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, 2019

or

 

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

For the transition period from                      to                     

Commission file number: 001-36199

 

 

PULMATRIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		46-1821392
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
99 Hayden Avenue, Suite 390 Lexington, MA		02421
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (781) 357-2333

 

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each Class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.0001 per share		PULM		The NASDAQ Stock Market LLC

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

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

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☒
				Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of October 30, 2019, the registrant had 19,994,560 shares of common stock outstanding.

 

 

 

PULMATRIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2019

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of September  30, 2019 (unaudited) and December 31, 2018			3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2019 and 2018 (unaudited)			4
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months and Nine Months Ended September 30, 2019 and 2018 (unaudited)			5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Mine Safety Disclosures			26
Item 5. Other Information			26
Item 6. Exhibits			26
SIGNATURES			28

 

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

PULMATRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

		At September 30, 2019				At December 31, 2018
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	27,879			$	2,563
Prepaid expenses and other current assets			960				717
Total current assets			28,839				3,280
Property and equipment, net			305				394
Long-term restricted cash			204				204
Goodwill			3,577				10,845
Total assets		$	32,925			$	14,723
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,159			$	1,183
Accrued expenses			1,265				1,696
Deferred revenue			9,304				—
Total current liabilities			11,728				2,879
Deferred revenue, net of current portion			6,471				—
Total liabilities			18,199				2,879
Commitments (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value—500,000 authorized and 0 issued and outstanding at September 30, 2019 and December 31, 2018			—				—
Common stock, $0.0001 par value—200,000,000 shares authorized; 19,994,560, and 4,932,723 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.			2				—
Additional paid-in capital			225,844				206,409
Accumulated deficit			(211,120	)			(194,565	)
Total stockholders’ equity			14,726				11,844
Total liabilities and stockholders’ equity		$	32,925			$	14,723

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

 

3

PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2019				2018				2019				2018
Revenues		$	1,406			$	—			$	6,225			$	153
Operating expenses
Research and development			3,297				3,056				8,637				10,290
General and administrative			1,785				1,769				6,900				5,930
Impairment of goodwill			—				—				7,268				—
Total operating expenses			5,082				4,825				22,805				16,220
Loss from operations			(3,676	)			(4,825	)			(16,580	)			(16,067	)
Interest income			121				8				227				23
Interest expense			—				—				—				(186	)
Settlement expense			—				—				(200	)			—
Other income/(expense), net			—				1				(2	)			5
Net loss		$	(3,555	)		$	(4,816	)		$	(16,555	)		$	(16,225	)
Net loss per share, basic and diluted		$	(0.18	)		$	(1.03	)		$	(1.07	)		$	(4.23	)
Weighted average shares of common stock used to compute basic and diluted net loss per share			20,294,560				4,692,723				15,533,983				3,839,385

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

 

4

PULMATRIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three and nine months ended September 30, 2019 and 2018

(in thousands, except share data)

 

		Common Stock								Additional Paid-In Capital				Accumulated Deficit				Total
		Shares				Amount
Balance — January 1, 2019			4,932,723			$	—			$	206,409			$	(194,565	)		$	11,844
Adjustment for reverse stock split			2,717				—				—				—				—
Issuance of common stock, net of issuance costs			2,394,955				1				2,978				—				2,979
Exercise of pre-funded warrants			697,500				—				70				—				70
Stock-based compensation			—				—				459				—				459
Net loss			—				—				—				(5,156	)			(5,156	)
Balance — March 31, 2019			8,027,895				1				209,916				(199,721	)			10,196
Issuance of common stock, net of issuance costs			3,319,553				—				14,566				—				14,566
Exercise of pre-funded warrants			8,277,112				1				82				—				83
Stock-based compensation			—				—				1,091				—				1,091
Net loss			—				—				—				(7,844	)			(7,844	)
Balance — June 30, 2019			19,624,560				2				225,655				(207,565	)			18,092
Exercise of pre-funded warrants			370,000				—				4				—				4
Stock-based compensation			—				—				185				—				185
Net loss			—				—				—				(3,555	)			(3,555	)
Balance — September 30, 2019			19,994,560			$	2			$	225,844			$	(211,120	)		$	14,726
		Common Stock								Additional Paid-In Capital				Accumulated Deficit				Total
		Shares				Amount
Balance — January 1, 2018			2,104,750			$	—			$	184,139			$	(174,002	)		$	10,137
Issuance of common stock, net of issuance costs			123,266				—				1,847				—				1,847
Stock-based compensation			—				—				765				—				765
Net loss			—				—				—				(5,221	)			(5,221	)
Balance — March 31, 2018			2,228,016				—				186,751				(179,223	)			7,528
Issuance of common stock, net of issuance costs			1,681,000				—				14,447				—				14,449
Exercise of pre-funded warrants			783,707				—				78				—				76
Stock-based compensation			—				—				933				—				933
Net loss			—				—				—				(6,188	)			(6,188	)
Balance — June 30, 2018			4,692,723				—				202,209				(185,411	)			16,798
Shares issuance costs			—				—				(8	)			—				(8	)
Stock-based compensation			—				—				660				—				660
Net loss			—				—				—				(4,816	)			(4,816	)
Balance — September 30, 2018			4,692,723			$	—			$	202,861			$	(190,227	)		$	12,634

 

5

PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

		For the Nine months Ended September 30,
		2019				2018
Cash flows from operating activities:
Net loss		$	(16,555	)		$	(16,225	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			139				175
Stock-based compensation			1,735				2,358
Impairment of goodwill			7,268				—
Deferred rent			(17	)			—
Non-cash interest expense			—				55
Non-cash debt issuance expense			—				3
Gain on disposal of property and equipment			(1	)			—
Fair value adjustment on derivative liability			—				(1	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			(243	)			(218	)
Accounts payable			(24	)			910
Accrued expenses			(414	)			347
Deferred revenue			15,775				—
Net cash provided by (used in) operating activities			7,663				(12,596	)
Cash flows from investing activities:
Purchases of property and equipment			(49	)			(8	)
Net cash used in investing activities			(49	)			(8	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs			17,545				16,286
Proceeds from the exercise of pre-funded warrants			157				78
Term loan principal payments			—				(3,259	)
End of term payments			—				(245	)
Net cash provided by financing activities			17,702				12,860
Net increase in cash and cash equivalents			25,316				256
Cash, cash equivalents and restricted cash — beginning of period			2,767				3,754
Cash, cash equivalents and restricted cash — end of period		$	28,083			$	4,010

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

 

6

PULMATRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

(in thousands, except share and per share data)

1. Organization

Pulmatrix, Inc. (the “Company”) was incorporated in 2013 as a Nevada corporation and converted to a Delaware corporation in September 2013. On June 15, 2015, the Company completed a merger with Pulmatrix Operating Company, Inc. changed its name from Ruthigen, Inc. to “Pulmatrix, Inc.” and relocated its corporate headquarters to Lexington, Massachusetts. The Company is a clinical stage biotechnology company focused on the discovery and development of a novel class of inhaled therapeutic products. The Company’s proprietary dry powder delivery platform, iSPERSE^™ (inhaled Small Particles Easily Respirable and Emitted), is engineered to deliver small, dense particles with highly efficient dispersibility and delivery to the airways, which can be used with an array of dry powder inhaler technologies and can be formulated with a variety of drug substances. The Company is developing a pipeline of iSPERSE-based therapeutic candidates targeted at prevention and treatment of a range of respiratory diseases and infections with significant unmet medical needs.

