Aridis Pharmaceuticals, Inc. (Form: 10-Q, Received: 11/23/2020 16:20:21)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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

Commission File Number: 001-38630

Aridis Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

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

(408) 385-1742

(Registrant’s telephone number, including area code)

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

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

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

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

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Small reporting company x

		Emerging growth company x

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

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

The number of shares of the registrant’s common stock, $0.0001 par value per share, outstanding at October 31, 2020 was 10,065,727.

Table of Contents

		Page

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 4.	Controls and Procedures	36

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

Signatures		39

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2020			2019
		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,212		$	20,897
Other receivables		150			413
Contract costs		1,545			1,537
Prepaid expenses		2,287			2,990
Total current assets		10,194			25,837
Property and equipment, net		779			1,006
Intangible assets, net		28			32
Equity method investment		—			9
Contract costs		518			526
Other assets		587			557
Total assets	$	12,106		$	27,967
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable	$	1,219		$	1,755
Accrued liabilities		1,865			2,974
Deferred revenue, current		14,680			14,602
Note payable, current		356			—
Total current liabilities		18,120			19,331
Deferred revenue		4,922			5,000
Note payable		359			—
Other liabilities		3			—
Total liabilities		23,404			24,331
Commitments and contingencies (Note 12)
Stockholders’ equity (deficit):
Preferred stock (par value $0.0001; 60,000,000 shares authorized; zero shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)		—			—
Common stock (par value $0.0001; 100,000,000 shares authorized; shares issued and outstanding: 8,923,374 and 8,918,461 as of September 30, 2020 and December 31, 2019, respectively)		1			1
Additional paid-in capital		105,980			104,404
Accumulated deficit		(117,279	)		(100,769	)
Total stockholders' equity (deficit)		(11,298	)		3,636
Total liabilities and stockholders’ equity (deficit)	$	12,106		$	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 September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue:
Grant revenue	$	—		$	—		$	1,000		$	1,022
Operating expenses:
Research and development		4,161			6,011			12,725			19,782
General and administrative		1,631			1,384			4,853			4,638
Total operating expenses		5,792			7,395			17,578			24,420
Loss from operations		(5,792	)		(7,395	)		(16,578	)		(23,398	)
Other income (expense):
Interest income, net		6			90			77			275
Share of loss from equity method investment		—			(282	)		(9	)		(910	)
Net loss	$	(5,786	)	$	(7,587	)	$	(16,510	)	$	(24,033	)
Weighted-average common shares outstanding used in computing net loss, basic and diluted		8,923,374			8,694,104			8,922,052			8,304,510
Net loss per share, basic and diluted	$	(0.65	)	$	(0.87	)	$	(1.85	)	$	(2.89	)

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 September 30, 2020 (unaudited)
									Additional					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders'
	Shares		Amount		Shares		Dollars		Capital		Deficit			(Deficit)
Balances as of June 30, 2020		—	$	—		8,923,374	$	1	$	105,418	$	(111,493	)	$	(6,074	)
Stock-based compensation		—		—		—		—		562		—			562
Net loss		—		—		—		—		—		(5,786	)		(5,786	)
Balances as of September 30, 2020		—	$	—		8,923,374	$	1	$	105,980	$	(117,279	)	$	(11,298	)

	Three Months Ended September 30, 2019 (unaudited)
									Additional					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders'
	Shares		Amount		Shares		Dollars		Capital		Deficit			Equity
Balances at June 30, 2019		—	$	—		8,107,290	$	1	$	98,395	$	(87,534	)	$	10,862
Issuance of common stock in private placement, net of issuance costs		—		—		801,820		—		4,958		—			4,958
Exercise of stock options		—		—		3,117		—		9		—			9
Stock-based compensation		—		—		—		—		535		—			535
Net loss		—		—		—		—		—		(7,587	)		(7,587	)
Balances as of September 30, 2019		—	$	—		8,912,227	$	1	$	103,897	$	(95,121	)	$	8,777

	Nine Months Ended September 30, 2020 (unaudited)
									Additional					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders'
	Shares		Amount		Shares		Dollars		Capital		Deficit			(Deficit)
Balances at December 31, 2019		—	$	—		8,918,461	$	1	$	104,404	$	(100,769	)	$	3,636
Exercise of stock options		—		—		4,913		—		14		—			14
Stock-based compensation		—		—		—		—		1,562		—			1,562
Net loss		—		—		—		—		—		(16,510	)		(16,510	)
Balances as of September 30, 2020		—	$	—		8,923,374	$	1	$	105,980	$	(117,279	)	$	(11,298	)

	Nine Months Ended September 30, 2019 (unaudited)
									Additional					Total
	Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders'
	Shares		Amount		Shares		Dollars		Capital		Deficit			Equity
Balances at December 31, 2018		—	$	—		8,104,757	$	1	$	97,401	$	(71,088	)	$	26,314
Issuance of common stock in private placement, net of issuance costs		—		—		801,820		—		4,958		—			4,958
Exercise of stock options		—		—		5,650		—		17		—			17
Stock-based compensation		—		—		—		—		1,521		—			1,521
Net loss		—		—		—		—		—		(24,033	)		(24,033	)
Balances as of September 30, 2019		—	$	—		8,912,227	$	1	$	103,897	$	(95,121	)	$	8,777

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

Aridis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended September 30,
	2020			2019
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss	$	(16,510	)	$	(24,033	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		252			253
Stock-based compensation expense		1,562			1,521
Share of loss from equity method investment		9			910
Changes in operating assets and liabilities:
Accounts receivable		—			1,660
Other receivables		263			(162	)
Prepaid expenses		702			(1,605	)
Contract costs		(488	)		—
Other assets		(30	)		(547	)
Accounts payable		(522	)		394
Accrued liabilities and other		(619	)		200
Deferred revenue		—			9,580
Net cash used in operating activities		(15,381	)		(11,829	)
Cash flows from investing activities:
Purchase of property and equipment		(33	)		(53	)
Net cash used in investing activities		(33	)		(53	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		—			4,958
Proceeds from note payable		715			—
Proceeds from stock option exercises		14			17
Net cash provided by financing activities		729			4,975
Net decrease in cash and cash equivalents		(14,685	)		(6,907	)
Cash and cash equivalents at:
Beginning of period		20,897			24,237
End of period	$	6,212		$	17,330
Supplemental cash flow disclosures:
Cash paid for taxes	$	2		$	2

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. The Company’s suite of anti-infective product candidates offers opportunities to profoundly alter the current trajectory of increasing antibiotic resistance and improve the health outcome of many of the most serious life-threatening infections particularly in hospital settings.

Basis of Presentation and Consolidation

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

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

Reclassifications

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

COVID-19

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

Going Concern

The Company has had recurring losses from operations since inception and negative cash flows from operating activities during the nine months ended September 30, 2020. Management expects to incur additional operating losses and negative cash flows from operations in the foreseeable future as the Company continues its product development programs. At September 30, 2020, the Company had cash and cash equivalents of $6.2 million. In October 2020, the Company received gross proceeds of $8.5 million from a registered direct equity financing (see Note 13).

The Company’s research and development expenses and resulting cash burn during the nine months ended September 30, 2020, were largely due to costs associated with the Phase 3 study of AR-301 for the treatment of ventilator associated pneumonia (“VAP”) caused by the Staphylococcus aureus bacteria and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis. Current clinical development activities are focused on AR-301, AR-501 and AR-711. We expect our expenses to continue to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our therapeutic candidates.

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

The Company plans to fund its losses from operations through current cash on hand and future debt and equity financings which we may obtain through one or more public or private equity offerings, debt financings, government or other third-party funding, strategic alliances and licensing or collaboration arrangements. The Company may be unable to secure additional financing or other sources of funding on acceptable terms, or at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs or future commercialization efforts, which could adversely affect its future business prospects and its ability to continue as a going concern. The Company believes that its current available cash and cash equivalents, along with the additional cash received in October 2020 from the equity financing, will not be sufficient to fund its planned expenditures and meet the Company’s obligations for at least the one-year period following its condensed consolidated financial statement issuance date.

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

2. Summary of Significant Accounting Policies

Use of Estimates

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

Concentration of Risk

Credit Risk

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

Customer Risk

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

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of checking account and money market fund 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 September 30, 2020 and December 31, 2019, there were no allowances for doubtful accounts.

Property and Equipment

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

Intangible Assets

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

Impairment of Long-Lived Assets

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

Revenue Recognition

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

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

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

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

Contract Assets

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

Deferred Revenue

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

Research and Development

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

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

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

costs related to acquiring and manufacturing clinical trial materials;

costs related to compliance with regulatory requirements; and

payments related to licensed products and technologies.

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

Stock-Based Compensation

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

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

Income Taxes

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

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

Comprehensive Loss

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

Loss Per Share

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator:
Net loss (basic and diluted)	$	(5,786	)	$	(7,587	)	$	(16,510	)	$	(24,033	)

Denominator:
Weighted-average shares of common stock (basic and diluted)		8,923,374			8,694,104			8,922,052			8,304,510

Basic and diluted net loss per share	$	(0.65	)	$	(0.87	)	$	(1.85	)	$	(2.89	)

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

	Three and Nine Months Ended
	September 30,
	2020		2019
	(unaudited)		(unaudited)
Stock options to purchase common stock		1,543,978		1,415,169
Common stock warrants		1,733,322		1,733,322
		3,277,300		3,148,491

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 September 30, 2020

Accounting Standards Update 2016-02 and 2018-11

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

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

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

Accounting Standards Update 2016-13

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

Accounting Standards Update 2019-12

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

3. Fair Value Disclosure

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

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

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

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

4. Balance Sheet Components

Property and Equipment, net

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

	September 30,			December 31,
	2020			2019
	(unaudited)
Lab equipment	$	1,825		$	1,804
Computer equipment and software		25			25
Total property and equipment		1,850			1,829
Less: Accumulated depreciation		(1,071	)		(823	)
Property and equipment, net	$	779		$	1,006

Depreciation expense was approximately $83,000 and $86,000 for the three months ended September 30, 2020 and 2019, and approximately $248,000 and $249,000 for the nine months ended September 30, 2020 and 2019, respectively.

Intangible Assets, net

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

	September 30,			December 31,
	2020			2019
	(unaudited)
Licenses	$	81		$	81
Less: Accumulated amortization		(53	)		(49	)
Intangible assets, net	$	28		$	32

Amortization expense was approximately $2,000 and $1,000 for the three month periods ended September 30, 2020 and 2019, respectively, and approximately $4,000 for both nine month periods ended September 30, 2020 and 2019.

Licenses

The UAB Research Foundation —Exclusive Patent License Agreement

In September 2020, the Company entered into an exclusive licensing agreement with the UAB Research Foundation (“UABRF”), a non-profit corporation. This agreement granted to the Company an exclusive, royalty-bearing license for intellectual property entitled human neutralizing antibodies against SARS-CoV-02/COVID-19. UABRF and Texas Biomedical Research Institute (“Texas Biomed”) jointly own all right, title and interest in the intellectual property. The UABRF license agreement also granted to the Company the right to sublicense the technology. UABRF retained the non-transferrable right to use such patent rights for academic and research purposes, and also to certain pre-existing rights of the U.S. government.

The Company has agreed to provide at least $50,000 in research funding to each of the lead inventors’ research programs. This funding will be supplied under research agreements agreeable to the Company, UABRF and Texas Biomed, and it is expected that the intellectual property resulting from such research shall be included under this exclusive license agreement. The potential development and commercialization milestone payments under the UABRF agreement total up to $5.5 million. No milestones were met or accrued for as of September 30, 2020. The Company is also obligated to pay UABRF single digit percentage royalties on net sales from us and our sublicensee’s sale of any commercialized licensed product or process, subject to minimum annual amounts starting in 2026. The Company is obligated to pay UABRF double digit percentage royalties on non-royalty income received during the term of the license agreement, and payments will be reduced by one half for non-royalty income received for a combination product as defined in the agreement. The Company is responsible for all patent protection expenses.

The term of the license agreement continues until all patents and filed patent applications, included within the licensed UABRF patents, have expired or been abandoned, or until the agreement is earlier terminated. The Company may terminate the license agreement by giving no less than ninety (90) days prior written notice to UABRF. UABRF has the right to immediately terminate the license agreement upon the Company’s uncured material breach of obligations under the agreement.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2020		2019
	(unaudited)
Research and development services	$	1,434	$	2,709
Payroll related expenses		237		150
Professional services		194		115
Accrued liabilities	$	1,865	$	2,974

5. Equity Method Investment

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

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

The Company accounted for its investment in the JV Entity as an equity method investment. The Company recorded the equity method investment at $1.0 million which represents the Company’s contribution into the JV Entity. The Company’s license contributed to the JV Entity was recorded at its carryover basis of $0. The Company recognized losses from the operations of the JV Entity of approximately $0 and $9,000 for the three and nine months ended September 30, 2020, respectively, and approximately $282,000 and $910,000 for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020 and December 31, 2019, the Company’s equity method investment in the JV Entity was approximately $0 and $9,000, respectively.

6. Development and License Agreements

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

Immaterial Error in Accounting for Cystic Fibrosis Foundation Development Agreement

After receiving a comment letter from the SEC in connection with its review of the Company’s Form 10-K for the Fiscal Year Ended December 31, 2019, the Company conducted a review of its accounting for the CFF Agreement and determined that it did not appropriately apply ASC 606 to the CFF Agreement as of the adoption date of January 1, 2019 (the “Adoption Date”) and thereafter through June 30, 2020, with such determination being subject to further SEC comment.

Originally, the Company determined that the clinical research activities associated with all the milestones under the CFF Agreement were considered a single performance obligation. Hence, the entire estimated transaction price was allocated to this single performance obligation and recognized as revenue by measuring progress using the input method (cost-to-cost) that was based on total estimated costs to achieve all milestones included in the total project, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the CFF Agreement.

After further review, the Company identified the following promises as of the Adoption Date with regards to the clinical research activities: a) satisfied development-based milestones; b) one development-based milestone in progress; and c) five development-based milestones that had not yet been started. Of these promises, the satisfied development-based milestones and one development-based milestone in progress were determined to be distinct performance obligations as of the Adoption Date. For the clinical research activities related to the five development milestones that had not been started, the Company was contingently obligated to perform these clinical research activities in consecutive order only after each previous milestone, which achievement was uncertain, had been met.

The clinical research activities related to the five development milestones that have not been started were evaluated to determine if they should be considered variable consideration or contingent promises akin to optional purchases under ASC 606. The Company concluded that the five development-based milestones that have not been started are contingent promises because there is substantive uncertainty about the contingent events occurring (i.e. milestones being achieved) and these contingent events require additional distinct services and incremental payments from the CFF. The first of the five contingent promises was identified as a performance obligation as it provides the CFF with a material right. The four development based milestones that were not determined to be material rights will be accounted for as separate contracts at the time the Company is obligated to perform the underlying clinical research activities.

The Company determined as of the Adoption Date that the transaction price under the CFF Agreement was $2.7 million prior to any variable consideration constraints, consisting of the non-refundable payments of $1.7 million made by the CFF for the satisfied performance obligations and $1.0 million related to the clinical research activities for the development-based milestone in progress at the Adoption Date, which was considered variable consideration and was fully constrained and excluded from the transaction price as of the Adoption Date. As such, the transaction price allocated to the satisfied and unsatisfied performance obligations as of the Adoption Date was $1.7 million. At March 31, 2019, the transaction price under the CFF Agreement was $2.7 million as the clinical research activities for the development-based milestone in progress at the Adoption Date was considered probable of being achieved resulting in the $1.0 million that was previously constrained to be included in the transaction price. Upon achievement of this milestone, the Company was obligated to perform clinical research activities under the one material right identified which was accounted for as a continuation of the CFF Agreement.

