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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 ~~March~~June 3130, 2023

☐

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 ~~The Nasdaq Capital Market~~OTC

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 June 230, 2023 was 36,077,532.

Table of Contents

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022	3
	Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023, and 2022 (unaudited)	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2023, and 2022 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2023, and 2022 (unaudited)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and six months ended June 30, 2023, and 2022 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 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	33
Item 4.	Controls and Procedures	4243
	PART II OTHER INFORMATION	4243
Item 1.	Legal Proceedings	4243
Item 1A.	Risk Factors	4344
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	4344
Item 3	Default Upon Senior Securities	4344
Item 4	Mine Safety Disclosures	4344
Item 5.	Other Information	4344
Item 6.	Exhibits	4445
Signatures		4546

PART I — FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANICAL STATEMENTS (UNADUITED)

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	March 31,			December 31,
	June 30,			December 31,
	2023			2022
	(unaudited)	~~(unaudited)~~
Assets
Current assets:
Cash and cash equivalents	$	~~1,320~~19		$	4,876
Restricted cash		—			183
Accounts receivable		—200			1,000
Other receivables		100			240
Contract costs		~~1,986~~—			1,986
Prepaid asset		3,~~160~~565			3,341
Total current assets		63,~~566~~884			11,626
Property and equipment, net		~~645~~569			730
Right-of-use assets, net		1,~~302~~188			1,417
Intangible assets, net		1514			17
Restricted cash, non-current		500			500
Contract costs, non-current		78—			78
Other assets		~~328~~327			327
Total assets	$	96,~~434~~482		$	14,695
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	46,~~119~~237		$	2,308
Accrued liabilities		98,~~408~~461			9,564
Lease liabilities		~~550~~563			538
Deferred revenue		19,091			20,173
Contract liabilities		380			20,173
Note payable		~~208~~—			519
Note payable (at fair value)		24,~~040~~730			3,781
Other liabilities		1523			15
Total current liabilities		3520,~~431~~394			36,898
Deferred revenue, non-current		737			737
Contract liabilities, non-current		—			737
Lease liabilities, non-current		1,~~148~~002			1,292
Total liabilities		3721,~~316~~396			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 March 31, 2023 and December 31, 2022)		—			—
Preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of June 30, 2023 and December 31, 2022)		—			—
Common stock (par value $0.0001; 100,000,000 shares authorized; 36,077,532 and 27,033,532 shares issued and outstanding as of March 31, 2023 and December 31, 2022)		4			3
Common stock (par value $0.0001; 100,000,000 shares authorized; 36,077,532 and 27,033,532 shares issued and outstanding as of June 30, 2023 and December 31, 2022)		4			3
Additional paid-in capital		168,~~684~~894			166,380
Accumulated other comprehensive income		56,~~912~~526			5,051
Accumulated deficit		(~~202~~190,~~482~~338	)		(195,666	)
Total stockholders’ deficit		(2714,~~882~~914	)		(24,232	)
Total liabilities and stockholders’ deficit	$	96,~~434~~482		$	14,695

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

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations ~~and Comprehensive Loss~~

(In thousands, except share and per share amounts)

	2023			2022			2023			2022
	Three Months Ended						Six Months Ended
	March 31,
	June 30,						June 30,
	2023			2022			2023			2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue:
Grant revenue	$	~~1,082~~45		$	~~1,187~~292		$	1,127		$	1,479
Operating expenses:
License revenue		19,602			—			19,602			—
Research and development		5,531			6,450
Total revenue		19,647			292			20,729			1,479
General and administrative		1,814			2,161
Operating expenses:
Total operating expenses		7,345			8,611
Research and development		4,668			6,348			10,199			12,798
Loss from operations		(6,263	)		(7,424	)
General and administrative		1,310			1,681			3,124			3,842
Other income (expense):
Total operating expenses		5,978			8,029			13,323			16,640
Interest income (expense), net		27			(248	)
Loss from operations		13,669			(7,737	)		7,406			(15,161	)
Other income		25			22
Other income (expense):
Change in fair value of note payable		(605	)		(116	)
Interest income (expense), net		3			8			30			(240	)
Net loss	$	(6,816	)	$	(7,766	)
Other income		26			23			51			45
Weighted-average common shares outstanding used in computing net loss per share available to common stockholders, basic and diluted		30,414,865			17,701,592
Change in fair value of note payable		(1,554	)		(273	)		(2,159	)		(389	)
Net loss per share to common stockholders, basic and diluted	$	(0.22	)	$	(0.44	)
Net income (loss)	$	12,144		$	(7,979	)	$	5,328		$	(15,745	)
Net loss	$	(6,816	)	$	(7,766	)
Earnings (net loss) per share:
Other comprehensive income		861			-
Basic	$	0.34		$	(0.45	)	$	0.16		$	(0.89	)
Total comprehensive loss	$	(5,955	)	$	(7,766	)
Diluted	$	0.33		$	(0.45	)	$	0.16		$	(0.89	)
Weighted-average common shares outstanding used in computing net loss per share available to common stockholders:
Basic		36,077,532			17,701,592			33,261,841			17,701,592
Diluted		36,572,960			17,701,592			33,917,422			17,701,592
Net income (loss)	$	12,144		$	(7,979	)	$	5,328		$	(15,745	)
Other comprehensive (loss) income		614			—			1,475			1,844
Total comprehensive income (loss)	$	12,758		$	(7,979	)	$	6,803		$	(13,901	)

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

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands, except share amounts)

	Three Months Ended March 31, 2023 (unaudited)
	Shares		Dollars		Capital		Deficit			Income		Deficit
	Three Months Ended June 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		6,000,000		1		2,056		—			—		2,057
Issuance of common stock for PF warrant exercise		3,044,000		0		3		—			—		3
Change in fair value - notes payable		—		—		—		—			861		861
Stock-based compensation		—		—		245		—			—		245
Net loss		—		—		—		(6,816	)		—		(6,816	)
Balances as of March 31, 2023		36,077,532	$	4	$	168,684	$	(202,482	)	$	5,912	$	(27,882	)
Change in fair value - notes payable		—		—		—		—			614		614
Stock-based compensation		—		—		210		—			—		210
Net loss		—		—		—		12,144			—		12,144
Balances as of June 30, 2023		36,077,532	$	4	$	168,894	$	(190,338	)	$	6,526	$	(14,914	)

	Three Months Ended March 31, 2022 (unaudited)
	Three Months Ended June 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, 2021		17,701,592	$	2	$	152,183	$	(165,295	)	$	—	$	(13,110	)
Balance		17,701,592	$	2	$	152,183	$	(165,295	)	$	—	$	(13,110	)
Stock-based compensation		—		—		467		—			—		467
Net loss		—		—		—		(7,766	)		—		(7,766	)
Balances as of March 31, 2022		17,701,592	$	2	$	152,650	$	(173,061	)	$	—	$	(20,409	)
Balance		17,701,592	$	2	$	152,650	$	(173,061	)	$	—	$	(20,409	)
Stock-based compensation		—		—		348		—			—		348
Stock issued in exchange for accrued liability		—		—		107		—			—		107
Net loss		—		—		—		(7,979	)				(7,979	)
Balances as of June 30, 2022		17,701,592	$	2	$	153,105	$	(181,040	)	$	—	$	(27,933	)

	Six Months Ended June 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		6,000,000		1		2,056		—			—		2,057
Issuance of common stock upon exercise of warrants		3,044,000		0		3		—			—		3
Change in fair value - notes payable		—		—		—		—			1,475		1,475
Stock-based compensation		—		—		455		—			—		455
Net income (loss)		—		—		—		5,328			—		5,328
Balances as of June 30, 2023		36,077,532	$	4	$	168,894	$	(190,338	)	$	6,526	$	(14,914	)

	Six Months Ended June 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	)
Balances		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		—		—		812		—			—		812
Net loss		—		—				(15,745	)		—		(15,745	)
Net income (loss)		—		—				(15,745	)		—		(15,745	)

Balances as of June 30, 2022		17,701,592	$	2	$	153,105	$	(181,040	)	$	—	$	(27,933	)
Balances		17,701,592	$	2	$	153,105	$	(181,040	)	$	—	$	(27,933	)

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

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	2023			2022
	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
	2023			2022
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss	$	(6,816	)	$	(7,766	)
Net income (loss)	$	5,328		$	(15,745	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		87150			~~131~~262
Stock-based compensation expense		245			467
Asset impairment		—			33
Other comprehensive income, industry specific credit risk on notes payable		861			—
Stock-based compensation expense		455			812
Change in fair value of note payable		(256	)		116
Other comprehensive income, industry specific credit risk on notes payable		1,475			—
Issuance of common stock in exchange for consulting services		—			3
Change in fair value of note payable		(801	)		389
Non-cash debt issuance expense		—			250
Changes in operating assets and liabilities:
Accounts Receivable		~~1,000~~800			—(1,000	)
Other receivables		140			(17352	)
Prepaid asset		~~180~~(224	)		~~151~~808
Contract asset		—2,064			~~(1,250~~—	)
Other assets		—			5
Lease liabilities		(1736	)		(511	)
Accounts payable		13,~~811~~929			(2,~~213~~684	)
Accrued liabilities and other liabilities		(~~155~~1,095	)		~~(98~~1,155	)
Deferred revenue		(1,082	)		63
Contract liabilities		(20,530	)		(230	)
Net cash used in operating activities		(48,~~002~~345	)		(1016,~~166~~305	)
Cash flows from investing activities:
Purchase of property and equipment		—			(2133	)
Net cash used in investing activities		—			(21	)
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 note payable		—1,750			5,000
Proceeds from issuance of common stock and warrants, net		2,~~056~~057			—
Payment on note payable		(1,485	)		—
Payment on financing of insurance premium		(519	)		(696	)
Payment on financing of insurance premium		(311	)		(557	)
Proceeds from pre-funded warrants exercises		3			—
Net cash provided by financing activities		~~263~~3,291			4,~~443~~304
Net (decrease) in cash, cash equivalents and restricted cash		(35,~~739~~040	)		(512,~~744~~034	)
Cash, cash equivalents and restricted cash at:
Beginning of period		5,559			19,986
End of period	$	~~1,820~~519		$	147,~~242~~952
Supplemental cash flow disclosures:
Cash paid for taxes	$	18		$	—2
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

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

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 ~~March~~June 3130, 2023 has been derived from the audited balance sheet at December 31, 2022 contained in the above referenced Form 10-K.