On February 5, 2019, the Company effectuated a 1-for-10 reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”) pursuant to which every 10 shares of the Company’s issued and outstanding common stock were automatically converted into one share of common stock. Accordingly, all common share and per share data are retrospectively restated to give effect of the Reverse Stock Split for all periods presented herein.

2. Summary of Significant Accounting Policies and Recent Accounting Standards

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the nine months ended September 30, 2019, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2019. For further information, refer to the financial statements and footnotes included in the Company’s annual financial statements for the fiscal year ended December 31, 2018, which are included in the Company’s annual report on Form 10-K filed with the SEC on February 19, 2019.

Use of Estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results may differ from these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payments, estimating the useful lives of depreciable and amortizable assets, valuation allowance against deferred tax assets, recognition of research and development and license revenues, goodwill impairment, and estimating the fair value of long-lived assets to assess whether impairment charges may apply.

 

7

Revenue Recognition

Effective January 1, 2019, the Company adopted ASC (“Accounting Standards Codification”) 606, Revenue From Contracts With Customers (ASC 606), using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 605, Revenue Recognition (ASC 605). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company 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 and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

Exclusive Licenses. If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

Research and Development Services. The promises under the Company’s collaboration agreements may include research and development services to be performed by the Company on behalf of the partner. Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts. Reimbursements from and payments to the partner that are the result of a collaborative relationship with the partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense.

Customer Options. If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options that are not determined to be material rights are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised. As of September 30, 2019, the Company does not have any active arrangements that contain customer options.

 

8

Milestone Payments. At the inception of each arrangement that includes research or development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. As of September 30, 2019, the Company does not have any active arrangements that contain research or development milestones.

Royalties. For arrangements that include sales-based royalties, including milestone payments upon first commercial sales and milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

For a complete discussion of accounting for collaboration revenues, see Note 6, “Collaborations.”

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash, checking accounts and money market accounts. Restricted cash consists of cash deposited with a financial institution for $204.

The following table provides a reconciliation of cash, cash equivalents and restricted cash as reported in the condensed consolidated balance sheets that sum to the total of the same amounts in the statement of cash flows.

 

		Nine months Ended September 30,
		2019				2018
Cash and cash equivalents		$	27,879			$	3,806
Restricted Cash			204				204
Total cash, cash equivalents and restricted cash in the statement of cash flows		$	28,083			$	4,010

Goodwill

Goodwill represents the difference between the consideration transferred and the fair value of the net assets acquired, and liabilities assumed under the acquisition method of accounting for push-down accounting. Goodwill is not amortized but is evaluated for impairment within the Company’s single reporting unit on an annual basis during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount. When performing the impairment assessment, the accounting standard for testing goodwill for impairment permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill is impaired. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of goodwill is impaired, the Company then must perform a quantitative analysis to determine if the carrying value of the reporting entity exceeds its fair value.

During the nine months ended September 30, 2019, the Company’s common stock value declined, accordingly, the Company determined that its carrying value is in excess of its fair value and as such, recorded an impairment charge of $7,268 and revalued goodwill to $3,577. During the three months ended September 30, 2019, no additional impairment charge was recorded.

Significant Accounting Policies

Except for the change in revenue recognition policy as disclosed above, during the nine months ended September 30, 2019, there were no changes to the Company’s significant accounting policies identified in the Company’s most recent annual financial statements for the fiscal year ended December 31, 2018, which are included in the Company’s current report on Form 10-K.

 

9

Recent Accounting Standards

In November 2018, the FASB issued ASU No. 2018-18, Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers). The amendments are effective for public business entities for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has early adopted ASU 2018-18 and adoption of this ASU has no significant impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has not yet evaluated the impact of adoption of this ASU on its condensed consolidated financial statements disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees, addresses aspects of the accounting for nonemployee share based compensation. The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company has adopted ASU 2018-07 and adoption of this ASU has no significant impact on its condensed consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for us beginning January 1, 2019 (with early adoption permitted) and shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the corporate income tax rate in the Tax Act is recognized. The Company has adopted ASU 2018-02 and adoption of this ASU has no significant impact on its condensed consolidated financial statements.

In July 2017, FASB issued ASU No. 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). ASU 2017-11 consists of two parts. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company has adopted ASU 2017-11 and adoption of this ASU has no significant impact on its condensed consolidated financial statements.

In February 2016, the FASB issued authoritative guidance under ASU 2016-02, Leases (Topic 842). ASU 2016-02 provides new comprehensive lease accounting guidance that supersedes existing lease guidance. Upon adoption of ASU 2016-02, the Company will be required to recognize most leases on its balance sheet at the beginning of the earliest comparative period presented with a corresponding adjustment to stockholders’ equity. ASU 2016-02 requires the Company to capitalize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating lease obligations. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital leases and operating leases in previous lease guidance. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. Topic 842 includes a number of optional practical expedients that the Company may elect to apply. Expanded disclosures with additional qualitative and quantitative information will also be required. The adoption will include updates as provided under ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 and ASU 2018-10, Codification Improvements to Topic 842, Leases. Since the Company is an emerging growth company and elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act, this ASU 2016-02 and related ASUs will be effective for the Company beginning in fiscal 2020. The Company is currently evaluating the potential impact of adoption of this standard on its condensed consolidated financial statements and the additional transition method under ASU 2018-11, which allows the Company to recognize Topic 842’s cumulative effect within retained earnings in the period of adoption.

 

10

3. Prepaid Expenses and Other Current Assets

Prepaid expenses consisted of the following:

 

		At September 30, 2019				At December 31, 2018
Prepaid Insurance		$	301			$	243
Prepaid Clinical Trials			394				419
Prepaid Other			158				27
Deferred Operating Costs			107				28
Total prepaid expenses and other current assets		$	960			$	717

4. Property and Equipment, net

Property and equipment consisted of the following:

 

		At September 30, 2019				At December 31, 2018
Laboratory equipment		$	1,538			$	1,529
Computer equipment			216				185
Office furniture and equipment			217				217
Leasehold improvements			581				579
Total property and equipment			2,552				2,510
Less accumulated depreciation and amortization			(2,247	)			(2,116	)
Property and equipment, net		$	305			$	394

Depreciation and amortization expense for the three months and nine months ended September 30, 2019, was $44 and $139, respectively. Depreciation and amortization expense for the three months and nine months ended September 30, 2018, was $57 and $175, respectively.

