UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

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.)
983 University Avenue, Bldg. B
Los Gatos, California	95032
(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	OTCQB

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 ☒ 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 ☒ 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 ☒	Small reporting company ☒
	Emerging growth company ☒

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 ☒

The number of shares of the registrant’s common stock, $0.0001 par value per share, outstanding at September 30, 2023 was 44,574,021.

Table of Contents

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023, and 2022 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2023, and 2022 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 4.	Controls and Procedures	44
	PART II OTHER INFORMATION	44
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3	Default Upon Senior Securities	45
Item 4	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
Signatures		47

2

PART I — FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2023			2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	35		$	4,876
Restricted cash		—			183
Accounts receivable		417			1,000
Other receivables		100			240
Contract costs		—			1,986
Prepaid asset		3,558			3,341
Total current assets		4,110			11,626
Property and equipment, net		511			730
Right-of-use assets, net		1,073			1,417
Intangible assets, net		13			17
Restricted cash, non-current		500			500
Contract costs, non-current		—			78
Other assets		327			327
Total assets	$	6,534		$	14,695
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	5,410		$	2,308
Accrued liabilities		7,691			9,564
Lease liabilities		576			538
Contract liabilities		380			20,173
Note payable		—			519
Note payable (at fair value)		3,410			3,781
Other liabilities		15			15
Total current liabilities		17,482			36,898
Contract liabilities, non-current		—			737
Lease liabilities, non-current		854			1,292
Total liabilities		18,336			38,927
Commitments and contingencies (Note 12)
Stockholders’ deficit:
Preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of September 30, 2023 and December 31, 2022)		—			—
Common stock (par value $0.0001; 100,000,000 shares authorized; 44,574,021 and 27,033,532 shares issued and outstanding as of September 30, 2023 and December 31, 2022)		5			3
Additional paid-in capital		170,827			166,380
Accumulated other comprehensive income		7,787			5,051
Accumulated deficit		(190,421	)		(195,666	)
Total stockholders’ deficit		(11,802	)		(24,232	)
Total liabilities and stockholders’ deficit	$	6,534		$	14,695

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						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue:
Grant revenue	$	417		$	399		$	1,544		$	1,878
License revenue		—			—			19,602			—
Total revenue		417			399			21,146			1,878
Operating expenses:
Research and development		175			6,118			10,374			18,916
General and administrative		1,111			1,693			4,235			5,535
Total operating expenses		1,286			7,811			14,609			24,451
(Loss) income from operations		(869	)		(7,412	)		6,537			(22,573	)
Other income (expense):
Interest income (expense), net		1			(27	)		31			(267	)
Other income		26			23			77			68
Change in fair value of note payable		759			(823	)		(1,400	)		(1,212	)
Net income (loss)	$	(83	)	$	(8,239	)	$	5,245		$	(23,984	)
Earnings (net loss) per share:
Basic	$	0.00		$	(0.47	)	$	0.15		$	(1.35	)
Diluted	$	0.00		$	(0.47	)	$	0.11		$	(1.35	)
Weighted-average common shares outstanding used in computing net loss per share available to common stockholders:
Basic		37,428,943			17,701,592			35,562,129			17,701,592
Diluted		37,428,943			17,701,592			47,178,967			17,701,592
Net income (loss)	$	(83	)	$	(8,239	)	$	5,245		$	(23,984	)
Other comprehensive (loss) income		1,261			—			2,736			—
Total comprehensive income (loss)	$	1,178		$	(8,239	)	$	7,981		$	(23,984	)

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

4

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands, except share amounts)

	Three Months Ended September 30, 2023 (unaudited)
	Common Stock				Additional Paid-In		Accumulated			Accumulated Other Comprehensive		Total Stockholders’
	Shares		Dollars		Capital		Deficit			Income		Deficit
Balances as of June 30, 2023		36,077,532	$	4	$	168,894	$	(190,338	)	$	6,526	$	(14,914	)
Issuance of common stock in registered direct offering, net of issuance costs		4,000,000		1		1,683		—			—		1,684
Issuance of common stock upon exercise of warrants		3,462,000		—		—		—			—		—
Issuance of common stock in exchange for note modification		898,000		—		50		—			—		50
Issuance of common stock for restricted stock units		136,420		—		—		—			—		—
Stock-based compensation		—		—		200		—			—		200
Change in fair value of notes payable		—		—		—		—			1,261		1,261
Net loss		—		—		—		(83	)		—		(83	)
Balances as of September 30, 2023		44,574,021	$	5	$	170,827	$	(190,421	)	$	7,787	$	(11,802	)

	Three Months Ended September 30, 2022 (unaudited)
										Accumulated
	Common Stock				Additional Paid-In		Accumulated			Other Comprehensive		Total Stockholders’
	Shares		Dollars		Capital		Deficit			Income		Deficit
Balances as of June 30, 2022		17,701,592	$	2	$	153,105	$	(181,040	)	$	—	$	(27,933	)
Stock-based compensation		—		—		349		—			—		349
Net loss		—		—		—		(8,239	)				(8,239	)
Balances as of September 30, 2022		17,701,592	$	2	$	153,454	$	(189,279	)	$	—	$	(35,823	)

	Nine Months Ended September 30, 2023 (unaudited)
										Accumulated
	Common Stock				Additional Paid-In		Accumulated			Other Comprehensive		Total Stockholders’
	Shares		Dollars		Capital		Deficit			Income		Deficit
Balances as of December 31, 2022		27,033,532	$	3	$	166,380	$	(195,666	)	$	5,051	$	(24,232	)
Issuance of common stock in registered direct offering, net of issuance costs		10,000,000		1		3,739		—			—		3,740
Issuance of common stock upon exercise of warrants		6,506,000		1		3		—			—		4
Issuance of common stock in exchange for note modification		898,000		—		50		—			—		50
Issuance of common stock for restricted stock units		136,420		—		—		—			—		—
Change in fair value of notes payable		—		—		—		—			2,736		2,736
Stock-based compensation		—		—		655		—			—		655
Net income		—		—		—		5,245			—		5,245
Balances as of September 30, 2023		44,574,021	$	5	$	170,827	$	(190,421	)	$	7,787	$	(11,802	)

	Nine Months Ended September 30, 2022 (unaudited)
										Accumulated
	Common Stock				Additional Paid-In		Accumulated			Other Comprehensive		Total Stockholders’
	Shares		Dollars		Capital		Deficit			Income		Deficit
Balances as of December 31, 2022		17,701,592	$	2	$	152,183	$	(165,295	)	$	—	$	(13,110	)
Issuance of common stock for consulting services		—		—		3		—			—		3
Stock options issued in exchange for accrued liability		—		—		107		—			—		107
Stock-based compensation		—		—		1,161		—			—		1,161
Net loss		—		—				(23,984	)		—		(23,984	)
Balances as of September 30, 2022		17,701,592	$	2	$	153,454	$	(189,279	)	$	—	$	(35,823	)

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

5

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended
	September 30,
	2023			2022
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income (loss)	$	5,245		$	(23,984	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		209			387
Asset impairment		—			33
Stock-based compensation expense		655			1,161
Other comprehensive income, industry specific credit risk on notes payable		2,736			—
Issuance of common stock in exchange for debt modification		(50	)		—
Issuance of common stock in exchange for consulting services		—			3
Change in fair value of note payable		(1,336	)		1,212
Non-cash debt issuance expense		—			250
Changes in operating assets and liabilities:
Accounts Receivable		583			—
Other receivables		140			(11	)
Prepaid asset		(217	)		(132	)
Contract asset		1,986			—
Other assets		78			47
Lease liabilities		(56	)		(19	)
Accounts payable		3,102			(1,010	)
Accrued liabilities and other liabilities		(1,873	)		2,121
Contract liabilities		(20,530	)		(628	)
Net cash used in operating activities		(9,328	)		(20,570	)
Cash flows from investing activities:
Purchase of property and equipment		—			(33	)
Proceeds from disposal of property and equipment		14			—
Net cash provided by (used) in investing activities		14			(33	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net		3,794			—
Proceeds from note payable		2,500			5,000
Payments on note payable		(1,485	)		(450	)
Payment on financing of insurance premium		(519	)		(800	)
Net cash provided by financing activities		4,290			3,750
Net (decrease) in cash, cash equivalents and restricted cash		(5,024	)		(16,853	)
Cash, cash equivalents and restricted cash at:
Beginning of period		5,559			19,986
End of period	$	535		$	3,133
Supplemental cash flow disclosures:
Cash paid for taxes	$	8		$	5
Supplemental noncash investing and financing activities:
Right-of-use assets obtained with corresponding lease liability	$	—		$	1,877
Stock options issued in exchange for accrued liability	$	—		$	107
Issuance of common stock in exchange for debt modification	$	50		$	107
Insurance financing	$	519		$	935

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” or “us”) 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 Los Gatos, 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 complemented by a fully human monoclonal antibody discovery platform technology. The Company’s suite of anti-infective monoclonal antibodies 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 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 applicable rules 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 have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These condensed consolidated financial statements 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 May 22, 2023.

The condensed consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries, Aridis Biopharmaceuticals, LLC 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. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. The accompanying condensed consolidated balance sheet at September 30, 2023 has been derived from the audited balance sheet at December 31, 2022 contained in the above referenced Form 10-K.