To allocate the transaction price among the performance obligations, the Company estimated the standalone selling prices (“SSP”) for each promise. To estimate the SSP, the Company determined that the most appropriate valuation technique for the SSP for each promise was a cost-plus margin approach which included the actual costs the Company has incurred up through the Adoption Date, estimating the costs the Company expects to incur and applying a margin. In determining the significant assumptions used in the SSP for each promise, the Company used the most relevant and reliable data available to it at the Adoption Date, including but not limited to, estimated costs to be incurred for each promise, gross margin estimate, estimate of the discount rate, and estimated probabilities of achievement of each milestone. The Company believes that a change in the assumptions used to determine its best estimate of SSP for the performance obligations would not have a significant effect on the allocation of consideration received to the performance obligations. Furthermore, to estimate the SSP of the material right, the Company determined the discount associated with the related contingent promise.

At the Adoption Date, the transaction price was allocated to the performance obligations using the relative standalone selling prices. The Company allocated the $1.7 million transaction price to the following: approximately $1.3 million to the satisfied development-based milestones, approximately $0.4 million to the development-based milestone in progress and approximately $42,000 to the material right. At March 31, 2019, the increase in the transaction price of $1.0 million due to the probable achievement of the development-based milestone discussed above was allocated to all of the Adoption Date distinct performance obligations. At March 31, 2019, the Company allocated the $2.7 million transaction price to the following: approximately $2.0 million to the satisfied development-based milestones, approximately $0.6 million to the development-based milestone in progress and approximately $66,000 to the material right.

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

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

In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”), the Company has determined that the impact of inappropriately applying ASC 606 to the CFF Agreement was not material to its previously issued annual audited and unaudited consolidated financial statements, and accordingly, no prior period financial statements have been restated. The approximate amount of unrecorded deferred revenue associated with this error was approximately $280,000 and $233,000 at the Adoption Date and March 31, 2019, respectively. After March 31, 2019, the unrecorded deferred revenue amounts related to the error continued to decrease at each subsequent reporting period. As of June 30, 2020, the unrecorded deferred revenue amount related to the error was zero.

For the three months ended September 30, 2020 and 2019, no revenue was recognized from the CFF Agreement. For the nine months ended September 30, 2020, the Company recognized $1.0 million in revenue from the CFF Agreement, mainly due to the achievement of the milestone related to the clinical research activities underlying the material right. For the nine months ended September 30, 2019, the Company recognized approximately $1.0 million in revenue from the CFF Agreement primarily due to the achievement of the milestone related to the clinical research activities that was in progress as of the Adoption Date.

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

The Company determined that no performance obligations or material promises were satisfied as of September 30, 2020 and December 31, 2019. Therefore, no revenue related to the License Agreement was recognized during the nine months ended September 30, 2020 and the year ended December 31, 2019. The Company has recorded contract liabilities resulting from the License Agreement of approximately $14.7 million and $14.6 million to deferred revenue, current, and approximately $4.9 million and $5.0 million to deferred revenue, noncurrent, on its condensed consolidated balance sheets at September 30, 2020 and December 31, 2019, respectively. The Company capitalized a contract asset resulting from the License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License Agreement on its condensed consolidated balance sheets, of which approximately $1.5 million and $1.5 million is classified as current, and approximately $518,000 and $526,000 is classified as noncurrent, as of September 30, 2020 and December 31, 2019, respectively.

7. Paycheck Protection Program Loan

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

The Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments until February 2021. The Company is required to pay principal and interest on the Loan in equal monthly installments beginning in February 2021 and the outstanding interest balance accrued during the deferral period to be paid on the maturity date, which is May 1, 2022. The Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Loan contain events of default (as defined in the PPP Loan agreement), in which the occurrence could result in the acceleration of all amounts due under the Loan. As of September 30, 2020, there were no events of default under the PPP Loan.

The Company believes in good faith that it met the loan forgiveness eligibility requirements of the PPP Loan. The Company’s Loan forgiveness application was submitted to the Small Business Administration (“SBA”) in October 2020 and the Company expects to meet the forgiveness criteria. Since the forgiveness of the Loan is outside the Company’s control, the Company has accounted for its PPP Loan as debt. If the PPP Loan is ultimately forgiven and the Company is legally released from being the Loan’s primary obligor, the extinguishment of the liability will be recognized in the Company’s consolidated statement of operations as an extinguishment of debt gain.

At September 30, 2020, the Company recognized the entire amount of the PPP Loan proceeds of approximately $715,000 as a note payable, approximately $356,000 as current and $359,000 as noncurrent, in its condensed consolidated balance sheets. For the three and nine months ended September 30, 2020, the Company recognized approximately $1,000 and $3,000, respectively, in interest expense in its consolidated statements of operations.

Future payments on the Loan as of September 30, 2020, if the Loan is not forgiven, are as follows (in thousands):

Period ending:
Three months ending December 31, 2020	$	—
Year ending December 31, 2021		495
Year ending December 31, 2022		225
Total minimum payments		720
Less amount representing interest		(5	)
Loan, gross	$	715

8. Warrants

Common Stock Warrant Expense

On December 12, 2016, the Company issued 234,860 common stock warrants at an exercise price of $14.50 per share to its former Vice Chairman of the Board of Directors. The total fair value of the award was approximately $661,000 and was being amortized over a five-year vesting period. On August 13, 2019, this board member was not up for re-election at the annual shareholder’s meeting, therefore the vesting of the common stock warrants ceased on August 13, 2019 resulting in the cancellation of 109,601 unvested warrants. For the three and nine months ended September 30, 2019, the Company recorded stock-based compensation expense of approximately $16,000 and $82,000, respectively, related to these warrants. For the three and nine months ended September 30, 2020, the Company did not record any stock-based compensation expense related to these warrants.

9. Common Stock

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

Shares reserved for exercise of outstanding warrants to purchase common stock			1,733,322
Shares reserved for exercise of outstanding options to purchase common stock			1,543,978
Shares reserved for issuance of future options			591,139
Total			3,868,439

10. Stock-Based Compensation

Equity Incentive Plan

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

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

•

77,908 shares of our common stock; or

•

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

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

Stock Options

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

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

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted- Average Exercise Price
Balances at December 31, 2019		196,982			1,380,312		$	10.06
Additional shares reserved		562,736			—			—
Options granted		(200,177	)		200,177			5.85
Options exercised		—			(4,913	)		2.89
Options cancelled		31,598			(31,598	)		14.65
Balances at September 30, 2020		591,139			1,543,978		$	9.44

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Expected term (in years)		6.00			6.25			6.00			6.25
Expected volatility		99	%		79	%		84% - 99	%		78% - 95	%
Risk-free interest-rate		0.38	%		1.59% - 1.92	%		0.38% - 1.73	%		1.59% - 2.67	%
Dividend yield		0	%		0	%		0	%		0	%

During the three and nine months ended September 30, 2020, the Company granted options to purchase 26,677 and 200,177 shares with a weighted-average grant date fair value of $5.10 and $4.69 per share, respectively. During the three and nine months ended September 30, 2019, the Company granted options to purchase 201,082 and 584,957 shares with a weighted-average grant date fair value of $5.26 and $6.09 per share, respectively. There were no options exercised during the three months ended September 30, 2020. There were 4,913 options exercised during the nine months ended September 2020. There were 3,117 and 5,650 options exercised during the three and nine months ended September 30, 2019, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2020 was approximately $17,000. The aggregate intrinsic value of options exercised during the three and nine months ended September 30, 2019 was approximately $23,000 and $38,000, respectively.

Stock-Based Compensation

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Research and development	$	156	$	168	$	431	$	539
General and administrative		406		351		1,131		900
Total	$	562	$	519	$	1,562	$	1,439

As of September 30, 2020, total unrecognized stock-based compensation expenses related to unvested stock options was approximately $4.0 million, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.24 years.

11. Related Parties

Joint Venture

On February 11, 2018, the Company entered into a Joint Venture (“JV”) Agreement with Hepalink which is a related party and principal shareholder in the Company, pursuant to which the Company formed a JV Entity for developing and commercializing products for infectious diseases in the greater China territories. It was agreed by the parties that the Company shall be reimbursed for certain legal and contract manufacturing expenses related to the clinical drug supply for a Phase 3 clinical study of AR-301 and the clinical drug supply for a clinical study of AR-105. For the three months ended September 30, 2020 and 2019, the Company recorded approximately $0 and $451,000, respectively, and for the nine months ended September 30, 2020 and 2019, the Company recorded approximately $184,000 and $1.4 million, respectively, as a reduction to operating expenses in the condensed consolidated statements of operations for amounts reimbursed to the Company by the JV Entity under this arrangement. As of September 30, 2020 and December 31, 2019, the Company recorded approximately $0 and $152,000, respectively, in other receivables on the condensed consolidated balance sheets for amounts owed to the Company by the JV Entity under this arrangement and the Company expects the amounts to be collectable and as a result, no reserve for uncollectability was established.

Serum International B.V.

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

Cytovance Biologics, Inc.

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

12. Commitments and Contingencies

Leases

The Company leases office and lab space in San Jose, California under an operating lease arrangement, which will terminate in December 2020. The Company recognizes rent expense as incurred. Rent expense was approximately $129,000 and $82,000 for the three months ended September 30, 2020 and 2019, respectively, and $344,000 and $245,000 for the nine months ended September 30, 2020 and 2019, respectively. In October 2020, the Company entered into a new lease agreement to move its office and lab space to Los Gatos, California, which will commence in December 2020 (see Note 13).

Indemnification

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

License Agreements

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

Contingencies

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

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

Legal Proceedings

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

In July 2020, a complaint for declaratory relief was filed in the Superior Court of California, City and County of San Francisco against the Company by its current landlord, San Jose Biocube II, LLC. The complaint seeks a declaratory judgment regarding whether the defendant’s tenancy has been terminated and defendant can be evicted at the present time. The Company believes the complaint is without merit. To date, the complaint has not been served on the Company.

Grant Income

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

Cystic Fibrosis Foundation Agreement

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

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

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

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

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

13. Subsequent Events

Securities Purchase Agreement

In October 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”), pursuant to which the Company agreed to offer, issue and sell to the Purchasers, (i) in a registered direct offering, an aggregate of 1,134,470 shares (the “Shares”) of common stock, par value $0.0001 per share (“Common Stock”) and (ii) in a concurrent private placement, Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants” and collectively, with the Series A Warrants, the “Warrants”) to purchase up to an aggregate 567,234 shares (the “Warrant Shares”) of Common Stock, for aggregate gross proceeds to the Company of approximately $8.5 million, before deducting estimated offering expenses payable by the Company. The Company agreed to pay Arcadia Securities, LLC a fee equal to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering to certain of the investors. In addition, the Company agreed to pay Cantor Fitzgerald & Co. a fee equal to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering.

The combined purchase price for each Share, together with one Series A Warrant and one Series B Warrant, is $7.4925. The Series A Warrants have an exercise price of $7.43 per share, are exercisable six months from the date of issuance, and expire three and a half years from the date they become exercisable. The Series B Warrants have an exercise price of $9.00 per share, are exercisable six months from the date of issuance, and expire three and a half years from the date they become exercisable. In addition, the Series B Warrants are redeemable by the Company at $0.01 per share upon the price of the Company’s common stock closing at $9.00 or more over five (5) consecutive trading days. The exercise price of the Warrants and Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Series A Warrants and Series B Warrants, respectively.

Each of the Series A Warrants and the Series B Warrants may be exercised on a “cashless” basis under certain circumstances set forth in the Warrants.

New Facility Lease

In October 2020, the Company entered into a new lease agreement (the “Lease Agreement”) with Boccardo Corporation (the “Landlord”) pursuant to which the Company leased approximately 15,129 square feet of office and laboratory space in Los Gatos, California, which will serve as the Company’s headquarters. The lease represents additional space for the Company’s headquarters as compared to its prior lease. The lease is scheduled to commence in December 2020 and has an approximate five year term (the “Initial Term”). Rental payments by the Company commence on February 1, 2021. Base rent for the first year is approximately $492,000 (after giving effect to two months of rent abatement in the first year), increasing to approximately $668,000 in the final year of the Initial Term. The Company is required to deliver a security deposit in the form of a letter of credit of $500,000 to the Landlord in connection with the Lease Agreement.

ATM Agreement

In September 2019, the Company entered into a Common Stock Sales Agreement (the “ATM Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) under which the Company may offer and sell, from time to time, at its sole discretion, shares of common stock having an aggregate offering price of up to $25.0 million through Cantor as our sales agent. The Company 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. As a result of the limitations of General Instruction I.B.6 of Form S-3, and in accordance with the terms of the ATM Agreement, the Company filed a prospectus supplement on May 14, 2020 that registered the offer and sale of shares of its common stock having an aggregate offering price of up to $22.0 million from time to time through Cantor. In October 2020, the Company sold 7,883 shares of common stock under the ATM Agreement for gross proceeds of approximately $64,000, and after deducting commissions, net proceeds were approximately $62,000.

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:

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the timing of regulatory submissions;

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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;

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

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

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

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risks associated with obtaining third party funding;

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

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management and employee operations and execution risks;

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loss of key personnel;

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competition;

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risks related to market acceptance of products;

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intellectual property risks;

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

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risks associated with the uncertainty of future financial results;

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our ability to attract collaborators and partners; and

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

Overview

We are a late-stage biopharmaceutical company focused on the discovery and development of non-antibiotic anti-infectives. A significant focus of ours is on targeted immunotherapy using fully human monoclonal antibodies, or mAbs, to treat life-threatening infections. mAbs represent an innovative treatment approach that harnesses the human immune system to fight infections and are designed to overcome the deficiencies associated with current therapies, such as rise in drug resistance, short duration of response, negative impact on the human microbiome, and lack of differentiation among the treatment alternatives. The majority of our product candidates are derived by employing our differentiated antibody discovery platforms. Our proprietary product pipeline comprises fully human mAbs targeting specific pathogens associated with life-threatening bacterial infections, primarily nosocomial pneumonia, and viral infections such as COVID-19.

Recently we announced the development of a novel antibody discovery and production platform technology called ʎPEX™. This technology complements and further extends the capabilities of MabIgX^® to quickly screen large number of antibody-producing B-cells from patients and generation of high mAb-producing mammalian production cell line at a speed not previously attainable. As a result, we can significantly reduce time for antibody discovery and manufacturing compared to conventional approaches. This technology is being applied to the discovery and manufacturing of COVID-19 monoclonal antibodies (mAbs). We also announced initiation of research and development activities of our monoclonal antibody programs for COVID-19 called AR-711 and AR-701.

In October 2020, we announced the development of a highly neutralizing monoclonal antibody (AR-711), discovered from convalescent COVID-19 patients, that successfully eliminated all detectable SARS-CoV-2 virus in infected animals at substantially lower doses than parenterally administered (injected) COVID-19 mAbs. The potency of AR-711 and its direct delivery to the lungs by inhaled administration may facilitate broader treatment coverage and dose sparing not achievable by parenteral administration. A clinical Phase 1/2 study is expected to be launched in first half of 2021.