5. Accrued Expenses

Accrued expenses consisted of the following:

 

		At September 30, 2019				At December 31, 2018
Accrued vacation		$	58			$	59
Accrued wages and incentive			582				915
Accrued clinical & consulting			450				517
Accrued legal & patent			70				67
Deferred rent			50				67
Accrued other expenses			55				71
Total accrued expenses		$	1,265			$	1,696

6. Collaborations

On April 15, 2019 (“Effective Date”), the Company entered into a Development and Commercialization Agreement (the “Cipla Agreement”) with Cipla Technologies, LLC. for the worldwide development and commercialization of Pulmazole (the “Product”), an inhaled formulation of the anti-fungal drug itraconazole, developed using iSPERSE technology designed to treat allergic bronchopulmonary aspergillosis (“ABPA”) in patients with asthma.

 

11

Pursuant to the Cipla Agreement, the Company is responsible for the development of the Product in accordance with the development plan, which includes completion of the Phase 2 ABPA study, as well as any additional Phase 2/2b and/or Phase 3 clinical studies that may be required for regulatory approval. In addition, the Company will be responsible for submission of investigational new drug (“IND”) applications, annual reports and other regulatory filings to the extent required to conduct the development activities, including any clinical studies. Subsequent to regulatory approval of the Product for marketing in the U.S. or in any other country, Cipla will be responsible for the implementation of the commercialization plan, including all activities, arrangements and other matters related to commercialization.

The Company received a non-refundable upfront payment of $22,000 under the Cipla Agreement (the “Upfront Payment”). Upon receipt of the Upfront Payment, the Company irrevocably assigned to Cipla the following assets, solely to the extent that each covers the Product in connection with any treatment, prevention, and/or diagnosis of diseases of the pulmonary system (“Pulmonary Indications”): all existing and future technologies, current and future drug master files, dossiers, third-party contracts, regulatory filings, regulatory materials and regulatory approvals, patents, and intellectual property rights, as well as any other associated rights and assets directly related to the Product, specifically in relation to Pulmonary Indications (collectively, the “Assigned Assets”), excluding most specifically the Company’s iSPERSE technology. A portion of the Upfront Payment was deposited by the Company into a bank account, along with an equal amount from the Company, and will be dedicated to the development of the Product (the “Initial Development Funding”). After the Initial Development Funding is depleted, the Company and Cipla will each be responsible for 50% of the development costs actually incurred (the “Co-Development Phase”).

The Company and Cipla have established a joint steering committee (the “JSC”). The JSC will, among other powers and responsibilities, direct the further development and commercialization activities, including all budgetary activities in relation to the Product. The JSC will oversee the performance of the Company and Cipla under the Cipla Agreement and will provide a forum for sharing advice, progress and results relating to such activities. The JSC is also responsible for reviewing and approving the development plan developed by the Company, and the commercialization plan developed by Cipla.

The Cipla Agreement will remain in effect in perpetuity, unless otherwise earlier terminated in accordance with its terms. In the event of circumstances affecting the continuity of development of the Product in line with the Cipla Agreement, the JSC will evaluate the cause and effect and make a recommendation as to the most optimal option available to Cipla and the Company. In any event, either the Company or Cipla may elect to terminate (a “Terminating Party”) its obligation to fund additional costs and expenses for the development and/or commercialization of the Product. If the non-Terminating Party wishes to continue the development of the Product, it will have the right to purchase the rights of the Terminating Party in the Product at fair market value. If both the Company and Cipla abandon the development program, the Company and Cipla shall make commercially reasonable efforts to monetize the Product and development program in connection with the Pulmonary Indications. The Company and Cipla will equally share the proceeds.

The Cipla Agreement also contains customary representations, warranties and covenants by both parties, as well as customary provisions relating to indemnification, confidentiality and other matters.

Accounting Treatment

The Company concluded that because both it and Cipla are active participants in the arrangement and are exposed to the significant risks and rewards of the collaboration, the Company’s collaboration with Cipla is within the scope of ASC 808 Collaborative Arrangements (“ASC 808”) for accounting purposes. Contemplating the guidance of ASU 2018-18, the Company concluded that because Cipla contracted with the Company to obtain research and development services and an irrevocable license to the Assigned Assets, each of which is an output of the Company’s ordinary activities in exchange for consideration, Cipla is a customer. Therefore, in order to determine the appropriate treatment for the research and development services and the license grant, the Company has applied the guidance in ASC 606 Revenue from Contracts with Customers (“ASC 606”) to account for and present consideration received from Cipla. Accordingly, the Company identified the following material promises under the arrangement: (1) the research and development services for the Product and (2) an irrevocable license to the Assigned Assets. The Company determined that the research and development services and license to the Assigned Assets are considered highly interdependent and highly interrelated and combined into a single performance obligation because it is impossible for Cipla to benefit from the license to the Assigned Assets without the performance by Pulmatrix of the research and development services. Such research and development services are highly specialized and proprietary to Pulmatrix and therefore not available to Cipla from any other third party.

The Company determined the total transaction price to be $22,000 – comprised of $12,000 for research and development services for the Product and $10,000 for the irrevocable license to the Assigned Assets. Any consideration related to the Co-Development Phase has not been included in the transaction price as such amounts are subject to the variable consideration constraint. Additionally, upon Commercialization, Cipla and the Company will share equally, both positive and negative total free cash-flows earned by Cipla in respect of the Product. However, the Company has not included such free cash-flows in the transaction price as these milestones are constrained until after the commercialization of the Product.

Revenue associated with the combined research and development services for the Product and the irrevocable license to the Assigned Assets is recognized as revenue as the research and development services are provided using an input method, according to the ratio of costs incurred to the total costs expected to be incurred in the future to satisfy the performance obligation. In management’s judgment, this input method is the best measure of the transfer of control of the performance obligation. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed consolidated balance sheet.

 

12

None of the performance obligations have been fully satisfied as of September 30, 2019. The Company received the $22,000 Upfront Payment in May 2019. During the three months that ended September 30, 2019, the Company recognized revenue of $1,154 that related to the portion of the performance obligations delivered for research and development services and $252 that related to the portion of the performance obligations delivered for the irrevocable license to the Assigned Assets. During the nine months that ended September 30, 2019, the Company recognized revenue of $4,929 that related to the portion of the performance obligations delivered for research and development services and $1,296 that related to the portion of the performance obligations delivered for the irrevocable license to the Assigned Assets. The aggregate amount of the transaction price related to the Company’s unsatisfied performance obligations and at September 30, 2019 the Company recorded $15,775 in deferred revenue, of which $9,304 is current. The Company expects to recognize the deferred revenue according to costs incurred, over the remaining research term, which is expected to be up to three years as of September 2019.

7. Common Stock

2019

Public Offering

On April 8, 2019, the Company closed its underwritten public offering in which, pursuant to the underwriting agreement entered into between the Company and H.C. Wainwright & Co., LLC, as representative of the underwriters, dated April 3, 2019, the Company issued and sold an aggregate of (i) 1,719,554 common units, with each common unit being comprised of one share of the Company’s common stock, par value $0.0001 per share and one warrant to purchase one share of common stock and (ii) 8,947,112 pre-funded units with each pre-funded unit being comprised of one pre-funded warrant to purchase one share of common stock and one common warrant to purchase one share of common stock. The public offering price was $1.35 per common unit and $1.34 per pre-funded unit. The common warrants have an exercise price of $1.35 per share. In addition, on April 8, 2019, the Company closed on the sale of an additional 1,599,999 common units purchased pursuant to the exercise in full of the underwriter’s option to purchase additional securities. Each common unit contains one share of common stock and one common warrant to purchase a share of common stock. The common warrants issued on April 8, 2019 have a fair value of $0.997 per share.