COVID-19

The COVID-19 pandemic has caused business disruption globally and may continue to cause an impact on patient enrollment globally and the rate of clinical site activation. The extent of the impact of COVID-19 on the Company’s future operational and financial performance will depend on certain developments, including the duration and spread of the pandemic, and impact on the Company’s clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact the Company’s future financial condition or results of operations remains uncertain.

Going Concern

The Company has had recurring losses from operations since inception and had negative cash flows from operating activities during the ~~three~~six months ended ~~March~~June 3130, 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~~ available on-hand.

The Company’s research and development expenses and resulting cash burn during the ~~three~~six months ended ~~March~~June 3130, 2023, were largely ~~due~~ due to costs associated with customary study closure activities associated with the recently completed Phase 3 study of AR-301 for the treatment of ventilator associated pneumonia (“VAP”) caused by the Staphylococcus aureus bacteria, 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. Current development activities are focused on AR-301, AR-320, and AR-501. However, going forward in the ~~second~~third quarter of 2023, we expect our expenses associated with the AR-301 and AR-320 programs to significantly decrease until the clinical development activities resume.

The Company plans to fund its cash flow needs through ~~current cash on hand and~~ future debt and/or equity financings which we may obtain ~~through~~ 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 ~~March~~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 ~~June~~October 3031, 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.

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

~~There~~The ~~was~~Company recognized $45,000 in grant revenue from one customer during the three months ended June 30, 2023, and $1.1 million in grant revenue from three customers ~~for~~during the ~~three~~six months ended ~~March~~June 3130, ~~2023~~2022, each individually ~~being~~comprising 5%, 1716% and 7879% of grant revenue for the six-month period accounting for 5% of total revenue. The Company recognized $0.3 million and $1.2 5 million in grant revenue from three customers during the three and six months ended ~~March~~June 3130, 2022, each individually ~~being~~comprising 1017%, 2428% and 6655% ~~accounting for 100%~~ of ~~total~~grant revenue. Asfor the ofsix-month ~~March~~period ~~31,~~accounting ~~2023,~~for ~~and~~100% ~~December~~of ~~31,~~total ~~2022, there were no accounts receivable~~revenue.

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

Accounts receivable from one customer were $0.2 million as of June 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):

Schedule of Cash, Cash Equivalents ~~And~~and Restricted Cash

	March 31,		December 31,
	June 30,		December 31,
	2023		2022
Cash and cash equivalents	$	~~1,320~~19	$	4,876
Restricted cash – current		-		183
Restricted cash – long-term		500		500
Restricted cash – non-current		500		500
Total cash, cash equivalents and restricted cash	$	~~1,820~~519	$	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~~ 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 ~~March~~June 3130, 2023, and December 31, 2022, there were ~~zero~~ $0.2 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 also 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.

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~~ 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 ~~March~~June 3130, 2023 and approximately $227,000 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.

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

Contract Assets

The incremental costs of obtaining a contract under ASC 606 (i.e., costs that would not have been incurred if the contract had not been obtained) are recognized as an asset in the Company’s condensed consolidated balance sheets if the Company expects to recover them (see Note 6). Capitalized costs will be amortized to the respective expenses using a systematic basis that mirrors the pattern in which the Company transfers control of the goods and service to the customer. At each reporting date, the Company determines whether 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 ~~$2.1~~zero ~~million~~ at ~~March~~June 3130, 2023 and $2.1 million at December 31, 2022. For the ~~three~~six months ended ~~March~~ 31June 30, 2023, and 2022, there was no ~~amortization~~ amortization of the contract assets. ~~and~~As ~~there~~of ~~have~~June ~~been~~30, ~~no impairments~~2023 as$2.1 million of ~~March~~contract ~~31,~~assets ~~2023~~were impaired in connection with the termination of a license agreement.

~~Deferred Revenue~~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 ~~March~~June 3130, 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.

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 ~~increased~~is derived from ~~$5,051,000~~the ~~for~~change ~~the~~in ~~year~~credit ~~ended~~risk ~~December~~calculated ~~31,~~by ~~2022~~our tofair ~~$5,912,000~~value ~~for~~option ~~the~~valuation ~~quarter~~in ~~ended~~connection ~~March~~with ~~31,~~the Note ~~2023~~Purchase .Agreements ~~This~~with ~~relates~~Streeterville toCapital, ~~the~~LLC. ~~change~~Accumulated inother ~~credit~~comprehensive ~~risk~~income ~~calculated~~increased byfrom ~~our~~$5.1 ~~fair~~million ~~value~~at ~~option~~December ~~valuation~~31, 2022 ~~for~~to ~~the~~$6.5 ~~Note~~million ~~Purchase~~at ~~Agreements~~June ~~with Streeterville Capital~~30, ~~LLC~~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.

For the three and six months ended ~~March~~June 3130, 2023, the number of shares used to compute basic earnings (net loss) per share were 36.1 million shares and ~~2022~~33.3 million shares, ~~there~~respectively. isFor nothe ~~difference~~three inand six months ended June 30, 2023 the number of shares used to compute ~~basic and~~ diluted ~~net~~earnings (net loss) per share ~~due~~were to36.6 ~~the~~million ~~Company’s~~shares ~~net~~and ~~loss~~33.9 ~~position~~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):

Schedule of Computation of ~~The~~the Basic ~~And~~and Diluted Net Loss Per Share

Numerator:	2023			2022
	Three Months Ended						Six Months Ended
	Three Months Ended
	June 30,						June 30,
	March 31,
	2023			2022			2023		2022
Numerator:	2023			2022
	(unaudited)			(unaudited)			(unaudited)		(unaudited)
	(unaudited)			(unaudited)
Numerator:
Net loss available to common stockholders (basic and diluted)	$	(6,816	)	$	(7,766	)
Net income (loss) available to common stockholders (basic and diluted)	$	12,144		$	(7,979	)	$	5,328	$	(15,745	)
Denominator:
Weighted-average common shares outstanding used in computing net loss per share available to common stockholders, basic and diluted		30,414,865			17,701,592
Weighted-average common shares outstanding used in computing net loss per share available to common stockholders:
Net loss per share to common stockholders (basic and diluted)	$	(0.22	)	$	(0.44	)
Basic		36,077,532			17,701,592			33,261,841		17,701,592
Diluted		36,572,960			17,701,592			33,917,422		17,701,592
Earnings (net loss) per share to common stockholders, basic and diluted
Basic	$	0.34		$	(0.45	)	$	0.16	$	(0.89	)
Diluted	$	0.33		$	(0.45	)	$	0.16	$	(0.89	)

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

Schedule of Potentially Dilutive Securities ~~Were~~were Excluded ~~From~~from ~~The~~the Computation of Diluted Net Loss Per Share

	2023		2022
	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
	2023		2022
	(unaudited)		(unaudited)
Stock options to purchase common stock		2,~~102~~012,~~944~~847		12,~~949~~105,~~030~~715
Restricted stock units		325,540		-
Common stock warrants		10,742,404		3,592,905
Potentially dilutive securities excluded from computation of diluted net loss per share		13,170,888		5,541,935
Potentially dilutive securities		12,755,251		5,698,620

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.

