~~Table ofContents~~

		Page

			PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of ~~June 30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019	3

	Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	4

	Condensed Consolidated Statements of Changes in ~~Convertible Preferred Stock and~~ Stockholders’ Equity (Deficit) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 22

Item 3.	Controls and Procedures	29 30

			PART II OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 6.	Exhibits	31

Signatures			32

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

June 30,
2019

December 31,
2018

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$
8,519

$
24,237

Accounts receivable

1,000

1,660

Other receivables

1,448

438

Prepaid expenses and other current assets

2,390

2,012

Total current assets

13,357

28,347

Property and equipment, net

1,135

1,271

Intangible assets, net

35

38

Equity method investment

332

960

Other assets

1,015

995

Total assets

$
15,874

$
31,611

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$
1,544

$
2,331

Accrued liabilities

3,468

2,944

Deferred revenue

—

22

Total current liabilities

5,012

5,297

Total liabilities

5,012

5,297

Commitments and contingencies (Note 10)

Stockholders’ equity:

Series A convertible preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively)

—

—

Common stock (par value $0.0001; 100,000,000 shares authorized; shares issued and outstanding: 8,107,290 and 8,104,757, as of June 30, 2019 and December 31, 2018, respectively)

1

1

Additional paid-in capital

98,395

97,401

Accumulated deficit

(87,534
)
(71,088
)
Total stockholders’ equity

10,862

26,314

Total liabilities and stockholders’ equity

$
15,874

$
31,611

	March 31,			December 31,
	2020			2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,324		$	20,897
Other receivables		261			413
Contract costs		1,543			1,537
Prepaid expenses		1,848			2,990
Total current assets		19,976			25,837
Property and equipment, net		923			1,006
Intangible assets, net		31			32
Equity method investment		—			9
Contract costs		520			526
Other assets		557			557
Total assets	$	22,007		$	27,967
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,967		$	1,755
Accrued liabilities		2,815			2,974
Deferred revenue, current		14,661			14,602
Total current liabilities		19,443			19,331
Deferred revenue		4,941			5,000
Total liabilities		24,384			24,331
Commitments and contingencies (Note 11)
Stockholders’ equity (deficit):
Preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively)		—			—
Common stock (par value $0.0001; 100,000,000 shares authorized; shares issued and outstanding: 8,923,374 and 8,918,461 as of March 31, 2020 and December 31, 2019, respectively)		1			1
Additional paid-in capital		104,895			104,404
Accumulated deficit		(107,273	)		(100,769	)
Total stockholders' equity (deficit)		(2,377	)		3,636
Total liabilities and stockholders’ equity (deficit)	$	22,007		$	27,967

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

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Revenue:

Grant revenue

$
—

$
22

$
1,022

$
344

Operating expenses:

Research and development

6,653

3,885

13,771

10,511

General and administrative

1,613

687

3,254

1,753

Total operating expenses

8,266

4,572

17,025

12,264

Loss from operations

(8,266
)
(4,550
)
(16,003
)
(11,920
)
Other income (expense):

Interest and other income, net

69

68

185

142

Change in fair value of warrant liability

—

3,058

—

3,021

Equity in net loss from equity method investment

(186
)
—

(628
)
—

Net loss

$
(8,383
)
$
(1,424
)
$
(16,446
)
$
(8,757
)
Preferred dividends

$
—

$
(535
)
$
—

$
(1,352
)
Net loss available to common stockholders

$
(8,383
)
$
(1,959
)
$
(16,446
)
$
(10,109
)
Weighted-average shares outstanding used in computing net loss available to common stockholders:

Basic

8,107,290

166,373

8,106,484

166,373

Diluted

8,107,290

166,373

8,106,484

166,373

Net loss per common share:

Basic

$
(1.03
)
$
(8.56
)
$
(2.03
)
$
(52.63
)
Diluted

$
(1.03
)
$
(8.56
)
$
(2.03
)
$
(52.63
)
Preferred dividends:

Basic

$
—

$
(3.22
)
$
—

$
(8.13
)
Diluted

$
—

$
(3.22
)
$
—

$
(8.13
)
Net loss per share available to common stockholders:

Basic

$
(1.03
)
$
(11.78
)
$
(2.03
)
$
(60.76
)
Diluted

$
(1.03
)
$
(11.78
)
$
(2.03
)
$
(60.76
)

	Three Months Ended March 31,
	2020			2019
	(unaudited)			(unaudited)
Revenue:
Grant revenue	$	—		$	1,022
Operating expenses:
Research and development		4,917			7,118
General and administrative		1,639			1,641
Total operating expenses		6,556			8,759
Loss from operations		(6,556	)		(7,737	)
Other income (expense):
Interest and other income, net		61			116
Share of loss from equity method investment		(9	)		(442	)
Net loss	$	(6,504	)	$	(8,063	)
Weighted-average common shares outstanding used in computing net loss, basic and diluted		8,919,393			8,105,636
Net loss per share, basic and diluted	$	(0.73	)	$	(0.99	)

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

Aridis Pharmaceuticals, Inc.

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

(In thousands, except share amounts)

	Three Months Ended March 31, 2020 (unaudited)
									Additional					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders'
	Shares		Amount		Shares		Dollars		Capital		Deficit			Equity (Deficit)
Balances as of December 31, 2019		—	$	—		8,918,461	$	1	$	104,404	$	(100,769	)	$	3,636
Exercise of stock options		—		—		4,913		—		14		—			14
Stock-based compensation		—		—		—		—		477		—			477
Net loss		—		—		—		—		—		(6,504	)		(6,504	)
Balances as of March 31, 2020		—	$	—		8,923,374	$	1	$	104,895	$	(107,273	)	$	(2,377	)

	Three Months Ended March 31, 2019 (unaudited)
									Additional					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders'
	Shares		Amount		Shares		Dollars		Capital		Deficit			Equity
Balances as of December 31, 2018		—	$	—		8,104,757	$	1	$	97,401	$	(71,088	)		26,314
Exercise of stock options		—		—		2,533		—		8		—			8
Stock-based compensation		—		—		—		—		450		—			450
Net loss		—		—		—		—		—		(8,063	)		(8,063	)
Balances as of March 31, 2019		—	$	—		8,107,290	$	1	$	97,859	$	(79,151	)	$	18,709

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

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of ~~Changes in Convertible Preferred Stock and~~

~~Stockholders’ Equity (Deficit)~~Cash Flows

(In ~~thousands, except share amounts)~~thousands)

Three Months Ended June 30, 2019 (unaudited)

Series A Convertible

Additional

Total

Preferred Stock

Common Stock

Paid-In

Accumulated

Stockholders’

Shares

Amount

Shares

Dollars

Capital

Deficit

Equity

Balances at March 31, 2019

—

$
—

8,107,290

$
1

$
97,859

$
(79,151
)
$
18,709

Stock-based compensation

—

—

—

—

536

—

536

Net loss

—

—

—

—

—

(8,383
)
(8,383
)
Balances as of June 30, 2019

—

$
—

8,107,290

$
1

$
98,395

$
(87,534
)
$
10,862

Three Months Ended June 30, 2018 (unaudited)

Series A Convertible

Additional

Total

Preferred Stock

Common Stock

Paid-In

Accumulated

Stockholders’

Shares

Amount

Shares

Dollars

Capital

Deficit

Equity (Deficit)

Balances at March 31, 2018

36,196,193

$
74,202

166,373

$
—

$
(14,637
)
$
(55,776
)
$
(70,413
)
Series A convertible preferred stock dividends accrued

—

—

—

—

—

(535
)
(535
)
Stock-based compensation

—

—

—

—

352

—

352

Net loss

—

—

—

—

—

(1,424
)
(1,424
)
Balances as of June 30, 2018

36,196,193

$
74,202

166,373

$
—

$
(14,285
)
$
(57,735
)
$
(72,020
)

Six Months Ended June 30, 2019 (unaudited)

Series A Convertible

Additional

Total

Preferred Stock

Common Stock

Paid-In

Accumulated

Stockholders’

Shares

Amount

Shares

Dollars

Capital

Deficit

Equity

Balances at December 31, 2018

—

$
—

8,104,757

$
1

$
97,401

$
(71,088
)
$
26,314

Exercise of stock options

—

—

2,533

—

8

—

8

Stock-based compensation

—

—

—

—

986

—

986

Net loss

—

—

—

—

—

(16,446
)
(16,446
)
Balances as of June 30, 2019

—

$
—

8,107,290

$
1

$
98,395

$
(87,534
)
$
10,862

Six Months Ended June 30, 2018 (unaudited)

Series A Convertible

Additional

Total

Preferred Stock

Common Stock

Paid-In

Accumulated

Stockholders’

Shares

Amount

Shares

Dollars

Capital

Deficit

Equity (Deficit)

Balances at December 31, 2017

36,196,193

$
74,202

166,373

$
—

$
(15,140
)
$
(47,626
)
$
(62,766
)
Series A convertible preferred stock dividends accrued

—

—

—

—

—

(1,352
)
(1,352
)
Stock-based compensation

—

—

—

—

855

—

855

Net loss

—

—

—

—

—

(8,757
)
(8,757
)
Balances as of June 30, 2018

36,196,193

$
74,202

166,373

$
—

$
(14,285
)
$
(57,735
)
$
(72,020
)

	Three Months Ended March 31,
	2020			2019
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss	$	(6,504	)	$	(8,063	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		84			83
Stock-based compensation expense		477			450
Share of loss from equity method investment		9			442
Changes in operating assets and liabilities:
Accounts receivable		—			1,660
Other receivables		153			(1,703	)
Prepaid expenses		1,141			(47	)
Contract costs		(488	)		—
Accounts payable		226			484
Accrued liabilities		328			(1,098	)
Deferred revenue		—			(22	)
Net cash used in operating activities		(4,574	)		(7,814	)
Cash flows from investing activities:
Purchase of property and equipment		(13	)		(120	)
Net cash used in investing activities		(13	)		(120	)
Cash flows from financing activities:
Proceeds from stock option exercises		14			8
Net cash provided by financing activities		14			8
Net decrease in cash and cash equivalents		(4,573	)		(7,926	)
Cash and cash equivalents at:
Beginning of period		20,897			24,237
End of period	$	16,324		$	16,311
Supplemental cash flow disclosures:
Cash paid for taxes	$	2		$	2

