ARIDIS PHARMACEUTICALS, INC. 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 endedDecember 31, 2020 , 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 theSEC onMarch 30, 2021 . 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 inU.S. dollars, unless otherwise noted.
Overview
We are a late-stage biopharmaceutical company focused on the discovery and development of novel 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, limited tolerability, 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. In 2019 we announced the development of a novel antibody discovery and production platform technology called ?PEX™. 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 development of COVID-19 mAbs. We also announced initiation of research and development activities of our monoclonal antibody programs for COVID-19 called AR-712 and AR-701. InOctober 2020 andFebruary 2021 , we announced the development of a highly neutralizing monoclonal antibody cocktail (AR-712), 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 cocktail broadly binds and neutralizes SAR-COV-2 viruses, including the Delta variant and the 'E484K' variant that are associated with theSouth Africa ,Brazil , andJapan strains. The potency of AR-712 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 towards the end of 2021. InJuly 2021 , we announced that our COVID-19 mAb cocktail AR-712 binds and neutralizes the Delta variant virus SARS COV2 at a highly effective level (~20ng/mL). Binding analyses project that AR-712 will be effective against all variants on theU.S. Center for Disease Control's Variants of Interest and Variants of Concern lists. The dual antibody cocktail will be delivered as an inhaled treatment and is expected to provide broad coverage of all known high-risk variants. In addition, we announced the preclinical development services support from theNational Institute of Allergy and Infectious Diseases ("NIAID") at theNational Institutes of Health ("NIH") which provided further demonstration of strong therapeutic efficacy of inhaled delivery in a SARS-COV2 hamster challenge model. AR-712 achieved reversal of disease in infected animals at an inhaled dose of 1mg/kg, equivalent to a 10mg dose in humans from a nebulizer. These results confirmed our efficacy studies showing highly efficient dosing by inhalation. For reference purposes, the dose of commercially available COVID antibody therapies is in the range of 500mg to 1,200mg. AR-712 is being developed as a self-administered, at-home inhaled treatment for COVID-19 patients who are not yet hospitalized. The product candidate is designed to substantially lower the barrier to treatment of COVID-19 patients and encourage treatment much earlier in the course of their disease within the patients' own homes. A clinical Phase 1/2 study is expected to be launched in the second half of 2021. 28 Table of Contents 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. InJanuary 2019 , we initiated a Phase 3 pivotal trial evaluating AR-301 for the treatment of VAP. This AR-301 Phase 3 study remains blinded, and the independent Data Monitoring Committee with access to unblinded data continues to monitor study subjects for safety and has not conveyed any safety concerns (i.e., thus far an un-remarkable safety profile). The on-going COVID-19 pandemic has caused an impact on patient enrollment globally and the rate of clinical site activation. The activation of AR-301 clinical trial sites progressed globally during the pandemic, but the patient enrollment slowed due to the prioritization of the intensive care units ("ICU") around the world to COVID-19 patients. As countries start to emerge from the pandemic, we expect patient enrollment to improve, and enrollment to be complete in late first half of 2022. At this rate, the Phase 3 interim futility analysis would be completed too close to the completion of patient enrollment to be useful. As such, we expect to elect to forgo the interim futility analysis and focus on accelerating patient enrollment to deliver top-line data by approximately mid-2022. InJuly 2021 , we announced an in-licensing agreement with AstraZeneca for the worldwide commercial rights of suvratoxumab, which is a half-life extended human IgG1 monoclonal antibody that also targets the alpha toxin produced by S. aureus. Suvratoxumab is a fully human, IgG1 monoclonal antibody targeting S. aureus alpha toxin. This product is given the product code 'AR-320'. As with AR-301, AR-320's mode of action is independent of the antibiotic resistance profile of S. aureus, and it is active against infections caused by both MRSA andMSSA . Suvratoxumab and AR-301 are complementary products. Suvratoxumab's focus on preventive treatment of S. aureus pneumonia complements Aridis' AR-301 Phase 3 mAb program which is being developed as a therapeutic treatment of S. aureus pneumonia. A multinational, randomized, double blinded, placebo controlled Phase 2 study conducted by AstraZeneca (n=196 patients) showed that mechanically ventilated ICU patients colonized with S. aureus who are treated with suvratoxumab saw a relative risk reduction of pneumonia by 32% in the overall intend to treat ("ITT") study population, and by 47% in the under 65 year old population, which is the target population in the planned Phase 3 study. The relative risk reduction in the target population reached statistical significance, and was also associated with a substantial reduction in the duration of care needed in the ICU and hospital [see https://www.thelancet.com/journals/laninf/article/PIIS1473-3099(20)30995-6/fulltext]. We believe that AR-320 will be first-line treatment, first to market, first-in-class pre-emptive treatment of S. aureus colonized patients. The same first-line, first to market and first-in-class strategy applies to the acute treatment with the monoclonal antibody AR-301, which we believe makes us a global leader in this space. 