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 ~~March~~June 3130, 2023 and December 31, 2022 (in thousands):

	March 31, 2023
	June 30, 2023
Liabilities measured at fair value on a recurring basis	Level 1		Level 2		Level 3		Total
Streeterville notes payable		—		—		2,040		2,040
Notes payable (fair value)		—		—		4,730		4,730
Total liabilities measured at fair value		—		—		24,~~040~~730		24,~~040~~730

	December 31, 2022
	Level 1		Level 2		Level 3		Total
Streeterville notes payable		—		—		3,781		3,781
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:

Schedule of Estimated Fair Value

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

Quarter ended March 31, 2023	Streeterville Notes Payable
Six months ended June 30, 2023	Streeterville Notes Payable
Beginning fair value of Level 3 liability		3,781
Borrowings on notes payable		1,750
Repayments		(1,485	)
Change in fair value		~~605~~2,159
Change in instrument specific credit risk		(~~861~~1,475	)
Ending fair value of Level 3 liability		24,~~040~~730

Streeterville Note

The fair value of the Streeterville Note as of ~~March~~June 3130, 2023 amounting to $24.07 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~~ measurement for the periods ended ~~March~~June 3130, 2023 and December 31, 2022:

	Range of Inputs
	(risk free rate)
Unobservable Inputs	2023			2022
Risk free rate		45.70% - 45.85	%		2.1% - 4.7	%
Option adjusted spread		15.0	%		10.0~~%-10.0~~	%
Illiquidity discount		3.75	%		2.5~~% - 2.5~~	%
Concluded discount rate		8.5275% - 89.5925	%		4.75% - 8.5	%

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):

Schedule of Property and Equipment, Net

	March 31,			December 31,
	June 30,			December 31,
	2023			2022
	(unaudited)
Lab equipment	$	2,~~246~~232		$	2,246
Leasehold improvements		527			527
Total property and equipment		2,~~773~~759			2,773
Less: Accumulated depreciation		(2,~~128~~190	)		(2,043	)
Property and equipment, net	$	~~645~~569		$	730

Depreciation expense was approximately $8661,000 and $~~482~~130,000 for the three months ended ~~March~~June 3130, 2023 and 2022, respectively, and approximately $147,000 and $261,000 for the six months ended June 30, 2023 and 2022.

Intangible Assets, net

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

Schedule of Intangible Assets, Net

	March 31,			December 31,
	June 30,			December 31,
	2023			2022
	(unaudited)
Licenses	$	81		$	81
Less: Accumulated amortization		(6667	)		(64	)
Intangible assets, net	$	1514		$	17

Amortization expense was approximately $12,000 for ~~both~~each of the three month periods ended ~~March~~June 3130, 2023 and 2022, and approximately $3,000 for each of the six month periods ended June 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.

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 ~~March~~June 3130, 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 20th, 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 ~~must~~has bebeen 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):

Schedule of Accrued Liabilities

	March 31,		December 31,
	June 30,		December 31,
	2023		2022
	(unaudited)
Research and development services	$	87,~~758~~928	$	9,000
Payroll related expenses		~~532~~519		456
Professional services and other		~~118~~14		108
Accrued liabilities	$	98,~~408~~461	$	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).

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 six months ended ~~March~~June 3130, 2023 and 2022, respectively. As As of ~~March~~June 3130, 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 project 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.

~~For~~Research ~~research~~ and development costs incurred at non-EU sites, weare ~~recognize~~recognized ~~these expenses~~ as incurred. WeThe Company recognized research and development expenses of $1.5 million and $0.5 million for the three and six months ended ~~March~~June 3130, 2023, respectively, and approximately $5.5 million for the year ended December 31, 2022 at non-EU sites.

~~For~~Research ~~research~~ and development costs incurred at EU sites, weare ~~recognize~~recognized aas ~~liability~~incurred for 25% of these costs. Research and development expenses of approximately $1.9 million and $2.3 million were incurred at EU sites for the three and six months ended ~~March~~June 3130, 2023, respectively, and approximately $3.8 million for the year ended December 31, 2022. Of this gross expense amount, the EU ~~has~~ contributed services of 75%, or $0.3 million and $1.47 million for the three and six months ended ~~March~~June 3130, 2023, respectively, and $2.9 million for the year ended December31, 2022. Thus, our liability presented on the accompanying condensed consolidated balance sheet is $1.45 million as of ~~March~~June 3130, 2023 and $1.0 million as of December 31, 2022, and are presented within ~~Other~~ 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 ~~months~~and six month periods ended ~~March~~June 3130, 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 $~~0.15~~150,000 ~~million~~ 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.

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 as of ~~March~~June 3130, 2023, the transaction price for the Phase 2a clinical trial contract was $3.02 million as achievement of the three development-based milestones was achieved during the year ended December 31, 2022 and a partial completion was achieve of the fourth milestone during the quarter ended June 30, 2023. As of ~~March~~June 3130, 2023, the amount of the ~~remaining~~ ~~two~~single remaining development-based milestone ~~milestones~~ could not be included in the transaction price for this contract as it was contingent on successful completion of the remaining ~~two milestones~~ milestone, and it was not probable that a significant reversal of cumulative revenue recognized would not occur if ~~those~~that ~~milestones~~milestone were included in the transaction price. The Company recorded a contract liability for the remaining consideration of approximately $0.24 million to deferred revenue, current, on its consolidated balance sheet as of ~~March~~June 3130, 2023.

~~For~~The ~~each~~Company recognized grant revenue from the CFF Agreement of approximately $45,000 and $894,000 during the three ~~months~~and six month periods ended ~~March~~June 3130, 2023, respectively, and ~~2022~~approximately $36,000 and $815,000 during the ~~Company~~three ~~recognized~~and ~~revenue~~six ~~from~~month ~~the~~periods ~~CFF~~ended ~~Agreement~~June of30, $02022, respectively.~~8 million.~~

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.

~~For~~The ~~the~~Company ~~quarter~~recognized ~~ended~~approximately ~~March~~$0 ~~31,~~and ~~2023~~$183,000 in ~~the~~grant ~~Company recognized~~ revenue ofrelated ~~approximately~~to ~~$0.2~~the ~~million~~Grant ~~from~~Agreement for the ~~Grant~~three ~~Agreement,~~and ~~based~~six onmonth ~~expenses incurred~~periods ended June 30, 2023 and ~~paid~~approximately to$132,000 ~~partners~~and $252,000 toin grant ~~assist~~revenue ~~with~~for the ~~research~~three and ~~development~~six ~~services~~month periods ended June 30, 2022, respectively. The Company eliminated the contract liability in in deferred revenue, current, on its condensed consolidated balance sheet as of ~~March~~June 3130, 2023, as all of 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. The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of specified milestones related to completion of certain trials and regulatory approvals as defined in the License Agreement. Further, the Company may receive additional royalty-based payments from SAMR if certain sales levels on licensed products are achieved as defined in the License Agreement.

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.

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

The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of specified milestones related to completion of certain trials and regulatory approvals as defined in the License Agreement. Further, the Company may receive additional royalty-based payments from SAMR if certain sales levels on licensed products are achieved as defined in the License Agreement. The Company concluded that these milestones and royalty payments each contain a significant uncertainty associated with a future event. As such, these milestone and royalty payments are constrained at contract inception and are not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these payments. At the end of each reporting period, the Company will update its assessment of whether the milestone and royalty payments are constrained by considering both the likelihood and magnitude of the potential revenue reversal. At March 31, 2023 and December 31, 2022 the Company performed an assessment and determined that these milestone and royalty payments are constrained.

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.

The Company determined that the intellectual property licensed under the License Agreement represents functional intellectual property and it has significant standalone functionality and therefore should be recognized at a point in time upon satisfying the performance obligations. The Company intended to satisfy the performance obligations upon transfer of the licenses and know-how to SAMR to satisfy these performance obligations by March 31, 2023.

The Company determined that no performance obligations or material promises were satisfied as of March 31, 2023, and therefore, no revenue related to the License Agreement was recognized for the three months ended March 31, 2023, and 2022. The Company has recorded contract liabilities resulting from the License Agreement of approximately $18.7 million and $18.7 million to deferred revenue, current, and approximately $854,000 and $913,000 to deferred revenue, noncurrent, on its consolidated balance sheets as of March 31, 2023, and December 31, 2022, respectively. The Company capitalized a contract asset resulting from the License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License Agreement on its consolidated balance sheets, of which approximately $2.0 million and $2.0 million is classified as current, and approximately $90,000 and $96,000 is classified as noncurrent, as of March 31, 2023, and December 31, 2022, respectively.

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 approximately $19.6 million in license revenue for the three month period ended June 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 June 30, 2023 and has no further obligations under the License Agreement due to the termination.

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 $51,000 in grant revenue related to the Kermode Agreement for the three ~~months~~and six month periods ended ~~March~~June 3130, 2023 and approximately $~~288~~125,000 and $413,000 in grant revenue for the three ~~months~~and six month periods ended ~~March~~June 3130, 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 ~~March~~June 3130, 2023 as the statement of work was considered completed.

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.

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.

~~The~~On ~~fair~~July ~~value~~20, ~~measurement~~2023, ~~includes~~Streeterville ~~interest,~~provided ata waiver with respect to the ~~stated~~breach ~~rate,~~of ~~and~~Section ~~this~~4(ii) ~~separate~~of ~~amount~~that iscertain ~~not~~Note ~~reflected~~Purchase Agreement dated November 23, 2021, in connection with the ~~consolidated~~recent ~~statement~~ delisting of ~~operations~~the Company’s common stock from Nasdaq to OTC Markets Pink Sheets. This ~~The~~in ~~Company~~turn ~~has~~means ~~recorded~~that ano ~~liability~~such Event of ~~approximately~~Default $2has occurred pursuant to Section 4.01(l) ~~million~~of ~~for~~Secured Promissory Note ~~Payable~~#1 dated November 23, 2021, with respect to the recent delisting. Additionally, Streeterville provided a waiver with respect to the breach of Section 4(~~current~~ii) and ~~for~~4(iii) ~~both~~of ~~Notes~~that certain Note Purchase and Loan Restructuring Agreement dated April 26, as2023, in connection with the recent delisting of ~~March~~the Company’s common stock from Nasdaq to OTC Markets Pink Sheets. This in turn means that no such Triggering Event has occurred 31pursuant to Section 4.1(h) of Secured Promissory Note dated April 26, 2023, with respect to the recent delisting.