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

~~Aridis Pharmaceuticals, Inc.~~

~~Condensed Consolidated Statements of Cash Flows~~

~~(In thousands)~~

Six Months Ended
June 30,

2019

2018

(unaudited)

(unaudited)

Cash flows from operating activities:

Net loss

$
(16,446
)
$
(8,757
)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

166

124

Stock-based compensation expense

986

855

Equity in net loss from equity method investment

628

—

Change in fair value of preferred stock warrants

—

(3,021
)
Changes in operating assets and liabilities:

Accounts receivable

660

—

Other receivables

(1,010
)
—

Prepaid expenses and other current assets

(833
)
(560
)
Other assets

(20
)
—

Accounts payable

(787
)
(55
)
Accrued liabilities

979

51

Deferred revenue

(22
)
656

Net cash used in operating activities

(15,699
)
(10,707
)
Cash flows from investing activities:

Purchase of property and equipment

(27
)
(919
)
Net cash used in investing activities

(27
)
(919
)
Cash flows from financing activities:

Proceeds from stock option exercises

8

—

Net cash provided by financing activities

8

—

Net decrease in cash and cash equivalents

(15,718
)
(11,626
)
Cash and cash equivalents at:

Beginning of period

24,237

25,096

End of period

$
8,519

$
13,470

Supplemental cash flow disclosures:

Cash paid for taxes

$
2

$
—

Supplemental noncash financing activities:

Preferred stock dividends accrued

$
—

$
1,352

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

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements (unaudited) include the amounts of the Company and our wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements (unaudited) have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements (unaudited) reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These condensed consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes thereto for the preceding fiscal year ~~contained in the Company’s audited consolidated financial statements and notes thereto~~ included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on ~~March 28, 2019.~~April 8, 2020.

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

Reclassifications

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

~~Reverse Stock Split~~COVID-19

~~On August 3, 2018,~~The COVID-19 outbreak in the ~~Company effected a 1 for 6.417896 reverse stock split~~United States has caused business disruption. The extent of the impact of COVID-19 on the Company’s ~~common stock. The par value~~operational and financial performance will depend on certain developments, including the ~~number of authorized shares~~duration and spread of the ~~common~~outbreak, and ~~convertible preferred stock were not adjusted as a result~~impact on the Company’s clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the ~~reverse stock split. All common stock share and per-share amounts for all periods presented in this Quarterly Report on Form 10-Q have been adjusted retroactively~~extent to ~~reflect~~which COVID-19 may impact the ~~reverse stock split.~~Company’s financial condition or results of operations is uncertain.

Going Concern

The accompanying condensed consolidated financial statements (unaudited) have been prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in their normal course of business. The Company has ~~suffered~~had recurring losses from operations since inception and negative cash flows from operating activities during the ~~six~~three months ended ~~June 30, 2019 and the year ended December~~March 31, ~~2018. At June 30, 2019, the Company had cash and cash equivalents of $8.5 million, working capital of $8.3 million and an accumulated deficit of $87.5 million.~~ In July 2019, the Company issued and sold 801,820 shares of restricted common stock at a price of approximately $12.47 per share and received total net proceeds of approximately $9.2 million (see Note 12).2020. Management expects to incur additional operating losses and negative cash flows from operations in the foreseeable future as the Company continues its product development programs. ~~The~~At March 31, 2020, the Company ~~believes that its current available~~had cash and cash equivalents ~~along~~of $16.3 million. In May 2020, the Company was granted a loan for approximately $715,000pursuant to the Paycheck Protection Program (see Note 12).

Our research and development expenses and resulting cash burn during the three months ended March 31, 2020, were largely due to costs associated with the ~~additional cash raised from~~Phase 3 study of AR-301 for the ~~sale~~treatment of ~~restricted common stock~~ventilator associated pneumonia (“VAP”) caused by theStaphylococcus aureus bacteria and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis. Current clinical development activities are focused on AR-301 and AR-501. We expect our expenses to continue to increase in ~~July 2019, will not be sufficient to fund its planned expenditures~~connection with our ongoing development activities, particularly as we continue the research, development and ~~meet~~clinical trials of, and seek regulatory approval for, our therapeutic candidates.

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s ~~obligations for at least~~operations and those of third parties on which the ~~one-year period following its~~Company relies, including by causing disruptions in the supply of the product candidates and the conduct of current and future clinical trials. Additionally, as the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial ~~statement issuance date. These factors raise substantial doubt about~~markets may reduce our ability to access capital, which could negatively impact the Company’s ~~ability to continue as~~short-term and long-term liquidity. These effects could have a ~~going concern.~~material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.

The Company plans to fund its losses from operations ~~and capital funding needs~~ through current cash on hand and future debt and equity financings which we may obtain through one or more public or private equity offerings, debt financings, government or other third-party funding, strategic alliances and licensing or collaboration arrangements. The Company may be unable to secure additional financing or other sources of funding on acceptable terms, or at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs or future commercialization efforts, which could adversely affect its future business prospects and its ability to continue as a going concern. ~~Our expenses~~The Company believes that its current available cash and ~~resulting~~ cash ~~burn during~~equivalents, along with the ~~six months ended June 30, 2019, were largely due~~additional cash received in May 2020, will not be sufficient to ~~costs associated with launching~~fund its planned expenditures and meet the ~~Phase 3 study of~~ ~~AR-301~~Company’s obligations for at least the ~~treatment of ventilator associated pneumonia (VAP) caused by the~~ ~~Staphylococus aureus~~ ~~bacteria and the Phase 2 study of AR-105 for the treatment of VAP caused by the~~ ~~Pseudomonas aeruginosa~~ ~~bacteria.~~ one-year period following its condensed consolidated financial statement issuance date.

The ~~AR-301 study start up phase contains a disproportionately high percentage of total study expenses which~~accompanying condensed consolidated financial statements have been ~~largely completed.~~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 ~~(unaudited)~~ 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 ~~recognition,~~deliverables, allowance for doubtful accounts, long-lived assets, classification of deferred revenue, income taxes, assumptions used in the Black-Scholes-Merton (“BSM”) model to calculate the fair value of stock-based compensation, ~~Monte Carlo Simulation (“MSM”) model to calculate the fair value of warrants,~~ deferred tax asset valuation allowances, ~~valuation of the Company’s common and convertible preferred stock, fair value assumptions used in the valuation of warrants,~~ preclinical study and clinical trial ~~accruals and various accrued liabilities.~~accruals. Actual results could differ from those estimates.

Concentration of Risk

Credit Risk

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

Customer Risk

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020, the Company did not have any revenue. For the three months ended March 31, 2019, ~~and 2018,~~ one customer accounted for 100% of total revenue. This customer is located in the United States. As of ~~June 30, 2019, one customer accounted for 100% of accounts receivable. As of~~March 31, 2020 and December 31, ~~2018, two customers accounted for 60% and 40% of total~~2019, there were no accounts receivable.

Cash and Cash Equivalents

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

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company considers the credit worthiness of its customers but does not require collateral in advance of a sale. The Company evaluates collectability and maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio when necessary. The allowance is based on the Company’s best estimate of the amount of losses in the Company’s existing accounts receivable, which is based on customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were no allowances for doubtful accounts.

Property and Equipment

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

Intangible Assets

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

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment is measured by the excess of the carrying amount of the assets over fair value less the costs to sell the assets, generally determined using the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

Revenue Recognition

~~Effective January 1, 2019, the~~The Company ~~adopted~~recognizes revenue based on Accounting Standards Codification (“ASC”) ~~Topic~~ 606,Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, ~~Revenue Recognition~~ ~~(“ASC 605”). 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. ~~Under ASC 606, an entity recognizes revenue when its customer obtains control~~See Note 6 for details of ~~promised goods or services, in an amount that reflects~~ the ~~consideration which the entity expects to receive in exchange for those goods or services.~~ development and license agreements.

To determine revenue recognition for arrangements that ~~an entity~~the Company determines are within the scope of ASC 606, the ~~entity~~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 a performance ~~obligation.~~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.

The Company enters into licensing and development agreements which are within the scope of ASC 606, under which it may collaborate with third parties to research, develop, manufacture and commercialize its product candidates. The terms of these arrangements may include payment to the Company of one or more of the following: nonrefundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

As part of the accounting for customer arrangements, the Company must use ~~significant~~ 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 ~~stand-alone~~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 as described further below.~~price.

The transaction price is allocated to each performance obligation on a relative ~~stand-alone~~standalone selling price ~~basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.~~basis. In developing the ~~stand-alone~~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 ~~validates~~recognizes revenue as or when the ~~stand-alone selling price for~~ performance obligations ~~by evaluating whether changes~~under the contract are satisfied. The Company receives payments from its customers based on payment schedules established in ~~the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of transaction price between multiple performance obligations.~~each contract. The Company records any amounts received prior to satisfying the revenue recognition criteria as deferred ~~revenue.~~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 ~~Company only has one~~incremental costs of obtaining a contract ~~within the scope of~~under ASC 606 (i.e. costs that would not have been incurred if the ~~Development Program Letter Agreement (the “CFF Agreement”) with Cystic Fibrosis Foundation (CFF or CF Foundation)~~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). ~~Under the CFF Agreement, CFF made an upfront payment of $200,000 and~~Capitalized costs will ~~make milestone payments~~be amortized to the ~~company as certain milestones defined~~respective expenses using a systematic basis that mirrors the pattern in which the ~~agreement~~Company transfers control of the goods and service to the customer. At each reporting date, the Company determines whether or not the capitalized costs to obtain a contract are ~~met. The~~impaired by comparing the carrying amount of the asset to the remaining amount of consideration that the Company ~~has determined~~received and expects to receive less the costs that ~~there is one performance obligation~~relate to providing services under the CFF Agreement. Hence, all of the estimated transaction price is allocated to this combined performance obligation and is recognized as revenue by measuring progress using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the agreement.

relevant contract. For the three months ended ~~June 30, 2019~~March 31, 2020, there was no amortization of the contract assets and 2018, grant revenue totaled approximately $0 and $22,000, respectively, and for the six months ended June 30, 2019 and 2018, grant revenue totaled approximately $1.0 million and $344,000, respectively. All grant revenue was derived from our award agreement with the CF Foundation.