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 theCystic 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 theFood and Drug Administration ("FDA"). During the third quarter of 2019, theEuropean Medicines Agency ("EMA") granted the program Orphan Drug Designation. We initiated a Phase 1/2a clinical trial inDecember 2018 of the inhalable formulation of gallium citrate, which is being evaluated for the treatment of chronic lung infections associated with cystic fibrosis. InJune 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 theCystic 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"). The on-going COVID-19 pandemic has caused an impact on the rate of clinical site activation. We provisionally expect to complete enrollment of the Phase 2a portion with cystic fibrosis subjects in early 2022 with top-line data available shortly afterward. InSeptember 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 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 29
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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, AR-712 and AR-501. Our expenses and resulting cash burn during the six months endedJune 30, 2021 and year endedDecember 31, 2020 , 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, preclinical development of AR-712 COVID-19 mAb, and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis.
Financial Overview
We have incurred losses since our inception. Our net losses were approximately$12.4 million and$22.3 million for the six months endedJune 30, 2021 and the year endedDecember 31, 2020 , respectively. As ofJune 30, 2021 we had approximately$3.6 million of cash and cash equivalents and had an accumulated deficit of approximately$135.5 million . Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs, clinical trials, intellectual property matters, strengthening our manufacturing capabilities and from general and administrative costs associated with our operations. We have not yet achieved commercialization of any of our products, and we 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, grant funding and license agreements. Historically, our principal sources of cash have included proceeds from grant funding, license agreements, fees for services performed, issuances of convertible debt and the sale of our common and preferred stock. Our principal use of cash has been cash used in operations, including funding of research and development, our clinical trials and general working capital requirements. We expect that the principal use of cash in the future will be for continuing operations, including funding of research and development, our clinical trials and general working capital requirements.
We anticipate that our expenses will increase substantially if and as we:
? continue enrollment in our ongoing clinical trials;
? initiate new clinical trials;
? seek to identify, assess, acquire and develop other products, therapeutic
candidates and technologies;
? seek regulatory and marketing approvals in multiple jurisdictions for our
therapeutic candidates that successfully complete clinical studies;
? establish collaborations with third parties for the development and
commercialization of our products and therapeutic candidates;
? make milestone or other payments under our agreements, pursuant to which we
have or will license or acquire rights to intellectual property and technology;
? seek to maintain, protect, and expand our intellectual property portfolio;
? seek to attract and retain skilled personnel;
? incur the administrative costs associated with being a public company and
related costs of compliance;
? create additional infrastructure to support our operations as a commercial
stage public company and our planned future commercialization efforts;
? experience any delays or encounter issues with any of the above; and
? experience protracted COVID-19 related delays.
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We expect to continue to incur significant expenses and increasing losses for at
least the next several years. Accordingly, we anticipate that we will need to
raise additional capital in order to obtain regulatory approval for, and the
commercialization of, our therapeutic candidates. Until such time that we can
generate meaningful revenue from product sales, if ever, we expect to finance
our operating activities through public or private equity or debt financings,
government or other third-party funding and other collaborations, strategic
alliances and licensing arrangements or a combination of these approaches. If we
are unable to obtain funding on a timely basis, we may be required to
significantly curtail, delay or discontinue one or more of our research or
development programs or the commercialization of any approved therapies or
products or be unable to expand our operations or otherwise capitalize on our
business opportunities, as desired, which could adversely affect our business,
financial condition and results of operations.
Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed consolidated financial statements, which
we have prepared in accordance with generally accepted accounting principles in
the United States , or GAAP.
