insurance premiums and information systems costs.

 

We expect that our general and administrative expenses will increase as we continue to operate as a public company, continue to conduct our clinical trials and prepare for commercialization. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel to support product commercialization efforts and increased fees for outside consultants, attorneys and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls, investor relations and disclosures, and similar requirements applicable to public companies.

 

Interest Income, Net

 

Interest income, net consists primarily of interest earned on our cash balances, partially offset by interest expense resulting from our PPP Loan.

 

Stock-Based Compensation

 

We recognize compensation expense for all stock-based awards based on the grant-date estimated fair values, which we determine using the BSM option pricing model, on a straight-line basis over the requisite service period for the award. We account for forfeitures as they occur.

 

The BSM option pricing model incorporates various highly sensitive assumptions, including the fair value of our common stock, expected volatility, expected term and risk-free interest rates. The weighted average expected life of options was calculated using the simplified method as prescribed by the SEC’s Staff Accounting Bulletin, Topic 14 (“SAB Topic 14”). This decision was based on the lack of relevant historical data due to our limited historical experience. In addition, due to our limited historical data, the estimated volatility also reflects the application of SAB Topic 14, incorporating the historical volatility of comparable companies whose stock prices are publicly available. The risk-free interest rate for the periods within the expected term of the option is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield was zero, as we have never declared or paid dividends and have no plans to do so in the foreseeable future.

 

Income Taxes

 

We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. For the six months ended June 30, 2020 and 2019, no income tax expense or benefit was recognized, primarily due to a full valuation allowance recorded against the net deferred tax asset

 

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by the relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. At each balance sheet date, unresolved uncertain tax positions must be reassessed, and we determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

 

27

 

 

Going Concern

 

We assess and determine our ability to continue as a going concern under the provisions of ASC 205-40, Presentation of Financial Statements—Going Concern, which requires us to evaluate whether there are conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that our annual and interim consolidated financial statements are issued. Certain additional financial statement disclosures are required if such conditions or events are identified. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting.

 

Determining the extent, if any, to which conditions or events raise substantial doubt about our ability to continue as a going concern, or the extent to which mitigating plans sufficiently alleviate any such substantial doubt, as well as whether or not liquidation is imminent, requires significant judgment by us. We have determined that there is substantial doubt about our ability to continue as a going concern for at least the one-year period following our condensed consolidated financial statements issuance date, which have been prepared assuming that we will continue as a going concern. We have not made any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of us to continue as a going concern.

 

Results of Operations

 

Comparison of the Three Months Ended June 30, 2020 and 2019

 

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (in thousands):

 

  

Three Months Ended

June 30,

     
   2020   2019   Change $ 
Revenue:  (unaudited)   (unaudited)     
Grant revenue  $1,000   $   $1,000 
Operating expenses:               
Research and development   3,647    6,653    (3,006)
General and administrative   1,583    1,613    (30)
Total operating expenses   5,230    8,266    (3,036)
Loss from operations   (4,230)   (8,266)   4,036 
Other income (expense):               
Interest income, net   10    69    (59)
Share of loss from equity method investment       (186)   186 
Net loss  $(4,220)  $(8,383)  $4,163 

 

Grant Revenue. Grant revenue increased to approximately $1.0 million for the three months ended June 30, 2020 from zero for the three months ended June 30, 2019 primarily due to the recognition of revenue related to a milestone achieved under the grant award from the CFF during the second quarter of 2020 and none during the second quarter of 2019.

 

Research and Development Expenses. Research and development expenses decreased by approximately $3.0 million from $6.7 million for the three months ended June 30, 2019 to $3.6 million for the three months ended June 30, 2020 due primarily to:

 

·a decrease of approximately $1.8 million in spending on clinical trial activities and drug manufacturing expenses for the Phase 2 study of our AR-105 program, which terminated during 2019;
·a decrease of approximately $1.0 million in spending on our clinical trial activities and drug manufacturing expenses for the Phase 3 study of our AR-301 program during the second quarter of 2020 as compared to the second quarter of 2019 which included increased study start-up costs; and
·a decrease of approximately $300,000 in personnel, consulting and other related costs.

 

These decreases were partially offset by an increase of approximately $100,000 in spending on clinical trial activities for the Phase 1/2a study of our AR-501 program.