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

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

In September 2020, we announced that we reached an agreement with the FDA to simplify our AR-501 Phase 2 trial design for the treatment of chronic lung infections associated with CF. We proposed, and the FDA agreed, to streamline AR-501's forthcoming Phase 2a clinical trial in CF patients, by removing the single ascending dose (“SAD”) portion of the study and only conducting a multiple ascending dose (“MAD”) regimen. Furthermore, the FDA also concurred with our proposal to expand the originally planned Phase 2a protocol design into a Phase 2a/2b study. This Phase 2a/2b design will enable seamless and efficient advancement of the study from Phase 2a into Phase 2b using the same clinical study protocol. The data from the Phase 2a will inform the dose selection and sample size expansion to achieve statistical significance in efficacy in Phase 2b.

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 nine months ended September 30, 2020 and the year ended December 31, 2019, were largely due to costs associated with the Phase 3 study of AR-301 for the treatment of VAP caused by the S. aureus bacteria and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis.

We have incurred losses since our inception. Our net losses were approximately $16.5 million for the nine months ended September 30, 2020 and $29.7 million for the year ended December 31, 2019. As of September 30, 2020 we had approximately $6.2 million of cash and cash equivalents and had an accumulated deficit of approximately $117.3 million. Substantially, all of our net losses have resulted from costs incurred in connection with our research and development programs, clinical trials, intellectual property matters, strengthening our manufacturing capabilities, and from general and administrative costs associated with our operations.

In September 2019, we entered into a Common Stock Sales Agreement (the “ATM Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) under which we may offer and sell, from time to time, at our sole discretion, shares of common stock having an aggregate offering price of up to $25.0 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. As a result of the limitations of General Instruction I.B.6 of Form S-3, and in accordance with the terms of the ATM Agreement, the Company filed a prospectus supplement on May 14, 2020 that registered the offer and sale of shares of our common stock having an aggregate offering price of up to $22.0 million from time to time through Cantor. As of November 20, 2020, we have sold 7,883 shares of common stock under the ATM Agreement for gross proceeds of approximately $64,000, and after deducting commissions, net proceeds were approximately $62,000.

In May 2020, we received a loan in the form of a note, from Silicon Valley Bank (“SVB”) in the aggregate amount of approximately $715,000 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the covered period. The Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments until February 2021. We are required to pay principal and interest on the Loan in equal monthly installments beginning in February 2021 and the outstanding interest balance accrued during the deferral period to be paid on the maturity date, which is May 1, 2022. We believe in good faith that we met the loan forgiveness eligibility requirements of the PPP Loan. Our Loan forgiveness application was submitted to the Small Business Administration (“SBA”) in October 2020 and we expect to meet the forgiveness criteria. Since the forgiveness of the Loan is outside of our control, we have accounted for our PPP Loan as debt. If the PPP Loan is ultimately forgiven and we are legally released from being the Loan’s primary obligor, the extinguishment of the liability will be recognized in our consolidated statement of operations as an extinguishment of debt gain.

In October 2020, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”), pursuant to which we agreed to offer, issue and sell to the Purchasers, (i) in a registered direct offering, an aggregate of 1,134,470 shares (the “Shares”) of common stock, par value $0.0001 per share (“Common Stock”) and (ii) in a concurrent private placement, Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants” and collectively, with the Series A Warrants, the “Warrants”) to purchase up to an aggregate 567,234 shares (the “Warrant Shares”) of Common Stock, for aggregate gross proceeds to us of approximately $8.5 million, before deducting estimated offering expenses payable by us. We agreed to pay Arcadia Securities, LLC a fee equal to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering to certain of the investors. In addition, we agreed to pay Cantor Fitzgerald & Co. a fee equal to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering.

The combined purchase price for each Share, together with one Series A Warrant and one Series B Warrant, is $7.4925. The Series A Warrants have an exercise price of $7.43 per share, are exercisable six months from the date of issuance, and expire three and a half years from the date they become exercisable. The Series B Warrants have an exercise price of $9.00 per share, are exercisable six months from the date of issuance, and expire three and a half years from the date they become exercisable. In addition, the Series B Warrants are redeemable by us at $0.01 per share upon the price of our common stock closing at $9.00 or more over five (5) consecutive trading days. The exercise price of the Warrants and Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Series A Warrants and Series B Warrants, respectively.

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

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

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continue enrollment in our ongoing clinical trials;

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initiate new clinical trials;

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

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

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

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

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

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seek to attract and retain skilled personnel;

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

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

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

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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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed financial statements, as well as the reported expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. Such estimates include those related to the evaluation of our ability to continue as a going concern, our best estimate of standalone selling price of revenue deliverables, long lived assets, classification of deferred revenue, income taxes, assumptions used in the Black Scholes Merton (“BSM”) model to calculate the fair value of stock based compensation, deferred tax asset valuation allowances, and preclinical study and clinical trial accruals. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

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

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

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

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

Under the Development Program Letter Agreement with CFF (the “CFF Agreement”), entered into in December 2016 and amended in November 2018 to support funding for the development of our Inhaled Gallium Citrate Anti-Infective program, we recognized revenue of approximately $1.0 million for both nine month periods ended September 30, 2020 and 2019. We expect that any revenue we generate for the foreseeable future will fluctuate from period to period as a result of the timing of when performance obligations and variable consideration criteria under the contract are satisfied.

Research and Development Expenses

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

•

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

•

costs related to acquiring and manufacturing clinical trial materials;

•

costs related to compliance with regulatory requirements; and

•

payments related to licensed products and technologies.

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

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

General and Administrative Expenses

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

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

Interest Income, Net

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

Stock-Based Compensation

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

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 nine months ended September 30, 2020 and 2019, no income tax expense or benefit was recognized, primarily due to a full valuation allowance recorded against the net deferred tax asset

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

Going Concern

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

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

Results of Operations

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

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

	Three Months Ended September 30,
	2020			2019			Change $
	(unaudited)			(unaudited)
Revenue:
Grant revenue	$	—		$	—		$	—
Operating expenses:
Research and development		4,161			6,011			(1,850	)
General and administrative		1,631			1,384			247
Total operating expenses		5,792			7,395			(1,603	)
Loss from operations		(5,792	)		(7,395	)		1,603
Other income (expense):
Interest income, net		6			90			(84	)
Share of loss from equity method investment		—			(282	)		282
Net loss	$	(5,786	)	$	(7,587	)	$	1,801

Grant Revenue. Grant revenue was zero for both three month periods ended September 30, 2020 and 2019.

Research and Development Expenses. Research and development expenses decreased by approximately $1.9 million from approximately $6.0 million for the three months ended September 30, 2019 to approximately $4.2 million for the three months ended September 30, 2020 due primarily to:

a decrease of approximately $1.0 million in spending on clinical trial activities and drug manufacturing expenses for the Phase 2 study of our AR-105 program that was terminated during 2019;

a decrease of approximately $800,000 in spending on our clinical trial activities for the Phase 3 study of our AR-301 program during the third quarter of 2020 as compared to the third quarter of 2019 which included increased study start-up costs;

a decrease of approximately $400,000 in spending on clinical trial activities for the Phase 1/2a study of our AR-501 program because the Phase 1 portion of the study ended in the second quarter of 2020; and

a decrease of approximately $100,000 in personnel, consulting and other related costs.

These decreases were partially offset by:

an increase of approximately $300,000 in drug manufacturing expenses for the Phase 3 study of our AR-301 program; and

an increase of approximately $100,000 in spending on other research and development activities, including our COVID-19 program.

General and Administrative Expenses. General and administrative expenses increased by approximately $247,000 from $1.4 million for the three months ended September 30, 2019 to $1.6 million for the three months ended September 30, 2020 due primarily to increases in professional service fees, directors’ and officers’ related liabilities insurance expense, personnel related expenses, including non-cash stock-based compensation, patent related fees, and Delaware franchise taxes.

Interest Income, Net. Interest income, net decreased by approximately $84,000 from $90,000 for the three months ended September 30, 2019 to $6,000 for the three months ended September 30, 2020. The decrease is primarily due to lower cash balances and lower interest rates during the third quarter of 2020 as compared to the third quarter of 2019.

Share of Loss in Equity Method Investment. Loss from equity method investment decreased by approximately $282,000 from $282,000 for the three months ended September 30, 2019 to zero for the three months ended September 30, 2020 due to there being no share of losses from our equity method investment recorded in the third quarter of 2020 as the net book value of the investment was zero since March 31, 2020.

Comparison of the Nine Months Ended September 30, 2020 and 2019

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

	Nine Months Ended September 30,
	2020			2019			Change $
Grant revenue	$	1,000		$	1,022		$	(22	)
Operating expenses:
Research and development		12,725			19,782			(7,057	)
General and administrative		4,853			4,638			215
Total operating expenses		17,578			24,420			(6,842	)
Loss from operations		(16,578	)		(23,398	)		6,820
Other income (expense):
Interest income, net		77			275			(198	)
Equity in net loss from equity method investment		(9	)		(910	)		901
Net loss	$	(16,510	)	$	(24,033	)	$	7,523

Grant Revenue. Grant revenue remained fairly constant at approximately $1.0 million for both nine month periods ended September 30, 2020 and 2019 as the recognition of revenue related to milestones under the grant award from the CFF during the first nine months of 2020 and 2019.

Research and Development Expenses. Research and development expenses decreased by approximately $7.1 million from $19.8 million for the nine months ended September 30, 2019 to $12.7 million for the nine months ended September 30, 2020 due primarily to:

a decrease of approximately $5.0 million in spending on clinical trial activities and drug manufacturing expenses for the Phase 2 study of our AR-105 program that was terminated during 2019;

a decrease of approximately $1.3 million in drug manufacturing expenses for the Phase 3 study of our AR-301 program;

a decrease of approximately $100,000 in spending on clinical trial activities for the Phase 3 study of our AR-301 program;

an decrease of approximately $250,000 in spending on clinical trial activities for the Phase 1/2a study of our AR-501 program because the Phase 1 portion of the study ended in the second quarter of 2020; and

a decrease of approximately $500,000 in personnel, consulting and other related costs.

These decreases were partially offset by:

an increase of approximately $100,000 in spending on other research and development activities, including our COVID-19 program.

General and Administrative Expenses. General and administrative expenses increased by approximately $215,000 from $4.6 million for the nine months ended September 30, 2019 to $4.9 million for the nine months ended September 30, 2020 due primarily to increases in directors’ and officers’ related liabilities insurance expense and professional service fees. These increases were partially offset by a decrease in patent related fees, Delaware franchise taxes, and personnel related expenses, including non-cash stock-based compensation.

Interest Income, Net. Interest income, net decreased by approximately $198,000 from $275,000 for the nine months ended September 30, 2019 to $77,000 for the nine months ended September 30, 2020. The decrease is primarily due to lower interest rates during first nine months of 2020 as compared to the same period in 2019.

Share of Loss in Equity Method Investment. Loss from equity method investment decreased by approximately $901,000 from $910,000 for the nine months ended September 30, 2019 to $9,000 for the nine months ended September 30, 2020 as our share of loss from our minority interest calculated under the equity method was limited to the reduction of the net book value of the investment to zero.

Liquidity, Capital Resources and Going Concern

As of September 30, 2020 we had approximately $6.2 million of cash and cash equivalents and had an accumulated deficit of approximately $117.3 million.

In September 2019, we entered into an ATM Agreement with Cantor under which we may offer and sell, from time to time, in our sole discretion, shares of common stock having an aggregate offering price of up to $25.0 million through Cantor as our sales agent. We will pay Cantor a commission of up to three percent (3.0%) of the gross sales proceeds of any common stock sold through Cantor under the ATM Agreement, and provided Cantor with customary indemnification rights. Our registration statement on Form S-3 contemplated under the ATM Agreement was declared effective by the SEC on September 5, 2019. As a result of the limitations of General Instruction I.B.6 of Form S-3, and in accordance with the terms of the ATM Agreement, we filed a prospectus supplement on May 14, 2020 that registered the offer and sale of shares of our common stock having an aggregate offering price of up to $22.0 million from time to time through Cantor. As of November 20, 2020, we have sold 7,883 shares of common stock under the ATM Agreement for gross proceeds of approximately $64,000, and after deducting commissions, net proceeds were approximately $62,000.

In May 2020, we received a PPP Loan from SVB in the aggregate amount of approximately $715,000. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the covered period. The Loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments until February 2021. We are required to pay principal and interest on the Loan in equal monthly installments beginning in February 2021 and the outstanding interest balance accrued during the deferral period to be paid on the maturity date, which is May 1, 2022. We believe in good faith that we met the loan forgiveness eligibility requirements of the PPP Loan. Our Loan forgiveness application was submitted to the Small Business Administration (“SBA”) in October 2020 and we expect to meet the forgiveness criteria. Since the forgiveness of the Loan is outside of our control, we have accounted for our PPP Loan as debt. If the PPP Loan is ultimately forgiven and we are legally released from being the Loan’s primary obligor, the extinguishment of the liability will be recognized in our consolidated statement of operations as an extinguishment of debt gain.

The combined purchase price for each Share, together with one Series A Warrant and one Series B Warrant, is $7.4925. The Series A Warrants have an exercise price of $7.43 per share, are exercisable six months from the date of issuance, and expire three and a half years from the date they become exercisable. The Series B Warrants have an exercise price of $9.00 per share, are exercisable six months from the date of issuance, and expire three and a half years from the date they become exercisable. In addition, the Series B Warrants are redeemable by us at $0.01 per share upon the price of our common stock closing at $9.00 or more over five (5) consecutive trading days. The exercise price of the Warrants and Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Series A Warrants and Series B Warrants, respectively.

We have had recurring losses from operations since inception and negative cash flows from operating activities during the nine months ended September 30, 2020 and the year ended December 31, 2019. We anticipate that we will continue to generate operating losses and use cash in operations through the foreseeable future. Management plans to finance operations through equity or debt financings or other capital sources, including potential collaborations or other strategic transactions. There can be no assurances that, in the event that we require additional financing, such financing will be available on terms which are favorable to us, or at all. If we are unable to raise additional funding to meet our working capital needs in the future, we will be forced to delay or reduce the scope of our research programs and/or limit or cease our operations. We believe that our current available cash and cash equivalents, along with the additional cash received in October 2020 from the equity financing, 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):

	Nine Months Ended September 30,
	2020			2019
	(unaudited)			(unaudited)
Net cash provided by (used in):
Operating activities	$	(15,381	)	$	(11,829	)
Investing activities		(33	)		(53	)
Financing activities		729			4,975
Net decrease in cash and cash equivalents	$	(14,685	)	$	(6,907	)

Cash Flows from Operating Activities.

Net cash used in operating activities was approximately $15.4 million for the nine months ended September 30, 2020, which was primarily due to our net loss of approximately $16.5 million, an increase of approximately $488,000 in capitalized contract costs, resulting from the SAMR License Agreement entered into in 2019, a decrease of approximately $619,000 in accrued liabilities and other, and a decrease of approximately $522,000 in accounts payables. The cash used in operating activities was partially offset by a decrease of approximately $702,000 in prepaid expenses and a decrease of approximately $263,000 in other receivables, and the non-cash charges of approximately $1.6 million related to stock-based compensation and approximately $252,000 in depreciation and amortization.

Net cash used in operating activities was approximately $11.8 million for the nine months ended September 30, 2019, which was primarily due to our net loss of approximately $24.0 million, an increase of approximately $1.6 million in prepaid expenses, an increase of approximately $547,000 in other assets, and an increase of approximately $162,000 in other receivables. The cash used in operating activities was partially offset by a decrease of approximately $1.7 million in accounts receivable, an increase of approximately $9.6 million in deferred revenue, and an increase of approximately $394,000 in accounts payable, and an increase of approximately $200,000 in accrued liabilities and other, and the non-cash charges of approximately $1.5 million related to stock-based compensation, approximately $910,000 from the loss on our equity method investment, and approximately $253,000 in depreciation and amortization.