The preparation of our condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported expenses during
the reported periods. We evaluate these estimates and judgments on an ongoing
basis. Such estimates include those related to the evaluation of our ability to
continue as a going concern, our best estimate of standalone selling price of
revenue deliverables, useful live of long lived assets, classification of
deferred revenue, income taxes, assumptions used in the Black Scholes Merton
("BSM") model to calculate the fair value of stock based compensation, deferred
tax asset valuation allowances, and preclinical study and clinical trial
accruals. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Our actual results
may differ from these estimates under different assumptions or conditions.
We define our critical accounting policies as those accounting principles
generally accepted in the United States that require us to make subjective
estimates and judgments about matters that are uncertain and are likely to have
a material impact on our financial condition and results of operations as well
as the specific manner in which we apply those principles. Our critical
accounting policies are primarily revenue recognition and research and
development expenses and related accruals.
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.
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The transaction price is allocated to each performance obligation on a relative standalone selling price basis. In developing the standalone price for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We recognize revenue as or when the performance obligations under the contract are satisfied. We receive payments from our customers based on payment schedules established in each contract. We record any amounts received prior to satisfying the revenue recognition criteria as deferred revenue on the condensed consolidated balance sheet. Amounts recognized as revenue, but not yet received or invoiced are recorded within other receivables on the condensed consolidated balance sheet. Amounts are recorded as other receivables on the condensed consolidated balance sheet when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of a majority of the promised goods or services to the customer will be one year or less.
Research and Development Expenses
We recognize research and development expenses to operations as they are incurred. Our research and development expenses consist primarily of:
? salaries and related overhead expenses, which include stock-based compensation
and benefits for personnel in research and development functions; fees paid to consultants and contract research organizations, or CROs,
including in connection with our preclinical studies and clinical trials and
? other related clinical trial fees, such as for investigator grants, patient
screening, laboratory work, clinical trial material management and statistical
compilation and analyses;
? costs related to acquiring and manufacturing clinical trial materials;
? costs related to compliance with regulatory requirements; and
? payments related to licensed products and technologies.
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. We plan to increase our research and development expenses for the foreseeable future as we continue to develop our therapeutic programs, and subject to the availability of additional funding, further advance the development of our therapeutic candidates for additional indications and begin to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our therapeutic candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our therapeutic candidates.
The significant accounting policies used in the preparation of our condensed consolidated financial statements are as follows:
General and Administrative Expenses
General and administrative expenses consist primarily of costs related to
executive, finance, corporate development and administrative support functions,
including stock-based compensation expenses and benefits for personnel in
general and administrative functions. Other significant, general and
administrative expenses include rent, accounting and legal services, obtaining
and maintaining patents or other intellectual property rights, the cost of
various consultants, occupancy costs, insurance premiums and information systems
costs.
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We expect that our general and administrative expenses will increase as we
continue to operate as a public company, continue to conduct our clinical trials
and prepare for commercialization. We believe that these increases will likely
include increased costs for director and officer liability insurance, costs
related to the hiring of additional personnel to support product
commercialization efforts and increased fees for outside consultants, attorneys
and accountants. We also expect to incur increased costs to comply with
corporate governance, internal controls, investor relations and disclosures, and
similar requirements applicable to public companies.
Stock-Based Compensation
We recognize compensation expense for all stock-based awards based on the grant-date estimated fair values, which we determine using the BSM option pricing model, on a straight-line basis over the requisite service period for the award. We account for forfeitures as they occur.
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 theSEC'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 theU.S. Treasury yield in effect at the time of grant. The dividend yield was zero, as we have never declared or paid dividends and have no plans to do so in the foreseeable future.
Income Taxes
We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. For the three and six months endedJune 30, 2021 and 2020, 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 condensed 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 our condensed consolidated financial statements 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.