~~Costs for Collaborative Arrangements~~there have been no impairments as of March 31, 2020.

~~Costs incurred under collaborative arrangements include personnel costs, laboratory supplies,~~Deferred Revenue

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

Research and Development

Research and development ~~in the accompanying condensed consolidated statement of operations. For the three and six months ended June 30, 2018, the Company incurred expenses of $161,000 and $318,000, respectively, related~~costs are expensed to its collaborative arrangement. The Company did not incur any expenses related to its collaborative arrangement during the three and six months ended June 30, 2019 due to the termination of the Company’s collaborative arrangement in 2018.

~~Research and Development~~

~~We recognize research and development expenses~~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;~~

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;

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 acquiring and manufacturing clinical trial materials;

· ~~costs related to compliance with regulatory requirements; and~~

costs related to compliance with regulatory requirements; and

· ~~payments related to licensed products and technologies.~~

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

~~Effective January 1, 2019, the Company early adopted Accounting Standards Update (“ASU”) No. 2018-07,~~ ~~Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting~~. 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.

Prior to the completion of the Company’s initial public offering of common stock on August 16, 2018, due to the absence of a public market trading for the Company’s common stock, it was necessary to estimate the fair value of the common stock underlying the Company’s stock-based awards when performing fair value calculations.

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 ~~positions~~position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. At each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Comprehensive Loss

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

Loss Per Share

Basic loss per ~~common~~ share is calculated by dividing net loss ~~available to common shareholders~~ for the period by the weighted-average number of common shares outstanding during the ~~period. For diluted~~period, without consideration for potentially dilutive securities. Diluted net loss per share ~~calculation purposes,~~is computed by dividing the net loss ~~available to commons shareholders~~by the weighted-average number of common shares and potentially dilutive securities outstanding for the period.

For the three months ended March 31, 2020 and 2019, there is ~~adjusted to add back any preferred stock dividends reflected~~no difference in the ~~condensed consolidated statement~~number of ~~operations for~~shares used to compute basic and diluted net loss per share due to the ~~respective periods.~~Company’s net loss position. The following tables presents the computation of the basic and diluted net loss per share (in thousands, except share and per share data):

	Three Months Ended
	March 31,
	2020			2019
	(unaudited)			(unaudited)
Numerator:
Net loss (basic and diluted)	$	(6,504	)	$	(8,063	)

Denominator:
Weighted-average shares of common stock (basic and diluted)		8,919,393			8,105,636

Basic and diluted net loss per share	$	(0.73	)	$	(0.99	)

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

Three and Six Months Ended

June 30,

2019

2018

(unaudited)

(unaudited)

Convertible preferred stock

—

5,723,919

Stock options to purchase common stock

1,250,145

742,124

Preferred stock warrants

—

1,359,635

Common stock warrants

1,966,930

607,295

3,217,075

8,432,973

	Three Months Ended
	March 31,
	2020		2019
	(unaudited)		(unaudited)
Stock options to purchase common stock		1,373,409		1,239,835
Common stock warrants		1,733,322		1,966,930
		3,106,731		3,206,765

~~The convertible preferred stock and preferred stock warrants in the previous table reflect the conversion of these instruments into their common stock equivalents as of the dates reported.~~

JOBS Act Accounting Election

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

Recently Issued Accounting Pronouncements not yet adopted as of March 31, 2020

Accounting Standards Update 2016-02 and 2018-11

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in ASC 605 and creates a new topic, ASC 606. In 2015 and 2016, the FASB issued additional ASUs related to ASC 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. Companies have the option of applying this new guidance retrospectively to each prior reporting period presented (the full retrospective method) or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application (the modified retrospective method).

The Company only has one contract, the CFF Agreement, within the scope of ASC 606. The cumulative-effect of adopting ASC 606 on January 1, 2019, using the modified retrospective method, was immaterial. The most significant changes under ASC 606 relate to the Company’s determination of transaction price at inception and each reporting period, the revenue recognition pattern under step (v) above for the CFF Agreement as well as treatment of variable consideration in the form of milestone payments. Under ASC 605, the Company recognized revenue under the milestone method up to the limit of the prior approval funding amounts, and when the Company determined that it had earned the right to receive the recognized portion according to the terms of the grant awarded. Upfront payment of $200,000 was recognized straight-line over the term of the contract as the Company believed the upfront fee related to

services performed throughout the contract period and the upfront fee did not represent a substantive milestone within the agreement. Under ASC 606, the Company is recognizing the revenue allocated to the one performance obligation measuring progress using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the agreement.
~~In June 2018, the FASB issued ASU 2018-07,~~ ~~Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting~~, which is intended to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. For public entities, ASU 2018-07 is effective for fiscal years beginning after December 15, 2018. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-07 is effective for the Company for the year ending on December 31, 2020, and all interim periods within. Early adoption is permitted. The Company early adopted this standard on January 1, 2019. The adoption of this standard did not have a material effect on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,Leases ~~(Topic~~(ASC 842). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to ~~Topic~~ASC 842,Leases, which provides clarification to ASU 2016-02. These ASUs (collectively, the new lease standard) require an entity to recognize a lease liability and a right-of-use asset on the condensed consolidated balance sheet for leases with lease terms of more than twelve months. Lessor accounting is largely unchanged, while lessees will no longer be provided with a source of off-balance sheet financing. Initial guidance required the adoption of the new lease standard using the modified retrospective transition method. In July 2018, the FASB issued ASU 2018-11,Leases ~~(Topic~~(ASC 842)—Targeted Improvements, which allows entities to elect an optional transition method where entities may continue to apply the existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative effect adjustment in the period of adoptions rather than in the earliest period presented. In March 2019, FASB issued ASU 2019-01,Codification improvements, which provides clarification on implementation issued associated with adopting ASU 2016-02. ASU 2019-01 enhances the guidance in ASC 842 surrounding the fair value of underlying assets for lessors, presentation of sales-type and direct financing leases on the condensed consolidated statement of cash flows, and transition guidance surrounding accounting changes and error corrections.
This guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In November 2019, the FASB deferred the effective date for adopting the leasing standard updates for private companies, not-for-profit organizations, and smaller reporting companies. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ~~ASU 2016-02 is effective for~~ the ~~Company for the year ended December 31, 2020, and all interim periods within. In July 2019, the FASB voted to issue proposals that would delay the effective date for adopting the~~new leasing standard updates ~~to Topic 842 for private companies, not-for-profit organizations, and smaller reporting companies. If the proposed adoption date deferral is passed, ASU 2016-02~~ would be effective for the Company for the year ended December 31, 2021, and all interim periods within the year ended December 31, 2022, due to its option to defer the adoption of new accounting standards under the JOBS Act. Early adoption is permitted. While the Company continues to review its current accounting policies and practices to identify potential differences that would result from applying the new guidance, the Company expects that its non-cancellable operating lease commitments with a term of more than twelve months will be subject to the new guidance and recognized as right-of-use assets and operating lease liabilities on the Company’s condensed consolidated balance sheets upon adoption. The Company expects to elect transitional practical expedients such that the Company will not need to reassess whether contracts are leases and will retain lease classification and initial direct costs for leases existing prior to the adoption of the new lease standard.

Accounting Standards Update 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (ASC 326)”, which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. For public business entities, ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2020. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-13 is effective for the Company for the fiscal year ending on December 31, 2022, and all interim periods within. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company's condensed consolidated financial statements and disclosures.
Accounting Standards Update 2019-12
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes (ASC 740)”, which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public entities, the ASU 2019-12 is effective forfiscal years and interim periods within those years beginning after December 15, 2020. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2019-12 is effective for the Company for the fiscal year ending on December 31, 2022, and all interim periods within. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
12

3. Fair Value Disclosure

The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, other assets, accounts payable, accrued liabilities, and convertible notes payable approximate fair value due to the short-term nature of these items.

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 I 1	Unadjusted quoted prices in active markets for identical assets or liabilities;
	Level II 2	Inputs other than quoted prices included within Level I1 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 ~~III~~ 3	Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

~~There were no~~ The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, other assets, accounts payable, and accrued liabilities approximate fair value ~~measurements as~~due to the short-term nature of ~~June 30, 2019.~~these items. As of March 31, 2020 and December 31, 2019, the Company did not have any assets or liabilities to be measured at fair value on its condensed consolidated balance sheets.

Fair Value at December 31, 2018

($ in thousands)

Total

Level 1

Level 2

Level 3

Assets:

Deferred charge related to stock options

$
455

$
—

$
455

$
—

Totals

$
455

$
—

$
455

$
—

Liabilities:

Stock option liability

$
455

$
—

$
455

$
—

Totals

$
455

$
—

$
455

$
—

4. Balance Sheet Components

~~Property and Equipment, net~~

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

Property and equipment, net consist of the following (in thousands):
	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
	(unaudited)						(unaudited)
Lab equipment	$	1,764		$	1,737		$	1,804		$	1,804
Computer equipment and software	25			25				25			25
Total property and equipment	1,789			1,762				1,829			1,829
Less: Accumulated depreciation	(654		)	(491		)		(906	)		(823	)
Property and equipment, net	$	1,135		$	1,271		$	923		$	1,006

Depreciation expense was approximately ~~$82,000~~$83,000 and ~~$72,000~~$81,000 for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and approximately $163,000 and $122,000 for the six months ended June 30, 2019 and 2018,~~ respectively.

Intangible Assets, net

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

Intangible assets, net consist of the following (in thousands):
	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
	(unaudited)						(unaudited)
Licenses	$	81		$	81		$	81		$	81
Less: Accumulated amortization	(46		)	(43		)		(50	)		(49	)
Intangible assets, net	$	35		$	38		$	31		$	32

Amortization expense was approximately $1,000 and ~~$1,000~~$2,000 for the three ~~months~~month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and approximately $3,000 and $2,000 for the six months ended June 30, 2019 and 2018,~~ respectively.