Cash Flows from Investing Activities.

Cash used in investing activities of approximately $33,000 and $53,000 during the nine months ended September 30, 2020 and 2019, respectively, was due to the purchase of equipment, primarily for diagnostic use in clinical trials.

Cash Flows from Financing Activities.

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

Net cash provided by financing activities of approximately $5.0 million during the nine months ended September 30, 2019 was due to net proceeds received from a private placement of our restricted common stock and approximately $17,000 was due to net proceeds from stock option exercises.

Future Funding Requirements

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

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

•

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

•

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

•

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

•

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

•

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

•

our need to expand our research and development activities;

•

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

•

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

•

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

•

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

•

the effect of competing technological and market developments; and

•

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

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 not yet adopted as of September 30, 2020” in Note 2 of our Notes to the Condensed Consolidated Financial Statements.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

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 September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

On July 30, 2020, a complaint for declaratory relief was filed in Superior Court of California, City and County of San Francisco against us by its current landlord, San Jose Biocube II, LLC. The complaint seeks a declaratory judgment regarding whether the defendant’s tenancy has been terminated and defendant can be evicted at the present time. To date, the complaint has not been served on us.

Item 1A. Risk Factors

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

Item 5. Other Information.

On September 10, 2020, we entered into an exclusive licensing agreement with the UAB Research Foundation (“UABRF”), a non-profit corporation. This agreement granted to us an exclusive, royalty-bearing license for intellectual property entitled human neutralizing antibodies against SARS-CoV-02/COVID-19. UABRF and Texas Biomedical Research Institute (“Texas Biomed”) jointly own all right, title and interest in the intellectual property. The UABRF license agreement also granted to us the right to sublicense the technology.

We have agreed to provide at least $50,000 in research funding to each of the lead inventors’ research programs. This funding will be supplied under research agreements agreeable to us, UABRF and Texas Biomed, and it is expected that the intellectual property resulting from such research shall be included under this exclusive license agreement. The potential development and commercialization milestone payments under the UABRF agreement total up to $5.5 million. We are also obligated to pay UABRF single digit percentage royalties on net sales from us and our sublicensee’s sale of any commercialized licensed product or process, subject to minimum annual amounts starting in 2026. We are obligated to pay UABRF double digit percentage royalties on non-royalty income received during the term of the license agreement, and payments will be reduced by one half for non-royalty income received for a combination product as defined in the agreement. We are responsible for all patent protection expenses.

The term of the license agreement continues until all patents and filed patent applications, included within the licensed UABRF patents, have expired or been abandoned, or until the agreement is earlier terminated. We may terminate the license agreement by giving no less than ninety (90) days prior written notice to UABRF. UABRF has the right to immediately terminate the license agreement upon our uncured material breach of obligations under the agreement.

Item 6. Exhibits

Exhibit No.		Description
10.1		Form of Securities Purchase Agreement, dated October 13, 2020, by and between Aridis Pharmaceuticals, Inc. and the Purchasers (filed with the Registrant’s Current Report on Form 8-K on October 14, 2020 and incorporated herein by reference).

10.2		Form of Series A Warrant (filed with the Registrant’s Current Report on Form 8-K on October 14, 2020 and incorporated herein by reference).

10.3		Form of Series B Warrant (filed with the Registrant’s Current Report on Form 8-K on October 14, 2020 and incorporated herein by reference).

10.4		Office Lease dated October 14, 2020 by and between Aridis Pharmaceuticals, Inc. and Boccardo Corporation (filed with the Registrant’s Current Report on Form 8-K on October 20, 2020 and incorporated herein by reference).

10.5*		Exclusive License Agreement dated September 10, 2020 by and between Aridis Pharmaceuticals, Inc. and UAB Research Foundation.

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

* Portions of this exhibit (indicated by asterisks) have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv).

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: November 23, 2020	By:	/s/ Vu Truong
	Vu Truong
	Chief Executive Officer
	(Principal Executive Officer)

Dated: November 23, 2020	By:	/s/ Michael A. Nazak
	Michael A. Nazak, Chief Financial Officer
	(Principal Financial Officer)

Exhibit 10.5

[*] Certain information in this document has been omitted from this exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.

EXCLUSIVE LICENSE AGREEMENT

This exclusive license agreement (this “Agreement”) is made and is effective as of September 10, 2020 (the “Effective Date”) between The UAB Research Foundation (“UABRF”), a non-profit 501(c)(3) corporation incorporated in the State of Alabama, and Aridis Pharmaceuticals, Inc. (the “Licensee”), a publicly traded company incorporated under the laws of the state of Delaware, with its principal places of operations as described in the signature block on the signature page below.

RECITALS

WHEREAS, UABRF and Texas Biomedical Research Institute (Texas Biomed) jointly own all right, title and interest in (i) the intellectual property described in UABRF intellectual property disclosure numbered U2020-0060, entitled “Human neutralizing antibodies against SARS-CoV-2 / COVID-19” (the “Invention”), which was co-developed by the Texas Biomed Inventors (defined below) while employed at Texas Biomed and the UAB Inventors (defined below) while employed at UABRF’s affiliate, the University of Alabama at Birmingham (“UAB”), and (ii) the patent application(s) noted on Exhibit A hereto which is part of the Licensed Patents which covers such intellectual property;

WHEREAS, UABRF and Texas Biomed have executed an Inter-Institutional Agreement attached hereto as Exhibit C pursuant to which Texas Biomed has granted UABRF the right to negotiate licenses to commercialize the jointly owned Licensed Patents on behalf of both entities and accordingly UABRF, has the right to grant exclusive licenses to the Licensed Patents as set forth in this Agreement and desires to have the same developed and commercialized to benefit the public; and

WHEREAS, the Licensee, a leading company focused on the development of novel, differentiated therapies for infectious diseases, desires to obtain a license to the Licensed Patent upon the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises described above and the mutual promises and agreements set forth in this Agreement, the Parties agree as set forth below.

Article 1

Definitions

The definitions used in this Agreement are set forth below.

1.1

“Affiliate” means any Person that directly or indirectly controls, is controlled by, or is under common control with a Party. “Control” means (i) the beneficial ownership of at least fifty percent (50%) of the voting securities of a Person with voting equity, or (ii) the power to direct or cause the direction of the management or policies of a Person.

1.2

“Agreement” means this agreement, as amended from time to time in accordance with the terms and conditions set forth in this agreement.

1.3

“Combination Product” means a Licensed Product consisting of one or products or technology covered by a Valid Claim packaged, bundled, or otherwise combined for sale with one or more other antibody products or antibody technology that is not covered by a Valid Claim.

1.4

“First Commercial Sale” means the first Sale of a Licensed Product by the Licensee, its Affiliates or its Sublicensees to a Third Party.

1.5

“For Value” means any consideration, remuneration or benefit of any kind, whether received directly or indirectly, including, but not limited to, cash, equity, debt, preferential treatment, including waiver, rebate, discount, etc.

1.6

“Inventors” are collectively the Texas Biomed Inventors and the UAB Inventors.

1.7

“Licensed Field of Use” means treatment of patients for infection, or prevention of infection, with SARS-COV-2.

1.8

“Licensed Patents” means all patents and/or patent applications owned or controlled by Texas Biomed, UABRF, and/or UAB covering the above-described Invention including (a) the patents and/or patent applications set forth on attached Exhibit A, (b) any foreign patent applications based thereon, (c) all patents proceeding from such domestic and foreign patent applications, (d) all divisionals, continuations, reissues, reexaminations and extensions of any patent or patent application described in (a) – (c) above. “Licensed Patents” shall also include patents and patent applications covering inventions arising out of research by sponsored by Licensee as contemplated under section 5.2.

1.9

“Licensed Product” means any product or part thereof, process or service, the development, manufacture, use, import, export, offer for sale or sale of which is covered by, or which cannot be undertaken or completed without infringing, a Valid Patent Claim set forth in any Licensed Patent.

1.10

“Licensed Territory” means worldwide.

1.11

“Major Market” means the United States of America, the European Union or Japan.

1.12

“Net Sales” means the gross amount received by Licensee (or Affiliate or Sublicensee) relating to any Sale of a Licensed Product, less (a) discounts actually allowed, (b) rebates, price reductions, rebates to social and welfare systems, charge backs, government mandated and similar rebates, (c) credits for claims, allowances, retroactive price reductions or returned goods, (d) prepaid freight and insurance, (e) customs duties, sales taxes or other governmental charges actually paid in connection with such Sale (but excluding income tax). Where a Licensed Product is not used, transferred or exchanged For Value, the Net Sales will be fair market cash value for such transaction to be agreed upon between the Parties.

1.13

“Non-Royalty Income” means anything received by the Licensee from a Sublicensee For Value to the extent received in exchange for sublicense rights hereunder that is cash or a cash equivalent that is not calculated upon a percentage of Net Sales, including, but not limited to, fees and advances. For purposes of clarity, a sublicensee issue fee is an example of “Non-Royalty Income” because it is not based on Net Sales but instead is a fee paid to gain access to the Licensed Patents.

1.14

“Parties” means UABRF and the Licensee, and each of them individually is a “Party”.

1.15

“Person” means an individual, corporation, partnership, trust, business trust, association or any other entity with a separate legal identity, including the Parties.

1.16

“Protection Activities” means taking all actions deemed necessary and desirable to protect the Licensed Patents, including, but not limited to, obtaining, filing for, securing, pursuing, prosecuting, and continuing or maintaining the patents and patent applications.

1.17

“Protection Expenses” means all legal fees, costs and expenses reasonably incurred by UABRF in the performance of the Protection Activities, such fees, costs and expenses to be documented by written invoice.

1.18

“Representative(s)” means, with respect to each Party and their Affiliates, all trustees, directors, officers, employees, agents and advisors.

1.19

“Sale or Sales” means any use, transfer or exchange, For Value or otherwise, of a Licensed Product. Sales include all Sales by the Licensee, its Affiliates, and its Sublicensees and includes any transfer by the Licensee or a Sublicensee to an Affiliate or sublicensee where there is no subsequent Sale (i.e., the Licensed Product is not further resold or transferred).

1.20

“Sublicensee” means a Person to whom the Licensee has granted a sublicense pursuant to Section 2.5 of this Agreement.

1.21

“Texas Biomed Inventors” means Luis Martinez-Sobrido, Fatai Oladunni, and Jun-gyu Park.

1.22

“Third Party” means any Person other than the Parties, their Affiliates, and Texas Biomed.

1.23

“UAB Inventors” means James Kobie, Mark Walter, Ashlesha Deshpande, Michael Piepenbrink, Paul Gopefert, Nathan Erdmann, Madhubanti Basu, and Sanghita Sarkar.

1.24

“United States” means the United States of America.

1.25

“Valid Patent Claim” means (i) a pending patent claim included within the Licensed Patents or (ii) an issued and unexpired patent claim included within the Licensed Patents which has not been held permanently revoked, unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, to which an appeal has not or cannot be taken within the time allowed for appeal, and which has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue, disclaimer or otherwise.

Article 2

Grant of License

2.1 Grant of License. Subject to the terms and upon the conditions set forth in this Agreement, UABRF hereby grants to the Licensee an exclusive, sublicensable right and license, subject to the terms and conditions of this Agreement, to (a) practice the Licensed Patents and (b) make, have made, develop, use, lease, offer to sell, sell, import and export Licensed Products, within the Licensed Field of Use in the Licensed Territory during the Term. The Licensee may transfer its rights under this Agreement to an Affiliate, provided such Affiliate assumes all of the obligations of the Licensee under this Agreement.

2.2 Rights of the United States Government. It is understood that if a United States Governmental Authority has funded research, during the course of or under which the Licensed Patent(s) was conceived or made, the United States government is entitled, as a right, under the provisions of 35 U.S.C. §§ 200-212 and applicable regulations of Chapter 37 of the Code of Federal Regulations, to a non-exclusive, non-transferable, paid-up license to practice or have practiced and use the affected Licensed Patents for governmental purposes. The Licensee acknowledges that the rights and license granted to it pursuant to this Agreement are subject to any and all rights of the United States government.

2.3 Reservation of Rights by UABRF, its Affiliates and Texas Biomed. UABRF reserves the right, for itself, for its Affiliates, and for Texas Biomed, to:

(a)

practice and use, and to permit their Representatives to practice and use, the Licensed Patents within the Licensed Field of Use for non-commercial educational and research purposes;

(b)

grant to non-profit academic, educational or research institutions and governmental authorities, non-exclusive, royalty-free licenses to make and use the Licensed Patents within the Licensed Field of Use for non-commercial educational and research purposes;

(c)

permit their respective Representatives to disseminate and publish scientific findings from research related to the Licensed Patents; and

(d)

practice, use and otherwise commercialize, including licensing, the Licensed Patents to Third Parties for applications and uses outside of the Licensed Field of Use and outside the Licensed Territory.

2.4 Title Remains with UABRF and Texas Biomed. All right, title and interest in and to the Licensed Patents remains with UABRF and Texas Biomed. Except as provided in this Agreement, no express or implied licenses with respect to the Licensed Patents or any other rights are transferred or granted to the Licensee by implication, estoppel or otherwise.

2.5 Right to Grant Sublicenses. The Licensee has the right to grant sublicenses to any Person under this Agreement on the following terms and conditions:

(a)

the execution of a sublicense shall not in any way diminish, reduce or eliminate any of the Licensee’s obligations under this Agreement, and the Licensee shall remain primarily liable for such obligations and any breach of any provision of this Agreement by a Sublicensee;

(b)

the Licensee shall provide UABRF with a copy of any such sublicense granted by it under this Agreement within thirty (30) days of the execution of the sublicense;

(c)

UABRF and Texas Biomed are third party beneficiaries to each sublicense and each agreement evidencing a sublicensing arrangement shall include a statement and an acknowledgement by the Sublicensee to this effect;

(d)

the Licensee may not sublicense the right to prosecute or protect the Licensed Patents to a Sublicensee;

(e)

Sublicensees are prohibited from further sublicensing the Sublicensee’s rights to any other Person;

(f)

the Sublicensee shall obtain and maintain insurance coverage as described in Section 8.2;

(g)

the Sublicensee shall be subject to indemnification obligations as described in Section 11.2; and

(h)

in the event this Agreement is terminated or upon the expiration of the Term, (i) the Licensee shall notify the Sublicensee of the termination or expiration, (ii) the sublicense will terminate simultaneously with the termination or expiration of this Agreement, and (iii) the Sublicensee may enter into a license agreement with UABRF on substantially the same terms as the Sublicensee’s sublicense with the Licensee with UABRF’s approval (which approval shall be granted subject to such Sublicensee’s agreement to the terms as required in this Section).

Article 3

Development and Commercialization

3.1 Development and Commercialization Plan and Milestones. During the Term, the Licensee shall use good faith, reasonable commercial efforts to develop, manufacture, commercialize and market the Licensed Patents through a diligent program designed to accomplish the commercial exploitation of the same and to make the technology covered by or embedded in the Licensed Patents available to the general public in accordance with the procedures and practices that are usual and customary for similar technologies and industries. Notwithstanding the foregoing, the Licensee shall be required to demonstrate continuing good faith, reasonable commercial efforts to commercialize the Licensed Patents in one or more Major Markets and do all that is legally required to obtain and retain any regulatory and/or governmental approvals to manufacture and/or sell Licensed Products in such Major Market(s). The Parties acknowledge that the development and commercialization plan and milestones set forth below are reasonable. Licensee shall use good faith, reasonable commercial efforts to achieve the milestones set out below, or shall demonstrate to UABRF a reasonable, alternate development and commercialization plan if such milestones cannot be achieved. Such alternate plan to be approved by UABRF and not unreasonably withheld.