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.

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 $4.7 million in Notes Payable (current) for both Notes, as of June 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 is 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 promises to pay Lender the amount Financed plus interest and other charges permitted under the Agreement. AtThe ~~March~~Company ~~31,~~paid ~~2023~~the ~~and~~insurance financing through installment ~~December~~payments ~~31,~~and ~~2022,~~paid the ~~Company~~remaining ~~recognized~~balance ~~approximately~~in ~~$208,000 and~~May ~~$519~~2023. Accordingly,~~000, respectively,~~ asthe ~~insurance~~Company ~~financing~~had ~~note~~no ~~payable~~liability inrecorded ~~its~~as ~~consolidated~~of ~~balance~~June ~~sheet.~~30, ~~The~~2023 ~~Company~~and ~~paid~~a ~~the~~liability of ~~insurance~~approximately ~~financing through~~$0.5 ~~installment~~million ~~payments~~recorded ~~with~~in ~~the~~Note ~~last~~Payable ~~payment~~as ~~made~~of inDecember ~~May~~31, ~~2023~~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).

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 of the 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 (see Note 9)

The 2021 Pre-Funded Warrants and 2022 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.

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. On the date of the amendment, the Company calculated ~~the~~ the fair value, using the Black -Scholes -Merton (“BSM”) option pricing model, of the 2021 Warrants immediately prior to the Warrant Amendment and immediately after the Warrant Amendment. On the date of the exchange, the 2021 Warrants were valued at $0.716 ~~and~~ and $0.843, respectively, using the original and modified terms of the 2021 Warrants. The incremental change in fair value was deemed to be be $314,170, which was included as equity issuance costs related to the October 2022 Securities Purchase Agreement.

In January 2023, Armistice exercised 3,044,000 warrants to purchase common stock.

9. Common Stock

As of ~~March~~June 3130, 2023 the Company had reserved the following common stock for future issuance:

Shares reserved for exercise of outstanding options to purchase common stock			2,~~102~~322,~~944~~576
Shares reserved for vesting of restricted stock units			~~325~~315,540
Shares reserved for exercise of outstanding warrants to purchase common stock			10,742,404
Shares reserved for issuance of future options			~~455~~245,~~074~~442
Total			13,625,962

Securities Purchase Agreement

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.

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.

ATM Agreement

On January 19, 2022, the Company entered into an At-the-Market (“ATM”) Sales Agreement (“Sales Agreement”) with Virtu Americas LLC (“Virtu”), as sales agent. Pursuant to the terms of the Sales Agreement, the Company may issue and sell from time-to-time shares of its common stock, par value $0.0001 per share, through Virtu, acting as its sales agent, or directly to Virtu, acting as principal. Pursuant to the Company’s prospectus supplement filed on January 19, 2022, the Company may issue and sell shares of its common stock having an aggregate offering price of up to $25.0 million.

Under the Sales Agreement, Shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-233601) filed with the Securities and Exchange Commission (the “SEC”) on September 3, 2019, declared effective by the SEC on September 5, 2019. In addition, under the Sales Agreement, sales of Shares may be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.

The Company will pay Virtu a commission rate of up to 3.0% of the gross proceeds from each sale of Shares and has agreed to provide Virtu with customary indemnification and contribution rights. The Company will also reimburse Virtu for certain specified expenses in connection with entering into the Sales Agreement. The Company has no obligation to sell any of the Shares under the Sales Agreement and may at any time suspend the offering of its common stock upon notice and subject to other conditions. The Sales Agreement contains customary representations, warranties and agreements by the Company, other obligations of the parties and termination provisions.

As of March 31, 2023, the Company had not sold any shares of common stock under the ATM Sales Agreement. The ATM Sales Agreement facility currently cannot be used without the Company updating certain required conditions that are expired. The Company presently has no plans to update such required conditions.

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.

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 ~~three~~six months ended ~~March~~June 3130, 2023 is represented in the following table:

					Options/RSUs Outstanding
				Options Outstanding
	Shares	~~Shares~~					Weighted-	~~Weighted-~~
	Available	~~Available~~		Number of	~~Number of~~		Average	~~Average~~
	for Grant	~~for Grant~~		Shares	~~Shares~~		Exercise Price	~~Exercise 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

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 ~~months~~and ~~ended~~six ~~March~~month ~~31,~~periods ended June 30, 2023 and 2022 were estimated using the following assumptions:

	Three Months Ended						Six Months Ended
	March 31,
	June 30,						June 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		34.6504% - 4.90	%		2.44% - 3.03	%		4.28% - 4.90	%		1.72% - 3.03	%
Dividend yield		0	%		0	%		0	%		0	%

During the three ~~months~~and six month periods ended ~~March~~June 3130, 2023, ~~and 2022,~~ the Company granted options to purchase 54377,~~000~~500 and 431,500 shares, respectively, with a weighted-average grant date fair value of $0.16 per share. During the three and six month periods ended June 30, 2022, the Company granted options to purchase 258,934 and 334,569 shares with a weighted-average grant date fair value of $0.4684 and $10.9295 per share, respectively.

There were no options exercised during the three ~~months~~and six month periods ended ~~March~~June 3130, 2023 and 2022.

Stock-Based Compensation

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

	2023		2022		2023		2022
	Three Months Ended				Six Months Ended
	March 31,
	June 30,				June 30,
	2023		2022		2023		2022
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Research and development	$	~~144~~149	$	~~166~~169	$	293	$	332
General and administrative		~~101~~61		~~301~~287		162		480
Total	$	~~245~~210	$	~~467~~456	$	455	$	812

As of ~~March~~June 3130, 2023, total unrecognized stock-based compensation expenses related to unvested stock options and RSUs was approximately $1.0 .9 million, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.3 years.

11. Related Parties

Joint Venture

On February 11, 2018, the Company entered into a Joint Venture (“JV”) Agreement with Hepalink which is a related party and principal shareholder in the Company, pursuant to which the Company formed a JV Entity for developing and commercializing products for infectious diseases in the greater China territories. It was agreed by the parties that the Company shall be reimbursed for certain legal and contract manufacturing expenses related to the clinical drug supply for a Phase 3 clinical study of AR-301 and the clinical drug supply for a clinical study of AR-105. For the three months ended ~~March~~June 3130, 2023, and ~~2021~~2022, the Company recorded approximately $~~17,000~~0 and $3316,000, respectively, as a reduction to operating expenses in the condensed consolidated statements of operations for amounts reimbursed to the Company by the JV Entity under this arrangement. As of ~~March~~June 3130, 2023, and December 31, ~~2021~~2022, the Company recorded approximately $17,000 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.

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).

The Company determined that no performance obligations or material promises were satisfied as of March 31, 2023, and therefore, no revenue related to the License Agreement was recognized for the three months ended March 31, 2023. The Company has recorded contract liabilities resulting from the License Agreement of approximately $18.9 million to deferred revenue, current, and approximately $0.7 million to deferred revenue, noncurrent, on both condensed consolidated balance sheets as of March 31, 2023, and December 31, 2022. The Company capitalized a contract asset resulting from the License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License Agreement on its condensed consolidated balance sheets, of which approximately $2.0 million is classified as current, and approximately $0.1 million is classified as noncurrent, as of both March 31, 2023, and December 31, 2022, respectively.

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.

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 three months ended June 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 ~~March~~June 3130, 2023, and December 31, 2022, respectively.

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 ~~March~~June 3130, 2023, the Company’s ROU assets and liabilities related to the Lease are as follows (in thousands):

ROU assets, net	$	1,~~302~~188
Current portion of lease liabilities (included in current liabilities)		~~550~~563
Lease liabilities, less current portion		1,~~148~~002
Total lease liabilities	$	1,~~698~~565

The future minimum lease payments for the new facility as of ~~March~~June 3130, 2023 are as follows (in thousands):

Period ending:
Year ending December 31, 2023		~~471~~315
Year ending December 31, 2024		646
Year ending December 31, 2025		666
Thereafter		57
Total lease payments		1,~~840~~684
Less: imputed interest		(~~142~~119	)
Present value of operating lease liabilities	$	1,~~698~~565

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~~ development and regulatory activities. None of these events occurred as of ~~March~~June 3130, 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 ~~March~~June 3130, 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 ~~March~~June 3130, 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.

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. Discovery in the case is proceeding and no trial date has been set. AtThe ~~the~~parties ~~recent~~have ~~case~~agreed ~~management~~to ~~conference,~~mediate the ~~court~~ ~~set~~dispute aand ~~further~~have ~~case~~selected ~~management~~a ~~conference for September 7, 2023~~mediator. The court ~~advised~~has ~~the~~set ~~parties~~a totrial ~~mediate~~setting ~~the dispute prior to the next case management~~ conference ~~and~~for ~~indicated~~February ~~that~~20, ~~if no settlement is reached prior to that conference, a trial date will be set~~2024.

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 ~~March~~June 3130, 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 ~~March~~June 3130, 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. 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.

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 ~~March~~June 3130, 2023.