~~Accrued Liabilities~~

Accrued ~~liabilities consist of the following (in thousands):~~Liabilities

June 30,

December 31,

2019

2018

(unaudited)

Research and development services

$
3,072

$
2,179

Stock option liability

—

455

Payroll related expenses

199

254

Professional services

197

56

Accrued liabilities

$
3,468

$
2,944

Accrued liabilities consist of the following (in thousands):
	March 31,		December 31,
	2020		2019
	(unaudited)
Research and development services	$	2,443	$	2,709
Payroll related expenses		223		150
Professional services		149		115
Accrued liabilities	$	2,815	$	2,974

5. Equity Method Investment

On February 11, 2018, the Company entered into a joint venture agreement (the “JV Agreement”) with ~~Shenzen~~Shenzhen Hepalink Pharmaceutical Group Co., Ltd., a related party, principal shareholder of the Company, and a Chinese entity (“Hepalink”), for developing and commercializing products for infectious diseases. Under the terms of the JV Agreement, the Company ~~is obligated to contribute $1~~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 ~~entity~~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 Peoples Republic of China.~~

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~~It was agreed by 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 andparties that the Company ~~does not hold decision-making power over activities that significantly impact~~shall be reimbursed for certain legal and contract manufacturing expenses related to the ~~JV Entity’s operations.~~ 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 10).

The Company accounted for its investment in the JV Entity as an equity method investment. The Company recorded the equity method investment at $1$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. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, the Company recognized approximately ~~$186,000~~$9,000 and ~~$628,000~~$442,000 losses from the operations of the JV Entity, respectively. ~~For the three and six months ended June 30, 2018, the Company did not recognize any losses from the operations of the JV Entity as the JV operations had not started until the third quarter of 2018.~~ As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company’s equity method investment in the JV Entity was approximately ~~$332,000~~$0 and ~~$960,000,~~$9,000, respectively.

6. ~~Warrants~~Development and License Agreements

Cystic Fibrosis Foundation Development Agreement

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

The Company determined that the CFF Agreement was under the scope of ASC 606 and that the clinical research activities are considered one performance obligation. Hence, the entire estimated transaction price is allocated to this combined performance obligation and is recognized as revenue by measuring progress using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the CFF Agreement. The remaining milestones at March 31, 2020 of approximately $4.8 million related to clinical research activities are constrained and evaluated at every reporting period.

There was no revenue from the CFF agreement recognized during the three months ended March 31, 2020. For the three months ended March 31, 2019, all grant revenue totaling approximately $1.0 million was derived from the CFF Agreement.

Serum License Agreement

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

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

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

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

The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of specified milestones related to completion of certain trials and regulatory approvals as defined in the License Agreement.Further, the Company may receive additional royalty-based payments from SAMR if certain sales levels on licensed products are achieved as defined in the License Agreement. The Company concluded that these milestones and royalty payments each contain a significant uncertainty associated with a future event. As such, these milestone and royalty payments are constrained at contract inception and are not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these payments. At the end of each reporting period, the Company will update its assessment of whether the milestone and royalty payments are constrained by considering both the likelihood and magnitude of the potential revenue reversal. At March 31, 2020 and December 31, 2019, 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 million from upfront payments under the License Agreement and approximately $4.6 million from the equity allocation as noted above, which was allocated among the performance obligations and material promises based on their respective related standalone selling prices. The Company allocated the $19.6 million transaction price to the following: approximately $14.5 million to the licenses and know-how; approximately $79,000 to the development support services; approximately $892,000 to the research and development option; and approximately $4.1 million to the manufacturing rights option. See further disclosure related to the License Agreement in the Company’s audited consolidated financial statements and notes thereto for the preceding fiscal year included in the Company’s Annual Report on Form 10-K filed with the United States SEC on April 8, 2020.

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

7. Warrants

Common Stock Warrant Expense

In November 2015, an engagement letter was effectuated with the Company’s current Vice Chairman of the Board of Directors. Under the terms of the engagement, upon being appointed the Company’s Vice Chairman and the closing of a minimum of $25 million in gross proceeds from sales of its Series A convertible preferred stock under a private placement memorandum, the Vice Chairman would receive 234,860 common stock warrants. On December 12, 2016, ~~both of the aforementioned conditions had been met and~~ the Company issued 234,860 common stock warrants at an exercise price of $14.50 per ~~share.~~

~~The fair value~~share to its former Vice Chairman of the ~~warrants was determined using a Monte Carlo simulation method which calculates the estimated value based on running numerous simulations and analyzing the various outcomes.~~Board of Directors. The total fair value of the award was approximately $661,000 and iswas being amortized over ~~the~~a five-year vesting period. On August 13, 2019, this board member was not up for re-election at the annual shareholder’s meeting, therefore the vesting of the common stock warrants ceased on August 13, 2019 resulting in the cancellation of 109,601 unvested warrants. For ~~each of~~ the three months ended ~~June 30,~~March 31, 2019, ~~and 2018 and for each of the six months ended June 30, 2019 and 2018,~~ the Company recorded stock-based compensation expense of approximately $33,000, ~~and $66,000, respectively,~~ related to these warrants.

~~7. Convertible Preferred Stock~~

In connection with the IPO, the holders of a majority of the Series A Preferred Stock approved the mandatory conversion of the Series A Preferred Stock into one share of common stock for every 6.417896 shares of Series A Preferred Stock which converted immediately prior to the consummation of the IPO. Upon conversion, a total of 5,744,586 shares of common stock were issued for the converted Series A Preferred Stock which includes accrued dividends upon conversion. All warrants to purchase Series A Preferred Stock became warrants to purchase common stock, adjusted for the 1 for 6.417896 shares reverse stock split.

8. Common Stock

~~As of June 30, 2019 (unaudited), the Company had reserved the following common stock for future issuance:~~

As of March 31, 2020 (unaudited), the Company had reserved the following common stock for future issuance:

	Shares reserved for exercise of outstanding warrants to purchase common stock		~~1,966,930~~	1,733,322
	Shares reserved for exercise of outstanding options to purchase common stock		~~1,250,145~~	1,373,409
	Shares reserved for issuance of future options		~~336,500~~	361,708
~~Total~~	Total	~~3,553,575~~		3,468,439

9. Stock-Based Compensation

Equity Incentive Plan

In May 2014, the Company adopted and the shareholders approved the 2014 Equity Incentive Plan (the ~~“2014 Plan”)~~2014 Plan). Under the 2014 Plan, 233,722 shares of the Company’s common stock ~~have been~~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 ~~and nonstatutory~~ stock options may not be less than 110% of fair market ~~value.~~value, as determined by the Board of Directors. The terms of options granted under the 2014 Plan may not exceed ten years.

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

77,908 shares of our common stock; or

· ~~Such~~

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

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 months ended March 31, 2020 is represented in the following table:

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted- Average Exercise Price
Balances at December 31, 2019		196,982			1,380,312		$	10.06
Additional shares reserved		162,736			—			—
Options granted		(28,500	)		28,500			4.76
Options exercised		—			(4,913	)		2.89
Options cancelled		30,490			(30,490	)		15.08
Balances at March 31, 2020		361,708			1,373,409		$	9.86

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 ~~periods presented~~three months ended March 31, 2020 and 2019 were estimated using the following assumptions:

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Expected term (in years)

6.25

N/A

6.25

6.25

Expected volatility

95%

N/A

78% - 95%

78% - 79%

Risk-free interest-rate

2.06%

N/A

2.06% - 2.67%

2.22% - 2.62%

Dividend yield

0%

N/A

0%

0%

	Three Months Ended March 31,
	2020		2019
Expected term (in years)		6.00		6.25
Expected volatility		84% - 94%		78% - 82%
Risk-free interest-rate		0.51% - 1.73%		2.47% - 2.53%
Dividend yield		0%		0%

~~Stock option activity for~~During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, the Company granted options to purchase 28,500 and 343,875 shares with a weighted-average grant date fair value of $3.60 and $6.52 per share, respectively, and the aggregate intrinsic value of options exercised was approximately $17,000 and $15,000, respectively.

Stock-Based Compensation

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

	Three Months Ended March 31,
	2020		2019
	(unaudited)		(unaudited)
Research and development	$	145	$	173
General and administrative		332		244
Total	$	477	$	417

As of March 31, 2020, total unrecognized stock-based compensation expenses related to unvested stock options was approximately $4.2 million, which is ~~represented~~expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.48 years.

10. 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 ~~following table:~~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 31, 2020 and 2019, the Company recorded approximately $72,000 and $703,000, 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. Asof March 31, 2020 and December 31, 2019, the Company recorded approximately $72,000 and $152,000, respectively, in other receivables on the condensed consolidated balance sheets for amounts owed to the Company by the JV Entity under this arrangement and the Company expects the amounts to be collectable and as a result, no reserve for uncollectability was established.

Options Outstanding

Shares
Available
for Grant

Number of
Shares

Weighted-
Average
Exercise Price

Balances at December 31, 2018

—

825,205

$
12.15

Additional shares reserved

763,973

—

—

Options granted

(460,292
)
460,292

8.78

Options exercised

—

(2,533
)
2.89

Options cancelled

32,819

(32,819
)
10.81

Balances at June 30, 2019

336,500

1,250,145

$
10.54

Serum International B.V.