Going Concern

The Company has had recurring losses from operations since inception and had negative cash flows from operating activities during the nine months ended September 30, 2023, and the year ended December 31, 2022. Management expects to incur operating losses and negative cash flows from operations in the foreseeable future as the Company continues its product development programs. The forecasted outflow of cash for at least a one-year period from the expected condensed consolidated financial statement issuance date is in excess of the cash available on-hand.

7

The Company’s research and development expenses and resulting cash burn during the nine months ended September 30, 2023, were largely due to costs associated with the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis and the activities associated with the Phase 3 study of AR-320 for the prevention of S. aureus VAP. Until the clinical development activities for AR-301 and AR-320 resume, the current clinical development activities are focused primarily on AR-501.

The Company plans to fund its cash flow needs through future debt and/or 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. 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, including cash received in August 2023 from equity raise proceeds, will not be sufficient to fund its planned expenditures and meet the Company’s obligations for at least the one-year period following its consolidated financial statement issuance date. In the absence of equity or debt financing, or other capital sources, including grant funding, potential collaborations or other strategic transactions, management anticipates that existing cash resources will not be sufficient to meet operating and liquidity needs on or before November 30, 2023.

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, useful life of 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, and preclinical study and clinical trial accruals. Actual results could differ from those estimates.

8

Concentrations

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

The Company recognized $0.4 million in grant revenue from one customer during the three months ended September 30, 2023, and $1.5 million in grant revenue from three customers during the nine months ended September 30, 2023, each individually comprising 3%, 12% and 85% of grant revenue for the nine-month period accounting for 7% of total revenue. The Company recognized $0.4 million and $1.9 million in grant revenue from three customers during the three and nine months ended September 30, 2022, each individually comprising 27%, 34% and 39% of grant revenue for the nine-month period accounting for 100% of total revenue.

The Company recognized $0 and $19.6 million in license revenue (non-cash) from one customer during the three and nine months ended September 30, 2023, and no license revenue during the three and nine months ended September 30, 2022.

Accounts receivable from one customer were $0.4 million as of September 30, 2023, and $1.0 million as of December 31, 2022.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of checking account and money market fund account balances. Restricted cash consists of deposits for a letter of credit that the Company has provided to secure its obligations under its facility lease as well as grant funds identified for the specific grant project.

The following table provides a reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets which, in aggregate, represent the amount reported in the condensed consolidated statements of cash flows (in thousands):

	September 30,		December 31,
	2023		2022
Cash and cash equivalents	$	35	$	4,876
Restricted cash – current		-		183
Restricted cash – non-current		500		500
Total cash, cash equivalents and restricted cash	$	535	$	5,559

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivables are recorded at the invoiced amount and do not bear interest. The Company considers the creditworthiness 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 September 30, 2023, and December 31, 2022, there were $0.4 million and $1.0 million in accounts receivable, respectively, and no allowances for doubtful accounts.

Operating Leases

The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and include any lease payments made prior to or on lease commencement and lease incentives and initial direct costs incurred, as applicable.

As the implicit rate in the Company’s leases is generally unknown, the Company used its incremental borrowing rate of 6% based on the information available at the lease commencement date in determining the present value of future lease payments. Lease costs for the Company’s operating leases are recognized on a straight-line basis within operating expenses over the reasonably assured lease term. The Company has elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for any lease and non-lease components as a single lease component.

9

Prior to adoption of ASC 842, Leases as of January 1, 2022, the Company evaluated leases at their inception as either operating or capital leases, and renewal or expansion options, rent holidays, leasehold improvement allowances and other incentives on such lease agreements. The Company recognized operating lease costs on a straight-line basis over the term of the agreement.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years for lab equipment and computer equipment and software, and over the shorter of the lease term or useful life for leasehold improvements. Maintenance and repairs are charged to expense as incurred, and costs of improvements are capitalized. 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 during the period ended September 30, 2023 and approximately $227 thousand in impairment of lab equipment during the period ended December 31, 2022.

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.

10

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 grant and license 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 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. Capitalized contract assets were $0 at September 30, 2023 and $2.1 million at December 31, 2022. Amortization of the contract assets was $0 for the three and nine month periods ended September 30, 2023, and $0 for the three and nine month periods ended September 30, 2022. In connection with the termination of a license agreement, $0 and $2.1 million of contract assets were impaired for the three and nine month periods ended September 30, 2023, respectively.

Contract Liabilities

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 September 30, 2023, and December 31, 2022 (see Note 6).

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.

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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.

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. The Company’s policy is to recognize interest or penalties related to income tax matters in income tax expense.

Other Comprehensive Income

Other comprehensive income is derived from the change in credit risk calculated by our fair value option valuation in connection with the Note Purchase Agreements with Streeterville Capital, LLC. Accumulated other comprehensive income increased from $5.1 million at December 31, 2022 to $7.8 million at September 30, 2023.

Earnings (Net Loss) Per Share

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

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For the three and nine months ended September 30, 2023 the number of shares used to compute basic earnings (net loss) per share were 37.4 million shares and 35.6 million shares, respectively. For the three and nine months ended September 30, 2023 the number of shares used to compute diluted earnings (net loss) per share were 37.4 million shares and 47.2 million shares, respectively. The following table presents the computation of the basic and diluted net loss per share to common stockholders (in thousands, except share and per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023		2022
	(unaudited)			(unaudited)			(unaudited)		(unaudited)
Numerator:
Net (loss) income available to common stockholders (basic and diluted)	$	(83	)	$	(8,239	)	$	5,245	$	(23,984	)
Denominator:
Weighted-average common shares outstanding used in computing net loss per share available to common stockholders:
Basic		37,428,943			17,701,592			35,562,129		17,701,592
Diluted		37,428,943			17,701,592			47,178,967		17,701,592
Earnings (net loss) per share to common stockholders, basic and diluted
Basic	$	0.00		$	(0.47	)	$	0.15	$	(1.35	)
Diluted	$	0.00		$	(0.47	)	$	0.11	$	(1.35	)

The following potentially dilutive securities were excluded from the computation of diluted earnings (net loss) per share for the nine month period ended September 30, 2023 because including them would have been antidilutive:

Stock options to purchase common stock	2,461,749
Common stock warrants	23,280,404
	25,742,153

All potentially dilutive securities were excluded from the computation of net loss per share for the nine month period ended September 30, 2022 because including them would have been antidilutive.

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.

New Accounting Pronouncements

ASU 2016-02 - Accounting for Lease Obligation (“ASU 2016-02”)

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842). This guidance requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use model (ROU) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The Company adopted this standard effective January 1, 2022, as required, retrospectively through a cumulative effect adjustment. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which permits the Company not to reassess, under ASU 2016-02, prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected to utilize the short-term lease recognition exemption for all leases that qualify. This means, for those short-term leases that qualify, the Company will not recognize ROU assets or lease liabilities. The Company also elected to separate lease and non-lease components for facility leases. Adoption of this guidance resulted in the recognition of lease liabilities of $2.3 million, based on the present value of the remaining minimum rental payments under current leasing standards for the Company’s applicable existing office space operating lease, with corresponding ROU assets of $1.9 million as of adoption date on January 1, 2022.

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.

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The following tables set forth the fair value of the Company’s consolidated financial instruments that were measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands):

	September 30, 2023
Liabilities measured at fair value on a recurring basis	Level 1		Level 2		Level 3		Total
Notes payable (fair value)		—		—		3,410		3,410
Total liabilities measured at fair value		—		—		3,410		3,410

	December 31, 2022
	Level 1		Level 2		Level 3		Total
Notes payable (fair value)		—		—		3,781		3,781
Total liabilities measured at fair value		—		—		3,781		3,781

The change in the estimated fair value of the Level 3 liability is summarized below:

Year ended December 31, 2022	Streeterville Notes Payable
Beginning fair value of Level 3 liability		5,282
Borrowings on notes payable		5,000
Repayments		(1,800	)
Change in fair value		850
Gain on valuation		(500	)
Change in instrument specific credit risk		(5,051	)
Ending fair value of Level 3 liability		3,781

Nine months ended September 30, 2023	Streeterville Notes Payable
Beginning fair value of Level 3 liability		3,781
Borrowings on notes payable		2,500
Repayments		(1,535	)
Change in fair value		1,400
Change in instrument specific credit risk		(2,736	)
Ending fair value of Level 3 liability		3,410

Streeterville Note

The fair value of the Streeterville Note as of September 30, 2023 amounting to $3.4 million, was based on the weighted average discounted expected future cash flows representing the terms of the note, discounting them to their present value equivalents. This was classified as Level 3 fair value in the fair value hierarchy due to the use of unobservable inputs, including the Company’s own credit risk.

The Company determined and performed the valuations of the Streeterville Note with the assistance of an independent valuation service provider. On a quarterly basis, the Company considers the main Level 3 inputs used as follows:

● Discount rate for the Streeterville notes was determined using a comparison of various effective yields on bonds as of the valuation date.

● Weighted probability of cash outflows was estimated based on the entity’s knowledge of the business and how the current economic environment is likely to impact the timing of the cash outflows, attributed to the different repayment features of the notes.