13. Subsequent Events

On ~~April~~July 1917, 2023, weAridis ~~received~~Pharmaceuticals, ~~written~~Inc. ~~notice~~(the ~~from~~“Company”) ~~Nasdaq indicating that Nasdaq had not~~ received ~~our~~written ~~Form~~notice ~~10-K~~(the ~~for~~“Notice”) from the ~~year ended~~Nasdaq ~~December~~Stock 31Market, ~~2022~~LLC ~~and~~(“Nasdaq”) ~~this~~that ~~serves~~it aswould andelist ~~additional~~the ~~basis~~Company’s ~~for~~shares ~~delisting~~of ~~our~~common ~~securities~~stock from ~~The~~the Nasdaq Capital Market~~. Since we~~ ~~already~~upon ~~had~~the aopening ~~hearing~~of ~~date~~trading ofon ~~May~~July 419, 2023. ~~before~~The ~~the~~Company’s ~~Hearings~~common ~~Panel~~stock ~~for~~will ~~our~~be ~~failure~~traded toon ~~comply with~~ the ~~Market~~OTC ~~Value~~Pink ~~Rule,~~Sheets weand ~~needed to request a stay of~~ the ~~suspension~~Company will ofseek ~~our~~to ~~securities~~establish ~~pending~~relationships awith ~~Hearings~~market ~~Panel~~makers ~~decision. Subsequent~~ to ~~the~~provide ~~hearing,~~additional wetrading ~~requested~~opportunities ~~a stay~~in of the ~~suspension and are awaiting the Hearings Panel~~Company’s ~~decision~~stock.

OnIn ~~April~~August ~~20,~~ 2023, the Company ~~received~~entered ~~written~~into ~~notice~~a ~~from~~Securities ~~Nasdaq~~Purchase ~~that~~Agreement ~~due~~(the to“August ~~the~~2023 ~~resignation~~Securities ofPurchase ~~Craig~~Agreement”) ~~Gibbs~~with a certain institutional and accredited investor, ~~Ph.D.~~pursuant ~~from~~to which the Company~~’s board~~ agreed to offer, issue and ~~audit~~sell ~~committee~~to onthis ~~March~~investor, 27in a registered direct offering, ~~2023~~4,000,000 ~~the~~shares ~~Company~~of nocommon ~~longer~~stock, ~~complies~~pre-funded ~~with~~warrants ~~Nasdaq’s~~to ~~independent~~purchase ~~director~~an ~~and~~aggregate ~~audit~~of ~~committee requirements~~6,000,000 asshares ~~set~~of ~~forth~~Common Stock in(the ~~Listing~~“2023 ~~Rule~~Pre-Funded ~~5605.~~Warrants”), ~~Pursuant~~and unregistered warrants to ~~Nasdaq’s~~purchase ~~cure~~up ~~period~~to 10,000,000 shares of Common Stock (the “2023 ~~Company~~Warrants”). Each Warrant is ~~required~~exercisable tofor ~~regain~~one ~~compliance~~share of Common Stock. The common stock was issued for $0.20 per share bywhich represents the ~~earlier~~per ofshare public price on the ~~Company’s~~date ~~next~~of ~~annual~~issuance. ~~shareholders’~~The ~~meeting~~2023 orPre-Funded ~~March~~Warrants ~~27,~~were ~~2024~~issued orfor if$0.1999 per warrant and include a $0.001 per share exercise price and the ~~next~~2023 ~~annual~~Warrants ~~shareholders’~~have an exercise price of $0.20 per warrant. The 2023 Pre-Funded ~~meeting~~Warrants isare ~~held~~exercisable ~~before~~immediately ~~September~~and ~~25,~~the 2032 Warrants are exercisable six months after the closing date. The 2023, ~~then~~Pre-Funded Warrants do not expire and the 2023 Warrants expire on August 4, 2028. The Company ~~must~~received ~~evidence~~gross ~~compliance~~proceeds noof ~~later~~approximately ~~than~~$2.0 ~~September~~million, 25and after deducting the placement agent fees and expenses and offering costs, ~~2023~~net proceeds were approximately $1.7 million

On April 26, 2023, the Company entered into a Note Purchase and Loan Restructuring Agreement with Streeterville Capital, LLC. We had previously issued to the Investor in February 2021, a secured promissory note in the original principal amount of $5,250,000. Pursuant to the Agreement, the Investor agreed to invest an additional investment amount of up to $2,500,000; with $1,000,000 being delivered to the Company at closing and the remaining $1,500,000 to be placed into escrow under a secured line of credit facility with the total original principal amount of the secured promissory note being up to $9,286,770.80 (the “Secured Note”). Closing occurred on April 26, 2023 (the “Issuance Date”). The Note carries an original issue discount of $606,564.45. The Note bears interest at the rate of 8% per annum and matures on April 26, 2024. Beginning on October 26, 2023, on the same day of each month for the following five (5) calendar months thereafter, the Company will be obligated to reduce the Outstanding Balance of the Secured Note by sixteen and two-thirds percent (16.6667%) of the Outstanding Balance of the Secured Note per month. The Company can prepay all or any portion of the Outstanding Amount at a rate of 110% of the portion of the Outstanding Balance. In addition, pursuant to the Security Agreement dated April 26, 2023 between the Company and the Investor, the Note is secured by all of the Company’s assets. The Company received payments of $500,000 in May 2023 and $250,000 in June 2023.

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

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; ● risks related to market acceptance of products; ● intellectual property risks; ● assumptions regarding the size of the available market, benefits of our products, product pricing, and timing of product launches; ● risks associated with the uncertainty of obtaining additional timely funding; ● risks associated with the uncertainty of future financial results; ● our ability to attract collaborators and partners; and ● risks associated with our reliance on third-party organizations.

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

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

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

The condensed consolidated financial statements (unaudited) included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2022, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K filed with the SEC on May 22, 2023. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. All amounts in this report are in U.S. dollars, unless otherwise noted.

Overview

We are a late-stage biopharmaceutical company focused on the discovery and development of targeted immunotherapy using fully human monoclonal antibodies, or mAbs, to treat life-threatening infections. mAbs represent a fundamentally new treatment approach in the infectious disease market and are designed to overcome key issues associated with current therapies, including drug resistance, short duration of response, tolerability, negative impact on the human microbiome, and lack of differentiation between treatment alternatives. Our proprietary product pipeline is comprised of fully human mAbs targeting specific pathogens associated with life-threatening bacterial and viral infections, primarily hospital-acquired pneumonia, or HAP, ventilator-associated pneumonia, or VAP and cystic fibrosis. Our clinical stage product candidates have exhibited promising preclinical data and clinical data. Our lead product candidates, AR-301 and AR-320, target the alpha toxin produced by gram-positive bacteria Staphylococcus aureus, or S. aureus, a common pathogen associated with HAP and VAP. AR-501 is a broad spectrum small molecule anti-infective we are developing in addition to our targeted mAb product candidates.

The majority of candidates from our product pipeline are derived by employing our differentiated antibody discovery platform called MabIgX^TMand λPEX^TM. This platform is designed to comprehensively screen the B-cell repertoire and isolate human antibody-producing B-cells from individuals who have either successfully overcome an infection by a particular pathogen or have been vaccinated against a particular pathogen. We believe that B-cells from these patients are the ideal source of highly protective and efficacious mAbs which can been administered safely to other patients. λPEX^TM complements and further extends the capabilities of MabIgX to quickly screen large number of antibody producing B-cells from patients and generation of high mAb producing mammalian production cell line at a speed not previously attainable. As a result, we can significantly reduce time for antibody discovery and manufacturing compared to conventional approaches.

Two of our mAbs in advanced clinical development are being developed for treatment of HAP and VAP in intensive care units or ICUs. Our initial clinical indication for AR-301 is for adjunctive therapeutic treatment with standard of care, or SOC, antibiotics for HAP and VAP. AR-320 is being developed as a pre-emptive treatment of mortality and morbidity associated with HAP and VAP. Current SOC antibiotics used to treat HAP and VAP typically involve a combination of several broad-spectrum antibiotics that are prescribed empirically at the start of treatment. The specific empirical antibiotic regimens that are prescribed vary widely among physicians, and generally result in modest clinical benefits due to a number of reasons, which can include an infection by an antibiotic resistant strain, immune deficiency, or potential mismatch of the antibiotics regimen to the etiologic agent. Recently, rapid diagnostic tests have been introduced that allow the identification of infection-causing agents within hours. These increasingly common rapid tests allow physicians to prescribe a more appropriate antibiotics regimen, and eventually more targeted anti-infectives such as AR-301 and AR-320 earlier in the course of infection. This evidenced-based treatment approach is designed to remove issues associated with empirical broad-spectrum antibiotics such as inappropriate antibiotic selection and promotion of antibiotic resistance. In contrast to the lack of differentiation among SOC antibiotics, mAbs are highly differentiated from SOC antibiotics in mechanism of action, pharmacokinetic and pharmacodynamic profile, and thus are well suited to complement antibiotics when used together. As an adjunctive treatment, AR-301 has the potential to improve the effectiveness of SOC antibiotics and cover antibiotic resistant S. aureus strains, while not competing directly with antibiotics. To emphasize the benefits of our product candidates as an adjunctive therapy, we design clinical trials based on superiority endpoints.