370,000 pre-funded warrants issued in the offering were exercised during the three months ending September 30, 2019 which resulted in the issuance of 370,000 shares of common stock with net proceeds of $4.

8,647,112 of the 8,947,112 pre-funded warrants issued in the offering were exercised during the nine months ending September 30, 2019 which resulted in the issuance of 8,647,112 shares of common stock with net proceeds of $87.

Warrants were also issued to the underwriters to purchase 797,334 shares of common stock with an exercise price of $1.6875 and a fair value of $1.2632 per share. Both the common and underwriter warrants have an exercise term of five years and are exercisable immediately following their issuance.

After giving effect to the exercise of the Underwriters’ overallotment option and the exercise of 8,647,112 pre-funded warrants, the gross aggregate proceeds from the offering on April 8 was $16,557, prior to deducting underwriting discounts and commissions and other estimated offering expenses. The Company agreed to pay H.C. Wainwright & Co, LLC a commission of 7% of the gross proceeds. The Company also agreed to pay or reimburse certain expenses on behalf of H.C. Wainwright. A total of $1,904 of commissions and other issuance costs were associated with the public offering.

For the nine months ending September 30, 2019, after giving effect to fees, commissions and other expenses of approximately $1,904, the Company recorded net proceeds of $14,653 in aggregate for the sale of the public offering and the pre-funded warrant exercises.

Confidential Marketed Public Offering (“CMPO”)

On January 31, 2019 and February 4, 2019, the Company closed two CMPOs, pursuant to which the Company sold 156,118 and 532,353 shares of common stock, respectively, at $1.70 per share and issued warrants to exercise 10,151 and 34,605 shares of common stock, respectively, to underwriters at an exercise price of $2.125 per share with expiration dates of January 26, 2024 and January 30, 2024, respectively. The underwriter warrants had a fair value of $0.9332 and $1.1946 per share at the January 31, 2019 and February 4, 2019 issuance date, respectively. Prior to deducting fees and commissions for both offerings, the Company recorded aggregate gross proceeds of approximately $1,170.

Registered Direct Offering

On February 12, 2019, the Company sold 1,706,484 shares at $1.465 per share for gross proceeds of approximately $2,500. In this registered direct offering, the Company issued warrants to purchase 1,706,484 shares of its common stock to investors with an exercise price of $1.34 and a fair value of $0.5962 per share, respectively, with an expiration date of August 12, 2024. In addition, the Company issued warrants to purchase 110,922 shares of its common stock to underwriters with an exercise price of $1.8313 per share and an expiration date of February 7, 2024. The underwriter warrants had a fair value of $0.5314 per share at the issuance date.

 

13

Exercise of Warrants

During the three months ended March 31, 2019, 697,500 pre-funded warrants, which were issued as part of the November 2018 securities purchase agreement with an institutional investor, were exercised and the Company recorded $70 in net proceeds.

For the three months ending March 31, 2019, after giving effect to fees, commissions and other expenses of approximately $691, the Company recorded net proceeds of $3,049 in aggregate for the sale of the CMPOs, the registered direct offering and the pre-funded warrant exercises.

For the nine months ending September 30, 2019, after giving effect to fees, commissions and other expenses of approximately $2,595, the Company recorded net proceeds of $17,702 in aggregate for the sale of the public offering, CMPOs, the registered direct offering and the pre-funded warrant exercises. The Company intends to use the net proceeds for research and development of its therapeutic candidates, particularly the development of Pulmazole, as well as for working capital and general corporate purposes.

2018

Public Offering

On April 3, 2018, the Company closed its previously announced underwritten public offering in which, pursuant to the underwriting agreement entered into between the Company and Oppenheimer & Co. Inc., as representative of the underwriters, dated March 28, 2018, the Company issued and sold (i) 1,566,000 common units, with each common unit being comprised of one share of the Company’s common stock, par value $0.0001 per share, one Series A warrant to purchase one share of common stock and one Series B warrant to purchase one share of common stock, and (ii) 784,000 pre-funded units, with each pre-funded unit being comprised of one pre-funded warrant to purchase one share of common stock, one Series A Warrant and one Series B Warrant. The public offering price was $6.50 per common unit and $6.40 per pre-funded unit, and the gross proceeds received by the Company on April 3, 2018 pursuant to such sales were $15,197, prior to deducting underwriting discounts and commissions and other estimated offering expenses.

In addition, on April 4, 2018, the Company closed on the sale of 115,000 additional common units pursuant to the underwriters’ option, under the underwriting agreement, to purchase up to an additional 115,000 common and pre-funded units, which were exercised in full. After giving effect to the exercise of the Underwriters’ overallotment option, the gross aggregate proceeds from the offering on April 3 and 4 were $15,944, prior to deducting underwriting discounts and commissions and other estimated offering expenses.

All of the pre-funded warrants issued in the offering were exercised in April 2018 and, as 15,000 were exercised on a cashless basis, resulted in the issuance of an additional 783,707 shares of common stock with gross proceeds of $78.

The Series A Warrants included in the common units and the pre-funded units were immediately exercisable at a price of $6.50 per share of common stock, subject to adjustment in certain circumstances, and expired six months from the date of issuance. The Series B Warrants included in the common units and the pre-funded units were immediately exercisable at a price of $7.50 per share of common stock, subject to adjustment in certain circumstances, and will expire five years from the date of issuance. The shares of common stock, or pre-funded warrants in the case of the pre-funded units, and the Series A Warrants and Series B Warrants were offered together, but the securities contained in the common units and the pre-funded units were issued separately.

The Company agreed to pay Oppenheimer & Co., Inc. a commission of (a) 7% of the gross proceeds raised up to $5,000 and (b) 6.5% of the gross proceeds raised in excess of $5,000. The Company also agreed to pay or reimburse certain expenses on behalf of Oppenheimer. A total of $1,497 of commissions and other issuance costs were associated with the public offering.

The net proceeds to the Company from the Offering of the common units and pre-funded units were approximately $14,517, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from the Offering for research and development of its therapeutic candidates, particularly the development of Pulmazole, as well as for working capital and general corporate purposes.

 

14

At-the-Market Offering

On March 17, 2017, the Company entered into an At-The-Market Sales Agreement (the “Sales Agreement”) with BTIG, LLC (“BTIG”) to act as the Company’s sales agent with respect to the issuance and sale of up to $11,000 of the Company’s shares of common stock, from time to time in an at-the-market public offering. Sales of common stock under the Sales Agreement were made pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission on July 15, 2016, and subsequently declared effective on August 3, 2016 (File No. 333-212546), and a related prospectus. BTIG acted as the Company’s sales agent on a commercially reasonable efforts basis, consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and the rules of The NASDAQ Global Market. BTIG received compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of the Company’s common stock pursuant to the Sales Agreement.