 

General and Administrative Expenses. There was no material difference in general and administrative expenses for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

 

28

 

 

Interest Income, Net. Interest income, net decreased by approximately $59,000 from $69,000 for the three months ended June 30, 2019 to $10,000 for the three months ended June 30, 2020. The decrease is primarily due to lower interest rates during the second quarter of 2020 as compared to the second quarter of 2019.

 

Share of Loss in Equity Method Investment.    Loss from equity method investment decreased by approximately $186,000 from $186,000 for the three months ended June 30, 2019 to zero for the three months ended June 30, 2020 due to there being no share of losses from our equity method investment recorded in the second quarter of 2020 as the net book value of the investment was zero at March 31, 2020.

 

Comparison of the Six Months Ended June 30, 2020 and 2019

 

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019 (in thousands):

 

  

Six Months Ended

June 30,

     
   2020   2019   Change $ 
Grant revenue  $1,000   $1,022   $(22)
Operating expenses:               
Research and development   8,564    13,771    (5,207)
General and administrative   3,222    3,254    (32)
Total operating expenses   11,786    17,025    (5,239)
Loss from operations   (10,786)   (16,003)   5,217 
Other income (expense):               
Interest income, net   71    185    (114)
Equity in net loss from equity method investment   (9)   (628)   619 
Net loss  $(10,724)  $(16,446)  $5,722 

 

Grant Revenue. Grant revenue was approximately $1.0 million for both six month periods ended June 30, 2020 and 2019 as the recognition of revenue related to a milestone achieved under the grant award from the CFF during the first half of 2020 and during the first half of 2019.

 

Research and Development Expenses. Research and development expenses decreased by approximately $5.2 million from $13.8 million for the six months ended June 30, 2019 to $8.6 million for the six months ended June 30, 2020 due primarily to:

 

·a decrease of approximately $4.0 million in spending on clinical trial activities and drug manufacturing expenses for the Phase 2 study of our AR-105 program, which terminated during 2019;
·a decrease of approximately $1.4 million in drug manufacturing expenses for the Phase 3 study of our AR-301 program; and
·a decrease of approximately $400,000 in personnel, consulting and other related costs.

 

These decreases were partially offset by:

 

·an increase of approximately $500,000 in spending on clinical trial activities for the Phase 3 study of our AR-301 program; and
·an increase of approximately $100,000 in spending on clinical trial activities for the Phase 1/2a study of our AR-501 program.

 

General and Administrative Expenses. There was no material difference in general and administrative expenses for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

 

Interest Income, Net. Interest income, net decreased by approximately $114,000 from $185,000 for the six months ended June 30, 2019 to $71,000 for the six months ended June 30, 2020. The decrease is primarily due to lower interest rates during the first half of 2020 as compared to the first half of 2019.

 

Share of Loss in Equity Method Investment.    Loss from equity method investment decreased by approximately $619,000 from $628,000 for the six months ended June 30, 2019 to $9,000 for the six months ended June 30, 2020 as our share of loss from our minority interest calculated under the equity method was limited to the reduction of the net book value of the investment to zero.

 

Liquidity, Capital Resources and Going Concern

 

As of June 30, 2020 we had approximately $11.8 million of cash and cash equivalents and had an accumulated deficit of approximately $111.5 million.

 

29

 

 

In September 2019, we entered into an ATM Agreement with Cantor under which we may offer and sell, from time to time, in our sole discretion, shares of common stock having an aggregate offering price of up to $25 million through Cantor as our sales agent. We will pay Cantor a commission of up to three percent (3.0%) of the gross sales proceeds of any common stock sold through Cantor under the ATM Agreement, and provided Cantor with customary indemnification rights. Our registration statement on Form S-3 contemplated under the ATM Agreement was declared effective by the SEC on September 5, 2019. The registration statement on Form S-3 includes a base prospectus covering the offering of up to $100 million in aggregate shares of securities as defined within the prospectus and a prospectus supplement of up to a maximum aggregate offering of $25 million in common stock in accordance with the ATM Agreement. As of May 14, 2020 we had not sold any securities pursuant to General Instruction I.B.6 of Form S-3. As a result of the limitations of General Instruction I.B.6, and in accordance with the terms of the ATM Agreement, we filed a prospectus supplement on May 14, 2020 that registered the offer and sale of shares of our common stock having an aggregate offering price of up to $22 million from time to time through Cantor. As of August 10, 2020, we have not sold any shares of common stock under the ATM Agreement.