AR-301 and AR-320 neutralize alpha-toxin from Staphylococcus aureus bacteria, leading to protection from alpha-toxin mediated destruction of host cells, including cells from the immune system. This mode of action is independent of the antibiotic resistance profile of S. aureus, and as such AR-301 and AR-320 are active against infections caused by both MRSA (methicillin-resistant staphylococcus aureus) and MSSA (methicillin-sensitive staphylococcus aureus). AR-320 and AR-301 are complementary products. AR-320 treatment focuses on preventive treatment of S. aureus pneumonia, which complements Aridis’ AR-301 Phase 3 mAb program that is being developed as a therapeutic treatment of S. aureus pneumonia. We believe that AR-301 will be first-line treatment, first to market, first-in-class pre-emptive treatment of S. aureus colonized patients. The same first-line, first to market and first-in-class strategy applies to the acute treatment with the monoclonal antibody AR-320.

AR-320 is being developed for pre-emptive treatment of high-risk patients under 65 years old for prevention of nosocomial pneumonia caused by S. aureus, which is associated with significant morbidity and mortality despite current standard of care, including antibiotics and infection control practices like ventilator-associated pneumonia (VAP) bundles. Currently, there are no treatments available for prevention or early preemptive management of patients at high-risk of developing S. aureus pneumonia. AR-320 has the potential to address this unmet medical need by reducing the incidence of S. aureus pneumonia in patients at high-risk of developing the disease, e.g., mechanically ventilated patients in the intensive care unit (ICU) who are colonized with S. aureus in their respiratory tract.

HAP and VAP pose serious challenges in the hospital setting, as SOC antibiotics are becoming inadequate in treating infected patients. There are approximately 3,000,000 cases of pneumonia reported in the U.S. per year and approximately 628,000 annual cases of HAP and VAP caused by gram negative bacteria and MRSA (DRG, 2016). These patients are typically at high risk of mortality, which is compounded by other life-threatening co-morbidities and the rise in antibiotic resistance. Epidemiology studies estimate that the probability of death attributed to S. aureus ranges from 29% to 55%. In addition, pneumonia infections can prolong patient stays in ICUs and the use of mechanical ventilation, creating a major economic burden on patients, hospital systems and payors. For example, ICU cost of care for a ventilated pneumonia patient is approximately $10,000 per day in the U.S., and the duration of ICU stays are typically twice that of a non-ventilated patient (Infection Control and Hospital Epidemiology. 2010, vol. 31, pp. 509-515). The average cost of care per pneumonia patient is approximately $41,250 which increases 86% for HAP/VAP patients to approximately $76,730. We estimate that our two clinical mAb candidates have an addressable market of $25 billion and the potential to address approximately 325,000 HAP and VAP patients in the U.S.

To date, we have devoted substantially all of our resources to research and development efforts relating to our therapeutic candidates, including conducting clinical trials and developing manufacturing capabilities, in-licensing related intellectual property, protecting our intellectual property and providing general and administrative support for these operations. We have generated revenue from our payments under our collaboration strategic research and development contracts and federal awards and grants, as well as awards and grants from not-for-profit entities and fee for service to third-party entities. Since our inception, we have funded our operations primarily through these sources and the issuance of common stock, convertible preferred stock, and debt securities. Our expenses and resulting cash burn during the three months ended March 31, 2023 and year ended December 31, 2022, were largely due to costs associated with study close-out activities on the first Phase 3 study of AR-301 for the treatment of VAP caused by the S. aureus bacteria, the Phase 3 study of AR-320 for prevention of nosocomial pneumonia, and the Phase 1/2a study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis. Until the clinical development activities for AR-301 and AR-320 resume, the current clinical development activities are focused primarily on AR-501.

Financial Overview

We have incurred losses since our inception. ~~Our~~Due ~~net~~to ~~losses~~termination ~~were~~of the SAMR License Agreement we recognized upfront payments of approximately $619.86 million ~~and~~as ~~$30.4~~license ~~million~~revenue which resulted in net income for the three ~~months~~and six month periods ended ~~March~~ 31June 30, 2023 of $12.1 million and $5.3 million respectively. Our results for the year ended December 31, 2022, ~~respectively~~were a net loss of approximately $30.4 million. As of ~~March~~June 3130, 2023 we had approximately $~~1.8~~519 ~~million~~thousand of cash and cash equivalents and had an accumulated deficit of approximately $~~202~~190.53 million. Substantially, all of our net losses have resulted from costs incurred in connection with our research and development programs, clinical trials, intellectual property matters, strengthening our manufacturing capabilities, and from general and administrative costs associated with our operations.

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

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

● continue enrollment in our ongoing clinical trials; ● initiate new clinical trials; ● seek to identify, assess, acquire and develop other products, therapeutic candidates and technologies; ● seek regulatory and marketing approvals in multiple jurisdictions for our therapeutic candidates that successfully complete clinical studies; ● establish collaborations with third parties for the development and commercialization of our products and therapeutic candidates; ● make milestone or other payments under our agreements, pursuant to which we have licensed or acquired rights to intellectual property and technology; ● seek to maintain, protect, and expand our intellectual property portfolio; ● seek to attract and retain skilled personnel; ● incur the administrative costs associated with being a public company and related costs of compliance; ● create additional infrastructure to support our operations as a commercial stage public company and our planned future commercialization efforts; ● create additional interest-bearing debt; ● experience any delays or encounter issues with any of the above; ● incur risks associated with delays, increased costs and funding shortages caused by or resulting from the COVID-19 pandemic; and ● experience continued global disruptions associated with the conflict between Russian and Ukraine.

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

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or GAAP.

The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. Such estimates include those related to the evaluation of our ability to continue as a going concern, our 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. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

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

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

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

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

Research and Development Expenses

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

	●	salaries and related overhead expenses, which include stock-based compensation and benefits for personnel in research and development functions;
	●	fees paid to consultants and contract research organizations, or CROs, including in connection with our preclinical studies and clinical trials and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial material management and statistical compilation and analyses;
	●	costs related to acquiring and manufacturing clinical trial materials;
	●	costs related to compliance with regulatory requirements; and
	●	payments related to licensed products and technologies.

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

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

The significant accounting policies used in the preparation of our condensed consolidated financial statements are as follows:

General and Administrative Expenses

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

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

Stock-Based Compensation

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

Results of Operations

Comparison of the Three Months Ended ~~March~~June 3130, 2023, and 2022

The following table summarizes our results of operations for the three months ended ~~March~~June 3130, 2023, and 2022 (in thousands):

	Three Months Ended
	March 31,
	June 30,
	2023			2022			Change $
	(unaudited)			(unaudited)
Revenue:
Grant revenue	$	~~1,082~~45		$	~~1,187~~292		$	(~~105~~247	)
License revenue		19,602						19,602
Total revenue		19,647			292			19,355
Operating expenses:
Research and development		54,~~531~~668			6,~~450~~348			(~~919~~1,680	)
General and administrative		1,~~814~~310			21,~~161~~681			(~~347~~371	)
Total operating expenses		75,~~345~~978			8,~~611~~029			(12,~~266~~051	)
Loss from operations		(6,263	)		(7,424	)		1,161
Income (loss) from operations		13,669			(7,737	)		21,406
Other income (expense):
Interest income, net		273			~~(248~~8	)		~~275~~(5	)
Other income		2526			2223			3
Change in fair value of note payable		(~~605~~1,554	)		(~~116~~273	)		(~~489~~1,281	)
Net loss	$	(6,816	)	$	(7,766	)	$	950
Net income (loss)	$	12,144		$	(7,979	)	$	20,123

Grant Revenue. Grant revenue was approximately $~~1.1~~45 ~~million~~thousand and $~~1.2~~292 ~~million~~thousand for the three~~-month~~ ~~period~~months ended ~~March~~June 3130, 2023 and ~~the three-month period ended March 31,~~ 2022, respectively. The three months ended ~~March~~June 3130, 2023 and 2022 included revenue from CFF, Kermode and Gates.

~~Research~~License ~~and Development Expenses~~Revenue. ~~Research~~License ~~and~~revenue ~~development~~was ~~expenses decreased by~~ approximately $019.96 million ~~from~~and ~~approximately~~zero ~~$6.4 million~~ for the three months ended ~~March~~June 3130, ~~2022~~2023 toand ~~approximately~~2022, $5respectively.5 The ~~million for the~~ three months ended ~~March~~June 3130, 2023 ~~due~~included ~~primarily~~recognition ~~to:~~of revenue from upfront payments in connection with termination of the SAMR License Agreement.

	●	an increase of approximately $250,000 in spending on our ongoing Phase 2a clinical trial evaluating AR-501 for the treatment of cystic fibrosis; and
	●	a increase of approximately $318,000 in spending on completion and normal wind down costs for our Phase 3 clinical trial evaluating AR-301 for the treatment of VAP.

Research and Development Expenses. Research and development expenses decreased by approximately $1.7 million from approximately $6.3 million for the three months ended June 30, 2022 to approximately $4.7 million for the three months ended June 30, 2023 due primarily to:

~~These increases~~● ~~were~~An ~~offset~~increase ~~by:~~of approximately $0.3 million in spending on our Phase 2a clinical trial evaluating AR-501 for the treatment of cystic fibrosis due to clinical trial study closures; and ● a decrease of approximately $1.3 million in spending on completion and normal wind down costs for our Phase 3 clinical trial evaluating AR-301 for the treatment of VAP. ● a decrease of approximately $0.4 million in spending on our clinical trial evaluating AR-320 for the prevention of VAP due to clinical trial study closures.

	●	a decrease of approximately $819,000 for manufacturing of clinical supplies for the initiation of a Phase 1 clinical trial evaluating AR-701 for the treatment of COVID-19; and
	●	a decrease of approximately $706,000 in spending on our clinical trial evaluating AR-320 for the prevention of VAP.