The following table summarizes the quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for the periods ended September 30, 2023 and December 31, 2022:

	Range of Inputs
	(risk free rate)
Unobservable Inputs	2023			2022
Risk free rate		5.4% - 5.6	%		2.1% - 4.7	%
Option adjusted spread		15.0	%		10.0	%
Illiquidity discount		3.75	%		2.5	%
Concluded discount rate		9.25	%		4.75% - 8.5	%

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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 Company has elected the fair value option for calculating the value of its Notes Payable and are classified as Level 3. The carrying value of the Company’s cash and cash equivalents, restricted cash, prepaid assets and other current assets, other assets, accounts payable, accrued liabilities, and insurance financing note payable approximate fair value due to the short-term nature of these items.

4. Balance Sheet Components

Property and Equipment, net

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

	September 30,			December 31,
	2023			2022
	(unaudited)
Lab equipment	$	2,232		$	2,246
Leasehold improvements		527			527
Total property and equipment		2,759			2,773
Less: Accumulated depreciation		(2,248	)		(2,043	)
Property and equipment, net	$	511		$	730

Depreciation expense was approximately $58,000 and $123,000 for the three months ended September 30, 2023 and 2022, respectively, and approximately $205,000 and $383,000 for the nine months ended September 30, 2023 and 2022, respectively.

Intangible Assets, net

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

	September 30,			December 31,
	2023			2022
	(unaudited)
Licenses	$	81		$	81
Less: Accumulated amortization		(68	)		(64	)
Intangible assets, net	$	13		$	17

Amortization expense was approximately $1,000 for each of the three month periods ended September 30, 2023 and 2022, and approximately $4,000 for each of the nine month periods ended September 30, 2023 and 2022.

Licenses

Broad Institute of MIT and Harvard — Non-Exclusive Manufacturing License Agreement

In January 2021, we entered into a non-exclusive manufacturing licensing agreement with the Broad Institute of MIT and Harvard (the “Broad Institute”) to make and manufacture CRISPR Modified Cell Lines, CRISPR Modified Animals and CRISPR Modified Plants. These license rights permit the non-exclusive use of the CRISPR Technology for the creation of and improvement of yield from protein and mAb production cell lines, which is one of the core components of the APEX^TM mAb discovery and manufacturing production technology.

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Pursuant to this agreement, the Company is obligated to pay to the Broad Institute an issue fee of $25,000, an annual license maintenance fee of $50,000 in 2022, and fees of $100,000 in December 2023 and each year thereafter. Additionally, the Company is obligated to pay a royalty of 7% of all service income received from a customer for the manufacture, sale or transfer of CRISPR modified cell line, CRISPR Modified Animals and CRISPR Modified Plants or end products, as well as 0.5% of end product net sales from use of any commercialized product that contains any small or large molecule made through the use of a CRISPR modified cell line, CRISPR Modified Animals and CRISPR Modified Plants. The term of the license agreement continues until all patents and filed patent applications, included within the licensed Broad Institute patents, have expired or been abandoned.

MedImmune Limited — License Agreement

In July 2021, the Company executed a license agreement effective July 12, 2021 and entered into an amendment to the license agreement on August 9, 2021 (collectively the “MedImmune License Agreement”) with MedImmune Limited (“MedImmune”), pursuant to which MedImmune granted the Company an exclusive worldwide license for the development and commercialization of suvratoxumab, a Phase 3 ready fully human monoclonal antibody targeting the Staphylococcus aureus alpha toxin (the “Licensed Product”). As consideration for the MedImmune License Agreement, the Company issued 884,956 shares of its common stock to MedImmune and a $5.0 million cash payment is due to MedImmune upon the earlier of (i) a registered direct offering in which the Company receives third-party funding or (ii) December 31, 2021. The $5.0 million liability has not been paid and therefore has been included in accrued liabilities within the Company’s consolidated balance sheet at December 31, 2022 and September 30, 2023.

As additional consideration, the Company will pay MedImmune milestone payments upon the achievement of certain regulatory approvals for one licensed product, up to a total aggregate amount of $30.0 million and sales related milestone payments of up to $85.0 million. To date, no milestones have been achieved and no milestone payments have been made pursuant to this agreement. MedImmune is entitled to royalty payments based on aggregate net sales ranging from 12.5% to 15% dependent on net sales volume. Further, until delivery of an interim data readout, or an interim futility analysis, from the first Phase 3 clinical study for any indication, MedImmune has a right of first negotiation regarding any commercial rights that the Company intends to sub-license. The term of the MedImmune License Agreement continues until the expiration of the last royalty term for the last licensed product as defined in the license agreement.

On March 20^th, 2023, the Company received a written notice from MedImmune that it has terminated that certain License Agreement by and between MedImmune and the Company dated as of July 12, 2021, and as amended by Amendment No. 1 to License Agreement, dated as of August 9, 2021 (the “License Agreement”), pursuant to Section 9.2.1 of the License Agreement for non-payment of the Upfront Cash Payment which was due on December 31, 2021. The notice states that such termination shall be effective on March 30, 2023. As a result of the termination, the on-going AR-320-003 Phase 3 clinical study has been put on hold. The Company does not agree that it is in material breach of the License Agreement. Based on the failure of MedImmune to assist in the necessary technology transfer pursuant to Section 3.5.2 of the License Agreement. The Company notified MedImmune on March 24, 2023 that it was in material breach of Section 3.5.2 and requested that the material breach be cured as soon as possible.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2023		2022
	(unaudited)
Research and development services	$	7,215	$	9,000
Payroll related expenses		435		456
Professional services and other		41		108
Accrued liabilities	$	7,691	$	9,564

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”), to develop and commercialize 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 July 2, 2018, the JV Entity received final approval from the government of the People’s Republic of China. 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).

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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.

The Company evaluated the accounting for the JV Agreement entered into noting that it did not meet the accounting definition of a joint venture and instead meets the definition of a variable interest entity. The Company concluded that it is not the primary beneficiary of the JV Entity and therefore is not required to consolidate the entity. This conclusion was based on the fact that the equity-at-risk is insufficient to support operations without additional investment and that the Company does not hold decision-making power over activities that significantly impact the JV Entity’s operations. 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 no losses from the operations of the JV Entity for the three and nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 and December 31, 2022, the Company’s equity method investment in the JV Entity was $0.

On August 21, 2023, Aridis Pharmaceuticals, Inc. (the “Company”) sent written notice to Shenzhen Arimab Biopharmaceuticals Co., Ltd. (“Arimab”) stating that as of August 21, 2023, the Amended and Restated Technology License and Collaboration Agreement between Arimab, a joint venture of the Company and Shenzhen Hepalink Pharmaceutical Group Co., Ltd. dated as of August 6, 2018 (the “Agreement”) would terminate pursuant to Section 11.2 of the Agreement.

6. Development and License Agreements

Agreement with Innovative Medicines Initiative Joint Undertaking

In March 2021, the Company entered into an agreement (the IMI JU Agreement) with the Innovative Medicines Initiative (IMI) funded consortium COMBACTE-NET to collaborate with other participants in a joint undertaking (the IMI JU) to combat bacterial resistance in Europe. The IMI JU Agreement facilitates a pan-European clinical trial network to test antibiotics and other drugs to prevent and treat various infections. This project commenced on January 1, 2013 with an initial duration of seven years. It has since been extended to October 31, 2023. The project has 46 participants including European Federation of Pharmaceutical Industries and Associations (EFPIA) companies, universities, research organizations, public bodies, non-profit groups, subject matter experts, and third parties.

The Company’s primary role in the project is to help lead a Phase 3, randomized, double-blind, placebo-controlled trial to evaluate efficacy of suvratoxumab in the prevention of S. aureus Ventilator Associated Pneumonia (VAP) in mechanically ventilated Intensive Care Unit (ICU) patients. We are acting as study sponsor for Phase 3 clinical study to be conducted and assume responsibility for ensuring that all studies are conducted according to International Conference on Harmonization (ICH) Good Clinical Practice (GCP) guidelines. This study will be conducted in approximately 200 sites distributed globally across European Union (EU) and non-EU sites (50% EU and 50% non-EU). To help facilitate these trials, we make in-kind contributions of materials and services to the project at non-EU sites.

The academic COMBACTE-NET consortium partners initially pay for all costs incurred at EU clinical sites and subsequently bills the Company for 25% of such costs. Specifically, we are billed for 25% of eligible costs during the entire fiscal year six to seven months following the fiscal year. The work at these sites is performed entirely by third-party subcontractors. As such, we reimburse the 25% at the passed-through invoice amounts. There is no reimbursement for costs incurred at non-EU sites. After October 31, 2023, the Company is committed to continuing the trials whether or not a renewal is executed with the IMI JU. If no renewal is executed, the trials will continue without any form of reimbursement.

Under the IMI JU Agreement, the Company will own all results, findings, and intellectual property generated by the project and is entitled to receive any benefits these items bring. As such, these costs are deemed research and development expenditures. Considering our obligation to repay a portion of costs incurred, we determined this agreement is under the scope of ASC Subtopic 730-20, Research and Development Arrangements. Further, as the parties in the IMI JU Agreement are active participants and are exposed to significant risks and rewards dependent on the commercial success of the research, this agreement is also under the scope of ASC Topic 808, Collaborative Arrangements.