During the nine-month period ended September 30, 2018, the Company sold 123,266 shares of its common stock under the Sales Agreement at an average selling price of approximately $15.40 per share which resulted in gross proceeds of approximately $1,904 and net proceeds of approximately $1,847 after payment of 3% commission to BTIG and other issuance costs.

8. Warrants

A rollforward of the common stock warrants outstanding at September 30, 2019 is as follows.

 

		Number of Common Warrants				Number of Pre-Funded Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding January 1, 2019			3,730,944				697,500			$	10.78							$	—
Adjustment for Reverse Stock Split			16				—			$
Warrants issued			14,926,161				—			$	1.37
Pre-funded warrants issued			—				8,947,112			$	0.01
Pre-funded warrants exercised			—				(9,344,612	)		$	0.01
Expirations			(3,926	)			—			$	226.60
Outstanding September 30, 2019			18,653,195				300,000			$	3.61				4.36			$	—

The following represents a summary of the warrants outstanding at each of the dates identified:

 

		Classification				Exercise Price				Expiration Date				Number of Shares Underlying Warrants
														For the Period Ended September 30,
Issue Date														2019				2018
April 8, 2019			Equity			$	0.01				—				300,000				—
April 8, 2019			Equity			$	1.35				April 8, 2024				12,266,665				—
April 8, 2019			Equity			$	1.6875				April 3, 2024				797,334				—
February 12, 2019			Equity			$	1.8313				February 7, 2024				110,922				—
February 12, 2019			Equity			$	1.34				August 12, 2024				1,706,484				—
February 04, 2019			Equity			$	2.125				January 30, 2024				34,605				—
January 31, 2019			Equity			$	2.125				January 26, 2024				10,151				—
December 3, 2018			Equity			$	3.90				June 3, 2024				937,500				—
April 3, 2018			Equity			$	7.50				April 3, 2023				2,350,011				4,815,000
April 4, 2018			Equity			$	7.50				April 4, 2023				115,000				230,000
August 31, 2015			Equity			$	118.00				August 31, 2020				3,000				3,000
June 15, 2015			Equity			$	75.50				May 6, 2024				319,008				319,008
June 15, 2015			Equity			$	83.50				June 16, 2020				2,515				2,515
June 15, 2015			Equity			$	83.50				Mar 21, 2019				—				3,926
Adjustment for Reverse Stock Split															—				(5	)
Total Outstanding															18,953,195				5,258,444

 

15

9. Stock-Based Compensation

The Company sponsors the Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan). As of September 30, 2019, the 2013 Plan provides for the grant of up to 4,060,000 shares of common stock, of which 2,933,044 shares remained available for future grant.

In addition, the Company has two legacy plans: The Pulmatrix Operating’s 2013 Employee, Director and Consultant Equity Incentive Plan (the “Original 2013 Plan”) and Pulmatrix Operating’s 2003 Employee, Director, and Consultant Stock Plan (the “2003 Plan”). As of September 30, 2019, a total of 16,037 shares of common stock may be delivered under options outstanding under the Original 2013 Plan and the 2003 Plan, however no additional awards may be granted under the Original 2013 Plan or the 2003 Plan.

Options

No options were granted to employees, directors or consultants during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company granted 561,600 options to employees and 90,000 options to directors. At the date of grant, the fair value of the options was $393 and $63 respectively. The stock options outstanding vest over either 36 or 48 months (the “Time Based Options”). Subject to the grantees’ continuous service with the Company and as defined in the grant agreement, Time Based Options vest in one of the following ways: (i) 25% on the first anniversary of the option grant date and the remainder in 36 equal monthly installments beginning in the month after the vesting start date, (ii) 25% on the option grant date and the remainder in 36 equal monthly installments beginning in the month after the vesting start date or (iii) in 48 equal monthly installments beginning on the monthly anniversary of the vesting start date. Stock options generally expire ten years after the date of grant.

The following table summarizes stock option activity for the nine months ended September 30, 2019:

 

		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term ( Years)				Aggregate Intrinsic Value
Outstanding — January 1, 2019			972,569			$	23.85							$	—
Granted			651,600			$	1.06
Exercised			—			$	—
Forfeited or expired			(535,493	)		$	23.77
Outstanding — September 30, 2019			1,088,676			$	10.25				8.86			$	—
Exercisable — September 30, 2019			355,845			$	26.24				7.77			$	—
Vested and expected to vest — September 30, 2019			1,082,710			$	10.28				8.86			$	—

The estimated fair values of employee stock options granted during the three and nine months ended September 30, 2019 and 2018, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Expected option life (years)			—				6.05				6.02				5.58
Risk-free interest rate			—				2.79	%			2.22	%			2.77	%
Expected volatility			—				78.91	%			74.14	%			79.67	%
Expected dividend yield			—				0	%			0	%			0	%

The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Company’s expected volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity. The dividend yield considers that the Company has not historically paid dividends and does not expect to pay dividends in the foreseeable future. As of September 30, 2019, there was $1,345 of unrecognized stock-based compensation expense related to unvested stock options granted under the Company’s stock award plans. This expense is expected to be recognized over a weighted-average period of approximately 1.9 years.

 

16

The following table presents total stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018:

 

		Three Months Ended September 30,								Nine months Ended September 30,
		2019				2018				2019				2018
Research and development		$	14			$	244			$	81			$	760
General and administrative			171				416			$	1,654			$	1,598
Total stock-based compensation expense		$	185			$	660			$	1,735			$	2,358

10. Income Taxes

The Company has total deferred tax assets of $44,770 and a full valuation allowance recorded against the assets. In general, if the Company experiences a greater than 50 percent aggregate change in ownership of certain significant stockholders over a three-year period, or a Section 382 ownership change, utilization of the Company’s pre-change net operating loss (“NOL”) carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state laws. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial. The Company has not, as of yet, completed a study to determine if any such changes have occurred that could limit its ability to use the net operating losses and tax credit carryforwards.

11. Net Loss Per Share

The Company computes basic and diluted net loss per share using a methodology that gives effect to the impact of outstanding participating securities (the “two-class method”). As the three months and nine months ended September 30, 2019 and 2018 resulted in net losses attributable to common shareholders, there is no income allocation required under the two-class method or dilution attributed to weighted average shares outstanding in the calculation of diluted net loss per share.

The following potentially dilutive securities outstanding prior to the use of the treasury stock method have been excluded from the computation of diluted weighted-average shares outstanding, as they would be anti-dilutive.