 

In May 2020, we received the PPP Loan from SVB in the aggregate amount of approximately $715,000. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the covered period. The Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments for the first six months. We are required to pay principal and interest on the Loan in equal monthly installments beginning on December 1, 2020 and the outstanding interest balance accrued during the deferral period to be paid on the maturity date, which is May 1, 2022. We believe in good faith that we met the eligibility requirements for the PPP Loan and expect to meet the forgiveness criteria. Since the forgiveness of the Loan is outside of our control, we have accounted for our PPP Loan as debt. If the PPP Loan is ultimately forgiven and we are legally released from being the Loan’s primary obligor, the extinguishment of the liability will be recognized in our consolidated statement of operations as a gain.

 

We have had recurring losses from operations since inception and negative cash flows from operating activities during the six months ended June 30, 2020 and the year ended December 31, 2019. We anticipate that we will continue to generate operating losses and use cash in operations through the foreseeable future. Management plans to finance operations through equity or debt financings or other capital sources, including potential collaborations or other strategic transactions. There can be no assurances that, in the event that we require additional financing, such financing will be available on terms which are favorable to us, or at all. If we are unable to raise additional funding to meet our working capital needs in the future, we will be forced to delay or reduce the scope of our research programs and/or limit or cease our operations. We believe that our current available cash and cash equivalents will not be sufficient to fund our planned expenditures and meet our obligations for at least the one-year period following our condensed consolidated financial statements issuance date. There is substantial doubt about our ability to continue as a going concern unless we are able to successfully raise additional capital.

 

Cash Flows

 

Our net cash flow from operating, investing and financing activities for the periods below were as follows (in thousands):

 

   Six Months Ended
June 30,
 
   2020   2019 
Net cash provided by (used in):  (unaudited)   (unaudited) 
Operating activities  $(9,797)  $(15,699)
Investing activities   (17)   (27)
Financing activities   729    8 
Net decrease in cash and cash equivalents  $(9,085)  $(15,718)

 

Cash Flows from Operating Activities.

 

Net cash used in operating activities was approximately $9.8 million for the six months ended June 30, 2020, which was primarily due to our net loss of approximately $10.7 million, an increase of approximately $1.0 million in accounts receivable, an increase of approximately $488,000 in capitalized contract costs, resulting from the SAMR License Agreement entered into in 2019, a decrease of approximately $311,000 in accrued liabilities and other, and a decrease of approximately $44,000 in accounts payables. The cash used in operating activities was partially offset by a decrease of approximately $1.5 million in prepaid expenses, a decrease of approximately $61,000 in other receivables, and the non-cash charges of approximately $1.0 million related to stock-based compensation and approximately $167,000 in depreciation and amortization.

 

Net cash used in operating activities was approximately $15.7 million for the six months ended June 30, 2019, which was primarily due to our net loss of approximately $16.4 million, an increase of approximately $1.0 million in other receivables, an increase of approximately $833,000 in prepaid expenses, and a decrease of approximately $787,000 in accounts payable. This cash used in operating activities was partially offset by a decrease of approximately $660,000 in accounts receivable, an increase of approximately $979,000 in accrued liabilities, and the non-cash charges of approximately $986,000 related to stock-based compensation, approximately $628,000 from the loss on our equity method investment, and approximately $166,000 in depreciation and amortization.

 

 30 

 

 

Cash Flows from Investing Activities.

 

Cash used in investing activities of approximately $17,000 and $27,000 during the six months ended June 30, 2020 and 2019, respectively, was due to the purchase of equipment, primarily for diagnostic use in clinical trials.

 

Cash Flows from Financing Activities.    

 

Net cash provided by financing activities of approximately $729,000 during the six months ended June 30, 2020 was due to proceeds of approximately $715,000 received from the PPP Loan and approximately $14,000 was due to net proceeds received from stock option exercises.

 

Net cash provided by financing activities of approximately $8,000 during the six months ended June 30, 2019 was due to net proceeds received from stock option exercises.

 

Future Funding Requirements

 

To date, we have generated revenue from grants and contract services performed and funding from the issuance of convertible preferred stock and common stock sales. We do not know when, or if, we will generate any revenue from our development stage therapeutic programs. We do not expect to generate any revenue from sales of our therapeutic candidates unless and until we obtain regulatory approval. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our therapeutic candidates. We expect to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our therapeutic candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need additional funding in connection with our continuing operations.