Research and development costs incurred at non-EU sites are recognized as incurred. The Company recognized research and development expenses of $0.7 and $1.4 million for the three and nine months ended September 30, 2023, respectively, and approximately $5.5 million for the year ended December 31, 2022 at non-EU sites.

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Research and development costs incurred at EU sites are recognized as incurred for 25% of these costs. Research and development expenses of approximately $0 and $2.3 million were incurred at EU sites for the three and nine months ended September 30, 2023, respectively, and approximately $3.8 million for the year ended December 31, 2022. Of this gross expense amount, the EU contributed services of 75%, or $0 and $1.7 million for the three and nine months ended September 30, 2023, respectively, and $2.9 million for the year ended December 31, 2022. Thus, our liability presented on the accompanying condensed consolidated balance sheet is $0.6 million as of September 30, 2023 and $1.0 million as of December 31, 2022, and are presented within Accrued Liabilities on the accompanying condensed consolidated balance sheets.

In-kind contributions we make to the program will be expensed as R&D at their fair value when made. If the fair value of an in-kind contribution we make to the IMI JU differs from its carrying amount, we will recognize a gain or loss on disposition. No gain or loss on disposition was recognized for the three and nine month periods ended September 30, 2023.

Cystic Fibrosis Foundation Development Agreement

In December 2016, the Company received an award from the Cystic Fibrosis Foundation (“CFF”), which was executed under 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 that the Company receives from the CFF. 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 CFF. In November 2018, the CFF increased the award to approximately $7.5 million. In December 2022, the CFF further increased the award to approximately $7.6 million by adding the “Additional Award Amount” of $150,000 with amendment no 2.

As of the adoption date of ASC 606 on January 1, 2019 (the “Adoption Date”), the Company identified the following promises with regards to the clinical research activities under the CFF Agreement that represent an initial contract of: a) Phase 1 single ascending dose (“SAD”) clinical trial, which consists of the satisfied development-based milestones and one development-based milestone in progress which was accounted for as a single performance obligation; and contingent promises of: b) Phase 1 multiple ascending dose (“MAD”) clinical trial, which consists of one development-based milestone that had not yet been started, and c) Phase 2a clinical trial, which consists of four development-based milestones that had not yet been started. Of these promises, the Phase 1 SAD clinical trial was determined to be a distinct performance obligation as of the Adoption Date. For the clinical research activities related to the Phase 1 MAD clinical trial and the Phase 2a clinical trial that had not yet been started, the Company was contingently obligated to perform these clinical research activities only after the previous milestones, which achievement was uncertain, had been met.

The Company determined that the consideration for the Phase 1 SAD clinical trial contract included several development-based milestones, which had been achieved as of the Adoption Date, totaling approximately $1.7 million, and the one development-based milestone in progress as of the Adoption Date of $1.0 million became probable during the quarter ended March 31, 2019. Additionally, the Company determined the consideration for the Phase 1 MAD clinical trial contract included one development-based milestone of $1.0 million which was achieved during the quarter ended June 30, 2020. The Company determined the consideration for the Phase 2a clinical trial contract totaled approximately $3.8 million which included four development-based milestones. With the increased grant funding in December 2022, bringing the Phase 2a clinical trial contract total to approximately $3.9 million, CFF introduced an additional development-based milestone.

The Company determined the consideration for the Phase 2a clinical trial contract totals approximately $3.8 million which includes four development-based milestones. The milestones under the CFF Agreement are related to pre-clinical and clinical research activities and the realization of or recognition of revenue associated with the milestones as determined by the completion of the milestones and, if applicable, review and approval of the achievement by the CFF. Each development-based milestone payment has specific criteria that needs to be met, some examples of which include, the completion of certain study activities and approval to move to the next activity. At every reporting period, the Company evaluates the individual facts and circumstances of the development-based milestone to assess whether the revenue attributable to the development-based milestone in progress should be constrained. The constraint assessment by the Company includes an analysis of the key judgements and considerations used for each milestone which include, but are not limited to, the nature and amount of work to be performed, if the work is subject to the approval of the CFF, clinical data and uncertainty with regards to the results of the clinical studies, and the probability of successful clinical studies. The constraint will be removed once the Company achieves the development-based milestone or has determined that there is probable completion of the development-based milestone, and it has also concluded that it is not probable that revenue recognized attributable to the development-based milestone will result in a significant reversal of revenue in the future.

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The Company determined that the clinical research activities under the CFF Agreement should be recognized over time by calculating the amount of revenue to recognize in any given period by accumulating the total related costs incurred for the respective clinical research activities related to that distinct performance obligation using the input method (cost-to-cost) and applies that percentage of completion to the transaction price at each reporting period. The Company believes this method best depicts the transfer of control to the customer, which occurs as the costs related to the clinical research activities are incurred.

The Company determined that as of September 30, 2023, the transaction price for the Phase 2a clinical trial contract was $3.6 million based on the achievement of the three development-based milestones during the year ended December 31, 2022 and completion of the fourth milestone during the quarter ended September 30, 2023.

The Company recognized grant revenue from the CFF Agreement of approximately $0.4 million and $1.3 million during the three and nine month periods ended September 30, 2023, respectively, and approximately $(0.1) million and $0.7 million during the three and nine month periods ended September 30, 2022, respectively.

Gates Foundation Grant Agreement

On October 15, 2021, the Company entered into an agreement with the Bill and Melinda Gates Foundation (“Gates Foundation” or “BMGF”) by executing a Grant Agreement identified as Investment ID INV-033376 (“Grant”). The goal of the Grant Agreement is to develop durable approaches to block the infection and transmission of pathogens. For providing research and development services under the Grant Agreement, the Gates Foundation has agreed to compensate the Company $1.93 million due upon execution of the Grant Agreement. In return, we agreed to conduct a proof-of-concept study seeking to demonstrate that inhaled neutralizing antibodies are effective for preventing viral infection and transmission. We are required to ensure global access which means that the knowledge and information gained from the project will be promptly and broadly disseminated, and that the products, technologies, materials, processes and other intellectual property resulting from the proof-of-concept study (collectively referred to as the Funded Developments) will be made available and accessible at an affordable price (i) to people most in need within developing countries or (ii) in support of the U.S. educational system and public libraries.

Under the Grant Agreement, the Gates Foundation made an upfront payment of $1.93 million. The Agreement specifies that we may not use funds provided under the Grant Agreement for any purpose other than the project. The Company is required to repay any portion of the funds used or committed in material breach of the Grant Agreement. Any grant funds, plus any income, that have not been used for, or committed to, the Project upon expiration or termination of the Agreement, must be returned promptly to the Gates Foundation.

The Company will conduct research and development services up until the proof-of-concept study is completed, at which point the Gates Foundation will determine whether to approve further grant funding for transmission studies or end the study in which case the Company will no longer provide any significant goods or services. The Company will partner with three main subcontractors to deliver the scope of work described in the investment document.

The Grant Agreement is considered within the scope of ASC 606 as the parties have a customer/vendor relationship and are not exposed equally to the risks and rewards of the research and development services contemplated in the Grant Agreement. The Company identified the following promises under the Agreement: 1) research and development services, 2) global access commitment, 3) humanitarian license, 4) publication if requested by the Gates Foundation, and 5) intellectual property reporting upon request. The Company determined that these promises are not distinct from each other, and therefore represent one performance obligation.

Since the Company is required to update the Gates Foundation on technical progress during each stage of the Funded Development, the ability to access research and development results represents the Gates Foundation’s consumption of the benefits from the Company’s research and development activities. As such, research and development services revenue are recognized over time. At each reporting period, the amount of revenue to recognize is calculated using the input method (cost-to-cost), by comparing cumulative costs incurred to the total estimated costs to perform the research and development services and applying that percentage of completion to the transaction price. The Company believes this method best depicts the transfer of control to the customer, which occurs as the costs related to the research and development services are incurred.

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The Company recognized approximately $0 and $0.2 million in grant revenue related to the Grant Agreement for the three and nine month periods ended September 30, 2023 and approximately $0.4 million and $0.6 million in grant revenue for the three and nine month periods ended September 30, 2022, respectively. The Company eliminated the contract liability in deferred revenue, current, on its condensed consolidated balance sheet as of September 30, 2023, as all the grant funding had been consumed.

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”). 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 (i.e. exclusive rights to, among other things, develop, distribute, market, promote, sell, import and otherwise commercialize) in (a) the country of India, and (b) all other countries of the world except the USA, Canada, EU Territory, UK, China, Australia, South Korea, Brazil, New Zealand, and Japan (products AR-105 and AR-101 countries do not exclude South Korea and Brazil) (the “Limited Territory”); and AR-201 (i.e. exclusive rights to, among other things, develop, manufacture, make, distribute, market, promote, sell, import and otherwise commercialize) in all countries of the world except China, Hong Kong, Macau and Taiwan (the “Worldwide Territory”) (the “licenses and know-how”). Further, the License Agreement grants 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 to develop, manufacture, make, distribute, market, promote, sell, import and otherwise commercialize these development products in the Worldwide Territory (the “research and development option”).