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

The Company ~~recognized stock compensation~~determined that no performance obligations or material promises were satisfied as of March 31, 2020 and December 31, 2019. Therefore, no revenue related to ~~stock options as follows (in thousands):~~

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Research and development

$
198

$
139

$
371

$
280

General and administrative

305

179

549

509

Total

$
503

$
318

$
920

$
789

Asthe License Agreement was recognized during the three months ended March 31, 2020 and the year ended December 31, 2019. The Company has recorded contract liabilities resulting from the License Agreement of ~~June 30,~~approximately $14.7 million and $14.6 million to deferred revenue, current, and approximately $4.9 million and $5.0 million to deferred revenue, noncurrent, on its condensed consolidated balance sheets at March 31, 2020 and December 31, 2019, respectively. The Company capitalized a contract asset resulting from the ~~Company had unrecognized stock-based compensation~~License Agreement of approximately $2.1 million related to ~~stock options~~the incremental costs of obtaining the License Agreement on its condensed consolidated balance sheets, of which approximately ~~$5.1 million. As of June 30, 2019, the intrinsic value of all vested options and outstanding options was approximately $1.3~~$1.5 million and ~~$2.0~~$1.5 million is classified as current, and approximately $520,000 and $526,000 is classified as noncurrent, as of March 31, 2020 and December 31, 2019, respectively.

~~10.~~11. Commitments and Contingencies

Leases

The Company leases office and lab space in San Jose, California under an operating lease arrangement which can be terminated at any time with 90 days’ notice. The Company recognizes rent expense as incurred. ~~The Company recognized rent~~Rent expense ~~of $82,000~~was approximately $102,000 and ~~$77,000~~$81,000, for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $163,000 and $155,000 for~~respectively. The Company is considering moving into new premises during the ~~six months ended June 30, 2019 and 2018, respectively.~~second half of 2020.

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.

~~Contingencies~~License Agreements

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

Contingencies

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

From time to time, the Company may be involved in various legal proceedings, claims and litigation arising in the ordinary course of business. See below Legal Proceedings for a legal complaint filed during the three months ended March 31, 2020. As of ~~June 30, 2019 and~~ December 31, ~~2018,~~2019, there were no pending legal proceedings.

Legal Proceeding

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

Grant Income

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

Cystic Fibrosis Foundation Agreement

In December 2016, the Company received an award for up to ~~$2,902,097~~$2.9 million from the ~~Cystic Fibrosis Foundation~~CFF to advance research on potential drugs utilizing inhaled gallium citrate anti-infective. In November 2018, the ~~Cystic Fibrosis Foundation~~CFF increased the award to ~~$7,466,000.~~$7.5 million. Under the award agreement, the ~~Cystic Fibrosis Foundation~~CFF will make payments to the Company as certain milestones are met. The award agreement also contains a provision whereby if the Company spends less on developing a potential drug utilizing inhaled gallium citrate anti-infective than the Company actually receives under this award agreement, the Company will be required to return the excess portion of the award to the ~~Cystic Fibrosis Foundation.~~CFF. At the end of any reporting period, if the Company determines that the cumulative amount spent on this program is less than the cumulative cash received from the ~~Cystic Fibrosis Foundation,~~CFF, the Company will record the excess amount received as a liability. No liability related to this excess amount was recorded by the Company as of March 31, 2020 and December 31, 2019.

In the event that development efforts are successful and the Company commercialized a drug from these related development efforts, the Company ~~may~~will be subject to ~~pay~~paying to ~~Cystic Fibrosis Foundation~~CFF a one-time amount over time equal to nine times the actual net award ~~received.~~received from CFF. Such amount shall be paid in not more than five annual installments, as follows: within ninety days of the end of the calendar

year in which the ~~First Commercial Sale~~first commercial sale occurs, and within ninety days of the end of each subsequent calendar year until the net amount received from CFF is ~~paid.~~repaid. The Company shall pay 15% of ~~Net Sales~~net sales for that calendar year up to the amount of the net award received from CFF (except that in the fifth installment, if any, the Company shall pay the remaining unpaid portion of the ~~awarded amount)~~net award received from CFF).

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

~~11. Related Parties~~In the event that the development efforts are delayed, which result from events within the Company’s control, for more than one hundred eighty (180) consecutive days at any time before the first commercialization of the drug from the related development efforts, the CFF may provide an interruption notice to the Company. The Company then has thirty (30) days to respond to such notice. If the Company does not respond within thirty (30) days, an interruption license shall be effective. The interruption license to the CFF is an exclusive, worldwide license under the development program technology to manufacture, have manufactured, license, use, sell, offer to sell, and support the product in the field and includes financial conditions for both parties.

None of these events have occurred as of March 31, 2020.

12. Subsequent Events

~~On February 11, 2018,~~In May 2020, the Company ~~entered into~~was granted a ~~JV Agreement with Hepalink which is a related party and principal shareholder~~loan (the “Loan”) from Silicon Valley Bank in the ~~Company,~~aggregate amount of approximately $715,000, 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. As of June 30, 2019 and December 31, 2018, the Company recorded Paycheck Protection Program (the “PPP”).~~approximately $1.3 million and $360,000, respectively, in other receivables on the condensed consolidated balance sheet for amounts owed to the Company by the JV Entity under this arrangement.~~ The ~~Company expects the amounts to be collectable and~~PPP, established as ~~a result, no reserve for uncollectability was established.~~

~~12. Subsequent Events~~

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 grants SIBV the option to license multiple programs from the Company and access the Company’s MabIgX® platform technology for asset identification and selection (the “License Agreement”). As part of the ~~option agreement, SIBV made an equity investment whereby the Company issued 801,820 shares of its restricted common stock~~Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to ~~SIBV at a price of approximately $12.47 per share~~qualifying businesses for total gross proceeds of $10 million, and after deducting commissions of approximately $0.8 million, the net proceeds were approximately $9.2 million. In addition, the Company received an upfront cash payment of $5 million upon execution of this option agreement and expectsamounts up to ~~receive an additional $10 million upon the completion~~2.5 times of the ~~License Agreement by August 31, 2019.~~average monthly payroll expenses of the qualifying business. The ~~upfront payment~~loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of ~~$5 million~~loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. The unforgiven portion of the Loan is ~~refundable should~~payable over two years at an interest rate of 1% per annum, with a deferral of payments for the ~~parties not complete~~first six months. The Company intends to use the ~~License Agreement by August 31, 2019.~~total Loan proceeds for purposes consistent with the PPP.

FORWARD-LOOKING STATEMENTS

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

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

the timing of regulatory submissions;

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

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

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

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

risks associated with obtaining funding from third parties;

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

management and employee operations and execution risks;

loss of key personnel;

competition;

risks related to market acceptance of products;

intellectual property risks;

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

risks associated with the uncertainty of future financial results;

our ability to attract collaborators and partners; and

risks associated with our reliance on third party organizations.

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

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

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, ~~2018,~~2019, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K filed with the SEC on ~~March 28, 2019.~~April 8, 2020. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. All amounts in this report are in U.S. dollars, unless otherwise noted.

~~All dollar amounts in this discussion and analysis are to the nearest thousand unless otherwise noted.~~

Overview

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

Recently we announced the development of ~~our~~a novel antibody discovery and production platform technology called APEX^TM. This technology complements and further extends the capabilities of MabIgX^® to quickly screen large number of antibody producing B-cells from patients and generation of high mAb producing mammalian production cell line at a speed not previously attainable. As a result, we can significantly reduce time for antibody discovery and manufacturing compared to conventional approaches. This technology is being applied for the discovery and manufacturing of COVID-19 monoclonal antibodies.

Our lead product ~~candidates have~~candidate, AR-301 has exhibited promising preclinical data and Phase 1/2a clinical data ~~are available~~ from ~~two completed studies. Our lead product candidate,~~a Phase 1/2a clinical study in patients. AR-301 targets the alpha toxin produced by gram-positive bacteriaStaphylococcus aureus, orS. aureus, a common pathogen associated with HAP and VAP. WeIn contrast to other programs targetingS. aureus toxins, we are developing AR-301 as a treatment of pneumonia, rather than prevention ofS. aureus colonized patients from progression to pneumonia. In January 2019, we initiated a Phase 3 pivotal trial evaluating AR-301 for the treatment of HAP and ~~VAP,~~VAP. The on-going COVID-19 epidemic has caused an impact on patient enrollment globally and the rate of clinical site activation. We provisionally expect to report an interim data readout in the second half of 2020, and complete enrollment and top-line ~~results~~data in ~~late 2020. The other lead product candidate, AR-105, targets gram-negative bacteria Pseudomonas aeruginosa , or P. aeruginosa, has been~~the second half of 2021.

To complement and diversify our portfolio of targeted monoclonal antibodies, we are developinga broad spectrum small molecule non-antibiotic anti-infective gallium citrate (AR-501). AR-501 is being developed in collaboration with the Cystic Fibrosis Foundation (CFF) as a chronic inhaled therapy to treat lung infections in cystic fibrosis patients. In 2018, AR-501 was granted ~~Fast-Track designation~~Orphan Drug, Fast Track and Qualified Infectious Disease Product (QIDP) designations by the FDA. ~~We completed the enrollment and dosing of the global Phase 2 trial for AR-105 in HAP and VAP and expect to report top-line results of the AR-105 Phase 2 trial in~~During the third quarter of ~~2019.~~2019, the European Medicines Agency (EMA) granted the program Orphan Drug Designation. We initiated a Phase 1/2a clinical trial in December 2018 of the inhalable formulation of gallium citrate, which is being evaluated for the treatment of chronic lung infections associated with cystic fibrosis. We provisionally expect to report data from the Phase 1 portion of the trial into which healthy subjects were enrolled in the first half of 2020 and the Phase 2a portion with cystic fibrosis subjects in the second half of 2021.

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

We have incurred losses ~~in most years~~ since our inception. Our net losses were approximately ~~$16.4~~$6.5 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~$22.1~~$29.7 million for the year ended December 31, ~~2018.~~2019. As of ~~June 30, 2019,~~March 31, 2020 we had approximately $16.3 million of cash and cash equivalents and had an accumulated deficit of approximately ~~$87.5~~$107.3 million. ~~As of June 30, 2019, we had $8.5 million of cash and cash equivalents.~~ Substantially all 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.

