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 March 26, 2020. 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 on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact contained herein, including statements regarding our 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, are forward-looking statements. Words such as "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, as well as statements in future tense, are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will actually be achieved. Forward-looking statements are based on information we have when those statements are made or our management's good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:





  ? the impact of the novel coronavirus ("COVID-19") on the Company's ongoing and
    planned clinical trials;

  ? the geographic, social and economic impact of COVID-19 on the Company's
    ongoing and planned clinical trials;

  ? 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 or complete our 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 collaborators' inability to successfully carry out their contractual
    duties;

  ? termination of certain license agreements;

  ? our ability to adequately protect and enforce rights to intellectual property,
    or defend against claims of infringement by others;

  ? difficulties in obtaining financing on commercially reasonable terms, or at
    all;

  ? intense competition in our industry, with competitors having substantially
    greater financial, technological, research and development, regulatory and
    clinical, manufacturing, marketing and sales, distribution, personnel and
    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, except as required by law.





Overview



Business


We are a clinical stage biotechnology company focused on the discovery and development of novel inhaled therapeutic products intended to prevent and treat respiratory and other diseases and infections with significant unmet medical needs.

We design and develop inhaled therapeutic products based on our proprietary dry powder delivery technology, iSPERSE (inhaled Small Particles Easily Respirable and Emitted), which enables delivery of small or large molecule drugs to the lungs by inhalation for local or systemic applications. The iSPERSE powders are engineered to be small, dense particles with highly efficient dispersibility and delivery to airways. iSPERSE powders can be used with an array of dry powder inhaler technologies and can be formulated with a broad range of drug substances including small molecules and biologics. We believe the iSPERSE dry powder technology offers enhanced drug loading and delivery efficiency that outperforms traditional lactose-blend inhaled dry powder therapies. We believe the advantages of using the iSPERSE technology include reduced total inhaled powder mass, enhanced dosing efficiency, reduced cost of goods and improved safety and tolerability profiles. We are developing iSPERSE-based therapeutic candidates targeted at the prevention and treatment of a range of diseases, including allergic bronchopulmonary aspergillosis ("ABPA") in patients with asthma and in patients with cystic fibrosis ("CF"), and lung cancer. We are also exploring iSPERSE based therapeutics in neurological diseases.

Our goal is to develop breakthrough therapeutic products that are safe, convenient and more efficient than the existing therapeutic products for respiratory and other diseases where iSPERSE properties are advantageous. In support of this goal, we are focusing on developing inhaled anti-fungal therapies to prevent and treat pulmonary infections and allergic/hypersensitivity responses to fungus in patients with asthma and CF as well as other rare/orphan indications. We intend to capitalize on our iSPERSE technology platform and our expertise in inhaled therapeutics to identify new product candidates for the prevention and treatment of diseases with significant unmet medical needs and to build our product pipeline beyond our existing candidates. In order to advance our clinical trials for our therapeutic candidates for respiratory and neurological diseases, and leverage the iSPERSE platform to enable delivery of partnered compounds, we intend to form strategic alliances with third parties, including pharmaceutical, biotechnology companies or academic or private research institutes.





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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 do not have any products approved for sale and have not generated any revenue from product sales. 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 ("CROs") to carry out our clinical development activities and third-party contract manufacturing organizations ("CMOs") to carry out our clinical manufacturing activities as 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, licensing agreements, collaborations with third parties, non-dilutive grants 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, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.





Recent Developments



COVID-19 Developments


In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China and has reached multiple other countries, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in China and such other countries. On March 12, 2020, the World Health Organization ("WHO") declared COVID-19 to be a global pandemic, and the COVID-19 pandemic has resulted in significant financial market volatility and uncertainty in recent weeks. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock.

Moreover, the COVID-19 outbreak has begun to have indeterminable adverse effects on general commercial activity and the world economy, and the Company's business and results of operations could be adversely affected to the extent that COVID-19 or any other epidemic harms the global economy generally.

We do not yet know the full extent of potential delays or impact on our business, our relationship with our business partners, our clinical trials or the global economy as a whole. However, any one or a combination of these events could have an adverse effect on the operation of and results from our clinical trials and on our other business operations.





Pulmazole


In July of 2019, we initiated a Phase 2 clinical investigation for Pulmazole, our inhaled formulation of itraconazole, an anti-fungal drug commercially available as an oral drug that we are developing to treat and prevent pulmonary fungal infections. To date, five subjects have completed the 28-day dosing regimen, receiving either 10 mg, 20 mg, or 35 mg of Pulmazole or placebo in a randomized, double-blind treatment assignment. In the first quarter of 2020, we initiated the process of establishing additional study sites and amending the study protocol.

On January 28, 2020 the U.S. Food and Drug Administration (the "FDA") granted Fast Track designation to Pulmazole. However, as the COVID-19 pandemic escalated in late March and early April 2020, we were notified that 11 out of 21 clinical sites suspended enrollment in the Pulmazole study due to issues associated with COVID-19. Subsequently, we communicated with each of the remaining study sites as to their ability to ensure subject safety and completion of the study as per protocol. Following these discussions, we requested that each of these sites pause enrollment in the study pending further developments regarding the COVID-19 pandemic. As a result of this pause in enrollment, our expected development timeline for Pulmazole may be negatively impacted. The potential for delay in the development timeline, however, is dependent upon the timing of our ability to resume enrollment given the COVID-19 pandemic, the impact of the protocol amendment and adding additional study sites. Assuming we can resume enrollment within the next six months, top-line data for this study is anticipated mid-2021. However, given the unpredictable nature of the impact of this pandemic, the chance of COVID-19 infections increasing in the future after following a decline, coupled with the few patients who have completed the study to date, there may be further delays in obtaining this data.