Pursuant to the License Agreement, the Company will provide development support related to the licensed products above in order to assist SAMR in its efforts to develop, receive regulatory approval, and manufacture and sell 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 for AR-301, AR-105 and AR-101 does not allow for manufacturing. 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 this option is exercised, after SAMR has met certain requirements to exercise the option as defined in the License Agreement, it would provide for an exclusive license for use by SAMR to manufacture and supply the products for SAMR’s own use in the Limited Territory and to manufacture and supply these products to the Company, or their affiliates, for the Company’s use outside the Limited Territory. Should SAMR exercise the development and research option or the manufacturing rights option discussed above, SAMR and the Company shall negotiate in good faith the economic terms around these arrangements. 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 Limited Territory by paying to SAMR $5 million.

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.

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 as of December 31, 2019. 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 $15.0 million from upfront payments under the License Agreement and approximately $4.6 million from the equity allocation.

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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 determined that the transaction price under the License Agreement was $19.6 million, consisting of the $15.0 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.

On May 3, 2023, the Company sent written notice to Serum AMR Products stating that as of May 8, 2023, the License Agreement would terminate pursuant to Section 13.3(a) of the License Agreement for nonfulfillment of development obligations under the License Agreement.

As a result of termination of the License Agreement, the Company recognized $0 and approximately $19.6 million in license revenue during the three and nine month periods ended September 30, 2023. No license revenue had previously been recognized in connection with the License Agreement. The Company has no remaining portion of the nonrefundable upfront payment as a contract liability on its condensed consolidated balance sheet as of September 30, 2023 and has no further obligations under the License Agreement due to the termination.

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Kermode Licensing and Product Discovery Agreement

In February 2021, the Company entered into an out-licensing and product discovery agreement, and a statement of work, collectively (the “Kermode Agreement”), with Kermode Biotechnologies, Inc. (“Kermode”). Under the terms of this agreement, Kermode will fund for one year the discovery of product candidates for African Swine Fever Virus (“ASFV”) with an option to include the discovery of product candidates for swine influenza virus (“SIV”). Kermode also received exclusive rights to all mAbs and vaccines discovered for veterinary uses and rights to a non-exclusive license to use the Company’s ʎPEX technology platform for further development activities. The Company retained exclusive rights to mAbs and vaccines discovered for human uses. In March 2021, the Company received a nonrefundable upfront payment of $500,000 and received one milestone payment of $250,000 in December 2021. The Company will receive one more milestone payment of $250,000 from Kermode after certain research and development phases in the agreement are completed. The Kermode Agreement defines four phases of research and development activities. The Company is also entitled to royalty payments based on future net sales if Kermode is ultimately successful in commercializing product candidates.

The Kermode Agreement is within the scope of ASC 606 as the parties have a customer/vendor relationship and are not exposed equally to the risks and rewards of the activities contemplated in the Kermode Agreement. The Company identified the following promises under the Kermode Agreement: 1) research and development services, and 2) license rights of the ʎPEX Platform and mAbs and vaccines (“Program IP”). The Company determined that these promises are not distinct from each other, and therefore represent one performance obligation.

As of March 31, 2022, the transaction price of the Kermode Agreement was $1,000,000, consisting of the nonrefundable upfront payment of $500,000 and the two milestone payments, totaling $500,000. Potential royalty payments were not included in the transaction price, as it was not probable that a significant reversal of cumulative revenue recognized would not occur if these amounts were included. At the end of each reporting period, the Company will update its assessment of whether the milestone payments and royalties are constrained by considering both the likelihood and magnitude of the potential revenue reversal.

The Company determined that the one performance obligation under the Kermode Agreement should be recognized over time. At each reporting period, the amount of revenue to recognize will be calculated using the input method (cost-to-cost), by comparing cumulative costs incurred to the total estimated costs to perform all four phases of the research and development activities and applying that percentage of completion to the transaction price. The Company believes this method best depicts the transfer of control to the customer, which occurs as the costs related to the research and development activities are incurred.

The Company recognized approximately $0 and $0.1 million in grant revenue related to the Kermode Agreement for the three and nine month periods ended September 30, 2023 and approximately $0.1 million and $0.5 million in grant revenue for the three and nine month periods ended September 30, 2022, respectively. The Company has no remaining portion of the nonrefundable upfront payment as a contract liability on its condensed consolidated balance sheet as of September 30, 2023 as the statement of work was considered completed.

National Institutes of Health / National Institute of Allergy and Infectious Diseases Grants

In June 2023, the Company received a grant award from the National Institute of Allergy and Infectious Diseases division of the National Institutes of Health, in collaboration with researchers at Eitr Biosciences in San Diego, California, to develop pan-coronavirus human monoclonal antibody. The Company expects to commence work and receive funding under the collaboration in the fourth quarter of 2023.

In August 2023, the Company received a grant award from the National Institute of Allergy and Infectious Diseases division of the National Institutes of Health, in collaboration with researchers at Emory University in Atlanta, Georgia, to apply the company’s APEXTM human monoclonal antibody (“mAb’) discovery and production platform technology to discover and develop antibacterial mAbs from patients. The Company expects to commence work and receive funding under the collaboration in the fourth quarter of 2023.

7. Notes Payable

Note Purchase Agreement

On November 23, 2021, the Company entered into an agreement (“Note Purchase Agreement”) with Streeterville Capital, LLC (Lender), pursuant to which we issued to the Lender a secured promissory note (Note) in the aggregate principal amount of $5,250,000. Closing occurred on November 23, 2021 (Issuance Date). The Note carries an original issue discount of $250,000. The Note bears interest at the rate of 6% per annum and matures on November 23, 2023. Beginning on May 23, 2022, the Lender has the right to redeem all or any portion of the Note up to the Maximum Monthly Redemption Amount which is $450,000. Pursuant to the terms agreed in the Note Purchase Agreement, the Company issued a second Note to the Lender on February 21, 2022 in the aggregate principal amount of $5,250,000 with terms substantially similar to the first Note except the maturity date is February 21, 2024. As of September 30, 2022 the Lender has exercised their right to redeem one of the Maximum Monthly Redemption Amounts and the Company has made a payment for the first note on September 7, 2022 of $495,000 including $450,000 paydown on the principal and $45,000 prepayment premium.

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Payments of each redemption amount must be made in cash. Pursuant to the Note, the Company can defer all redemption payments that the Lender could otherwise elect to make during any calendar month on three (3) separate occasions by providing written notice to Lender at least three (3) trading days prior to the first day of each such calendar month for which it wishes to defer redemptions for that month. In the event the Company elects to defer, the aggregate principal amount plus accrued but unpaid interest (Outstanding Amount) shall automatically be increased by (a) 0.5% for the first exercise; (b) 1% for the second exercise and (c) 1.5% for the third exercise. The Company can prepay all or any portion of the Outstanding Amount at a rate of (a) 105% of the portion of the Outstanding Balance the Company elects to prepay if prepayment occurs on or before the three-month anniversary of the Issuance Date; (b) 107.5% of the portion of the Outstanding Balance the Company elects to prepay if prepayment occurs after the three-month anniversary of the Issuance Date but on or before the six-month anniversary of the Issuance Date and (c) 110% of the Outstanding Balance if the prepayment occurs after the six-month anniversary of the Issuance Date.

On September 30, 2022, the Company signed an amendment to promissory note #2. Subject to certain provisions and so long as no Event of Default has occurred, then in addition to the three (3) deferral rights previously available, the Company shall have the right to exercise additional monthly deferrals until March 31, 2023 (each, an “Additional Deferral”). Each time Borrower exercises an Additional Deferral the Outstanding Balance will automatically be increased by 1.5%. As of March 31, 2023, the Company has not made any payments on Note #2.

In April 2023, the Company entered into a Note Purchase and Loan Restructuring Agreement with Streeterville Capital, LLC modifying the principal amount of Note #2 from approximately $5,250,000 to approximately $9,287,000 in exchange for an additional investment amount of up to $2,500,000.

Pursuant to the Note Purchase Agreement, we are subject to certain covenants, including the obligations to: (i) timely file all reports required to be filed under Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and not terminate its status as an issuer required to file reports under the Exchange Act; (ii) maintain listing of our common stock on a securities exchange; and (iii) avoid trading in our common stock from being suspended, halted, chilled, frozen or otherwise ceased. The Company was in compliance with all covenants as of March 31, 2023. On April 17, 2023, the Company was no longer in compliance as it didn’t meet the timely filing of the annual report on 10-K. The Company has received a waiver from the lender for this covenant which also included waiving compliance for timely filing of the May 15, 2023 10Q filing for the period ended March 31, 2023. The Note is secured by the Company’s MabIgX assets and Note #2 is secured by all of the Company’s assets.

On July 20, 2023, Streeterville provided a waiver with respect to the breach of Section 4(ii) of that certain Note Purchase Agreement dated November 23, 2021, in connection with the recent delisting of the Company’s common stock from Nasdaq to OTC Markets Pink Sheets. This in turn means that no such Event of Default has occurred pursuant to Section 4.1(l) of Secured Promissory Note #1 dated November 23, 2021, with respect to the recent delisting. Additionally, Streeterville provided a waiver with respect to the breach of Section 4(ii) and 4(iii) of that certain Note Purchase and Loan Restructuring Agreement dated April 26, 2023, in connection with the recent delisting of the Company’s common stock from Nasdaq to OTC Markets Pink Sheets. This in turn means that no such Triggering Event has occurred pursuant to Section 4.1(h) of Secured Promissory Note dated April 26, 2023, with respect to the recent delisting.