 

		As of September 30,
		2019				2018
Options to purchase common stock			1,088,676				1,041,407
Warrants to purchase common stock			18,653,195				5,258,444

12. Commitments

Future minimum lease payments under the non-cancelable operating lease for office and lab space is as follows:

 

		Amount
2019		$	169
2020			698
Total		$	867

 

17

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

The information set forth below should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q as well as the audited financial statements and the notes thereto contained in our current report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2019. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “us,” “we,” “our,” or our “Company” and similar terms refer to Pulmatrix, Inc., a Delaware corporation, and its subsidiaries.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “guides,” “intends,” “is confident that”, “may,” “plans,” “seeks,” “projects,” “targets,” and “would,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control that could cause our actual results, performance and achievements to differ materially from those expressed or implied in these forward-looking statements. Factors which may affect our results include, but are not limited to:

 

•

our history of recurring losses and negative cash flows from operating activities, significant future commitments and the uncertainty regarding the adequacy of our liquidity to pursue our complete business objectives;

 

•

our inability to carry out research, development and commercialization plans;

 

•

our inability to manufacture our product candidates on a commercial scale on our own, or in collaborations with third parties;

 

•

our inability to complete preclinical testing and clinical trials as anticipated;

 

•

our ability to adequately protect and enforce rights to intellectual property;

 

•

difficulties in obtaining financing on commercially reasonable terms;

 

•

intense competition in our industry, with competitors having substantially greater financial, technological, research and development, regulatory and clinical, manufacturing, marketing and sales, distribution and personnel resources than we do;

 

•

entry of new competitors and products and potential technological obsolescence of our products;

 

•

adverse market and economic conditions;

 

•

loss of one or more key executives or scientists; and

 

•

difficulties in securing regulatory approval to market our product candidates.

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item 1A of this Quarterly Report. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Overview

Business

The Company is a clinical stage biotechnology company focused on the discovery and development of a novel class of inhaled therapeutic products. The Company’s proprietary dry powder delivery platform, iSPERSE^™ (inhaled Small Particles Easily Respirable and Emitted), is engineered to deliver small, dense particles with highly efficient dispersibility and delivery to the airways, which can be used with an array of dry powder inhaler technologies and can be formulated with a variety of drug substances. The Company is developing a pipeline of iSPERSE-based therapeutic candidates targeted at prevention and treatment of a range of respiratory diseases and infections with significant unmet medical needs. Since our inception in 2003, we have devoted substantially all of our efforts to product research and development. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date through proceeds from issuances of common and convertible preferred stock, issuances of convertible debt, collaborations with third parties and non-dilutive grants received from government agencies.

 

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Recent Developments

On April 15, 2019, we entered into a Development and Commercialization Agreement (the “Cipla Agreement”) with Cipla Technologies LLC (“Cipla”) for the co-development and commercialization, on a worldwide exclusive basis, of Pulmazole, our inhaled iSPERSE drug delivery system enabled formulation of the antifungal drug, itraconazole, for the treatment of all pulmonary indications, including allergic bronchopulmonary aspergillosis (“ABPA”) in patients with asthma.

Pursuant to the Cipla Agreement, Cipla made an initial upfront payment of $22 million to us in exchange for an irrevocable assignment of all existing and future technologies, current and future drug master files, dossiers, third-party contracts, regulatory filings, regulatory materials and regulatory approvals, patents, and intellectual property rights, as well as any other associated rights and assets with respect to Pulmazole, specifically in relation to pulmonary indications (the “Assigned Assets”) which Cipla will then irrevocably licensed back to us only for non-pulmonary application. As a condition precedent to signing agreement, we demonstrated to Cipla that we had at least $15 million of unencumbered cash available for the development of Pulmazole. Pursuant to the terms of the agreement, we dedicated $24 million of cash to the development of Pulmazole. The $24 million is expected to fund the development of Pulmazole beyond the completion of the initiated Phase 2 study. After such $24 million is exhausted, each of us and Cipla will bear 50% of any costs incurred with respect to the development, regulatory and commercialization costs of Pulmazole. The parties will share equally the total free cash flow in relation to commercialization of Pulmazole. Pulmatrix will remain primarily responsible for the execution of the clinical development of Pulmazole, and Cipla will be responsible for the global commercialization of the product.

Revenue associated with the combined research and development services for the Product and the irrevocable license to the Assigned Assets is recognized as revenue as the research and development services are provided using an input method, according to the ratio of costs incurred to the total costs expected to be incurred in the future to satisfy the performance obligation. In management’s judgment, this input method is the best measure of the transfer of control of the performance obligation. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed consolidated balance sheet.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years based on our drug development plans. We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities, as we:

 

•

initiate and expand clinical trials for Pulmazole for ABPA, and other indications for immunocompromised at-risk patients;

 

•

seek regulatory approval for our product candidates;

 

•

hire personnel to support our product development, commercialization and administrative efforts; and

 

•

advance the research and development related activities for inhaled therapeutic products in our pipeline.

We will not generate product sales unless, and until, we successfully complete clinical developments and obtain regulatory approvals for our product candidates. Additionally, we currently utilize third-party contract research organizations, or CROs, to carry out our clinical development activities, and we do not yet have a commercial organization. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Accordingly, we anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, potentially including collaborative commercial arrangements. Likewise, we intend to seek to limit our commercialization costs by partnering with other companies with complementary capabilities or larger infrastructure including sales and marketing.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

Financial Overview

Revenues

To date, we have not generated any product sales. Our 2019 revenue resulted from the portion of the upfront payment received and recognized as part of the Cipla Agreement. Our 2018 revenue resulted from an award from Cystic Fibrosis Foundation Therapeutics (“CFFT”), the nonprofit drug discovery and development affiliate of the Cystic Fibrosis Foundation, to support the development of Pulmazole for the treatment of ABPA in patients with asthma and cystic fibrosis.

 

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Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, and include:

 

•

employee-related expenses, including salaries, benefits and stock-based compensation expense;

 

•

expenses incurred under agreements with CROs, contract manufacturing organizations, or CMOs, and consultants that conduct our clinical trials and preclinical activities;

 

•

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies;

 

•

facility, depreciation and other expenses, which include direct and allocated expenses for rent, maintenance of our facility, insurance and other supplies; and

 

•

costs associated with preclinical activities and regulatory operations.

We expense research and development costs to operations as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

Research and development activities are central to our business model. We utilize a combination of internal and external efforts to advance product development from early stage work to clinical trial manufacturing and clinical trial support. External efforts include work with consultants and substantial work at CROs and CMOs. We support an internal research and development team and facility for our pipeline programs. To move these programs forward along our development timelines, a large portion, approximately 71% of staff, are research and development employees. In addition, we maintain a 12,000 square foot research and development facility which includes capital equipment for the manufacture and characterization of our iSPERSE^™ powders for our pipeline programs. As we identify opportunities for iSPERSE^™ in respiratory indications, we anticipate additional head count, capital, and development costs will be incurred to support these programs.

Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of these or other current or future preclinical studies and clinical trials. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs such as stock-based compensation for personnel and consultants in executive, finance, business development, corporate communications and human resource functions, facility costs not otherwise included in research and development expenses, patent filing fees and professional legal fees. Other general and administrative expenses include travel expenses and professional fees for consulting, auditing and tax services.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, director and officer liability insurance, investor relations costs and other costs associated with being a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in staffing and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Interest Expense

We incurred interest expense associated with a term loan executed in June 2015. The term loan was paid in its entirety as of June 30, 2018.