#	Development and Commercialization Plan and Milestones	Date
1	Complete animal studies at Texas Biomed to validate therapeutic potency of lead antibody	*
2	Initiate IND enabling GLP toxicity studies ¹	*
3	File IND or MCM application with FDA or foreign equivalent for a Licensed Product	*
4	Completion of a phase I/II human study ²	*
5	Completion of a phase III human study ²	*
6	BLA or MCM approval from FDA or foreign equivalent for a Licensed Product	*
7	First Commercial Sale of a Licensed Product	*

¹ Subject to the successful demonstration of prophylactic or therapeutic potency of lead antibody.

²Completion shall mean availability of the clinical study report.

All variations and deviations from and changes to the development and commercialization plan and milestones must be expressly approved in writing by UABRF, such consent not to be unreasonably withheld, conditioned or delayed. For purposes of clarity, any variation or deviation from or changes to development and commercialization milestones must be amended in a timely manner and expressly approved in writing by UABRF.

3.2 Development, Commercialization and Royalty Report. The Licensee shall provide UABRF, on each January 31 and July 31 following the Effective Date until completion of a phase I/II human study as described in milestone 4 in Section 3.1, with written semi-annual progress reports detailing the activities of the Licensee relating to the development and commercialization plan and accomplishment of the milestones. Subsequently, such reports shall be provided annually on each January 31 until the First Commercial Sale. After the First Commercial Sale, Licensee shall provide to UABRF written quarterly royalty reports setting forth all applicable information specified in Exhibit B.

3.3 Patent Markings. The Licensee shall ensure that each Licensed Product manufactured and/or sold in the United States shall bear patent markings that meet all applicable requirements of 35 U.S.C. §287, as amended from time to time. All Licensed Products manufactured and/or sold outside of the United States shall be marked in such a manner as to conform to the applicable law of such country/jurisdiction.

3.4 Manufacturing in the United States. Licensee acknowledges that, unless otherwise waived by the governmental authority that funded the development of the Licensed Patents, it is required to substantially manufacture in the United States any Licensed Products sold in the United States covered by the Licensed Patents. UABRF and Licensee shall cooperate to obtain any waivers from such manufacturing requirements as may be reasonably required.

Article 4

Protection of The Licensed Patents; Patent Prosecution

4.1 Patent Protection Activities.

(a)

UABRF Retains Primary Responsibility. Subject to the terms and conditions set forth in this Agreement, UABRF shall continue to be primarily responsible for undertaking all Protection Activities relating to the Licensed Patents.

(b)

Co-operation of the Licensee. The Licensee shall cooperate fully with UABRF and its designated legal counsel in connection with the Protection Activities.

(c)

Consultation with the Licensee. UABRF shall, and shall cause its designated legal counsel to, consult with the Licensee and provide to the Licensee all related documentation pertaining to prosecutorial matters arising in connection with such Protection Activities, and the Licensee shall be given reasonable opportunity to discuss, advise and review issues with UABRF and its designated legal counsel.

(d)

Foreign Protection Requested by the Licensee. The Licensee must notify UABRF in writing identifying in which foreign countries and jurisdictions, if any, the Licensee wishes to undertake Protection Activities with respect to any Licensed Patents. Exhibit A shall be deemed to be amended accordingly to reflect these designations.

(e)

Foreign Patent Protection Not Requested by the Licensee. UABRF, in its reasonable discretion and after consultation with Licensee, may elect to undertake Protection Activities with respect to any Licensed Patents in any country or jurisdiction not so designated by the Licensee pursuant to Section 4.1(d) above. In such cases Licensee shall have sixty (60) days to elect to include such Protection Activities under subsection (d) above; otherwise (i) UABRF shall be responsible for all Protection Expenses incurred in connection therewith and the Licensee shall not be responsible for such expenses, (ii) the Licensed Patents so affected shall no longer be deemed to be licensed to the Licensee, (iii) the Licensee shall forfeit and shall no longer have any rights or obligations with respect thereto, and (iv) Exhibit A shall be deemed to be amended accordingly to delete the affected Licensed Patents.

(f)

Disclaimed Licensed Patents. The Licensee may, at any time during the Term, provide at least sixty (60) days written notice to UABRF that it no longer wishes to be responsible for the Protection Expenses in connection with one or more Licensed Patents. In such cases, (i) the Licensee shall continue to be responsible for all Protection Expenses incurred in connection therewith until the expiration of such sixty (60) day notice period and thereafter shall not be responsible for such expenses, and (ii) the Licensed Patent(s) so affected shall no longer be deemed to be licensed to the Licensee and Exhibit A shall deemed to be amended accordingly.

Article 5

Financial Terms

5.1 Patent Protection Expenses. During the Term and with respect to the Licensed Patent(s), the Licensee will be financially responsible for the payment of all Protection Expenses incurred

either before or after the Effective Date. The Licensee shall pay such amounts to UABRF within thirty (30) days of receipt of an invoice for the same from UABRF.

5.2 Funding to Inventors’ Research Programs. Licensee shall provide at least Fifty-Thousand U.S. dollars ($50,000.00) in research funding to each of the Lead Inventor’s research program. The sponsored research proposals shall be submitted to the University of Alabama at Birmingham and the Texas Biomedical Research Institute prior to October 1, 2020. This funding will be supplied under research agreements agreeable to Licensee, UABRF and Texas Biomed, and it is expected that intellectual property resulting from such research shall be included under this License Agreement and the Interinstitutional Agreement between UABRF and Texas Biomed covering Licensed Patents.

5.3 Milestone Payments. During the Term, the Licensee shall pay to UABRF the development and commercialization milestone payments as set forth below. Payments shall be reduced by one half for milestones achieved with a Combination Product. Each such milestone payment is non-creditable and non-refundable and shall be due within thirty (30) days of achievement. The Licensee shall provide written notice to UABRF to accompany the payment identifying the milestone that has been achieved.

Milestones	Payment
File IND or MCM application with FDA or foreign equivalent for a Licensed Product	*
Initiation of a phase III human study	*
Completion of a successful phase III human study ^1,2	*
BLA or MCM approval from FDA or foreign equivalent for a Licensed Product in a Major Market	*
First Commercial Sale of a Licensed Product	*

¹Successful shall mean meeting the primary endpoints of the study design.

²Completion shall mean availability of the clinical study report.

5.4 Running Royalty Payments. During the Term and with respect to each country or jurisdiction within the Licensed Territory, the Licensee shall pay to UABRF a continuing royalty of * percent (*%) on all Net Sales of Licensed Products arising in such country/jurisdiction until the expiration of the last Valid Patent Claim in that country/jurisdiction. If Licensee sells any Licensed Product in the form of a Combination Product in a particular country, Net Sales of such Combination Product in such country for the purpose of determining the royalty due to UABRF pursuant to this Section will be calculated on a country-by-country basis as follows:

(a) where both the product or component of the Combination Product covered by any Licensed Patent (“Covered Component”) and the product(s) or component(s) not covered by any Licensed Patent (“Other Component(s)” are sold separately in such country, by multiplying actual Net Sales of such Combination Product in such country by the fraction A/(A+B), where A is the invoice price of the Covered Component if sold separately in such country and B is the total invoice price of the Other Component(s) if sold separately in such country;

(b) where the Covered Component is sold separately but the Other Component(s) are not sold separately in such country, by multiplying actual Net Sales of such Combination Product by the fraction A/C, where A is the invoice price of the Covered Component if sold separately in such country and C is the invoice price of the Combination Product; or

(c) where the Covered Component is not sold separately in such country, by multiplying actual Net Sales of such Combination Product by the fraction D/E, where D is the inventory cost of the Covered Component and E is the inventory cost of the Other Component(s), as such inventory costs are determined in accordance with Licensee's regular accounting methods, consistently applied. All amounts owing to UABRF under this Section 5.4 shall be paid on a quarterly basis, on or before the ninetieth (90^th) day following the end of the calendar quarter in which such amounts were earned.

(d) Special Handling of Multiple Antibody Combination Product. As of the Effective Date, Licensee expects that Licensed Product will be developed and sold as a Combination Product combining two distinct antibodies, one of which would, if sold separately, be considered a Licensed Product hereunder. Provided that Licensee reasonably demonstrates to UABRF that such Combination Product contains at least two distinct antibodies, and that each antibody confers significant expected efficacy to the resultant Licensed Product, then such Combination Product shall be considered a “Multiple Antibody Combination Product,” and Net Sales for such Licensed Product shall be calculated by multiplying actual Net Sales by the fraction ½ (one half). Milestone payments and Non-Royalty Income payments for such Multiple Antibody Combination Product shall be reduced by one half as for other Combination Products, as noted in Sections 5.3 and 5.6.

(e) Under no circumstances will the royalty due to UABRF be less than * percent (*%) on Net Sales on Combination Products.

5.5 Minimum Annual Payments. Beginning on January 1, 2026, the Licensee shall be obligated to pay minimum annual payments to UABRF as set forth below. Minimum annual payments shall be reduced by one half, if the only Licensed Products being sold or in development by the Licensee, its Affiliates and/or Sublicensees are Combination Products. All such minimum annual payments shall be nonrefundable but are creditable against royalties due to be paid to UABRF for that calendar year. Minimum annual payments shall be payable no later than January 31 of the calendar year due.

In any year in which the Licensee can reasonably demonstrate that there will be no significant market for any COVID-19 antibody product, the Licensee may provide such justification to UABRF by the minimum annual payment due date, and the payment below for that year shall be waived.

Calendar Year Ending	Minimum Payment
31-Dec-26	*
31-Dec-28	*
Each calendar year thereafter during the Term	*

The dates for all applicable minimum annual royalty payments may be adjusted by reasonable agreement of the Parties if the timelines and milestones presented in Section 5.1 are adjusted by reasonable agreement of the Parties.

5.6 Non-Royalty Income. The Licensee shall pay to UABRF * percent (*%) of any and all Non-Royalty Income received by it during the Term with such payments being made to UABRF on or before the thirtieth (30^th) day following receipt by the Licensee. Payments shall be reduced by one half for Non-Royalty Income received for a Combination Product. All such payments shall be accompanied by a written notification of the nature, origin and identity of the payor.

5.7 Royalty Payments from its Affiliates and Sublicensees. The Licensee shall pay to UABRF an amount equal to that which the Licensee would have been required to pay to UABRF had the Licensee effected the Sales actually effected by its Affiliates and/or its Sublicensees.

5.8 Address for Payments. Except as otherwise directed by UABRF, all amounts due to be paid by the Licensee to UABRF pursuant to this Agreement shall be paid to UABRF at the address set forth below its signature on the signature page of this Agreement.

5.9 Late Payment Penalty. The balance of any amount which remains unpaid more than thirty (30) days after it is due to UABRF shall accrue interest until paid at the rate equal to the lesser of one percent (1%) per calendar month or the maximum amount allowed under applicable law. However, in no event shall this interest provision be construed as a grant of permission for payment delays.

5.10 Currency Conversion. All amounts due to be paid to UABRF pursuant to this Agreement shall be made in United States dollars. Any and all amounts received by the Licensee or generated in foreign currency shall be converted into United States dollars at the official rate of exchange from such currency to United States dollars at the rate quoted in the Wall Street Journal (United States edition) for the last business day of the calendar quarter in which payment is due to UABRF or on a business day no earlier than five (5) business days before payment is made to UABRF.

5.11 Foreign Taxes. UABRF is exempt from paying income taxes under United States law; therefore, all payments under this Agreement shall be made without deduction for taxes, assessments or other charges of any kind which may be imposed on UABRF by any government outside of the United States or any political subdivision of such government with respect to any amounts payable to UABRF pursuant to this Agreement. All such taxes, assessments or other charges shall be assumed by the Licensee.

Article 6

Recordkeeping and Audit Rights

6.1 Books and Records. The Licensee shall keep complete and accurate books, accounts and other records and documentation necessary to ascertain all transactions and events pursuant to which payments due to UABRF under this Agreement arise or are accrued. All such books, accounts and other records and documentation shall be kept at the Licensee’s principal place of business for a period of not less than six (6) years following the end of the calendar year to which they pertain.

6.2 Right to Audit. UABRF shall have the right to have the Licensee’s books and records audited by an external, qualified, independent certified public accounting firm of its choosing, under appropriate confidentiality provisions such as those set forth in Section 8.3 of this Agreement, to ascertain the accuracy of the reports and payments due to UABRF under this Agreement and compliance by the Licensee, its Affiliates and its Sublicensees with their obligations pursuant to this Agreement and any sublicense. Such audit shall be conducted from on ten (10) days advance notice during normal business hours but not more than once in any twelve (12) month period. If any such examination reveals that the Licensee has underpaid or underreported any amount due under this Agreement, the Licensee shall promptly pay to UABRF the amount so underpaid or underreported. If such underpayment or underreporting exceeds five percent (5%) for any twelve (12) month period examined, the Licensee shall immediately reimburse UABRF the full costs and expenses incurred by it with respect to the audit.

Article 7

Infringement; Enforcement

7.1 Notification of Infringement. During the Term, each Party shall provide prompt written notice to the other Party of any actual infringement or suspected/potential infringement of the Licensed Patents of which such Party is or becomes aware and shall provide, to the extent reasonable and practicable, any available evidence of such infringement by a Third Party (an “Infringement Notice”).

7.2 Licensee Right to Pursue/Prosecute. During the Term, the Licensee shall have the right to resolve, in the Licensed Field of Use and in the Licensed Territory, any suspected/potential infringement and, in those jurisdictions in which the Licensee may file suit without the requirement that the owners of the Licensed Patents are parties to the lawsuit/action, prosecute any infringement of any Licensed Patents, in its own name and at its own expense, provided the Licensee remains in compliance, in all material respects, with its obligations under this Agreement. In those jurisdictions in which the owners of the Licensed Patents must participate as parties to the lawsuit/action, the Licensee may name UABRF and Texas Biomed as parties for standing purposes only, upon written approval of the Board of Trustees of the University of Alabama with respect to UABRF and of Texas Biomed, which approval shall not be unreasonably withheld.

The Licensee shall use its best commercially reasonable efforts to abate or terminate such infringement without resorting to litigation, which may include at its reasonable discretion negotiating and executing a sublicense agreement which complies with the terms of Section 2.5 of this Agreement. Before the Licensee commences any legal action with respect to any infringement or potential infringement, it shall give careful consideration to: a) the views of UABRF and Texas Biomed; b) there being reasonable legal and economic bases for doing so and c) giving UABRF twenty days’ notice before such legal action. UABRF shall cooperate with the Licensee in connection with any remedial action undertaken by the Licensee, including if Licensee commences a lawsuit. Licensee shall be responsible for the costs and expenses incurred by UABRF with respect to such cooperation.

7.3

Control of Suit; Joinder; Expenses.

(a)

Initiated by the Licensee. If the Licensee wishes to commence a lawsuit, it must do so within ninety (90) days following the date of notification of relevant infringement pursuant to Section 7.1, except where it is reasonably pursuing other action (including negotiation) to terminate such infringement.