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On August 31, 2023, Streeterville provided a waiver with respect to the breach of Section 4(i) of that certain Note Purchase and Loan Restructuring Agreement dated April 26, 2023, in connection with the delinquent filing of the Company’s Quarterly Report for the period ended June 30, 2023 on Form 10-Q with the SEC. This in turn means that no such Triggering Event has occurred pursuant to Section 4.1(h) of Secured Promissory Note dated April 26, 2023, with respect to the delinquent filing.

On September 22, 2023, the Company entered into an Exchange Agreement (the “September 2023 Exchange Agreement”) with Streeterville, pursuant to which we agreed to (i) partition from the Note a new Promissory Note (the “September 2023 Partitioned Note”) in the original principal amount of $50,000 (the “September 2023 Exchange Amount”), (ii) cause the outstanding balance of the Note to be reduced by an amount equal to the September 2023 Exchange Amount, and (iii) exchange (the “September 2023 Exchange”) the September 2023 Partitioned Note for 898,069 shares of the Company’s common stock. On September 22, 2023 the fair value of the shares issued was approximately $99 thousand and we immediately recorded $49 thousand as stock issuance costs through a reduction to additional paid-in-capital.

The September 2023 Exchange was effected pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). There are no gross proceeds to the Company in respect of the September 2023 Exchange, provided that all of the September 2023 Exchange Amount will be applied to settle the September 2023 Partitioned Note.

The fair value measurement includes interest, at the stated rate, and this separate amount is not reflected in the consolidated statement of operations. The Company has recorded a liability of approximately $3.4 million in Notes Payable (current) for both Notes, as of September 30, 2023.

Insurance Financing

The Company obtained financing for certain Director & Officer liability insurance policy premiums. The agreement assigns First Insurance Funding (Lender) a first priority lien on and security interest in the financed policies and any additional premium required in the financed policies including (a) all returned or unearned premiums, (b) all additional cash contributions or collateral amounts assessed by the insurance companies in relation to the financed policies and financed by Lender, (c) any credits generated by the financed policies, (d) dividend payments, and (e) loss payments which reduce unearned premiums. If any circumstances exist in which premiums related to any Financed Policy could become fully earned in the event of loss, Lender shall be named a loss-payee with respect to such policy.

The total premiums, taxes and fees financed was approximately $0.9 million with an annual interest rate of 5.129%. In consideration of the premium payment by Lender to the insurance companies or the Agent or Broker, the Company unconditionally promised to pay Lender the amount Financed plus interest and other charges permitted under the Agreement. The Company paid the insurance financing through installment payments and paid the remaining balance in May 2023. Accordingly, the Company had no liability recorded as of September 30, 2023 and a liability of approximately $0.5 million recorded in Note Payable as of December 31, 2022.

8. Warrants

In August 2021, the Company entered into a Securities Purchase Agreement (the “August 2021 Securities Purchase Agreement”) with an institutional investor, pursuant to which the Company agreed to offer, issue and sell to this investor, in a registered direct offering, 1,300,000 shares of its Common Stock, pre-funded warrants to purchase up to an aggregate of 3,647,556 shares of Common Stock (the “Pre-Funded Warrants”), and warrants to purchase up to 2,473,778 shares of Common Stock (the “Warrants”). The combined purchase price of each share of Common Stock and accompanying Warrants is $5.053 per share. The combined purchase price of each Pre-Funded Warrant and accompanying Warrant is $5.052 (equal to the combined purchase price per share of Common Stock and accompanying Warrant, minus $0.001). The Company received gross proceeds of approximately $25.0 million, and after deducting the placement agent fees and expenses and offering costs, net proceeds were approximately $22.6 million (see Note 10).

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Each Warrant is exercisable for one share of Common Stock at an exercise price of $5.00 per share. The Warrants are immediately exercisable and will expire seven years from the original issuance date, or August 4, 2028. The Pre-Funded Warrants were offered in lieu of shares of Common Stock to the Purchaser whose purchase of shares of Common Stock in the Offering would otherwise result in the Purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the Purchaser, 9.99)% of the Company’s outstanding Common Stock immediately following the consummation of this Offering. Each Pre-Funded Warrant is exercisable for one share of Common Stock at an exercise price of $0.001 per share. The Pre-Funded Warrants are immediately exercisable and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. A holder (together with its affiliates) may not exercise any portion of the Warrant or Pre-Funded Warrant, as applicable, to the extent that the holder would own more than 4.99% (or, at the holder’s option upon issuance, 9.99)% of the Company’s outstanding Common Stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant or Pre-Funded Warrant, as applicable. The exercise price of the Warrants and the Pre-Funded Warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants and Pre-Funded Warrants. Each of the Warrants and the Pre-Funded Warrants may be exercised on a “cashless” basis under certain circumstances set forth in the Warrants and Pre-Funded Warrants.

The Company measured the fair value of the Common Stock and Pre-Funded Warrants based on the Company’s closing stock price on the date the August 2021 Purchase Agreement was entered into and the fair value of the Warrants was based upon a BSM valuation model. The BSM valuation model used the following assumptions: expected term of seven years, expected volatility of approximately 97%, risk-free interest rate of 0.96%, and dividend yield of 0%. The Company used the relative fair value method to allocate the net proceeds received from the sale of the Common Stock, the Pre-Funded Warrants and the Warrants of approximately $22.6 million. The Company recorded approximately $4.4 million, $12.2 million and $6 million, which represented the relative fair value of the Common Stock, Pre-Funded Warrants and Warrants, respectively, to stockholders’ deficit within the Company’s condensed consolidated balance sheet.

In December 2021, all August 2021 Pre-Funded Warrants were exercised. A total of 3,647,556 shares of Common Stock were issued in exchange for approximately $4,000 in cash as a result of the exercise.

In October 2022, the Company entered into a Securities Purchase Agreement (the “October 2022 Securities Purchase Agreement”) with a certain institutional and accredited investor, pursuant to which the Company agreed to offer, issue and sell to this investor, in a registered direct offering, 1,800,000 shares of common stock, pre-funded warrants to purchase an aggregate of 5,407,208 shares of Common Stock (the “2022 Pre-Funded Warrants”), and unregistered warrants to purchase up to 7,207,208 shares of Common Stock (the “2022 Warrants”). Each Warrant is exercisable for one share of Common Stock. The common stock was issued for $1.11 per share which represents the per share public price on the date of issuance. The 2022 Pre-Funded Warrants were issued for $1.109 per warrant and include a $0.001 per share exercise price and the 2022 Warrants have an exercise price of $1.11 per warrant. The 2022 Pre-Funded Warrants are exercisable immediately and the 2022 Warrants are exercisable six months after the closing date. The 2022 Pre-Funded Warrants do not expire and the 2022 Warrants expire on April 7, 2028. The Company received gross proceeds of approximately $8.0 million, and after deducting the placement agent fees and expenses and offering costs, net proceeds were approximately $7.9 million.

In August 2023, the Company entered into a Securities Purchase Agreement (the “August 2023 Securities Purchase Agreement”) with a certain institutional and accredited investor, in which the Company agreed to offer, issue and sell to this investor, pursuant to a registration statement on Form S-1, 4,000,000 shares of common stock, pre-funded warrants to purchase an aggregate of 6,000,000 shares of Common Stock (the “2023 Pre-Funded Warrants”), and unregistered warrants to purchase up to 10,000,000 shares of Common Stock (the “2023 Warrants”). Each Warrant is exercisable for one share of Common Stock. The common stock was issued for $0.20 per share which represents the per share public price on the date of issuance. The 2023 Pre-Funded Warrants were issued for $0.1999 per warrant and include a $0.001 per share exercise price and the 2023 Warrants have an exercise price of $0.20 per warrant. The 2023 Pre-Funded Warrants and the 2023 Warrants are exercisable immediately. The 2023 Pre-Funded Warrants do not expire and the 2023 Warrants expire on August 4, 2028. The Company received gross proceeds of approximately $2.0 million, and after deducting the placement agent fees and expenses and offering costs, net proceeds were approximately $1.7 million (see Note 9). 

The 2021 Pre-Funded Warrants, 2022 Pre-Funded Warrants and the 2023 Pre-Funded Warrants (collectively, “the Pre-Funded Warrants”) were offered in lieu of shares of Common Stock to the Purchaser whose purchase of shares of Common Stock in the offerings would otherwise result in the Purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the Purchaser, 9.99%) of the Company’s outstanding Common Stock immediately following the consummation of the offerings. Each Pre-Funded Warrant is exercisable for one share of Common Stock at an exercise price of $0.001 per share. The Pre-Funded Warrants are immediately exercisable and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. A holder (together with its affiliates) may not exercise any portion of the Warrant or Pre-Funded Warrant, as applicable, to the extent that the holder would own more than 4.99% (or, at the holder’s option upon issuance, 9.99%) of the Company’s outstanding Common Stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant or Pre-Funded Warrants, as applicable. The exercise price of the Warrants and the Pre-Funded Warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants and Pre-Funded Warrants. Each of the Warrants and the Pre-Funded Warrants may be exercised on a “cashless” basis under certain circumstances set forth in the Warrants and Pre-Funded Warrants agreements.