~~On August 16, 2018,~~In September 2019, we ~~completed~~entered into a Common Stock Sales Agreement (the “ATM Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) under which we may offer and sell, from time to time, in our sole discretion, shares of common stock having an ~~initial public~~aggregate offering ~~or “IPO”~~price of up to $25 million through Cantor as our sales agent. We will pay Cantor a commission of up to three percent (3.0%) of the gross sales proceeds of any common stock sold through Cantor under the ATM Agreement, and also provided Cantor with customary indemnification rights. Our registration statement on Form S-3 contemplated under the ATM Agreement was declared effective by the SEC on September 5, 2019. The registration statement on Form S-3 includes a base prospectus covering the offering of up to $100 million in aggregate shares of securities as defined within the prospectus and a prospectus supplement of up to a maximum aggregate offering of $25 million in common stock in ~~which~~accordance with the ATM Agreement. As of March 31, 2020, we have not sold ~~and issued 2,000,000~~any shares ~~plus 192,824 shares subsequently sold~~of common stock under the ATM Agreement.

In May 2020, we were granted a loan (the “Loan”) from Silicon Valley Bank in the aggregate amount of approximately $715,000, pursuant to the ~~partial exercise by~~Paycheck Protection Program (the “PPP”).The PPP, established as part of the ~~underwriters~~Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of ~~their over-allotment option,~~the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. The unforgiven portion of the Loan is payable over two years at an ~~issuance price~~interest rate of ~~$13.00~~1% per ~~share, less underwriting discounts and commissions. As~~annum, with a ~~result~~deferral of the IPO and the exercise of the underwriters’ over-allotment option, we received total net proceeds of approximately $25.1 million, net of underwriting and other offering expenses. Our expenses and resulting cash burn during the six months ended June 30, 2019, were largely due to costs associated with launching the Phase 3 study of ~~AR-301~~payments for the ~~treatment of ventilator associated pneumonia caused by~~first six months. We intend to use the ~~Staphylococus aureus bacteria and the Phase 1 / 2 study of AR 501~~total Loan proceeds for the treatment of chronic lung infections associated with cystic fibrosis. These studies’ start up phases, which contain a disproportionately high percentage of total study expenses, have been largely completed.

In July 2019, we issued and sold 801,820 shares of restricted common stock to a new investor, Serum International B.V. (“SIBV”), an affiliate of Serum Institute of India Private Limited, at a price of approximately $12.47 per share and received total gross proceeds of $10 million, and after deducting commissions of approximately $0.8 million, the net proceeds were approximately $9.2 million. In addition, the Company received an upfront cash payment of $5 million upon the execution of an option agreement with SIBV and expects to receive an additional $10 million upon the completion of a license agreement with SIBV by August 31, 2019. The upfront

payment of $5 million is refundable should the parties not complete the license agreement by August 31, 2019. However, until the full license agreement is completed, we believe that our current available cash and cash equivalents, alongpurposes consistent with the additional cash raised from the sale of restricted common stock in July 2019, will not be sufficient to fund our planned expenditures and meeting our obligations for at least the one-year period following our financial statements issuance date.PPP.

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

Substantially all our net losses have resulted from costs incurred in connection with our research and development programs, clinical trials, intellectual property matters, building our manufacturing capabilities, and from general and administrative costs associated with our operations.

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; ~~and~~

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

experience protracted COVID-19 related delays.

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

Critical Accounting Policies and Estimates

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

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

~~Financial Overview~~

Use of Estimates

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

~~Reverse Stock Split~~Revenue Recognition

On August 3, 2018, we effected a 1 for 6.417896 reverse stock split of our common stock. The par value and the number of authorized shares of the common and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock share and per-share amounts for all periods presented in this Quarterly ReportWe recognize revenue based on ~~Form 10-Q have been adjusted retroactively to reflect the reverse stock split.~~

~~Initial Public Offering~~

On August 13, 2018, our registration statement on Form S-1 relating to our initial public offering of our common shares (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). The IPO closed on August 16, 2018 and we issued and sold 2,000,000 common shares at a public offering price of $13.00 per share. Gross proceeds totaled $26.0 million and net proceeds totaled $22.8 million after deducting underwriting discounts and commissions of $1.8 million and other offering expenses of approximately $1.4 million. The underwriters of the IPO partially exercised their over-allotment option, and on August 30, 2018 we issued and sold 192,824 common shares at a public offering price of $13.00 per share for gross proceeds totaling approximately $2.5 million and net proceeds of approximately $2.3 million after deducting underwriting discounts and commissions of approximately $0.2 million.

In connection with the IPO, the holders of a majority of the Series A Preferred Stock approved the mandatory conversion of the Series A Preferred Stock into one share of common stock for every 6.417896 shares of Series A Preferred Stock which converted immediately prior to the consummation of the IPO. Upon conversion, a total of 5,744,586 shares of common stock were issued for the converted Series A Preferred Stock which includes the accrued dividends upon conversion. All warrants to purchase Series A Preferred Stock became warrants to purchase common stock, adjusted for the 1 for 6.417896 shares reverse stock split.

~~Revenue~~

Our sources of revenue are grants and contract services provided to third party entities related to research and development activities under specific agreements with such granting authorities and third parties. As there is a contractually agreed upon price, and collectability from the granting authorities or other entities is reasonably assured, revenue for these services are earned according to the terms of the respective agreements, usually as progress is made throughout the term of the agreement or as certain material milestones are met. Primarily all our revenue to date has been derived from our previously held contracts with the National Institutes of Health, our collaboration agreement with GlaxoSmithKline Biologicals S.A., (GSK) and our continuing grant agreement with the Cystic Fibrosis Foundation (CF Foundation or CFF).

Under the Development Program Letter Agreement (the “CFF Agreement”) with CFF, entered into in December 2016, the Company recognized revenue of $0 and $22,000 million for the three months ended June 30, 2019 and 2018, respectively, and recognized $1.0 million and $344,000 for the six months ended June 30, 2019 and 2018, respectively. The Company adopted Accounting Standards Codification ~~Topic~~(“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 ~~January 1,~~the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the standalone selling price for each performance obligation identified in the contract for the allocation of the transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration should be included in the transaction price.

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

Under the Development Program Letter Agreement with CFF (the “CFF Agreement”), entered into in December 2016 and amended in November 2018 to support funding for the development of our Inhaled Gallium Citrate Anti-Infective program, we recognized revenue of approximately $1.0 million for the three months ended March 31, 2019. The ~~cumulative-effect of adopting ASC 606 on January 1, 2019, using~~Company recognized no revenue during the modified retrospective method, was immaterial. Under ASC 606, the Company is recognizing revenue over the expected research and development period using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the agreement. For the foreseeable future, we expect substantially all of our revenue will be generated from our grant with CFF, and any other collaborations or agreements we may enter into.

three months ended March 31, 2020. We expect that any revenue we generate for the foreseeable future will fluctuate from period to period as a result of the timing of when performance obligations and variable consideration criteria under the contract are satisfied.

Research and Development Expenses

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

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

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. We typically use our employee and infrastructure resources across multiple research and development programs, and accordingly we have not historically allocated resources specifically to our individual clinical programs.

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

General and Administrative Expenses

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

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

Interest and Other Income, Net

Interest and other income, net consists primarily of interest on our cash balances.

~~Critical Accounting Policies and Estimates~~

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

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

~~Use of Estimates~~Stock-Based Compensation

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 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, revenue recognition, long lived assets, income taxes, assumptions used in the Black Scholes Merton (“BSM”) model to calculate the fair value of stock based compensation, Monte Carlo Simulation (“MSM”) model to calculate the fair value of warrants, deferred tax asset valuation allowances, valuation of the Company’s common and convertible preferred stock, fair value assumptions used in the valuation of warrants, preclinical study and clinical trial accruals and various accrued liabilities. Actual results could differ from those estimates.

~~Revenue Recognition~~

Effective January 1, 2019, we adopted ASC 606, using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. ASC 606 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. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity 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 a performance obligation. We only apply 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, we assess the goods or services promised within each contract, determines 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.

We enter into licensing and development agreements which are within the scope of ASC 606, under which it may collaborate with third parties to research, develop, manufacture and commercialize its product candidates. The terms of these arrangements may include payment to us of one or more of the following: nonrefundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

As part of the accounting for customer arrangements, we must use significant 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 stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration should be included in the transaction price as described further below.

The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. In developing the stand-alone 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 validate the stand-alone selling price for performance obligations by evaluating whether changes in the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of transaction price between multiple performance obligations. We record any amounts received prior to satisfying the revenue recognition criteria as deferred revenue. Amounts recognized as revenue, but not yet received or invoiced are recorded within other receivables on the condensed consolidated balance sheet.

We only have one contract within the scope of ASC 606, the CFF Agreement with CFF. Under the CFF Agreement, CFF made an upfront payment of $200,000 and will make milestone payments to us as certain milestones defined in the agreement are met. We have determined that there is one performance obligation under the CFF Agreement. Hence, all of the estimated transaction price is allocated to this combined performance obligation and is recognized as revenue by measuring progress using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the agreement.

Total grant revenue derived from our award agreement with the CF Foundation for the three months ended June 30, 2019 and 2018, was approximately $0 and $22,000, respectively, and for the six months ended June 30, 2019 and 2018, was approximately $1.0 million and $344,000, respectively.

~~Stock-Based Compensation~~

~~Effective January 1, 2019, we early adopted ASU 2018-07,~~ ~~Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.~~ 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.

Due to the absence of a public market trading for our common stock prior to going public in August of 2018, it was necessary to estimate the fair value of the common stock underlying our stock-based awards when performing fair value calculations. The estimated fair value of our common stock was determined using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants, or AICPA, Practice Aid: Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

~~Fair Value of Common Stock~~

Prior to our public initial offering in August of 2018, to assist our board of directors with the determination of the exercise price of our stock options and the fair value of the common stock underlying the options, we obtained third-party valuations of our common stock as of various dates since we began granting options, with concluded fair values between $2.89 per share and $17.91 per share. Our board of directors considered the fair values of the common stock derived in the third-party valuations as one of the factors it considered when setting the exercise prices for options granted. The valuations were performed in accordance with applicable elements of the AICPA Practice Aid. The AICPA Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the AICPA Practice Aid, we considered the following methods:

·~~Option Pricing Method.~~ Under the option pricing method, or OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The estimated fair values of the preferred and common stock are inferred by analyzing these options.