(b)

Initiated by UABRF. If the Licensee elects not to exercise its right to commence, or fails to commence, an action within ninety (90) days of notification of relevant infringement, or sixty (60) days’ notice by UABRF of its intention to do so, whichever is later, UABRF may do so at its own expense, and shall retain sole control over the direction of such lawsuit. The Licensee shall cooperate fully with UABRF in connection with such lawsuit and shall be responsible for the costs and expenses incurred by it with respect to such co-operation.

(c)

Joinder by UABRF or Texas Biomed. UABRF and Texas Biomed, to the extent permitted by applicable law, may elect to join in as a party to any infringement lawsuit initiated by the Licensee, in which case, both Parties shall jointly control the lawsuit and shall equally share the responsibility of all legal fees, costs and expenses, unless otherwise agreed to by the Parties. If UABRF or Texas Biomed is involuntarily joined as a party to a lawsuit initiated by the Licensee, the Licensee shall pay all legal fees, costs and expenses incurred by UABRF and Texas Biomed arising out of such joinder and participation, including, but not limited to legal fees, costs and expenses reasonably incurred by legal counsel selected and retained by UABRF and Texas Biomed to represent them in such lawsuit.

7.4 Settlement. The Licensee may not settle, enter into a consent judgment or other voluntary final disposition of any lawsuit initiated by it or to which it is a party without the prior written consent of UABRF. Neither Party may settle or otherwise dispose of any lawsuit to which it is a party, which admits liability on the part of the other Party or which requires the other Party to pay money damages nor issue a formal statement without such other Party’s prior written consent. No Party may settle or otherwise dispose of any lawsuit to which Texas Biomed is voluntarily or involuntarily joined as a party, which admits liability on the part of Texas Biomed or which requires Texas Biomed to pay money damages nor issue a formal statement without Texas Biomed’s prior written consent.

7.5 Recoveries.

(a)

With respect to any lawsuit commenced by the Licensee in which UABRF is not a party pursuant to Section 7.3(a) above, or in which UABRF is joined as a party pursuant to Section 7.3(c) above, any recovery of damages shall first be applied in satisfaction of the costs and expenses incurred by the Parties in bringing such lawsuit, including attorneys’ fees, provided they are reasonably incurred, and any balance shall be shared 70% to Licensee and 30% to UABRF.

(b)

Lawsuit initiated by UABRF. With respect to any lawsuit commenced solely by UABRF pursuant to Section 7.3(b) above, all recoveries of damages awarded in the lawsuit shall belong to UABRF. To the extent the Licensee executes a sublicense with the infringing party with respect to future activities occurring after the conclusion of the lawsuit, the Licensee shall first pay over to UABRF all payments (whether or not designated as “royalties”) made by the infringer, up to the amount of UABRF’s unreimbursed litigation expenses (including, but not limited to, reasonable attorneys’ fees), and thereafter any amounts paid by the Licensee shall be in accordance with the terms of this Agreement.

Article 8

Other Covenants and Agreements

8.1 Use of Names. No Party may, without the prior written consent of the other Party:

(i)

use (a) the name of the other Party or its Affiliates, if applicable, (b) the name or image of any Representative of the other Party, or (c) any trade-name, trademark, trade device, service mark, symbol, image, icon, abbreviation, contraction or simulation thereof owned by the other Party in any publication, advertising or sales promotional material, press release or in any marketing or advertising documentation or material without the prior written consent and authorization of the other Party; or

(ii)

represent, either directly or indirectly, that any product or service of the other Party is a product or service of the representing Party or that it is made in accordance with or utilizes the information or documents of the other Party.

Notwithstanding the above, the Licensee may disclose that it has received a license to Licensed Patents owned by UABRF and Texas Biomed in connection with any Licensed Product and UABRF and Texas Biomed may disclose that it has granted a license to the Licensee, and either Party may use the name of the other Party to the extent such use is reasonably necessary for complying with applicable law.

8.2 Insurance Coverage. Upon the Effective Date of this Agreement and during the Term of this Agreement, the Licensee shall purchase and maintain insurance coverage in type and amounts that are sufficient to fulfill Licensee’s indemnification obligations and warranty obligations under this Agreement. For clarification, the Licensee shall obtain and maintain product liability insurance in an amount that is customary for the stage of product development and, if applicable, prior to commencing a clinical trial shall obtain and maintain clinical trial coverage in an amount of at least $10 million per occurrence. All insurance coverage shall be primary to any coverage carried by UABRF and/or its Affiliates, be placed with a reputable insurance company with an A.M Best rating of at least A-X, list UABRF and its Affiliates and Texas Biomed as additional insureds and waive all rights of subrogation against any additional insureds. If such insurance coverage is written on a “claims made” basis, the Licensee agrees to provide such coverage for ten years after the Agreement expires or is terminated. Upon UABRF’s prior written consent such insurance coverage may be maintained through a self-insurance program, provided it has an acceptable risk management. The Licensee shall provide certificates of insurance evidencing the Licensee’s insurance coverage to UABRF upon UABRF’s reasonable request and prior to, if applicable, commencing its first clinical trial and the First Commercial Sale of a Licensed Product. The Licensee shall provide UABRF with at least thirty (30) days prior written notice of any change in the terms or cancellation of coverage.

8.3 Confidentiality.

(a)

Exchange of Proprietary Information. The Parties acknowledge that during the Term they are likely to share information with each other that they each consider to be confidential and proprietary (“Proprietary Information”). For the purposes of this Agreement, the Party that discloses Proprietary Information shall be referred to as the “Disclosing Party” and the Party receiving the Proprietary Information, the “Receiving Party.”

(b)

Nature of Proprietary Information. The Parties agree that all information that is provided to the other Party shall be deemed to be Proprietary Information.

(c)

Restrictions. With respect to all Proprietary Information disclosed to it, the Receiving Party (i) shall keep it confidential (other than as permitted by this Agreement), (ii) shall store and maintain it with the same diligence and care as its own proprietary information, but no less than reasonable diligence and care, (iii) may only use it for the purpose for which it was disclosed by the Disclosing Party, (iv) may not disclose it (other than as permitted by this Agreement), (v) may not deconstruct, modify or copy it (other than as permitted by this Agreement), and (vi) may not transfer or assign it to any Third Party.

(d)

Access to the Proprietary Information. The Proprietary Information may be used by, and disclosed to, on an “as-needed” basis, the Receiving Party’s Representatives. The Licensee may disclose Proprietary Information relating to the Licensed Patents to investors, prospective investors, consultants, collaborators and other Third Parties in the chain of manufacturing and distribution, if and only if, the Licensee obtains from such recipient a written confidentiality agreement, the provisions of which are at least as protective of UABRF’s Proprietary Information as these set forth in this Section 8.3. Each Party will promptly notify the other Party of any unauthorized use of or access to the Proprietary Information of which it becomes aware.

(e)

Exceptions to Confidentiality Obligation. The restrictions of confidentiality described above shall not apply to Proprietary Information (i) which as of the Effective Date or subsequently becomes available to the public without breach of this Agreement, (ii) if it is lawfully obtained from a Third Party not bound by similar confidentiality and use restrictions and obligations, (iii) if it is known by the Receiving Party prior to disclosure as evidenced by contemporaneous records, or (iv) if it is at any time developed by the Receiving Party independently of any disclosure made pursuant to this Agreement. In addition, the confidentiality obligations shall not apply to the Receiving Party if the Receiving Party is legally required by applicable law, court order or Governmental Authority to disclose the Information, provided the Receiving Party discloses only the minimum to comply and, makes commercially reasonable efforts to provide prior notice to the Disclosing Party to enable it to contest the requirement or to seek a protective order. The confidentiality obligations herein shall not apply to the extent Licensee is reasonably required to make disclosure to regulatory authorities in relation to clinical development or licensure of Licensed Products.

(f)

Termination or Expiration of this Agreement. Upon the expiration of the Term, or the earlier termination of this Agreement, each Receiving Party shall, at the Disclosing Party’s option and upon written notice thereof to the Receiving Party, return all Proprietary Information, copies and other tangible expressions thereof, to the Disclosing Party or provide the Disclosing Party with written notice that the Proprietary Information in its possession, or in the possession of its Representatives, has been destroyed within thirty (30) days after receipt of the Disclosing Party’s written notice to the Receiving Party requiring the Receiving Party to destroy the Proprietary Information in its possession. The Receiving Party may retain one archival copy of the Information for purposes of compliance of its obligations under this Agreement.

(g)

Continuing Obligations after Termination/Expiration. The restrictions and obligations set forth in Section 8.3(c) above shall continue for five (5) years from the termination or expiration of this Agreement.

Article 9

Term and Termination

9.1 Term. This Agreement shall commence on the Effective Date and shall continue until the date of expiration of the last to expire of any Valid Patent Claim (inclusive of any extensions, supplementary protection certificates or their equivalents) within the Licensed Patents, unless terminated sooner in accordance with the terms of this Agreement (the “Term”).

9.2 Termination by the Licensee. The Licensee may terminate this Agreement at any time, in its sole discretion, by giving not less than ninety (90) days prior written notice to UABRF. Upon the reasonable request of UABRF, the Licensee shall provide assistance, at its expense, to UABRF to enable UABRF to facilitate and effect the transfer of applicable information and documents regarding the Licensed Patents to a new licensee.

9.3 Termination by UABRF. UABRF shall have the right to immediately terminate this Agreement upon the occurrence of any one or more of the following events:

(a)

if the Licensee is in material default of any provision of this Agreement or its obligations under this Agreement and such default has not been remedied within sixty (60) days after receipt of a notice to cure from UABRF;

(b)

if the Licensee is convicted of a felony within the United States or similar crime in the following jurisdictions relating to the manufacture, use or sale of a Licensed Product: European Union, Japan, Canada, Australia, United Kingdom, South Korea, New Zealand, or;

(c)

if the Licensee shall become insolvent, shall make an assignment for the benefit of its creditors, or shall have a petition in bankruptcy filed for or against it which is not resolved within 180 days thereof; or

(d)

if the Licensee disclaims payment of all Protection Expenses.

9.4 Effect of Termination or Expiration. Any termination or expiration of this Agreement will not relieve either Party of any obligation or liability accrued prior to such termination or expiration. Upon the termination of this Agreement or the expiration of the Term, all payments then or thereafter due to the Licensee pursuant to any sublicense shall, immediately and automatically, become owed directly to UABRF. Further, upon termination of this Agreement, Licensee shall a) submit a final report as described in Section 3.2; b) suspend its manufacture, use and sale of Licensed Products; and c) provide UABRF copies of any regulatory information filed with any U.S. or foreign government agency with respect to Licensed Products.

Article 10

Covenants; Representations and Warranties; Limitations on UABRF’s Obligations

10.1

The Licensee. The Licensee makes the following representations and warranties to UABRF.

(a)

The Licensee is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware.

(b)

The Licensee has all necessary corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.

(c)

The execution, delivery and performance of this Agreement by the Licensee will not conflict with or result in a breach of, or entitle any party thereto to terminate, an agreement or instrument to which the Licensee is a party, or by which any of the Licensee’s assets or properties are bound.

(d)

This Agreement has been duly authorized, executed and delivered by the Licensee and constitutes a legal, valid and binding agreement of the Licensee, enforceable against the Licensee in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors’ rights generally.

(e)

The Licensee possesses the necessary expertise and skill in the technical areas pertaining to the Licensed Patents, to make Licensed Products, and to make and has made, its own evaluation of the capabilities, safety, utility and commercial application of the Licensed Patents.

(f)

Any activity undertaken with the Licensed Patents and the Licensed Products will be conducted in compliance with all applicable laws.

10.2

UABRF. UABRF makes the following representations and warranties to the Licensee.

(a)

UABRF is a non-profit corporation, duly incorporated, validly existing and in good standing under the laws of the State of Alabama.

(b)

UABRF has all necessary corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.

(c)

The execution, delivery and performance of this Agreement by UABRF does not conflict with or contravene its governing documentation, nor will the execution, delivery and performance of this Agreement by UABRF conflict with or result in a breach of, or entitle any party thereto to terminate, an agreement or instrument to which UABRF is a party, or by which any of UABRF’s assets or properties are bound.

(d)

This Agreement has been duly authorized, executed and delivered by UABRF and constitutes a legal, valid and binding agreement of UABRF, enforceable against UABRF in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors’ rights generally.

(e)

UABRF has the right to grant the license under this Agreement.

(f)

To UABRF’s best knowledge and based upon information and representations and warranties made to it by its inventor(s) and by Texas Biomed to it, UABRF and Texas Biomed own all right, title and interest in the Licensed Patents and there have been no claims made against UABRF or Texas Biomed asserting the invalidity or non-enforceability of, or with respect to the Licensed Patents, and UABRF is not aware that any such claims exist.

(g)

UABRF has, with respect to UAB and Texas Biomed, sufficient rights from those parties to grant the exclusive license contemplated herein, and no additional compensation or obligations will be required by Licensee for the rights granted herein and obligations made by UABRF herein, other than those set out in this Agreement. UABRF and Texas Biomed have properly executed the Interinstitutional Agreement covering management and disposition of the Licensed patents between them, and UABRF shall maintain this Agreement in full force and effect throughout the term of this Agreement.

10.3 Limitations on UABRF’s Representations and Warranties. Except as set forth in this Agreement, UABRF makes no other representations or warranties of any kind. In particular, UABRF makes no express or implied warranties regarding merchantability, fitness for a particular purpose, non-infringement of the intellectual property rights of third parties, validity and scope of any Licensed Patents, the capability, safety, efficacy, utility or commercial application or usefulness for any purpose of any Licensed Patents, or that it will not grant licenses to one or more Third Parties to make, use or sell products or perform processes that may be similar to and/or compete with any Licensed Product. No Representations or warranties are being provided by Texas Biomed to the Licensee as a joint owner of the Licensed Patents.

Article 11

Liability and Indemnification

11.1 No Liability of UABRF or Texas Biomed. None of UABRF, its Affiliates, Texas Biomed, or any their respective Representatives have any liability whatsoever to the Licensee, its Affiliates or any Sublicensee or any Person for or on account of any injury, loss or damage of any kind or nature, sustained by, assessed or asserted against, or any other liability incurred by or imposed upon the Licensee, its Affiliates or any Sublicensee or any Person, arising out of or in connection with or resulting from:

(a)

the use of the Licensed Patents during the Term;

(b)

the production, use, practice, lease, or sale of any Licensed Product;

(c)

any advertising or other promotional activities with respect to (a) and/or (b) above; or

(d)

the Licensee’s compliance with, and performance of the Licensee’s representations and warranties given under, and the Licensee’s obligations pursuant to, this Agreement.

UABRF’s and Texas Biomed’s aggregate liability for all damages of any kind (other than for those arising from UABRF’s intentional misconduct or gross negligence) arising out of or relating to this Agreement or its subject matter under any contract, negligence, strict liability or other legal or equitable theory shall not exceed the amounts paid and/or payable to UABRF and Texas Biomed’s under this Agreement.

11.2 Indemnification by the Licensee. The Licensee agrees to defend, indemnify and hold UABRF, its Affiliates, Texas Biomed, and their Representatives (collectively, “Indemnitees”) harmless from and against any and all third party claims, demands, losses, costs, expenses, deficiencies, liabilities or causes of action of any kind or nature (including, without limitation, reasonable attorneys’ fees and other costs and expenses of defense) (collectively, “Claims”) based upon, arising out of or otherwise relating to the following, except to the extent any such Claim is attributable :

(a)

the use of the Licensed Patents during the Term;

(b)

the production, use, practice, lease, or sale of any Licensed Product;

(c)

any advertising or other promotional activities with respect to (a) and/or (b) above; or

(d)

the Licensee’s compliance with, and performance of the Licensee’s representations and warranties given under, and the Licensee’s obligations pursuant to, this Agreement.