 

Our future funding requirements will depend on many factors, including:

 

the progress, costs, results and timing of our clinical trials;

 

FDA acceptance, if any, of our therapies for infectious diseases and for other potential indications;

 

the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;

 

the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development;

 

the ability of our product candidates to progress through clinical development successfully;

 

our need to expand our research and development activities;

 

the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;

 

our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

 

the effect of the COVID-19 pandemic on our business and operations;

 

our need and ability to hire additional management and scientific, medical and administrative personnel;

 

the effect of competing technological and market developments; and

 

our need to implement additional internal systems and infrastructure, including financial and reporting systems.

 

 31 

 

 

Until such time that we can generate meaningful revenue from the sales of approved therapies and products, if ever, we expect to finance our operating activities through public or private equity or debt financings, government or other third-party funding, and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include conversion discounts or covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, or strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

Off-Balance Sheet Arrangements

 

During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules of the SEC.

 

JOBS Act Accounting Election

 

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to take advantage of this provision and, as a result, we will adopt the extended transition period available under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided under the JOBS Act.

 

Recently Issued Accounting Pronouncements

 

Please refer to section “Recently Issued Accounting Pronouncements not yet adopted as of June 30, 2020” in Note 2 of our Notes to the Condensed Consolidated Financial Statements.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (the “SEC’s”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting resulting from our finance department not being able to process and account for complex, non-routine transactions in a timely manner. While we have designed and implemented, or expect to implement, measures that we believe address or will address this control weakness, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, implementing software systems to manage our revenue and expenses and to allow us to budget, undertaking multi-year financial planning and analyses and designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight. We plan to remediate the identified material weakness by hiring additional senior accounting staff and financial consultants to complete the remediation by the end of 2020.

 

We expect to incur additional costs to remediate this weakness, primarily personnel costs and external consulting fees. We may not be successful in implementing these systems or in developing other internal controls, which may undermine our ability to provide accurate, timely and reliable reports on our financial and operating results. Further, we will not be able to fully assess whether the steps we are taking will remediate the material weakness in our internal control over financial reporting until we have completed our implementation efforts and sufficient time passes in order to evaluate their effectiveness. In addition, if we identify additional material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our condensed consolidated financial statements may be materially misstated. Moreover, in the future we may engage in business transactions, such as acquisitions, reorganizations or implementation of new information systems, that could negatively affect our internal control over financial reporting and result in material weaknesses.

 

 32 

 

 

Changes in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

A complaint was filed on February 18, 2020 in the New York State Supreme Court against us by an investor who invested in our company’s preferred stock in July 2017 which was prior to our initial public offering in August 2018.  The complaint alleges, among other things, that we breached our contract and fiduciary duty, by not issuing additional securities to the investor as a result of our initial public offering.  The plaintiff is asking for approximately $277,000 in compensatory damages.  The parties are currently in fact discovery. We believe that all of the claims in the complaint are without merit and intend to defend vigorously against them.

 

On July 30, 2020, a complaint for declaratory relief was filed in Superior Court of California, City and County of San Francisco against us by its current landlord, San Jose Biocube II, LLC.  The complaint seeks a declaratory judgment regarding whether the defendant’s tenancy has been terminated and defendant can be evicted at the present time.  We believe the complaint is without merit and intends to vigorously defend itself against it.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2019.

 

Item 6. Exhibits

 

Exhibit
No.
  Description
10.1   Aridis Pharmaceuticals, Inc. 2014 Amended and Restated 2014 Equity Incentive Plan (filed with the Registrant’s Proxy Statement as Appendix A on April 17, 2020 and incorporated herein by reference).
     
10.2   Promissory Note between the Registrant and Silicon Valley Bank dated May 1, 2020 (filed with the Registrant’s Current Report on Form 8-K on May 5, 2020 and incorporated herein by reference).
     
31.1   Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 33 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Aridis Pharmaceuticals, Inc.
     
Dated: August 11, 2020 By: /s/ Vu Truong
  Vu Truong
  Chief Executive Officer
  (Principal Executive Officer)
     
     
Dated: August 11, 2020 By: /s/ Michael A. Nazak
  Michael A. Nazak, Chief Financial Officer
  (Principal Financial Officer)

 

 34