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Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended
June 30,
2021 2020 Change $
Revenue: (unaudited) (unaudited)
Grant revenue $ - $ 1,000 $ (1,000)
License revenue 33 - 33
Total revenue 33 1,000 (967)
Operating expenses:
Research and development 4,573 3,647 926
General and administrative 1,694 1,583 111
Total operating expenses 6,267 5,230 1,037
Loss from operations (6,234) (4,230) (2,004)
Other income (expense):
Interest income, net - 10 (10)
Other income 22 - 22
Gain on extinguishment of Paycheck Protection
Program loan 722 - 722
Net loss $ (5,490) $ (4,220) $ (1,270)
Grant Revenue. Grant revenue decreased to zero for the three months ended June
30, 2021 from approximately $1.0 million for the three months ended June 30,
2020 due to the recognition of revenue related to a development-based milestone
achieved under the award from the CFF during the second quarter of 2020 and no
recognition of grant revenue during the second quarter of 2021.
License Revenue. License revenue increased to approximately $33,000 for the
three months ended June 30, 2021 from zero for the three months ended June 30,
2020 due to the recognition of revenue related to the out-licensing and product
discovery agreement, and a statement of work, with Kermode Biotechnologies, Inc.
("Kermode") (collectively, the "Kermode Agreement"), which was entered into in
February 2021 . There was no recognition of license revenue during the second
quarter of 2020.
Research and Development Expenses. Research and development expenses increased
by approximately $926,000 from approximately $3.6 million for the three months
ended June 30, 2020 to approximately $4.6 million for the three months ended
June 30, 2021 due primarily to:
? an increase of approximately
development activities for our COVID-19 programs;
? an increase of approximately
related costs;
an increase of approximately
? activities and drug manufacturing expenses for the Phase 2a study of our AR-501
program;
? an increase of approximately
activities for the Phase 3 study of our AR-301 program; and
? an increase of approximately
development activities.
These increases were partially offset by:
a decrease of approximately
? activities and drug manufacturing expenses as we continue to wind-down the
Phase 2 study of our AR-105 program that was terminated during 2019.
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General and Administrative Expenses. General and administrative expenses
increased by approximately $111,000 from approximately $1.6 million for the
three months ended June 30, 2020 to approximately $1.7 million for the three
months ended June 30, 2021 which was due primarily to increases in professional
service fees, personnel related costs, including stock based compensation, and
patent related expenses, partially offset by a decrease in Delaware franchise
taxes.
Interest Income, Net. Interest income, net decreased by approximately $10,000
from $10,000 for the three months ended June 30, 2020 to approximately zero for
the three months ended June 30, 2021 . The decrease is primarily due to lower
average cash balances during the quarter ended June 30, 2021 as compared to the
quarter ended June 30, 2020 .
Other Income. Other income increased by approximately $22,000 from zero for the
three months ended June 30, 2020 to approximately $22,000 for the three months
ended June 30, 2021 . The increase was primarily related to income from a
sublease agreement we entered into with a tenant on March 1, 2021 to sublet a
small portion of our Los Gatos facility. There was no sublease agreement or
related income during the quarter ended June 30, 2020 .
Gain on Extinguishment of Paycheck Protection Program Loan. Gain on
extinguishment of the Paycheck Protection Program (the "PPP") loan of
approximately $722,000 for the three months ended June 30, 2021 related to the
forgiveness of our loan from the Small Business Administration and release of
financial obligation from our lender, Silicon Valley Bank , in May 2021 . There
was no extinguishment of debt in 2020.
Comparison of the Six Months Ended
The following table summarizes our results of operations for the six months
ended
Six Months Ended
June 30,
2021 2020 Change $
Revenue: (unaudited) (unaudited)
Grant revenue $ - $ 1,000 $ (1,000)
License revenue 33 - 33
Total revenue 33 1,000 (967)
Operating expenses:
Research and development 9,528 8,564 964
General and administrative 3,638 3,222 416
Total operating expenses 13,166 11,786 1,380
Loss from operations (13,133) (10,786) (2,347)
Other income (expense):
Interest income, net 1 71 (70)
Other income 29 - 29
Gain on extinguishment of Paycheck Protection Program loan 722 - 722
Share of loss from equity method investment - (9) 9
Net loss $ (12,381) $ (10,724) $ (1,657)
Grant Revenue. Grant revenue decreased to zero for the six months ended June 30,
2021 from approximately $1.0 million for the six months ended June 30, 2020 due
to the recognition of revenue related to a development-based milestone achieved
under the award from the CFF during the first half of 2020 and no recognition of
grant revenue during the first half of 2021.