11.3 Procedures. The Indemnitees agree to provide Licensee with prompt written notice of any Claim for which indemnification is sought under this Agreement. Licensee shall, at its own expense, provide attorneys reasonably acceptable to UABRF and Texas Biomed (as applicable) to defend against any such Claim. The Indemnitees shall cooperate fully with Licensee in such defense and will permit the Licensee to conduct and control such defense and the disposition of such Claim (including all decisions relative to litigation, appeal, and settlement, subject to the qualifications set forth in this Section 11.3). Licensee agrees to keep UABRF informed of the progress in the defense and disposition of such Claim and to consult with UABRF with regard to any proposed settlement. Neither Licensee nor UABRF shall settle any Claim without the prior written consent of the other, which consent shall not be unreasonably withheld.

11.4 Limitation of Liability. Neither Party, its Affiliates nor any of their respective Representatives will be liable to the other with respect to any subject matter of this Agreement under any contract, negligence, strict liability or other legal or equitable theory for (a) any indirect, incidental, consequential or punitive damages or lost profits or (b) cost of procurement of substitute goods, technology or services. (This limitation of liability does not limit Licensee’s obligations pursuant to Section 11.2 for indemnification of UABRF or Texas Biomed against any third party Claims successfully brought against UABRF or Texas Biomed, regardless of the theory of liability).

Article 12

Miscellaneous

12.1 Entire Agreement. This Agreement is the sole and entire agreement by and between the Parties regarding the subject matter set forth in this Agreement, and this Agreement supersedes all prior agreements and understandings with respect thereto. All previous negotiations, statements and preliminary instruments by the Parties with respect to the subject matter hereof are merged in this Agreement.

12.2 No Inducement. Each Party hereby acknowledges that in executing this Agreement, such Party has not been induced, persuaded or motivated by any promise or representation made by any other Party, unless expressly set forth in this Agreement.

12.3 Independent Contractors. The relationship between the Parties is that of independent contractors. No Party has the authority to bind or act on behalf of the other Party without obtaining such other Party’s prior written consent. The Parties do not intend to create an employer/employee relationship.

12.4 No Third Party Beneficiaries. This Agreement is entered into by and among the Parties for the exclusive benefit of the Parties and permitted assignees. The Parties agree that Texas Biomed as a co-owner of the Licensed Patents is a third-party beneficiary of this Agreement. This Agreement is expressly not intended for the benefit of any creditor of a Party, or any other person. Except and only to the extent provided by applicable statute, no such creditor or Third Party shall have any rights under this Agreement or any other agreement between the Parties.

12.5 Assignment. Neither Party shall sell, assign, transfer or otherwise dispose of this Agreement to a Third Party without the prior written consent of the other, which consent shall not be unreasonably withheld. Any attempted assignment of this Agreement not in compliance with the terms of this Section 12.5 will be null and void. No assignment will relieve any Party of the performance of any accrued obligation that such Party may then have pursuant to this Agreement.

12.6 Amendments. Any and all modifications to this Agreement shall only be effective and binding if in writing and signed by a duly authorized representative of each Party.

12.7 Notices. Any notice, request, approval or consent required to be given under this Agreement will be sufficiently given if in writing and delivered to a Party in person, by recognized overnight courier or mailed in the United States Postal Service, postage prepaid to the address appearing below such Party’s signature on the last page of this Agreement, or at such other address as each Party so designates in accordance with these criteria. Notice shall be deemed effective upon receipt if delivered in person or by overnight courier or five (5) business days after mailing with the United States Postal Service.

12.8 Disputes.

(a)

Equitable Relief. Either Party may seek equitable and legal relief in the event of a breach or threatened breach by the other Party of its obligations under this Agreement, without the requirement to post a bond.

(b)

Internal Resolution. In the event of any dispute arising out of or relating to this Agreement or to a breach thereof, including its interpretation, performance or termination, the Parties shall try to settle such conflicts amicably between themselves.

(c)

Mediation. In the event the Parties are still unable to resolve the dispute or conflict, the dispute or conflict may then be submitted by a Party to a mediator, mutually agreed to by the Parties, for nonbinding mediation. The Parties shall cooperate with the mediator in an effort to resolve such dispute.

(d)

Litigation. If the dispute is not resolved within sixty (60) days of its submission to the mediator, either Party may resort to litigation.

12.9 Rights and Remedies. The use of any one right or remedy by any Party shall not preclude or waive the right to use any or all other remedies. Such rights and remedies are given in addition to any other rights the Parties may have by law, statute, ordinance or otherwise.

12.10 Waiver. No waiver of a provision, breach or default shall apply to any other provision or subsequent breach or default or be deemed continuous, nor will any single or partial exercise of a right or power preclude any other further exercise of any rights or remedies provided by law or equity.

12.11 Severability. In the event that any covenant, condition, or other provision contained in this Agreement is determined to be invalid, void or illegal, such covenant, condition or other provision shall be deemed deleted from the Agreement and shall not affect the validity of the remaining provisions of this Agreement.

12.12 Force Majeure. Neither Party shall be liable for any failure to perform as required by this Agreement to the extent such failure to perform is due to circumstances reasonably beyond such Party’s control, including, without limitation, labor disturbances or labor disputes of any kind; accidents; acts, omissions or delays in acting by any Governmental Authority; civil disorders; insurrections; riots; war; acts of war (whether war be declared or not); terrorism; acts of aggression; acts of God; fire; floods; earthquakes; natural disasters; energy or other conservation measures imposed by law or regulation; explosions; failure of utilities; mechanical breakdowns; material shortages; disease or other such occurrences; provided that the affected Party uses reasonable efforts to overcome or avoid the effects of such cause and continues to perform its obligations to the extent possible.

12.13 Survivability. All rights and obligations of the Parties which by intent or meaning have validity beyond or by their nature apply or are to be performed or exercised after the termination or expiration of this Agreement shall survive the termination or expiration of this Agreement for the period so specified, if any, or for perpetuity.

12.14 Governing Law. This Agreement, and the application or interpretation hereof, shall be governed exclusively by its terms and by the laws of the State of Alabama.

12.15 Jurisdiction. The Licensee consents to the personal jurisdiction of the federal and state courts located in the State of Alabama with respect to all claims or other causes of action arising out of this Agreement.

12.16 Interpretation. Whenever used in this Agreement and when required by the context, the singular number shall include the plural and the plural the singular. Pronouns of one gender shall include all genders, masculine, feminine and neuter.

12.17 Captions. The captions as to contents of particular sections or paragraphs contained in this Agreement are inserted for convenience and are in no way to be construed as part of this Agreement or as a limitation on the scope of the particular sections or paragraphs to which they refer.

12.18 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. Transmission by facsimile or e-mail of an executed counterpart of this Agreement shall be deemed to constitute due and sufficient delivery of such counterpart. If by e-mail, the executed Agreement must be delivered in a .pdf format.

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IN WITNESS WHEREOF, the Licensee and UABRF have each caused its duly authorized representative to execute this Agreement, effective as of the Effective Date.

UABRF:		THE LICENSEE:
The UAB Research Foundation		Aridis Pharmaceuticals

By:	/s/ Karthik Gopalakrishnan, Ph.D.	By:	/s/ Vu Truong
Name:	Karthik Gopalakrishnan, Ph.D.	Name:	Vu Truong
Title:	Director of Licensing and New Ventures	Title:	CEO

Addresses For Notices and Payments:

Address For Notices:

For Delivery by Courier Service:

The UAB Research Foundation

Attention: Executive Director

710 13th Street South

CSB 120

Birmingham, AL 35233

For Delivery by U.S. Postal Service:

The UAB Research Foundation

Attention: Executive Director

1720 2nd Avenue South

CSB 120

Birmingham, AL 35294

By email:

Innovation@uab.edu

Aridis Pharmaceuticals

Rebecca Edwards

Aridis Pharmaeuticals, Inc.

5941 Optical Ct.

San Jose, CA 95008

Read and acknowledged by: Texas Biomedical Research Institute

By:

/s/ Larry Schlesinger, MD

Larry Schlesinger, MD

President and CEO

Texas Biomedical Research Institute

8715 W. Military Drive, San Antonio, TX 78227-5302

Email: lschlesinger@txbiomed.org

EXHIBIT A

LICENSED PATENTS

EXHIBIT B

REQUIRED REPORT INFORMATION

Development and commercialization reports should include at a minimum, the following information:

A summary of the scientific/technical development related to product development since the previous report.

A summary of the Licensee’s business development initiatives and partnerships, including fund raising and any grants awarded.

A summary describing the status of the regulatory activities, including filings made and status of discussions with regulatory agencies regarding market approval of Licensed Products.

A summary describing achievement of development milestones.

A summary of all sublicenses executed by the Licensee, including a copy of each executed sublicense.

A summary of all reports provided to the Licensee by its Sublicensees.

Financial reports should include the following information:

With respect to each calendar quarter, the gross selling price and the number of units of all Licensed Products Sold (identified by product name/number) in each country/jurisdiction in the Licensed Territory, together with the calculations of Net Sales

With respect to each calendar quarter, the royalties payable in U.S. dollars accrued on such sales of Licensed Product.

With respect to each calendar quarter, the exchange rates, if any, used in determining the amount due.

The amount of any consideration received by the Licensee from its Sublicensees and an explanation of the contractual obligation satisfied by such consideration

The occurrence of any event triggering a milestone payment obligation

EXHIBIT C

INTER-INSTITUTIONAL AGREEMENT

This Inter-Institutional Agreement (“Agreement”) is made and entered into as of the Effective Date set forth below between the Lead Institution and Other Institution(s) identified below (together, the “Parties”). This Agreement consists of: Part 1 (“Transaction Terms”) which identifies the Parties, the Patent Rights subject to this Agreement, the economic arrangements between the Parties, and other transaction-specific terms; Part 2 (“General Terms”) which contains the general terms and conditions; and Exhibit A which includes terms to be included in any license of the Patent Rights subject to this Agreement.

The Parties hereby agree as follows:

Part 1 – Transaction Terms

Lead Institution			Other Institution(s)
The UAB Research Foundation			Texas Biomedical Research Institute
120 Collat School of Business			8715 W. Military Dr.
710 13^th Street South			San Antonio, TX 78227
Birmingham, AL 35233
ATTN: Karthikeyan Gopalakrishnan			ATTN: Joanne Turner, PhD
Phone: *			Phone: *
Email: innovation@uab.edu			Email: ip@txbiomed.org
Effective Date	September 10, 2020
Patent Rights	Internal Reference No.	Serial No./ Date of Filing	Title	Inventors (including employer at time of invention)
	UABRF Intellectual Property Disclosure # U2020-0060	*	Human Monoclonal Antibodies to Sars-Cov-2 and Use Thereof	Mark Walter, UAB Ashlesha Deshpande, UAB James Kobie, UAB Michael Piepenbrink, UAB Paul Gopefert, UAB Nathan Erdmann, UAB Madhubanti Basu, UAB Sanghita Sarkar, UAB Luis Martinez-Sobrido, Texas Biomed Fatai Oladunni, Texas Biomed Jun-gyu Park, Texas Biomed
Share of Net Consideration	*
Share of Patent Expenses	*
Administration Fee	*

Third-Party Interests
Governing Law	None

Page 1

Part 2 – General Terms

1. Definitions

The following capitalized terms have the meanings set forth below.

“Administration Fee” means the fee retained by Lead Institution as consideration for acting as lead under this Agreement. The amount of the Administration Fee, if any, is identified in the Transaction Terms and is calculated as a percentage of License Consideration after subtracting Patent Expenses reimbursed therefrom.

“License Agreement” means any agreement entered into by Lead Institution pursuant to the rights conferred by this Agreement granting Licensee the right to make, have made, import, use, offer to sell or sell products or services covered by Patent Rights, or any agreement granting an option for such a license or any agreement commercializing the Patent Rights.

“License Consideration” means collectively all money and other items of value (excluding research grants), including up-front license fees (whether cash, equity, or other consideration), annual maintenance fees, Patent Expense reimbursements, milestone fees, minimum royalties, earned royalties, and other consideration received from a Licensee or its sub-licensees, or otherwise received on account of licensing or optioning or otherwise commercializing the Patent Rights.

“Licensee” means a third party who has been granted an interest to practice the Patent Rights pursuant to a License Agreement with Lead Institution.

“Net Consideration” means the License Consideration less the Administration Fee and unreimbursed Patent Expenses paid by the Lead Institution.

“Patent Expenses” means all reasonable, out-of-pocket expenses incurred relating to the preparation, filing, prosecution, maintenance or defense of Patent Rights, both past and future. For avoidance of doubt, the salaries and overhead costs of each Party’s technology transfer office or legal affairs office are not included as out-of-pocket expenses for purposes of calculating the Patent Expenses.

“Patent Rights” means worldwide rights to the inventions described and claimed in the patents and patent applications identified as Patent Rights in the Transaction Terms; reissues, reexaminations, renewals, extensions, divisionals, continuations (including continuations-in-part (CIPs) only to the extent that the claims in such CIPs are entitled to the priority date of, and fully supported by, another patent or application in the Patent Rights) of the foregoing; and any extensions of or supplementary protection certificates referencing any of the foregoing, foreign counterparts and any other forms of protection directed to the inventions covered by the patents and patent applications identified as Patent Rights in the Transaction Terms.

Page 2

“Share of Net Consideration” means the respective percentage allocated to each Party of Net Consideration, as set forth in the Transaction Terms.

“Share of Patent Expenses” means the respective responsibility allocated to each Party for Patent Expenses not reimbursed by a Licensee as set forth in the Transaction Terms.

“Third-Party Interests” means rights of Licensees, research sponsors (including the U.S. government) or other third parties in the Patent Rights or in the proceeds of licensing the Patent Rights, other than inventors’ interest under the Parties’ intellectual property policies. The Third-Party Interests, if any, are identified in the Transaction Terms.

2. Patent Prosecution and Protection

2.1 Authority to File Patents. The Lead Institution has the responsibility and authority to take all reasonable actions necessary and appropriate to seek patent protection for the Patent Rights in accordance with the terms of this Agreement. The Lead Institution may not delegate this authority to a Licensee, unless such delegation is approved by the Other Institution(s) for a particular Licensee (or deemed approved in accordance with Section 3.3). Although the Lead Institution will have the ultimate decision authority in these matters, the Lead Institution will use reasonable efforts to keep the Other Institution(s) reasonably informed as to all material patent prosecution actions and decisions, and the Lead Institution will give due consideration to any recommendations made by the Other Institution(s) concerning the patent prosecution. Lead Institution will provide, or direct outside patent counsel to provide, Other Institution(s) with all serial numbers and filing dates, together with copies of all applications in the Patent Rights and patents that issue from the Patent Rights, including copies of all office actions, responses and all other communications from the U.S. Patent and Trademark Office and the patent offices in any other jurisdictions.

2.2 Abandonment of Patent Rights by Lead Institution. The Lead Institution will not abandon the prosecution of any patent application (except in favor of a continuation, divisional or continuation-in-part application) or the maintenance of any Patent Rights without notifying the Other Institution(s) in writing at least sixty (60) days in advance of any applicable deadline and allowing the Other Institution(s) the opportunity to elect to prosecute or maintain such Patent Rights at its sole expense in the name of Other Institution(s) and Lead Institution. If the Other Institution(s) wishes to continue prosecution of such Patent Rights, then the Parties will negotiate in good faith an appropriate arrangement to enable the Other Institution(s) to continue prosecution and commercialization of such Patent Rights, which may include the Parties entering into a new agreement that gives an Other Institution the lead in patent prosecution and licensing with appropriate adjustments in the economic arrangements between the Parties.