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In connection with the October 2022 Securities Purchase Agreement, the Company entered into a Warrant Amendment (the “Warrant Amendment”) with the investor to amend the 2021 Warrants. Pursuant to the Warrant Amendment, the 2021 Warrants were amended, effective upon the closing of the October 2022 Securities Purchase Agreement, so that the amended warrants have a reduced exercise price from $5.00 per share to $2.00 per share. All other terms and provisions remain in full force and effect. In connection with the August 2023 Securities Purchase Agreement, the Company entered into a Warrant Amendment with the investor to amend the 2021 Warrants. Pursuant to the Warrant Amendment, the 2021 Warrants were amended, effective upon the closing of the August 2023 Securities Purchase Agreement, so that the exercise price of the amended warrants was reduced from $2.00 per share to $0.20 per share and extended the original expiration date of such Existing Warrants to August 4, 2028. All other terms and provisions remain in full force and effect. Additionally, in connection with the August 2023 Securities Purchase Agreement, the Company entered into a Warrant Amendment with the investor to amend certain outstanding warrants that were previously issued in October 2022. Pursuant to the Warrant Amendment, the October 2022 Warrants were amended, effective upon the closing of the August 2023 Securities Purchase Agreement, so that the exercise price of the amended warrants was reduced from $1.11 per share to $0.20 per share. All other terms and provisions remain in full force and effect.

In January 2023, the investor exercised 3,044,000 of the October 2022 pre-funded warrants to purchase common stock and 3,044,000 shares of Common Stock were issued in exchange for approximately $3,000 in cash as a result of the exercise. In August 2023, the investor exercised 3,462,000 of the August 2023 pre-funded warrants to purchase common stock and 3,462,000 shares of Common Stock were issued in exchange for approximately $3,000 in cash as a result of the exercise.

9. Common Stock

As of September 30, 2023 the Company had reserved the following common stock for future issuance:

Shares reserved for exercise of outstanding options to purchase common stock	2,461,749
Shares reserved for vesting of restricted stock units	159,120
Shares reserved for exercise of outstanding warrants to purchase common stock	23,280,404
Shares reserved for issuance of future options	126,269
Total	26,027,542

Securities Purchase Agreement

In August 2023, the Company entered into a Securities Purchase Agreement (the “August 2023 Securities Purchase Agreement”) with a certain institutional and accredited investor, in which the Company agreed to offer, issue and sell to this investor, pursuant to a registration statement on Form S-1, 4,000,000 shares of common stock, pre-funded warrants to purchase an aggregate of 6,000,000 shares of Common Stock (the “2023 Pre-Funded Warrants”), and unregistered warrants to purchase up to 10,000,000 shares of Common Stock (the “2023 Warrants”). Each Warrant is exercisable for one share of Common Stock. The common stock was issued for $0.20 per share which represents the per share public price on the date of issuance. The 2023 Pre-Funded Warrants were issued for $0.1999 per warrant and include a $0.001 per share exercise price and the 2023 Warrants have an exercise price of $0.20 per warrant. The 2023 Pre-Funded Warrants are exercisable immediately and the 2023 Warrants are exercisable six months after the closing date. The 2023 Pre-Funded Warrants do not expire and the 2023 Warrants expire on August 4, 2028. The Company received gross proceeds of approximately $2.0 million, and after deducting the placement agent fees and expenses and offering costs, net proceeds were approximately $1.7 million.

In March 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional and accredited investors (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), 6,000,000 shares of its common stock, par value $0.0001 per share (the “Common Stock”). The purchase price of each share of Common Stock is $0.38 per share. The Purchase Agreement contains customary representations, warranties, covenants and indemnification rights and obligations of the Company and the Purchasers. The Offering closed in March 2023, and the Company received gross proceeds of approximately $2.28 million in connection with the Offering, before deducting placement agent fees and related offering expenses. The net proceeds to the Company from the Offering, after deducting the placement agent fees and expenses and the Company’s estimated offering expenses, was approximately $2.1 million.

In December 2022, the Company entered into a Securities Purchase Agreement with the Cystic Fibrosis Foundation (CFF) in which we agreed to offer, issue and sell 5,168,732 shares of Common Stock, par value $0.0001. The per share offering price of the shares was $0.94. Additionally, CFF agreed to increase the amount of grant award to provide additional $0.2 million. When combining the equity purchase with the additional grant award, we received total proceeds of $5.0 million.

On October 5, 2022, the Company entered into a securities purchase agreement (the “October 2022 Purchase Agreement”) with a certain institutional and accredited investor (the “Purchaser”), relating to the issuance and sale of 1,800,000 shares (the “Shares”) of common stock, par value $0.0001 per share (the “Common Stock”) and pre-funded warrants to purchase an aggregate of 5,407,208 shares of Common Stock (the “Pre-Funded Warrants”), at a purchase price of $1.11 per share. Concurrently with the sale of the Shares and the Pre-Funded Warrants, pursuant to the Purchase Agreement, the Company also sold to the investor unregistered warrants to purchase up to an aggregate of 7,207,208 shares of Common Stock (the “Warrant”) in a private placement. The aggregate gross proceeds to the Company from the offerings were approximately $8 million, excluding the proceeds, if any, from the exercise of the Pre-Funded Warrants and the Warrants

In March 2021, the Company entered into a Securities Purchase Agreement (the “March 2021 Securities Purchase Agreement”) with certain institutional and individual investors (the “Purchasers”), pursuant to which the Company agreed to offer, issue and sell to the Purchasers, in a registered direct offering, an aggregate of 1,037,405 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (“Common Stock”) for aggregate gross proceeds to the Company of approximately $7.0 million, and after deducting commissions and offering costs, net proceeds were approximately $6.4 million.

MedImmune Limited License Agreement

Effective July 12, 2021, the Company entered into the MedImmune License Agreement, pursuant to which MedImmune granted the Company an exclusive worldwide license for the development and commercialization of suvratoxumab, a Phase 3 ready fully human monoclonal antibody targeting Staphylococcus aureus alpha toxin (see Note 4). As part of the consideration for the MedImmune License Agreement, the Company issued 884,956 shares of its common stock to MedImmune. The fair value of the 884,956 shares of the Company’s common stock issued in connection with the MedImmune License agreement is approximately $6.5 million. The Company measured the fair value of the common stock issued to MedImmune based on the Company’s closing stock price on the effective date of the MedImmune License Agreement. The Company recognized the $6.5 million as research and development expense within its consolidated statement of operations and additional paid-in capital within equity in its consolidated balance sheet for the year ended December 31, 2021.

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On March 20, 2023, we received written notice from MedImmune Limited that it has terminated that certain License Agreement by and between MedImmune and us dated as of July 12, 2021, and as amended by Amendment No. 1 to License Agreement, dated as of August 9, 2021 (the “License Agreement”), pursuant to Section 9.2.1 of the License Agreement for non-payment of the Upfront Cash Payment which was due on December 31, 2021. The notice states that such termination shall be effective on March 30, 2023. As a result of the termination notice, the on-going AR-320-003 Phase 3 clinical study has been put on hold. We do not agree that we are in material breach of the License Agreement.

Based on the failure of MedImmune to assist in the necessary technology transfer pursuant to Section 3.5.2 of the License Agreement, we notified MedImmune on March 24, 2023 that it was in material breach of Section 3.5.2 and requested that the material breach be cured as soon as possible.

Nasdaq Stock Market

On July 17, 2023, Aridis Pharmaceuticals, Inc. (the “Company”) received written notice (the “Notice”) from the Nasdaq Stock Market, LLC (“Nasdaq”) that it would delist the Company’s shares of common stock from the Nasdaq Capital Market upon the opening of trading on July 19, 2023. As of September 30, 2023, the Company’s common stock was traded on the OTC Pink Sheets.

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 June 2020, the adoption of an amendment to the 2014 Plan to eliminate the evergreen provision and set the number of shares of common stock reserved for issuance thereunder to 2,183,692 shares was approved by the Company’s stockholders.

In June 2022, the shareholder approved an additional 750,000 shares to be reserved for the issuance of stock options to employees, directors, and consultants, under terms and provisions established by the Board of Directors.

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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 nine months ended September 30, 2023 is represented in the following table:

			Options Outstanding
	Shares					Weighted- Average
	Available		Number of			Exercise
	for Grant		Shares			Price
Balances at December 31, 2022	396,014		2,111,379		$	7.36
Options granted	(54,000	)	54,000		$	0.46
Options cancelled	113,060		(62,435	)	$	1.72
Balances at March 31, 2023	455,074		2,102,944		$	7.35
Options granted	(377,500	)	377,500		$	0.16
Options cancelled	167,868		(157,868	)	$	0.16
Balances at June 30, 2023	245,442		2,322,576		$	6.18
Options granted	(185,000	)	185,000		$	0.08
Options cancelled	65,827		(45,827	)	$	1.66
Balances at September 30, 2023	126,269		2,322,576		$	6.27

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 nine month periods ended September 30, 2023 and 2022 were estimated using the following assumptions:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
Expected term (in years)		6.00			6.00			6.00			6.00
Expected volatility		99%-100	%		99%-100	%		99%- 100	%		99%- 100	%
Risk-free interest-rate		4.43	%		2.44% - 3.03	%		3.31% - 4.43	%		1.72% - 3.03	%
Dividend yield		0	%		0	%		0	%		0	%

During the three and nine month periods ended September 30, 2023, the Company granted options to purchase 185,000 and 616,500 shares, respectively, with a weighted-average grant date fair value of $0.08 and $0.16 per share, respectively. During the three and nine month periods ended September 30, 2022, the Company granted options to purchase 35,000 and 379,569 shares with a weighted-average grant date fair value of $1.53 and $1.00 per share, respectively.