General and Administrative Expenses. General and administrative expenses decreased by approximately $0.4 million from approximately $1.7 million for the three months ended June 30, 2022 to approximately $1.3 million for the three months ended June 30, 2023. The decrease was due primarily to decreases in personnel related costs, stock compensation expense, and liability insurance, partially offset by an increase in professional fees.

~~General~~Interest ~~and~~Income, ~~Administrative Expenses~~Net. ~~General~~Interest ~~and~~income, ~~administrative~~net ~~expenses~~ decreased by approximately $~~0.3~~5 ~~million~~thousand from approximately $~~2.2 million~~8 thousand for the three months ended June ~~March 31~~30, 2022 to approximately $~~1.8~~3 ~~million~~thousand for the three months ended ~~March~~June 3130, 2023. The decrease ~~was~~ ~~due~~is primarily due to ~~decreases~~lower indemand ~~stock compensation expense, professional fees and liability insurance, partially offset by an increase~~deposit inaccount ~~personnel related costs and DE franchise tax~~balances.

Interest Expense, Net. Interest expense, net increased by approximately $275,000 from $248,000 income for the three months ended March 31, 2022 to $27,000 expense for the three months ended March 31, 2023. The expense increase for the quarter ended March 31, 2023 as compared to the quarter ended March 31, 2022 is primarily due to the original issue discount on the Note Purchase Agreement with Streeterville Capital, LLC.

~~Other~~Change ~~Income.~~in ~~Other~~fair ~~income~~value ~~increased~~of bynote ~~approximately~~payable. ~~$3,000~~Change ~~from~~in ~~$22,000~~fair ~~for~~value ~~the~~of ~~three~~notes ~~months~~payable ~~ended~~decreased ~~March~~by ~~31,~~approximately ~~2022~~$1.3 million to ~~approximately~~a ~~$25,000~~loss of approximately ~~for~~$1.6 ~~the~~million for three months ended ~~March~~June 3130, 2023. ~~The~~from ~~increase~~a ~~was~~loss ~~primarily~~of ~~related~~approximately to$0.3 ~~sublease~~million ~~income~~for ~~from~~the athree ~~sublease~~months ~~agreement~~ended weJune ~~entered~~30, 2022 ~~into~~due ~~with~~to achanges ~~tenant~~in ondefault ~~March~~probability 1,as ~~2021~~determined toby ~~sublet~~ a ~~small~~third ~~portion~~party ofvaluation ~~our Los Gatos facility~~expert.

~~Change~~Comparison ~~in fair value~~ of ~~note~~the ~~payable.~~Six ~~Change~~Months inEnded ~~fair~~June ~~value of notes payable decreased by approximately 489~~30,~~000~~ ~~to $(605,000) for the quarter ended March 31,~~ 2023 ~~from $(116~~,~~000)~~ ~~for~~and ~~the quarter ended March 31,~~ 2022.

The following table summarizes our results of operations for the six months ended June 30, 2023, and 2022 (in thousands):

	Six Months Ended
	June 30,
	2023			2022			Change $
	(unaudited)			(unaudited)
Revenue:
Grant revenue	$	1,127		$	1,479		$	(352	)
License revenue		19,602						19,602
Total revenue		20,729			1,479			19,250
Operating expenses:
Research and development		10,199			12,798			(2,599	)
General and administrative		3,124			3,842			(718	)
Total operating expenses		13,323			16,640			(3,317	)
Income (loss) from operations		7,406			(15,161	)		22,567
Other income (expense):
Interest income, net		30			(240	)		270
Other income		51			45			6
Change in fair value of note payable		(2,159	)		(389	)		(1,770	)
Net income (loss)	$	5,328		$	(15,745	)	$	21,073

Grant Revenue. Grant revenue was approximately $1.1 million and $1.5 million for the six months ended June 30, 2023 and 2022, respectively. The six months ended June 30, 2023 and 2022 included revenue from CFF, Kermode and Gates.

License Revenue. License revenue was approximately $19.6 million and zero for the six months ended June 30, 2023 and 2022, respectively. The six months ended June 30, 2023 included recognition of revenue from upfront payments in connection with termination of the SAMR License Agreement.

Research and Development Expenses. Research and development expenses decreased by approximately $2.6 million from approximately $12.8 million for the six months ended June 30, 2022 to approximately $10.2 million for the six months ended June 30, 2023 due primarily to:

	●	A decrease of approximately $1.2 million in spending on our Phase 2a clinical trial evaluating AR-501 for the treatment of cystic fibrosis due to clinical trial study closures; and
	●	a decrease of approximately $1.0 million in spending on completion and normal wind down costs for our Phase 3 clinical trial evaluating AR-301 for the treatment of VAP.
	●	a decrease of approximately $1.1 million in spending on our clinical trial evaluating AR-320 for the prevention of VAP due to clinical trial study closures.

General and Administrative Expenses. General and administrative expenses decreased by approximately $0.7 million from approximately $3.8 million for the six months ended June 30, 2022 to approximately $3.1 million for the six months ended June 30, 2023. The decrease was due primarily to decreases in personnel related costs, stock compensation expense, and liability insurance, partially offset by an increase in professional fees.

Interest Income, Net. Interest income (expense), net increased by approximately $270 thousand from approximately $240 thousand of interest expense, net for the six months ended June 30, 2022 to approximately $30 thousand of interest income, net for the six months ended June 30, 2023. The expense decrease was primarily due to interest waivers on the Note Payable to Streeterville Capital, LLC.

Change in fair value of note payable. Change in fair value of notes payable decreased by approximately $1.8 million to a loss of approximately $2.2 million for six months ended June 30, 2023 from a loss of approximately $0.4 million for the six months ended June 30, 2022 due to changes in in default probability as determined by a third party valuation expert.

Liquidity, Capital Resources and Going Concern

As of ~~March~~June 3130, 2023, we had approximately $~~1.8~~19 ~~million~~thousand of cash and cash equivalents, ~~and~~$500 of restricted cash and had an accumulated deficit of approximately $~~202~~190.53 million. As of December 31, 2022, we had approximately $54.69 million of cash, cash equivalents, ~~and~~$0.7 million of restricted cash and had an accumulated deficit of approximately $195.7 million.

We entered into a Note Purchase Agreement with Streeterville Capital, LLC (the “Lender”), pursuant to which we issued to the Lender a secured promissory note (the “Note”) in the aggregate principal amount of $5,250,000. Closing occurred on November 23, 2021 (the “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. Net proceeds after deducting the discount fee were $5,000,000. Pursuant to the terms agreed in the Note Purchase Agreement with Streeterville Capital, LLC, we issued a second Note to the Lender on February 21, 2022 in the aggregate principal amount of $5,250,000 which are substantially similar to the first Note except the maturity date is February 21, 2024.

On September 30, 2022, we 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, we 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, no payments have been made on note #2.

On April 26, 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.

We obtained financing for certain Director & Officer liability insurance policy premiums from First Insurance Funding. The total premiums, taxes and fees financed is approximately $915,000 with an annual percentage interest rate of 5.13%. At March 31, 2023 the balance of insurance financing note payable was approximately $208,000 in the condensed consolidated balance sheet.

We have had recurring losses from operations since inception and negative cash flows from operating activities during the three months ended March 31, 2023 and the year ended December 31, 2022. We anticipate that we will continue to generate operating losses and use cash in operations through the foreseeable future. Management plans to finance operations through equity or debt financings or other capital sources, including potential collaborations or other strategic transactions. There can be no assurances that, in the event that we require additional financing, such financing will be available on terms which are favorable to us, or at all. If we are unable to raise additional funding to meet our working capital needs in the future, we will be forced to delay or reduce the scope of our research programs and/or limit or cease our operations. As described above under “Going Concern,” 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 June 30, 2023. Management is currently evaluating various cost reduction actions, including possible reductions in our workforce and suspending research and development expenditures on one or more product candidates, in order to reduce our expenditures and preserve cash. We are limited in our ability to reduce expenditures for known contractual obligations. As a result, we are not able to predict whether any cost reduction actions will be successful or how much longer any such actions will allow us to continue to operate without financing.

On September 30, 2022, we 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, we 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 June 30, 2023, no payments have been made on note #2.

We obtained financing for certain Director & Officer liability insurance policy premiums from First Insurance Funding. The total premiums, taxes and fees financed is approximately $915,000 with an annual percentage interest rate of 5.13%. At June 30, 2023, the balance of the insurance financing note had been paid in full.

We have had recurring negative cash flows from operations since inception and we anticipate that we will continue to generate operating losses and use cash in operations through the foreseeable future. Management plans to finance operations through equity or debt financings or other capital sources, including potential collaborations or other strategic transactions. There can be no assurances that, in the event that we require additional financing, such financing will be available on terms which are favorable to us, or at all. If we are unable to raise additional funding to meet our working capital needs in the future, we will be forced to delay or reduce the scope of our research programs and/or limit or cease our operations. As described above under “Going Concern,” 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 October 31, 2023. Management is currently evaluating various cost reduction actions, including possible reductions in our workforce and suspending research and development expenditures on one or more product candidates, in order to reduce our expenditures and preserve cash. We are limited in our ability to reduce expenditures for known contractual obligations. As a result, we are not able to predict whether any cost reduction actions will be successful or how much longer any such actions will allow us to continue to operate without financing.