2.3 Patent Assignments. Lead Institution will record assignments of Patent Rights in the names of the Lead Institution and the Other Institution(s) in the U.S. Patent and Trademark Office and other government patent offices, as applicable, and will provide Other Institution(s) with a copy of each recorded assignment.

3. Licensing

3.1 Exclusive Right to License. Subject to the terms and conditions of this Agreement and Lead Institution’s compliance therewith, Other Institution(s) hereby grants to Lead Institution (a) the exclusive right and authority to negotiate, execute, and administer License Agreements that comply with the requirements of Exhibit A, and (b) except as permitted under Section 3.4, the exclusive license to grant licenses to Other Institution(s)’ rights in the Patent Rights. Other Institution(s) will not license the Patent Rights, except as permitted under Section 3.4.

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3.2 Efforts to License. Lead Institution will use reasonable efforts, consistent with its usual practices, to seek Licensee(s) for the commercial development of Patent Rights and will administer all License Agreements for the mutual benefit of the Parties and in the public interest. Lead Institution will exercise reasonable efforts to ensure that any Licensee fully complies with the terms of any License Agreement. Under no circumstances will Lead Institution be liable to Other Institution(s) for monetary damages for any alleged failure by Lead Institution to meet the obligations stated in this Section 3.2.

3.3 License Agreement. Lead Institution will provide Other Institution(s) with a substantially final draft of any License Agreement or amendment to a License Agreement prior to execution for the Other Institution for review and written approval. Absence of response within ten (10) business days shall be deemed approval by the Other Institution. The Lead Institution will provide the Other Institution(s) a copy of any License Agreement or amendment that is executed.

3.4 Reserved Rights. Each Party expressly reserves the right to use the Patent Rights and associated inventions or technology for educational and research purposes, and to grant such educational and research rights to other non-profit institutions. Each Party can also license rights to the U.S. government as required by its obligations related to research funding.

3.5 No Agency Relationship. This Agreement does not create an agency relationship between the Parties.

3.6 Equity in Licensees. If the License Consideration includes equity in the Licensee, the Lead Institution will in accordance with its regular practices, and as approved in writing by the Other Institution, hold such equity until it receives cash on account of such equity whether by way of dividend, sale of shares, merger or other transaction or event and then allocate and distribute such cash as License Consideration hereunder.

3.7 No Implied License. This Agreement grants no express or implied license in any rights of either Party except for the rights explicitly granted in Patent Rights.

4. Financial Terms

4.1 Patent Expenses.

(a) The Lead Institution will be solely responsible for all Patent Expenses not reimbursed by a Licensee incurred after the Effective Date and for ensuring that all Patent Expenses are paid in a timely manner.

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4.2 License Consideration.

(a) The Lead Institution will have the responsibility, obligation and authority to receive and collect the License Consideration payable under the License Agreement, and perform such audits under the License Agreement as the Lead Institution deems appropriate.

(b) The Lead Institution will deduct from the License Consideration and retain for itself or reimburse the Other Institution(s) the following amounts: first, the Patent Expenses and second the Administration Fee. The Net Consideration will be distributed to the Other Institution(s) in accordance with the Share of Net Consideration set forth in the Transaction Terms.

4.3 Allocation of Proceeds. If the Lead Institution licenses the Patent Rights together with other patent or intellectual property rights controlled by Lead Institution or Other Institution that are not covered by this Agreement, the Parties will negotiate in good faith to determine the portion of the gross licensing proceeds received under the License Agreement that are attributable to the Patent Rights.

5. Records, Reports and Audits

5.1 Books and Records. Lead Institution will keep complete, true and accurate accounts of all Patent Expenses and of all License Consideration received by it from each Licensee of the Patent Rights and will permit Other Institution(s) to examine its books and records in order to verify the payments due or owed under this Agreement.

5.2 Payments and Reports. Lead Institution will calculate the allocation of License Consideration in accordance with the terms of this Agreement and furnish to the Other Institution(s) a written report of receipts and calculations and deliver the Net Consideration due to the Other Institution(s), if any, with the report. Such reports and distributions will be provided no less frequently than once per calendar year. Lead Institution will provide the Other Institution(s) copies of reports, sublicense agreements and other material documents received from Licensees.

5.3 Annual Reports. Upon request by Other Institution(s), Lead Institution will submit to Other Institution(s) an annual report setting forth the status of all patent prosecution, commercial development and licensing activity relating to the Patent Rights for the preceding year.

6. Notice

Any notice or payment required to be given to a Party will be sent to the address of that Party specified in the Transaction Terms. If an email address is included for a Party in the Transaction Terms, then transmission of an email to that email address will constitute valid notice under this Agreement. Any Party may notify the other in writing of a change of address, in which event any subsequent communication relative to this Agreement will be sent to the last said notified address. All notices and communications relating to this Agreement will be deemed to have been given when received.

7. Confidentiality of Licensee Information

If required by a License Agreement, each Party will, to the extent permitted by law, keep confidential the terms of such License Agreement and any business information received from the Licensee (e.g., revenues, business development reports, milestones accomplished, sublicensee information and sublicense agreements), except that a Party may report revenue it receives in accordance with its reporting requirements to sponsors and may include such revenue in aggregate licensing revenue reported by such Party.

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8. Term and Termination

8.1 Term Duration. This Agreement is effective from the Effective Date and will remain in effect for the life of the last-to-expire patent under Patent Rights, or in the event no patent contained in Patent Rights issues or such patents or patent applications are abandoned, then one year after the last patent or patent application is abandoned, unless otherwise terminated by operation of law or by acts of the Parties in accordance with the terms of this Agreement.

8.2 Termination for Convenience After Three Years. Any Party may terminate this Agreement without cause at any time after three years have passed from the Effective Date upon 90 days’ prior written notice to the other Parties, unless either (a) there is a License Agreement in effect at such time, or (b) the Lead Institution notifies the Other Institution that it is actively engaged in good faith negotiations with a bona fide potential Licensee and the Lead Institution consummates a License Agreement with such potential Licensee within 120 days of the notice of termination. For the purpose of this Section, “actively engaged” will mean that there has been at least one exchange of a draft License Agreement or term sheet between the Lead Institution and the bona fide potential Licensee within 60 days after receipt of the notice of termination.

8.3 Termination for Cause. Any Party may terminate this Agreement for cause by written notice in the event another Party materially breaches this Agreement and does not cure the breach within 30 days of such written notice.

8.4 Effect of Agreement Termination on Patent Rights. After termination of this Agreement and subject to any previously signed License Agreement and applicable law, each Party may separately license its interest in the Patent Rights on a worldwide basis and no Party will have any ongoing obligations to share Patent Expenses or share or account for revenues under such licenses.

8.5 Other Effects of Termination.

(a) Termination will not affect any previously signed License Agreement or the distribution of License Consideration thereunder if still appropriate, and the applicable provisions of this Agreement will continue to be effective and applied.

(b) Termination of this Agreement will not relieve any Party of any obligation or liability accrued under this Agreement before termination, or rescind any payments made or due before termination.

(c) Apart from the provisions specifically set forth in this Section 8.5, the Parties will have no further rights or obligations under this Agreement.

8.6 Surviving Terms. Any termination of this Agreement pursuant to this Section 8 will not affect the rights and obligations set forth in this Section 8 as well as the following Sections of the General Terms, all of which will survive termination: 7 (Confidentiality of Licensee Information), 10 (Disclaimer; Limitations), and 13 (Governing Law).

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9. Representations.

9.1 Assignment by Inventors. Each Party represents that its inventors have assigned or are obligated to assign to such Party all of the inventors’ rights in the Patent Rights, and that such Party will use diligent efforts to cause its inventors to sign any additional papers as may be necessary to evidence or effect such assignment.

9.2 No Conflict. Except for the Third-Party Interests identified in the Transaction Terms and any rights granted pursuant to Section 3.4, each Party represents that, to the knowledge of its technology transfer office or other licensing office or department or equivalent officers, it has not granted any rights to any entity or person in the Patent Rights.

9.3 Title. Each Party represents that its owns all of its right, title and interest in the Patent Rights, free and clear of any lien, charge, or encumbrance, that it has no knowledge of any defects to its title and interest in the Patent Rights and that no claims have been made against it asserting the invalidity or non-enforceability of the Patent Rights and that it is not aware that any such claim exists.

9.4 No Infringement. Each party represents that to the best of its knowledge, there is no action alleging infringement of the intellectual property rights of any Third Party has been made or threatened against it or any of its Affiliates with respect to the Patent Rights, (ii) there is no pending or threatened action or litigation relating to the Patent Rights, and (iii) there are no judgements or settlements against or owed by it or any of its Affiliates relating to the Patent Rights.

10. Disclaimers; Limitations.

EXCEPT AS SET FORTH IN THIS SECTION 10, NO PARTY EXTENDS ANY WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE PATENT RIGHTS. IN ADDITION, EACH OF THE PARTIES EXPRESSLY DISCLAIMS ANY WARRANTY THAT THE PRACTICE OF THE PATENT RIGHTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OF THIRD PARTIES. No Party will make statements, representations, or warranties, or accept liabilities or responsibilities, with respect to or potentially involving the other Party, that are inconsistent with this Section.

TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT WILL ANY PARTY BE RESPONSIBLE FOR ANY INCIDENTAL DAMAGES, CONSEQUENTIAL DAMAGES, EXEMPLARY DAMAGES OF ANY KIND, LOST GOODWILL, LOST PROFITS, LOST BUSINESS AND/OR ANY INDIRECT ECONOMIC DAMAGES WHATSOEVER REGARDLESS OF WHETHER SUCH DAMAGES ARISE FROM CLAIMS BASED UPON CONTRACT, NEGLIGENCE, TORT (INCLUDING STRICT LIABILITY OR OTHER LEGAL THEORY), A BREACH OF ANY WARRANTY OR TERM OF THIS AGREEMENT, AND REGARDLESS OF WHETHER A PARTY WAS ADVISED OR HAD REASON TO KNOW OF THE POSSIBILITY OF INCURRING SUCH DAMAGES IN ADVANCE.

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11. Sponsor Reporting

Each Party will assume responsibility for reporting the Patent Rights to its own government and other research sponsors as may be required, provided that if Lead Institution and the Other Institution(s) both received federal funding for the research that resulted in the Patent Rights, then the Lead Institution will take responsibility for the federal reporting, and provide viewing rights or copies of sponsor reports to the other Party.

12. Use of Names

Each Party agrees that it will not use the name of any other Party or a Licensee in any advertising or publicity material, or make any form of representation or statement which would constitute an express or implied endorsement by such other Party of any licensed product, and that it will not authorize others to do so, without having obtained written approval from such other Party or Licensee. Notwithstanding the foregoing, either Party may make factual statements regarding the existence of this Agreement and that Lead Institution is managing commercialization of the Patent Rights. After a License Agreement is executed, the Parties may make factual statements that the Patent Rights have been licensed to a particular Licensee, except to the extent limited by Section 7.

13. Governing Law

This Agreement will be governed by and interpreted, and its performance enforced in accordance with the laws of the jurisdiction specified in the Transaction Terms, without giving effect to choice of law and conflicts of law principles, except that the scope and validity of any patent application or patent will be governed and enforced by the laws of the applicable country of the patent application or patent. If no jurisdiction is so specified or the Transaction Terms states “None” or the like, then the Parties have contractually agreed not to designate a particular governing law for this Agreement.

14. Publication

Each Party reserves the right to publish related to the Patent Rights, in accordance with each Party’s own policies and practices. A License Agreement will not give Licensee the right to review an advance copy of the proposed publication by any of the Parties relating to the Patent Rights unless such Party has specifically agreed in advance to the inclusion of and scope of such provision.

15. Complete Agreement

This Agreement sets forth the complete agreement of the Parties concerning the subject matter hereof. No waiver of or change in any of the terms hereof subsequent to the execution hereof claimed to have been made by any representative of either Party will have any force or effect unless in writing, signed by duly authorized representatives of the parties.

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16. Counterpart Signatures; Electronic Delivery

The Parties may execute this Agreement in one or more counterparts, which may be by electronic signature or transmission, each of which will be deemed an original and all of which, taken together, will constitute one and the same instrument, and will be given the effect of an original signature upon receipt by the other Party of the electronic signature or transmission.

In Witness Whereof, the parties have caused this Agreement to be executed as of the Effective Date:

The UAB Research Foundation		Texas Biomedical Research Institute

By	/s/ Karthik Gopalakrishnan, Ph.D.	By	/s/ Larry Schlesinger, MD
Name	Karthik Gopalakrishnan, Ph.D.	Name	Larry Schlesinger, MD
Title	Director of Licensing & New Ventures	Title	President and CEO

Date	11th sept 2020	Date	09/11/2020

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Exhibit A

License Agreement Requirements

All License Agreements will contain terms covering the following:

Reservation of rights to all parties to the Inter-Institutional Agreement (“IIA”) and, where possible, the right to license such rights to other non-profit research institutions, to use the Patent Rights in future for research and educational purposes without any payment to the Licensee;

Reservation of rights to government entities and to private sponsors (to the extent such rights are required under sponsored research agreements and disclosed in the IIA)

Payment of earned royalties on net sales by Licensee, its Affiliates and any sublicensee;

Reimbursement of all patent prosecution expenses if the license to Patent Rights is exclusive;

Product development and commercialization diligence if the license to Patent Rights is exclusive;

Periodic reports (at least annually) covering development and commercialization efforts and sale of products, including date of first commercial sale for each product;

Standard audit rights exercisable by the Lead Institution or Other Institution or its representatives;

Indemnification of all Parties (and applicable Affiliates) to the IIA;

Disclaimer on behalf of all Parties (and applicable Affiliates) to the IIA of all warranties, including validity, enforceability and non-infringement of the Patent Rights;

10.

Limitation of damages for all Parties (and applicable Affiliates) to the IIA to direct damages only;

11.

Prohibition on the use of the names, logos and trademarks of the Parties (and applicable Affiliates) to the IIA;

12.

Unfettered right on part of all Parties (and applicable Affiliates) to the IIA to publish in connection with the Patent Rights (with reasonable delays for review for confidentiality and filing for intellectual property protection);

13.

Maintenance of general liability insurance as is standard for the business of the Licensee at its various stages of development and commercialization, naming all of the Parties (and applicable Affiliates) to the IIA as additional insureds, or appropriate self-insurance provisions.

14.

For start-up companies, annual reporting of business information and annual reports on progress of development of technology encompassed by Patent Rights.

15.

Compliance with all applicable laws, including export control laws.

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Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Vu Truong, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Aridis Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 23, 2020	By:	/s/ Vu Truong
		Vu Truong
		Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael A. Nazak, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Aridis Pharmaceuticals, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 23, 2020	By:	/s/ Michael A. Nazak
		Michael A. Nazak
		Chief Financial Officer
		(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Aridis Pharmaceuticals, Inc. (the “Company”) for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Vu Truong, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 23, 2020	By:	/s/ Vu Truong
		Vu Truong
		Chief Executive Officer
		(Principal Executive Officer)

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Aridis Pharmaceuticals, Inc. (the “Company”) for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Michael A. Nazak, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 23, 2020	By:	/s/ Michael A. Nazak
		Michael A. Nazak
		Chief Financial Officer
		(Principal Financial Officer)