·~~Probability-Weighted Expected Return Method.~~ Under the probability-weighted expected return method, or PWERM, common equity value is based upon an analysis of various future outcomes, such as an initial public offering, or IPO, merger or sale, dissolution, or continued operation as a private enterprise until a later exit date. The future allocated value is based upon the probability-weighted present values of expected future investment returns, considering each of the possible outcomes available to the enterprise, as well as the rights of each security class.

Our board of directors also considered a range of objective and subjective factors and assumptions in estimating the fair value of our common stock on the date of grant, including: progress of our research and development efforts; our operating results and financial condition, including our levels of available capital resources; rights and preferences of our common stock compared to the rights and preferences of our other outstanding equity securities; our stage of development and material risks related to our business; our commercial success in regard to our catheter sales; the achievement of enterprise milestones; the valuation of publicly-traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies; equity market conditions affecting comparable public companies; the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering given prevailing market and biotechnology sector conditions; and that the grants involved illiquid securities in a private company. Following the closing of our public offering in August 2018, the fair value of our common stock is determined based on the closing price of our common stock on The Nasdaq Capital Market on the date immediately prior to the date of grant.

Income Taxes

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

deferred tax assets to the amounts expected to be realized. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ no income tax expense or benefit was recognized, primarily due to a full valuation allowance recorded against the net deferred tax ~~asset.~~asset

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by the relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the ~~positions~~position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. At each balance sheet date, unresolved uncertain tax positions must be reassessed, and we ~~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.

Going Concern

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

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

Results of Operations

Comparison of the Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

The following table summarizes our results of operations for the three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):

	Three Months Ended June 30,									Three Months Ended March 31,
	2019			2018			Change $			2020			2019			Change $
Revenue:										(unaudited)			(unaudited)
Grant revenue	$	—		$	22		$	(22	)	$	—		$	1,022		$	(1,022	)
Operating expenses:
Research and development	6,653			3,885			2,768				4,917			7,118			(2,201	)
General and administrative	1,613			687			926				1,639			1,641			(2	)
Total operating expenses	8,266			4,572			3,694				6,556			8,759			(2,203	)
Loss from operations	(8,266		)	(4,550		)	(3,716		)		(6,556	)		(7,737	)		1,181
Other income (expense):
Interest and other income, net	69			68			1				61			116			(55	)
Change in fair value of warrant liability	—			3,058			(3,058		)
Equity in net loss from equity method investment	(186		)	—			(186		)
Share of loss from equity method investment											(9	)		(442	)		433
Net loss	$	(8,383	)	$	(1,424	)	$	(6,959	)	$	(6,504	)	$	(8,063	)	$	1,559

Grant Revenue. Grant revenue decreased ~~by $22,000~~ from $22,000 for the three months ended June 30, 2018 to $0 for the three months ended June 30, 2019 due to the Company not recognizing any revenue related to the grant award from the Cystic Fibrosis Foundation during the second quarter of 2019.

~~Research and Development Expenses.~~ ~~Research and development expenses increased by~~ approximately ~~$2.8 million from $3.9~~$1.0 million for the three months ended ~~June 30, 2018~~March 31, 2019 to ~~$6.7~~zero for the three months ended March 31, 2020 primarily due to the recognition of revenue related to a milestone under the grant award from the CFF during the first quarter of 2019 and none during the first quarter of 2020.

Research and Development Expenses. Research and development expenses decreased by approximately $2.2 million from $7.1 million for the three months ended ~~June 30,~~March 31, 2019 to $4.9 million for the three months ended March 31, 2020 due primarily to an increase in spending on clinical trial activities and drug manufacturing for our AR-301 program, and an increase in spending on drug manufacturing for the Phase 3 study of our AR-105 program, partially offset by a decrease in spending on clinical trial activities for the Phase 2 study of our AR-105 program, which ended during 2019, and a decrease in ~~spending on toxicology studies~~drug manufacturing expenses related to our Phase 3 clinical trial of AR-301. These decreases were partially offset by an increase in spending on our Phase 3 clinical trial activities of AR-301 and an increase in spending on the Phase 1/2a clinical trial of our AR-501 program.

General and Administrative Expenses. ~~General~~ There was no material difference in general and administrative expenses ~~increased by approximately $926,000 from $687,000~~ for the three months ended ~~June 30, 2018~~March 31, 2020 as compared to ~~$1.6 million~~the three months ended March 31, 2019.

Interest and Other Income, Net. Interest and other income, net decreased by approximately $55,000 from $116,000 for the three months ended ~~June 30,~~March 31, 2019 ~~due primarily~~ to an increase in professional service fees, an increase in personnel related expenses, including stock-based compensation, directors and officers’ liabilities insurance expense, and an increase in Delaware franchise taxes and patent related fees.

~~Interest and Other Income, Net.~~ ~~Interest and other income, net increased by approximately $1,000 from $68,000~~$61,000 for the three months ended ~~June 30, 2018~~March 31, 2020 due primarily due to ~~$69,000~~a lower average cash balance and lower interest rates.

Share of Loss in Equity Method Investment. Loss from equity method investment decreased by approximately $433,000 from $442,000 for the three months ended ~~June 30,~~March 31, 2019 ~~due primarily~~ to ~~a higher rate of return on our cash balance partially offset by a lower average cash balance.~~

~~Change in Fair Value of Warrant Liability.~~ ~~Change in fair value of warrant liability decreased by approximately $3.1 million from a gain of $3.1 million~~$9,000 for the three months ended ~~June 30, 2018 to $0 for the three months ended June 30, 2019 due to our Series A convertible preferred stock being converted into common stock upon our IPO in August 2018.~~

~~Equity in Net Loss of Equity Method Investment.~~ ~~Loss from equity method investment increased by $186,000 from $0 for the three months ended June 30, 2018 to $186,000 for the three months ended June 30, 2019~~March 31, 2020 due to our share of loss from our minority interest calculated under the equity ~~method.~~method which was limited to the reduction of the net book value of the investment to zero.

~~Comparison of the Six Months Ended June 30, 2019 and 2018~~

~~The following table summarizes our results of operations for the six months ended June 30, 2019 and 2018 (in thousands):~~

Six Months Ended
June 30,

2019

2018

Change $

Grant revenue

$
1,022

$
344

$
678

Operating expenses:

Research and development

13,771

10,511

3,260

General and administrative

3,254

1,753

1,501

Total operating expenses

17,025

12,264

4,761

Loss from operations

(16,003
)
(11,920
)
(4,083
)
Other income (expense):

Interest and other income, net

185

142

43

Change in fair value of warrant liability

—

3,021

(3,021
)
Equity in net loss from equity method investment

(628
)
—

(628
)
Net loss

$
(16,446
)
$
(8,757
)
$
(7,689
)

~~Grant Revenue.~~ Grant revenue increased by $678,000 from $344,000 for the six months ended June 30, 2018 to $1 million for the six months ended June 30, 2019 due the recognition of revenue from the achievement of certain performance obligations and variable consideration related to the grant award from the Cystic Fibrosis Foundation.

~~Research and Development Expenses.~~ Research and development expenses increased by approximately $3.3 million from $10.5 million for the six months ended June 30, 2018 to $13.8 million for the six months ended June 30, 2019 due primarily to an increase in spending on clinical trial activities and drug manufacturing for our AR-301 program, partially offset by a decrease in spending on clinical trial activities and drug manufacturing for our AR-105 program and a decrease in spending on toxicology studies related to our AR-501 program.

~~General and Administrative Expenses.~~ General and administrative expenses increased by approximately $1.5 million from $1.8 million for the six months ended June 30, 2018 to $3.3 million for the six months ended June 30, 2019 due primarily to an increase in directors and officers’ liabilities insurance expense, an increase in personnel related expenses, an increase in professional service fees, and an increase in Delaware franchise taxes and patent related fees.

~~Interest and Other Income, Net.~~ Interest and other income, net increased by approximately $43,000 from $142,000 for the six months ended June 30, 2018 to $185,000 for the six months ended June 30, 2019 due primarily to a higher rate of return on our cash balance partially offset by a lower average cash balance.

~~Change in Fair Value of Warrant Liability.~~ Change in fair value of warrant liability decreased by approximately $3.0 million from a gain of $3.0 million for the six months ended June 30, 2018 to $0 for the six months ended June 30, 2019 due to our Series A convertible preferred stock being converted into common stock upon our IPO in August 2018.

~~Equity in Net Loss of Equity Method Investment.~~ Loss from equity method investment increased by $628,000 from $0 for the six months ended June 30, 2018 to $628,000 for the six months ended June 30, 2019 due to our share of loss from our minority interest calculated under the equity method.

Liquidity, Capital Resources and Going Concern

~~Our IPO closed on August 16, 2018~~In September 2019, we entered into an ATM Agreement with Cantor under which we may offer and ~~we issued and sold 2,000,000~~sell, from time to time, in our sole discretion, shares of common ~~shares at a public~~stock having an aggregate offering price of ~~$13.00 per share. Gross proceeds totaled $26.0~~up to $25 million ~~and net proceeds totaled $22.8 million after deducting underwriting discounts and commissions~~through Cantor as our sales agent. We will pay Cantor a commission of ~~$1.8 million and other offering expenses of approximately $1.4 million. The underwriters~~up to three percent (3.0%) of the ~~IPO partially exercised their over-allotment option, and on August 30, 2018, we issued and sold 192,824 common shares at a public offering price of $13.00 per share for~~ gross ~~proceeds totaling approximately $2.5 million and net~~sales proceeds of ~~approximately $2.3 million after deducting underwriting discounts and commissions of approximately $0.2 million.~~

~~In July 2019, we issued and sold 801,820 shares of restricted~~any common stock ~~to SIBV at a price of approximately $12.47 per share~~sold through Cantor under the ATM Agreement, and ~~received total gross proceeds of $10 million, and after deducting commissions of approximately $0.8 million,~~provided Cantor with customary indemnification rights. Our registration statement on Form S-3 contemplated under the ~~net proceeds were approximately $9.2 million. In addition,~~ATM Agreement was declared effective by the Company received an upfront cash payment of $5 million upon the execution of an option agreement with SIBV and expects to receive an additional $10 million upon the completion of a license agreement with SIBV by August 31,SEC on September 5, 2019. The ~~upfront payment~~registration statement on Form S-3 includes a prospectus supplement covering the offering of $5up to $100 million is refundable should the parties not complete the license agreement by August 31, 2019. However, until the full license agreement is completed, we believe that our current available cash and cash equivalents, along with the additional cash raised from the sale of ~~restricted~~shares of common stock in ~~July 2019,~~accordance with the ATM Agreement. As of March 31, 2020, we have not sold any shares of common stock under the ATM Agreement.