License Revenue. License revenue increased to approximately $33,000 for the six
months ended June 30, 2021 from zero for the six months ended June 30, 2020
primarily due to the recognition of revenue related to the Kermode Agreement,
which was entered into in February 2021 . There was no recognition of license
revenue during the first half of 2020.
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Research and Development Expenses. Research and development expenses increased
by approximately $964,000 from approximately $8.6 million for the six months
ended June 30, 2020 to approximately $9.5 million for the six months ended June
30, 2021 due primarily to:
? an increase of approximately
development activities for our COVID-19 programs;
? an increase of approximately
related costs;
an increase of approximately
? activities and drug manufacturing expenses for the Phase 2a study of our AR-501
program; and
? an increase of approximately
development activities.
These increases were partially offset by:
a decrease of approximately
? activities and drug manufacturing expenses for the Phase 3 study of our AR-301
program; and
a decrease of approximately
? activities and drug manufacturing expenses as we continue to wind-down the
Phase 2 study of our AR-105 program that was terminated during 2019.
General and Administrative Expenses. General and administrative expenses increased by approximately$416,000 from approximately$3.2 million for the six months endedJune 30, 2020 to approximately$3.6 million for the six months endedJune 30, 2021 which was due primarily to increases in personnel related costs, including stock based compensation, professional service fees, andDelaware franchise taxes. Interest Income, Net. Interest income, net decreased by approximately$70,000 from$71,000 for the six months endedJune 30, 2020 to approximately$1,000 for the six months endedJune 30, 2021 . The decrease is primarily due to lower average cash balances during the first half of 2021 as compared to the first half of 2020. Other Income. Other income increased by approximately$29,000 from zero for the six months endedJune 30, 2020 to approximately$29,000 for the six months endedJune 30, 2021 . The increase was primarily related to income from a sublease agreement we entered into with a tenant onMarch 1, 2021 to sublet a small portion of ourLos Gatos facility. There was no sublease agreement or related income during the first half of 2020. Gain on Extinguishment of Paycheck Protection Program Loan. Gain on extinguishment of the PPP loan of approximately$722,000 for the six months endedJune 30, 2021 is related to the forgiveness of our loan from theSmall Business Administration and release of financial obligation from our lender,Silicon Valley Bank , inMay 2021 . There was no extinguishment of debt in 2020. Share of Loss inEquity Method Investment . Loss from equity method investment decreased by approximately$9,000 from$9,000 for the six months endedJune 30, 2020 to zero for the six months endedJune 30 2021 which was due to there being no share of losses from our equity method investment recorded in the first half of 2021 as the net book value of the investment has been zero sinceMarch 31, 2020 .
Liquidity, Capital Resources and Going Concern
As of
InMarch 2021 , we entered into a Securities Purchase Agreement with certain institutional and individual investors, pursuant to which we agreed to offer, issue and sell to these investors, in a registered direct offering, an aggregate of 1,037,405 shares of our common stock for aggregate gross proceeds to us of approximately$7.0 million , and after deducting commissions and offering costs, net proceeds were approximately$6.4 million . 36
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As a result of theMarch 2021 registered direct offering price per share being less than theOctober 2020 registered direct offering price per share, we were obligated to issue an additional 124,789 shares of unregistered common stock to the investors in ourOctober 2020 registered direct offering pursuant to the anti-dilutive provisions of theOctober 2020 Securities Purchase Agreement. InMarch 2021 , we issued 124,789 shares to our common stockholders, who purchased inOctober 2020 , with a fair value of approximately$986,000 which we recorded as a credit to additional paid-in capital, and since we have an accumulated deficit, the corresponding debit to additional paid-in capital, resulting in no dollar impact within our condensed consolidated statement of changes in stockholders' deficit for the six months endedJune 30, 2021 . OnAugust 2, 2021 , we entered into a Securities Purchase Agreement with an institutional investor, pursuant to which we agreed to offer, issue and sell to this investor, in a registered direct offering, 1,300,000 shares of our common stock, pre-funded warrants to purchase up to an aggregate of 3,647,556 shares of our common stock (the "Pre-Funded Warrants"), and warrants to purchase up to 2,473,778 shares of our common stock (the "Warrants"). The combined purchase price of each share of common stock and accompanying Warrants is$5.053 per share. The combined purchase price of each Pre-Funded Warrant and accompanying Warrant is$5.052 (equal to the combined purchase price per share of common stock and accompanying Warrant, minus$0.001 ). We received gross proceeds of