Critical Accounting Policies

This management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and

 

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judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements appearing elsewhere in this Form 10-Q and in our audited financial statements included in our annual report on Form 10-K filed with the SEC on February 19, 2019, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Use of Estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results may differ from these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payments, estimating the useful lives of depreciable and amortizable assets, valuation allowance against deferred tax assets, recognition of research and development and license revenues, goodwill impairment, and estimating the fair value of long-lived assets to assess whether impairment charges may apply.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s core principal is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring good or services to a customer. The principles in the standard are applied in 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 when (or as) the entity satisfies a performance obligation. The Company adopted Topic 606 as of January 1, 2019 using the modified retrospective transition method. The adoption of Topic 606 did not have any material impact on the Company’s condensed consolidated financial statements.

The Company only applies the five-step model to contracts when it is probable that the Company 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 and 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.

Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

During the nine months ended September 30, 2019, our principal source of revenue was income from the amortization of the $22 million upfront payment received as part of the Cipla Agreement.

During the nine months ended September 30, 2018, our principle source of revenue was income for reimbursement of clinical study costs as part of a grant received from CFFT.

Goodwill

Goodwill represents the difference between the consideration transferred and the fair value of the net assets acquired under the acquisition method of accounting for push-down accounting. Goodwill is not amortized but is evaluated for impairment on an annual basis, during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the related reporting unit below its carrying amount. When performing the impairment assessment, the accounting standard for testing goodwill for impairment permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill is impaired. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of goodwill is impaired, we must perform the goodwill impairment test. During the nine months ending September 30, 2019, the Company’s common stock value declined, accordingly, the Company determined that its carrying value is in excess of its fair value and as such, recorded an impairment charge of $7,268 and revalued goodwill to $3,577. During the three months ended September 30, 2019, no additional impairment charge was recorded.

 

21

Results of Operations

Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018

The following table sets forth our results of operations for each of the periods set forth below (in thousands):

 

		Three months ended September 30,								Change
		2019				2018
Revenue		$	1,406			$	—			$	1,406
Operating expenses
Research and development			3,297				3,056				241
General and administrative			1,785				1,769				16
Total operating expenses			5,082				4,825				257
Loss from operations			(3,676	)			(4,825	)			1,149
Interest Income			121				8				113
Other income			—				1				(1	)
Net loss		$	(3,555	)		$	(4,816	)		$	1,261

Revenue — For the three months ended September 30, 2019, revenue recorded was $1.4 million compared to no revenue recorded for the three months ended September 30, 2018. The increase in revenue was the result of recognition of revenue pursuant to the Cipla Agreement.

Research and development expenses — For the three months ended September 30, 2019, research and development expense was $3.3 million compared to $3.1 million for the three months ended September 30, 2018, an increase of $0.2 million. The increase was primarily due to increased spend of $1.0 million on the Pulmazole project partially offset by decreased spend of $0.4 million on the PUR1800 project, $0.2 million for employment costs and $0.2 million of stock compensation charges.

General and administrative expenses — For the three months ended September 30, 2019 and 2018, general and administrative expense was $1.8 million for both periods.

Nine months Ended September 30, 2019 Compared with Nine months Ended September 30, 2018

The following table sets forth our results of operations for each of the periods set forth below (in thousands):

 

		Nine months ended September 30,								Change
		2019				2018
Revenue		$	6,225			$	153			$	6,072
Operating expenses
Research and development			8,637				10,290				(1,653	)
General and administrative			6,900				5,930				970
Impairment of goodwill			7,268				—				7,268
Total operating expenses			22,805				16,220				6,585
Loss from operations			(16,580	)			(16,067	)			(513	)
Interest Income			227				23				204
Interest expense			—				(186	)			186
Settlement expense			(200	)			—				(200	)
Other income/(expense), net			(2	)			5				(7	)
Net loss		$	(16,555	)		$	(16,225	)			(330	)

Revenue — For the nine months ended September 30, 2019, revenue was $6.2 million compared to $0.2 million for the nine months ended September 30, 2018. The increase in revenue was the result of recognition of revenue pursuant to the Cipla Agreement.

Research and development expenses — For the nine months ended September 30, 2019, research and development expense was $8.6 million compared to $10.3 million for the nine months ended September 30, 2018, a decrease of $1.7 million. The decrease was primarily due to decreased spend of $1.6 million on the PUR1800 project, $1.0 million in of employment costs, $0.7 million in stock compensation expense and $0.1 of consulting and lab related costs, partially offset by $1.7 million of increased spend on the Pulmazole program.

 

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General and administrative expenses — For the nine months ended September 30, 2019, general and administrative expense was $6.9 million compared to $5.9 million for the nine months ended September 30, 2018, an increase of $1.0 million. The increase was primarily due to a $0.3 million royalty payment to the CFFT as result of the Cipla Agreement, $0.3 million of increased legal expense relating to the Cipla Agreement, $0.2 million of increased consultant and travel expense, $0.1 million of increased employment expenses and $0.1 million of increased audit and tax related expense.

Impairment of goodwill — For the nine months ended September 30, 2019, due to the decline in the company’s common stock value, we recorded charges that totaled approximately $7.3 million for impairment of goodwill.

Liquidity and Capital Resources

Through September 30, 2019, we have incurred an accumulated deficit of $211.1 million, primarily as a result of expenses incurred through a combination of research and development activities related to our various product candidates and general and administrative expenses supporting research and development and business activities. We have financed our operations since inception primarily through the sale of preferred and common stock, the issuance of convertible promissory notes, term loans and collaboration agreements. Our total cash and cash equivalents balance as of September 30, 2019 was $27.9 million.

In April 2019, the Company received gross proceeds of approximately $16.6 million in connection with the sale of the Units in the Offering. 8,277,112 pre-funded warrants issued in the Offering were exercised and resulted in the issuance shares of common stock and gross proceeds of approximately $0.1 million. In May 2019, $22.0 million was received pursuant to the terms of the Cipla Agreement, which was entered into between the Company and Cipla during April 2019.

In August 2019, 370,000 pre-funded warrants issued in the April 2019 offering were exercised and resulted in the issuance of 370,000 shares of common stock.

We anticipate that we will continue to incur losses, and that such losses will increase over the next several years due to development costs associated with our iSPERSE^™ pipeline programs. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding and other collaborations and strategic alliances. The Pulmazole Phase 2 study is fully funded. Development costs for that program beyond the Phase 2 study will be shared with our partner, Cipla.

The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):

 

		Nine months ended September 30,
		2019				2018
Net cash provided by/(used) in operating activities		$	7,663			$	(12,596	)
Net cash used in investing activities			(49	)			(8	)
Net cash provided by financing activities			17,702				12,860
Net increase in cash and cash equivalents		$	25,316			$	256

Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2019 was $7.7 million, which was primarily the result of a net loss of $16.6 million, offset by $9.2 million of net non-cash adjustments and $15.1 million in cash inflows associated with changes in operating assets and liabilities. Our non-cash adjustments were primarily comprised of $7.3 million of goodwill impairment, $1.7 million of stock-based compensation expense and $0.2 million of depreciation and amortization expense. The net cash inflows associated with changes in operating assets and liabilities were primarily due to an increase of $15.8 million of deferred revenue, partially offset by increases in prepaid assets and decreases in accrued expenses and accounts payable totaling $0.7 million.