Cash Flows

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

	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
	2023			2022
	(unaudited)			(unaudited)
Net cash (used in) provided by:
Operating activities	$	(48,~~002~~345	)	$	(1016,~~166~~305	)
Investing activities		-14			(2133	)
Financing activities		~~263~~3,291			4,~~443~~304
Net (decrease) in cash, cash equivalents and restricted cash	$	(35,~~739~~040	)	$	(512,~~744~~034	)

Cash Flows from Operating Activities.

Net cash used in operating activities was approximately $48.03 million for the ~~three~~six months ended ~~March~~June 3130, 2023, which was primarily due to ~~our~~ our net ~~loss~~income of approximately $65.83 million, an increase in accounts payable of approximately $3.9 million, a decrease in contract costs of approximately $12.1 million, ina ~~deferred~~decrease ~~revenue~~in ~~and~~other ancomprehensive ~~increase~~income of approximately $01.95 million , a decrease in ~~other~~accounts ~~comprehensive~~receivable of ~~income~~approximately ~~offset~~$0.8 bymillion anand ~~increase~~stock-based compensation expense of approximately $10.85 million, offset by a decrease in ~~accounts~~deferred ~~payable,~~revenue of ~~and~~approximately $20.5 million, a decrease of approximately $1.01 million in ~~accounts~~accrued ~~receivable~~liabilities and an increase in change in fair value of note payable of $0.8 million.

Net cash used in operating activities was approximately $1016.23 million for the ~~three~~six months ended ~~March~~June 3130, 2022, which was primarily due to our net loss of approximately $715.87 million, a decrease of approximately $2.7 million in accounts payable, a decrease of approximately $0.8 million in prepaid assets, a decrease of approximately $0.2 in deferred revenue, was partially offset by an increase of approximately $1.2 million, in accrued liabilities and other; an increase of approximately $1.0 million in accounts receivable; an increase of approximately ~~contract~~$0.4 ~~costs~~in other receivables, and the non-cash charges of approximately $10.8 million related to stock-based compensation and approximately $0.2 million in depreciation and amortization, and approximately $0.3 million from debt issuance expense.

Cash Flows from Investing Activities.

~~There~~Net ~~was no~~ cash ~~used~~provided inby investing activities ~~for~~of approximately $14 thousand during the ~~three~~six months ended ~~March~~June 3130, 2023, was due to proceeds received from disposal of equipment.

Net cash used in investing activities of approximately $~~21,000~~33 thousand during the ~~three~~six months ended ~~March~~June 3130, 2022, was due to the purchase of of equipment, primarily for diagnostic use in clinical trials.

Cash Flows from Financing Activities.

Net cash provided by financing activities of approximately $03.3 million during the ~~year~~six months ended ~~March~~June 3130, 2023 was from $2.10 million ~~proceeds~~in proceeds received from issuance of common stock, ~~partially~~net ~~offset~~of byissuance costs and approximately $1.58 million ~~for~~in ~~payment~~proceeds onfrom ~~note~~notes payable, net ~~and~~of issuance costs, partially offset by approximately $0.35 million for payment on financing of insurance premium during the ~~first~~ second quarter of 2023.

Net cash provided by financing activities of approximately $4.43 million during the ~~year~~six months ended ~~March~~June 3130, 2022 was from $5.0 million ~~proceeds~~ proceeds received from our loan from Streeterville Capital partially offset by approximately $0.67 million for payment on financing of insurance premium ~~during the first quarter of 2022~~.

Future Funding Requirements

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

4041

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

	●	the progress, costs, results and timing of our clinical trials;
	●	FDA acceptance, if any, of our therapies for infectious diseases and for other potential indications;
	●	the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;
	●	the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development;
	●	the ability of our product candidates to progress through clinical development successfully;
	●	our need to expand our research and development activities;
	●	the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;
	●	our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
	●	the effect of the COVID-19 pandemic on our business and operations;
	●	our need and ability to hire additional management and scientific, medical and administrative personnel;
	●	the effect of administrative costs associated with being a public company and related costs of compliance including director and officers’ liability insurance required to attract and retain Board members;
	●	the effect of competing technological and market developments; and
	●	our need to implement additional internal systems and infrastructure, including financial and reporting systems.

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

Off-Balance Sheet Arrangements

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

JOBS Act Accounting Election

New Accounting Pronouncements

Please refer to section “New Accounting Pronouncements” in Note 2 of our Notes to the Condensed Consolidated Financial Statements.

4142

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer ~~and Chief Financial Officer~~ (our principal executive officer and principal financial officer~~, respectively~~), evaluated the effectiveness of our disclosure controls and procedures as of ~~March~~June 3130, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (the “SEC’s”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of ~~March~~June 3130, 2023, the Chief Executive Officer ~~and Chief Financial Officer~~ concluded that our disclosure controls and procedures were ineffective due to a material weakness in our internal controls resulting from our finance department not being able to process and account for complex, non-routine transactions in a timely manner. While we have designed and implemented, or expect to implement, measures that we believe address or will address this control weakness, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, and designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight. We have begun to remediate the identified material weakness by hiring additional senior accounting staff and financial consultants in our efforts to remediate the identified material weakness.

We will continue to augment our team with third-party professionals with whom we consult regarding complex accounting applications. Utilizing these financial consultants will help us identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

The conclusion of the Company’s Chief Executive Officer ~~and Chief Financial Officer~~ is based on the recognition that there are inherent limitations in all systems of internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, errors or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the ~~policies~~ policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the ~~three~~six months ended ~~March~~June 3130, 2023 that has materially affected, or is reasonably likely to materially affect, our internal ~~control~~ control over financial reporting.

PART II — OTHER INFORMATION

Item 1. 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 our company’s preferred stock in July 2017 which was prior to our initial public offering (IPO) in August 2018. The complaint alleges, among other things, that we breached our contract and fiduciary duty, by not issuing additional securities to the investor as a result of 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 $531,686.85. 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 all of the claims in the complaint are without merit and intend to defend vigorously against them.

4243

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. Discovery in the case is proceeding and no trial date has been set. At the recent case management conference, the court set a further case management conference for September 7, 2023. The court advised the parties to mediate the dispute prior to the next case management conference and indicated that, if no settlement is reached prior to that conference, a trial date will be set.

OnItem March 20, 2023, we received written notice from MedImmune Limited (“MedImmune”) 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 No1A. 1Risk to License Agreement, dated as of August 9, 2021 (the “License Agreement”), pursuant to Section 9.2.1 of the License Agreement for nonpayment 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 ongoing 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 possibleFactors

~~Item~~There ~~1A.~~have ~~Risk~~been ~~Factors~~no material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2022.

~~There~~Item ~~have~~2. ~~been~~Unregistered noSales ~~material~~of ~~changes~~Equity toSecurities ~~the~~and ~~risk~~Use ~~factors~~of ~~disclosed in our Form 10-K for the year ended December 31, 2021.~~Proceeds

~~Item~~There 2.are ~~Unregistered~~no ~~Sales~~transactions ofthat ~~Equity~~have ~~Securities~~not ~~and~~been ~~Use~~previously ofincluded ~~Proceeds~~in a Current Report on Form 8-K.

~~There~~Item ~~are~~3. noDefault ~~transactions~~Upon ~~that~~Senior ~~have not been previously included in a Current Report on Form 8-K.~~Securities

~~Item 3~~None. ~~Default Upon Senior Securities~~

~~None~~Item 4. Mine Safety Disclosures

~~Item~~Not 4applicable. ~~Mine Safety Disclosures~~

~~Not~~Item ~~applicable~~5. Other Information.

~~Item 5~~None. ~~Other Information.~~

~~None.~~44

43Item 6. Exhibits

Item 6. Exhibits

Exhibit No.		Description
4.1		Form of Warrant (incorporated by reference to Exhibit 4.1 filed with Form Amendment No. 2 to Form S-1 on June 27, 2023)

10.1		Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.39 filed with Amendment No. 2 to Form S-1 on June 27, 2023)

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

Exhibit No.		Description
4.1		Form of Secured Promissory Note (incorporated by reference to Exhibit 4.1 filed with Form 8-K on May 1, 2023)
10.1		Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 filed with Form 8-K on March 15, 2023)
10.2		Form of Note Purchase Agreement dated as of April 26, 2023 (incorporated by reference to Exhibit 10.1 filed with Form 8-K on May 1, 2023)
10.3		Form of Security Agreement dated as of April 26, 2023 (incorporated by reference to Exhibit 10.2 filed with Form 8-K on May 1, 2023)
31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

44SIGNATURES

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

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

	Aridis Pharmaceuticals, Inc.

Dated: September 13, 2023	By:	/s/ Vu Truong
	Vu Truong
	Chief Executive Officer
	(Principal Executive Officer)

Dated: September 13, 2023	By:	/s/ Vu Truong
	Vu Truong, Chief Executive Officer
	(Principal Financial Officer)

	Aridis Pharmaceuticals, Inc.
Dated: June 8, 2023	By:	/s/ Vu Truong
	Vu Truong
	Chief Executive Officer
	(Principal Executive Officer)
Dated: June 8, 2023	By:	/s/ Fred Kurland
	Fred Kurland, Chief Financial Officer
	(Principal Financial Officer)

Filing Compare · Aridis Pharmaceuticals, Inc.