In May 2020, we were granted a Loan from Silicon Valley Bank in the aggregate amount of approximately $715,000, pursuant to the PPP.The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will ~~not~~ be ~~sufficient~~reduced if the borrower terminates employees or reduces salaries during the eight-week period. The unforgiven portion of the Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments for the first six months. We intend to ~~fund our planned expenditures and meeting our obligations~~use the total Loan proceeds for ~~at least~~purposes consistent with the ~~one-year period following our financial statements issuance date.~~PPP.

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

Cash Flows

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

							Three Months Ended March 31,
	Six Months Ended June 30,						2020			2019
	2019			2018			(unaudited)			(unaudited)
Net cash provided by (used in):
Operating activities	$	(15,699	)	$	(10,707	)	$	(4,574	)	$	(7,814	)
Investing activities	(27		)	(919		)		(13	)		(120	)
Financing activities	8			—				14			8
Net decrease in cash and cash equivalents	$	(15,718	)	$	(11,626	)	$	(4,573	)	$	(7,926	)

Cash Flows from Operating Activities.

Net cash used in operating activities was approximately ~~$15.7~~$4.6 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, which was primarily due to our net loss of approximately ~~$16.4~~$6.5 million and an increase of approximately ~~$1.0 million~~$488,000 in ~~other receivables, an increase of approximately $0.8 million~~capitalized contract costs, resulting from the SAMR License Agreement entered into in ~~prepaid expenses, and a decrease of approximately $0.8 million in accounts payable.~~2019. The cash used in operating activities was partially offset by a decrease of approximately ~~$0.7~~$1.1 million in ~~account receivable,~~prepaid expenses, a decrease of approximately $153,000 in other receivables, an increase of approximately ~~$1.0 million~~$226,000 in accounts payables and an increase of approximately $328,000 in accrued liabilities, and the non-cash charges of approximately ~~$1.8 million~~$477,000 related to stock-based compensation and approximately $84,000 in depreciation and ~~amortization and the net loss from our equity method investment.~~amortization.

Net cash used in operating activities was approximately ~~$10.7~~$7.8 million for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, which was primarily due to our net loss of approximately ~~$8.8~~$8.1 million, ~~the non-cash gain of approximately $3.0 million on the change in fair value~~

~~of preferred stock warrants, and~~ an increase of approximately ~~$0.6~~$1.7 million in ~~prepaid expenses. The~~other receivables, and a decrease of approximately $1.1 million in accrued liabilities. This cash used in operating activities was partially offset by a decrease of approximately $1.7 million in accounts receivable, an increase of approximately ~~$0.7 million~~$484,000 in ~~deferred revenue,~~accounts payable, and the non-cash charges of approximately ~~$1.0 million~~$450,000 related to stock-based compensation, approximately $442,000 from the loss on our equity method investment, and approximately $83,000 in depreciation and amortization.

Cash Flows from Investing Activities.

Cash used in investing activities of ~~$27,000~~approximately $13,000 and ~~$919,000~~$120,000 during the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, was due to the purchase of equipment, primarily for diagnostic use in clinical trials.

Cash Flows from Financing Activities.

Net cash provided by financing activities of approximately $14,000 and $8,000 during the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, respectively, was due to net proceeds received from stock option exercises. ~~There were no financing activities for the six months ended June 30, 2018.~~

Future Funding Requirements

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

Our future ~~capital~~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;

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

the effect of competing technological and market developments; and

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

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

Recently Issued Accounting Pronouncements

Please refer to section “Recently Issued Accounting ~~Pronouncements”~~Pronouncements not yet adopted as of March 31, 2020” in Note 2 of our Notes to the Condensed Consolidated Financial Statements.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of ~~June 30, 2019.~~March 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the ~~SEC’s~~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 ~~June 30, 2019,~~March 31, 2020, our management concluded that we had a material weakness in our internal controls resulting from ~~one individual having almost complete responsibility, for some of the second quarter of 2019, for the processing of financial information and from~~ our finance department not ~~having adequate staff~~being able to process and account for complex, non-routine transactions in a timely ~~manner complex, non-routine transactions.~~manner. While we have designed and implemented, or expect to implement, measures that we believe address or will address ~~these~~this control ~~weaknesses,~~weakness, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, implementing software systems to manage our revenue and expenses and to allow us to budget, undertaking multi-year financial planning and analyses and designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight. ~~Our efforts~~We plan to remediate the identified material weakness by hiring financial consultants and we expect to date include the hiring of a Vice President of Finance in November 2018 and an Executive Director of Technical Accounting and External Reporting in May 2019. With the hiring of these individuals, we have implemented controls to help strengthen our financial andhire additional senior accounting ~~segregation of duties limitations previously noted. In addition, we believe we will have adequate~~ staff ~~to now process in a timely manner complex, non-routine transactions and are on track~~ to complete the remediation by the end of ~~2019.~~2020.

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

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended ~~June 30, 2019~~March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial ~~reporting other than that describes above.~~reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

~~From time to time, we may be subject to litigation and claims arising~~A complaint was filed on February 18, 2020 in the ~~ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding~~New York State Supreme Court against us by an investor who invested in our company’s preferred stock in July 2017 which was prior to our initial public offering in August 2018. The complaint alleges, among other things, that we breached our contract and fiduciary duty, by not issuing additional securities to the investor as a result of our initial public offering. The plaintiff is asking for approximately $277,000 in compensatory damages. We believe ~~could have a material adverse effect on our business, operating results, cash flows or financial condition.~~that all of the claims in the complaint are without merit and intend to defend vigorously against them

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, ~~2018, except for adding the following risk factor:~~2019.

~~Serum International BV may never exercise its option to enter into a license agreement with us.~~

On July 16, 2019, we entered into an Option Agreement for Exclusive Product and Platform Technology License, or Option Agreement, with Serum International BV, or SIBV, pursuant to which SIBV paid $5 million to us. SIBV is also obligated to pay $10 million to us within 5 days of execution of the license agreement. There can be no assurance that we will enter into a license agreement with SIBV by August 31, 2019 or that we would enter into a license agreement with SIBV on acceptable terms. Pursuant to the Option Agreement, if the license agreement has not been executed by August 31, 2019, we would reimburse the $5 million payment to SIBV and we would not receive the $10 million payment from SIBV which could have an adverse impact on our financial condition and financing plans.

Item 6. Exhibits

Exhibit No.		Description

~~10.1~~ 31.1		Option Agreement for Exclusive Product and Platform Technology License between Aridis Pharmaceuticals, Inc. and Serum International BV, dated July 16, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 30, 2019).

~~10.2~~		~~Stock Subscription Agreement, dated July 19, 2019 (incorporated by reference to Exhibit 10.2 to Form 8-K filed on July 30, 2019).~~

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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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

	Aridis Pharmaceuticals, Inc.

Dated: ~~August~~May 12, ~~2019~~ 2020	By:	/s/ Vu Truong
	Vu Truong
	Chief Executive Officer
	(Principal Executive Officer)


Dated: ~~August~~May 12, ~~2019~~ 2020	By:	/s/ ~~Fred Kurland~~ Michael A. Nazak
	~~Fred Kurland,~~Michael A. Nazak, Chief Financial Officer
	(Principal Financial Officer)

Delaware		47-2641188
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5941 Optical Ct.
San Jose, California		95138
(Address of principal executive offices)		(Zip Code)

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

Large accelerated filero¨		Accelerated filero¨

Non-accelerated filerx		Small reporting companyx

		Emerging growth companyx

	June 30, 2019			December 31, 2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,519		$	24,237
Accounts receivable	1,000			1,660
Other receivables	1,448			438
Prepaid expenses and other current assets	2,390			2,012
Total current assets	13,357			28,347
Property and equipment, net	1,135			1,271
Intangible assets, net	35			38
Equity method investment	332			960
Other assets	1,015			995
Total assets	$	15,874		$	31,611
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,544		$	2,331
Accrued liabilities	3,468			2,944
Deferred revenue	—			22
Total current liabilities	5,012			5,297
Total liabilities	5,012			5,297
Commitments and contingencies (Note 10)
Stockholders’ equity:
Series A convertible preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively)	—			—
Common stock (par value $0.0001; 100,000,000 shares authorized; shares issued and outstanding: 8,107,290 and 8,104,757, as of June 30, 2019 and December 31, 2018, respectively)	1			1
Additional paid-in capital	98,395			97,401
Accumulated deficit	(87,534		)	(71,088		)
Total stockholders’ equity	10,862			26,314
Total liabilities and stockholders’ equity	$	15,874		$	31,611

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

	Three and Six Months Ended
	June 30,
	2019	2018
	(unaudited)	(unaudited)
Convertible preferred stock	—	5,723,919
Stock options to purchase common stock	1,250,145	742,124
Preferred stock warrants	—	1,359,635
Common stock warrants	1,966,930	607,295
	3,217,075	8,432,973

	Fair Value at December 31, 2018
($ in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Deferred charge related to stock options	$	455	$	—	$	455	$	—
Totals	$	455	$	—	$	455	$	—
Liabilities:
Stock option liability	$	455	$	—	$	455	$	—
Totals	$	455	$	—	$	455	$	—

			Options Outstanding
	Shares Available for Grant		Number of Shares		Weighted- Average Exercise Price
Balances at December 31, 2018	—		825,205		$	12.15
Additional shares reserved	763,973		—		—
Options granted	(460,292	)	460,292		8.78
Options exercised	—		(2,533	)	2.89
Options cancelled	32,819		(32,819	)	10.81
Balances at June 30, 2019	336,500		1,250,145		$	10.54