Net cash used in operating activities for the nine months ended September 30, 2018 was $12.6 million, which was primarily the result of a net loss of $16.2 million, partially offset by $2.6 million of net non-cash adjustments and $1.0 million in cash inflows associated with changes in operating assets and liabilities. Our non-cash adjustments were primarily comprised of $2.4 million of stock-based compensation expense and $0.2 million of depreciation and amortization. The net cash inflows associated with changes in operating assets and liabilities was primarily due to increases of $0.9 million in accounts payable and $0.3 million in accrued expenses, partially offset by a $0.2 million decrease in prepaid expenses and other current assets.

 

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Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2019 and September 30, 2018 were entirely due to purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2019 was $17.7 million, as compared to $12.9 million for the nine months ended September 30, 2018. Net cash provided by financing activities for the nine months ended September 30, 2019 resulted from the issuance of common stock, net of issuance costs of $17.5 million, and pre-funded warrant exercises of $0.2 million. Net cash provided by financing activities for the nine months ended September 30, 2018 resulted from the issuance of common stock, net of issuance costs of $16.4 million, partially offset by $3.5 million of principal and end of term loan payments.

Financings

2019

On April 8, 2019, we closed our firm commitment underwritten public offering in which, pursuant to the underwriting agreement (the “Underwriting Agreement”) entered into between the Company and H.C. Wainwright & Co., LLC, as representative of the underwriters (the “Underwriters”), dated April 3, 2019, we issued and sold an aggregate of (i) 1,719,554 Common Units (“Common Units”), with each Common Unit being comprised of one share of the Company’s common stock, par value $0.0001 per share and one warrant to purchase one share of common stock and (ii) 8,947,112 pre-funded units (the “Pre-Funded Units”) with each Pre-Funded Unit being comprised of one pre-funded warrant to purchase one share of common stock and one common warrant to purchase a share of common stock. The public offering price was $1.35 per Common Unit and $1.34 per Pre-Funded Unit. The common warrants have an exercise price of $1.35 per share. In addition, on April 8, 2019, we closed on the sale of an additional 1,599,999 Common Units purchased pursuant to the exercise in full of the underwriter’s option to purchase additional securities. Each Common Unit contains one share of common stock and one common warrant to purchase a share of common stock.

We recorded gross proceeds of $16.6 million and after commissions and fees of $1.9 million, the financing resulted in $14.6 million of net proceeds.

8,647,112 of the 8,947,112 pre-funded warrants issued in the offering were exercised during the nine months ending September 30, 2019 which resulted in the issuance of an additional 8,647,112 shares of common stock with net proceeds of $87.

2018

On March 17, 2017, the Company entered into an At-The-Market Sales Agreement with respect to the issuance and sale of up to $11 million of the Company’s common stock from time to time in an at-the-market public offering. During the nine months ended June 30, 2018, the Company sold 123,266 shares of its common stock pursuant to the At-The-Market Sales Agreement for aggregate net proceeds of $1.8 million.

On March 28, 2018, we entered into an underwriting agreement with Oppenheimer and Co., Inc. relating to the Offering, pursuant to which the Company sold, 1,681,000 common units and 784,000 pre-funded units. All of the pre-funded warrants issued in the Offering were exercised in April 2018 and, as 15,000 were exercised on a cashless basis, resulted in the issuance of an additional 783,707 shares of common stock. Each common unit was comprised of one share of common stock, one Series A Warrant to purchase one share of common stock and one Series B Warrant to purchase one share of common stock. Each Pre-Funded Unit was comprised of one pre-funded warrant to purchase one share of common stock, one Series A Warrant and one Series B Warrant. Gross proceeds from the Offering and of the exercise of the pre-funded warrants issued in the Offering, before commissions and fees, were approximately $16.0 million. The Series A Warrants had a six month term from date of issuance, they have expired according to their terms and are no longer outstanding. The Series B Warrants have a five year term from the date of issuance.

Based on our planned use for our existing cash resources, we believe that our available funds will be sufficient to enable us to support clinical development of our Pulmazole program through the issuance of the final report on the Phase 2 trial, preparation costs relating to our planned Phase 2b/3 trial and completion of a toxicology study in support of PUR1800, all of which are expected to conclude during the third quarter, 2020. The funding will not be sufficient to complete additional clinical work for any of the pipeline programs. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

 

•

the initiation, progress, timing, costs and results of clinical studies for existing and new pipeline programs based on iSPERSE™;

 

•

the outcome, timing and cost of regulatory approvals by the FDA and European regulatory authorities, including the potential for these agencies to require that we perform studies in addition to those that we currently have planned;

 

24

•

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

•

our need to expand our research and development activities;

 

•

our need and ability to hire additional personnel;

 

•

our need to implement additional infrastructure and internal systems;

 

•

the cost of establishing and maintaining a commercial-scale manufacturing line; and

 

•

the cost of establishing sales, marketing and distribution capabilities for any products for which we may receive regulatory approval.

If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported,

 

25

within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings.

From time to time, we may be involved in litigation that arises through the normal course of business. As of the date of this filing, we are not aware of any material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, nor are we aware of any such threatened or pending litigation or any such proceedings known to be contemplated by governmental authorities.

We are not aware of any material proceedings in which any of our directors, officers or affiliates or any registered or beneficial stockholder of more than 5% of our common stock, or any associate of any of the foregoing, is a party adverse to or has a material interest adverse to, us or any of our subsidiaries.

 

Item 1A.

Risk Factors.

There have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K. For more information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Unregistered Sales of Equity Securities

None.

(b) Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during the quarter ended September 30, 2019.

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

Mine Safety Disclosures.

Not applicable.

 

Item 5.

Other Information.

None.

 

Item 6.

Exhibits.

See Index to Exhibits.

 

26

EXHIBIT INDEX

 

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation of Pulmatrix, Inc., as amended through June  15, 2015 (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q filed with the Securities and Exchange commission on August 14, 2015).
3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Pulmatrix, Inc., dated as of June  5, 2018 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2018).
3.3		Restated Bylaws of Pulmatrix, Inc., as amended through June  15, 2015 (incorporated by reference to Exhibit 3.2 to Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2015).
10.1		Third Amendment to the Pulmatrix, Inc. Amended and Restated 2013 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2019).
31.1*		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017, (ii) Condensed Consolidated Statements of Operations for the six months ended June 30, 2018 and 2017 (unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (unaudited).

 

*	Filed herewith.

 

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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.

 

				PULMATRIX, INC.
Date: November 1, 2019				By:		/s/ Teofilo Raad
						Teofilo Raad
						President and Chief Executive Officer
						(Principal Executive Officer)
Date: November 1, 2019				By:		/s/ William Duke, Jr.
						William Duke, Jr.
						Chief Financial Officer
						(Principal Financial Officer)

 

28