approximately$25.0 million , and after deducting the placement agent fees and expenses and our estimated offering expenses, net proceeds were approximately$23.2 million . As a result of theAugust 2021 registered direct offering price per share being less than theOctober 2020 andMarch 2021 registered direct offerings price per share, we are obligated to issue an additional 634,600 shares of unregistered common stock to the investors in ourOctober 2020 andMarch 2021 registered direct offerings pursuant to the anti-dilutive provisions of theOctober 2020 andMarch 2021 Securities Purchase Agreements. We have had recurring losses from operations since inception and negative cash flows from operating activities during the six months endedJune 30, 2021 and the year endedDecember 31, 2020 . We anticipate that we will continue to generate operating losses and use cash in operations through the foreseeable future. Management plans to finance operations through equity or debt financings or other capital sources, including potential collaborations or other strategic transactions. There can be no assurances that, in the event that we require additional financing, such financing will be available on terms which are favorable to us, or at all. If we are unable to raise additional funding to meet our working capital needs in the future, we will be forced to delay or reduce the scope of our research programs and/or limit or cease our operations. We believe that our current available cash and cash equivalents will not be sufficient to fund our planned expenditures and meet our obligations for at least the one-year period following our condensed consolidated financial statements issuance date. There is substantial doubt about our ability to continue as a going concern unless we are able to successfully raise additional capital. Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as follows (in thousands):
Six Months Ended
June 30,
2021 2020
Net cash provided by (used in): (unaudited) (unaudited)
Operating activities $ (10,614) $ (9,797)
Investing activities (459) (17)
Financing activities 6,433 729
Net decrease in cash, cash equivalents and restricted cash
$ (9,085) 37 Table of Contents
Cash Flows from Operating Activities.
Net cash used in operating activities was approximately$10.6 million for the six months endedJune 30, 2021 , which was primarily due to our net loss of approximately$12.4 million , an increase of approximately$1.0 million in prepaid expenses, and the non-cash gain of approximately$722,000 related to the gain on extinguishment of our PPP loan resulting from the SBA's forgiveness of our loan. The cash used in operating activities was partially offset by an increase of approximately$698,000 in accounts payable, an increase of approximately$613,000 in accrued liabilities and other, an increase of approximately$467,000 in deferred revenue, resulting from the Kermode Agreement, a decrease of approximately$421,000 in other receivables, and the non-cash charges of approximately$1.1 million related to stock-based compensation and approximately$184,000 in depreciation and amortization. Net cash used in operating activities was approximately$9.8 million for the six months endedJune 30, 2020 , which was primarily due to our net loss of approximately$10.7 million , an increase of approximately$1.0 million in accounts receivable, an increase of approximately$488,000 in capitalized contract costs, resulting from the SAMR License Agreement, a decrease of approximately$311,000 in accrued liabilities and other, and a decrease of approximately$44,000 in accounts payable. The cash used in operating activities was partially offset by a decrease of approximately$1.5 million in prepaid expenses, a decrease of approximately$61,000 in other receivables, and the non-cash charges of approximately$1.0 million related to stock-based compensation and approximately$167,000 in depreciation and amortization.
Cash Flows from Investing Activities.
Net cash used in investing activities of approximately$459,000 during the six months endedJune 30, 2021 , was due to the purchase of equipment, primarily for diagnostic use in clinical trials, and improvements to our new leased facility during the first half of 2021.
Net cash used in investing activities of approximately
Cash Flows from Financing Activities.
Net cash provided by financing activities of approximately$6.4 million during the six months endedJune 30, 2021 was primarily due to net proceeds received from a registered direct offering of our common stock inMarch 2021 and net proceeds received from stock option exercises. Net cash provided by financing activities of approximately$729,000 during the six months endedJune 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.
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.
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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, 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, 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 and/or 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
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.
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Recently Issued Accounting Pronouncements
Please refer to section "Recently Issued Accounting Pronouncements not yet
adopted as of
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