There were no options exercised during the three and nine month periods ended September 30, 2023 and 2022.

Stock-Based Compensation

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Research and development	$	135	$	159	$	428	$	385
General and administrative		65		190		227		776
Total	$	200	$	349	$	655	$	1,161

As of September 30, 2023, total unrecognized stock-based compensation expenses related to unvested stock options and RSUs was approximately $0.6 million, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.3 years.

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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 both the three and nine month periods ended September 30, 2023, and 2022, the Company recorded $0, 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 September 30, 2023, and December 31, 2022, the Company recorded approximately $6,000 and $33,000, 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.

On August 21, 2023, Aridis Pharmaceuticals, Inc. (the “Company”) sent written notice to Shenzhen Arimab Biopharmaceuticals Co., Ltd. (“Arimab”) stating that as of August 21, 2023, the Amended and Restated Technology License and Collaboration Agreement between Arimab, a joint venture of the Company and Shenzhen Hepalink Pharmaceutical Group Co., Ltd. dated as of August 6, 2018 (the “Agreement”) would terminate pursuant to Section 11.2 of the Agreement.

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, a party under common ownership of SIBV, entered into a License, Development and Commercialization Agreement (the “License Agreement”) (see Note 6).

On May 3, 2023, the Company sent written notice to SAMR stating that as of May 8, 2023, the License Agreement would terminate pursuant to Section 13.3(a) of the License Agreement for nonfulfillment of development obligations under the License Agreement.

As a result of termination of the License Agreement, the Company recognized approximately $19.6 million in license revenue during the nine-month period ended September 30, 2023. No license revenue had previously been recognized in connection with the License Agreement. The Company has no remaining portion of the nonrefundable upfront payment as a contract liability on its condensed consolidated balance sheet as of September 30, 2023 and has no further obligations under the License Agreement due to the termination.

The Company recorded an impairment loss of approximately $2.1 million of a capitalized contract asset related to the incremental costs of obtaining the License Agreement resulting from termination of the License Agreement during the nine-month period ended September 30, 2023. No impairment losses had previously been recorded in connection with the License Agreement.

Cystic Fibrosis Foundation

On December 7, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Cystic Fibrosis Foundation ( “CFF”), pursuant to which the Company agreed to offer, issue and sell to CFF in a private placement (the “PIPE”) 5,168,732 shares (the “Common Shares”) of common stock, par value $0.0001 (the “Common Stock”) for a purchase price of $0.938 per share for aggregate gross proceeds of approximately $4.85 million. In connection with the PIPE, CFF agreed not to sell or transfer any of the Common Shares, subject to certain customary exceptions, for a period of six months from the closing date of the PIPE.

12. Commitments and Contingencies

Facility Lease

The Company determines if an arrangement is a finance lease, operating lease or short-term lease at inception, or as applicable, and accounts for the arrangement under the relevant accounting literature. Currently, the Company is only party to a non-cancelable office space operating lease. Under the relevant guidance, the Company recognizes operating lease ROU assets and liabilities based on the present value of the future minimum lease payments over the lease term at the commencement date, using the Company’s assumed incremental borrowing rate of 6%, and amortizes the ROU assets and liabilities over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

In October 2020, the Company entered into a new lease agreement (the “Lease Agreement”) with Boccardo Corporation (the “Landlord”) pursuant to which the Company leased approximately 15,129 square feet of office and laboratory space in Los Gatos, California. In December 2020, the Company moved into the new facility which serves as the Company’s corporate headquarters and the Company has made leasehold improvements to the new facility of which approximately $378,000 may be reimbursed by the Landlord as certain criteria are met as defined in the Lease Agreement. The lease commenced in December 2020 and has an approximate five-year term with a three-year renewal option. Rental payments by the Company commenced on February 1, 2021. In connection with the Lease Agreement, the Company was required to deliver a security deposit in the form of a letter of credit of $500,000 to the Landlord, which is classified as restricted cash, noncurrent, in the Company’s condensed consolidated balance sheets at September 30, 2023, and December 31, 2022, respectively.

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As of January 1, 2022, the Company adopted ASC 842, Leases. The Company recognizes ROU assets and lease liabilities at the adoption date based on the present value of future minimum lease payments over the lease term. The discount rate used was the incremental borrowing rate of 6% in determining the present value of the future minimum lease payments. The Company recognized ROU assets of $1.9 million and lease liabilities of $2.3 million as of adoption date. As of September 30, 2023, the Company’s ROU assets and liabilities related to the Lease are as follows (in thousands):

ROU assets, net	$	1,073
Current portion of lease liabilities (included in current liabilities)		576
Lease liabilities, less current portion		854
Total lease liabilities	$	1,430

The future minimum lease payments for the new facility as of September 30, 2023 are as follows (in thousands):

Period ending:
Year ending December 31, 2023		158
Year ending December 31, 2024		646
Year ending December 31, 2025		666
Thereafter		57
Total lease payments		1,527
Less: imputed interest		(97	)
Present value of operating lease liabilities	$	1,430

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. None of these events occurred as of September 30, 2023. See “Development and License Agreements” in Note 6 of our Notes to the Condensed Consolidated Financial Statements.

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 a potential loss will be incurred and such amount can be reasonably estimated. As of September 30, 2023, and December 31, 2022, 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 Proceedings ongoing at September 30, 2023.

Legal Proceedings

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, although in a recent motion practice the plaintiff indicated that it wants the stock purchase agreement between the parties, entered into prior to the IPO, to be rescinded and a return of the original purchase price of $531,687. Discovery has been completed and the parties filed competing motions for summary judgment on all claims. The Court heard oral argument on those motions on January 12, 2023. The parties now await the Court’s decision. We believe that the claims in this complaint are without merit and intend to continue to defend vigorously against them.

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The Company submitted a complaint in Superior Court of the State of California, County of Santa Clara, against our former landlord on October 22, 2021, asserting claims for breach of contract, breach of the covenant of good faith and fair dealing, wrongful eviction/constructive eviction and unjust enrichment and violation of the unfair competition law. The claims arise from rent increases and the termination of the tenancy that we allege were not permitted by the agreement with the landlord. We seek to recover rent paid under protest, our deposit, moving and relocation expenses and consequential damages arising from disruption to our operations. The Company filed a first amended complaint on July 18, 2022 asserting the same claims. The landlord has filed a cross-complaint for damage to property and attorneys’ fees. The court has set a trial setting conference for February 20, 2024. The parties have agreed to mediate the dispute and mediation is on-going.

The Company accrues a liability for such matters when it is probable that potential loss will be incurred and such amount can be reasonably estimated. As of September 30, 2023, and December 31, 2022, no liability has been recognized in relation to these matters.

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. As of September 30, 2023, management has complied with all of the required grant terms. There are no grant audits currently in process.

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. In December 2022, the CFF further increased the award to approximately $7.6 million by adding the “Additional Award Amount” of $150,000 with amendment no 2. Under the award agreement, the CFF will make payments to the Company as certain milestones are met. See Note 6 for details of the grant agreement.

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Kermode Agreement

In February 2021, the Company entered into the Kermode Agreement, in which the Company received an upfront payment of $500,000 and received one milestone payment of $250,000 in December 2021. The Company will receive one more milestone payment of $250,000 from Kermode after certain research and development phases in the agreement are completed. The Company is also entitled to additional payments from Kermode for royalty payments on future net sales (see Note 6). In the event that the research and development efforts under the agreement are successful and if the Company elects to develop and commercialize products under certain provisions contained in the agreement, the Company shall pay to Kermode a 5% royalty of net sales from those products. None of these events occurred as of September 30, 2023.

13. Subsequent Events

On October 5, 2023, the Company received approval for its shares of common stock to trade on the OTCQB. The Company’s shares of common stock began trading on the OTCQB on October 6, 2023.

On October 18, 2023, the Company entered into an agreement (the “Lease Amendment”) with Boccardo Corporation (the “Landlord”) to amend its facility lease. Pursuant to the Lease Amendment, effective October 1, 2023, the Landlord agreed to reduce the base monthly rent in exchange for an extension of the lease term by seventeen months. In addition, the parties agreed to the expiration of a certain tenant improvement allowance, subject to final inspection of municipal authorities, of March 31, 2024.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “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. 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 will not be successful or confirm earlier results, meet expectations, 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;

● risks associated with delays, increased costs and funding shortages caused by or resulting from geopolitical disruptions, such as the conflict between Ukraine and Russia;

● management and employee operations and execution risks;

● loss of key personnel;

● competition;