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PUR 1800


Separately, we plan to initiate a Phase 1b study of PUR1800 in stable moderate-severe COPD patients in the second half of 2020. The COVID-19 pandemic could delay this date or impact enrollment generally to the extent we cannot secure sites to enroll patients, patients remain or become subject to government "stay at home" mandates, patients feel like they cannot safely visit trial sites or patients drop out due to COVID-19 related issues.





Sensory Cloud Agreement


On April 9, 2020, we entered into a Collaboration and License Agreement (the "Agreement") with Sensory Cloud, Inc. ("Sensory Cloud"). Under the terms of the Agreement, the Company has granted Sensory Cloud an exclusive, worldwide, royalty bearing license to PUR 003 and PUR 006, the Company's proprietary aerosol salt solution for delivery or administration to or through the nasal passages also known as NasoCalm, as well as related patents and know-how, for use in the field (the "Sensory Licensed Product"). For purposes of the Agreement, the field means the formulation and commercialization of over-the-counter products for the prophylaxis, prevention and treatment of upper and lower respiratory disease that are delivered or administered to or through the nasal passages. The license granted to Sensory Cloud does not cover the development or commercialization of any prescription products.

The Sensory Licensed Products are expected to include an emergency response product for the reduction of pathogenic risk and transmissibility of contagions, including with respect to COVID-19 (the "Emergency Product"). We have the right to terminate the Agreement in the event that Sensory Cloud has not, within six months after April 9, 2020, met certain regulatory and funding milestones related to rapid development and commercialization of the Emergency Product, as set forth in the Agreement.

Under the terms of the Agreement, Sensory Cloud may develop other over-the-counter Sensory Licensed Products that contain other active pharmaceutical ingredients or therapeutic agents and combine the Sensory Licensed Product with one or more of Sensory Cloud's proprietary delivery devices. In addition, we have granted Sensory Cloud an exclusive right of first refusal to any new over-the-counter products in the field that may be developed by us.

During the term of the Agreement, neither party may alone or with, through or for the benefit of any third party, with respect to any Sensory Licensed Product in the field, pursue any research, development or commercialization activities specifically directed to development or commercialization of any Sensory Licensed Product.

The Company shall be entitled to royalties on net sales of Sensory Licensed Product in each country in which there is a valid claim of a patent within the licensed intellectual property covering the Sensory Licensed Product. Our rights to receive such royalties commences upon the first commercial sale of a Sensory Licensed Product in any such country and terminates upon the expiration of the last valid claim in such territory. The royalty rates are as follows: (1) 7% of net sales during calendar year 2020, (2) 14% of net sales during calendar year 2021, and (3) 17% of net sales during calendar year 2022 and each calendar year thereafter during the royalty term. In addition, the Company shall be entitled to receive a milestone payment of $1.0 million following the achievement of aggregate net sales of all Sensory Licensed Products of $20.0 million.

The Agreement shall terminate at such time that we would no longer be entitled to royalties because there are no longer any valid claims of a patent within the licensed intellectual property covering any Sensory Licensed Product. Upon there being no more such royalty payments owed by Sensory Cloud for a Sensory Licensed Product, the licenses granted by us to Sensory Cloud shall become fully-paid up, royalty free, perpetual, irrevocable and non-exclusive licenses to such Sensory Licensed Product. The Agreement may also be terminated earlier by Sensory Cloud for convenience and by Sensory Cloud or us for material breach or upon the bankruptcy or insolvency of the other party.

2020 Registered Direct Offering

On April 16, 2020, we entered into a Securities Purchase Agreement with certain institutional investors (the "Purchasers"), pursuant to which on April 20, 2020, we issued and sold in a registered direct offering (the "Offering") an aggregate of 4,787,553 shares of our common stock at an offering price of $1.671 per share, for gross proceeds of approximately $8.0 million before the deduction of placement agent fees and offering expenses. In a concurrent private placement, we issued to the Purchasers, for each share of common stock purchased in the Offering, a warrant ("Common Warrants") to purchase one share of common stock. The Common Warrants have an exercise price of $1.55 per share and are exercisable to purchase an aggregate of up to 4,787,553 shares of common stock. In addition, we issued to the placement agent for the Offering warrants to purchase 311,191 shares of common stock at an exercise price of $2.0888 per share. Both the Common Warrants and the placement agent warrants are exercisable immediately upon issuance and terminate on April 20, 2022.





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SBA Loan


On April 10, 2020, we received a loan of $0.6 million through the Paycheck Protection Program. Administered through the U.S. Small Business Administration, the loan was made possible through the Coronavirus Aid, Relief and Economic Security Act. On April 28, 2020, we repaid the loan in full.





Leases


On April 23, 2020, an extension to the Company's operating lease for office and lab space was signed between the Company and 99 Hayden LLC. The 5th amendment to the original lease executed on May 31, 2007 corrects the square footage for office and lab space to 22,119, has a base rent of $1.2 million which is adjusted annually by 3%, and will expire on June 30, 2022.





Financial Overview



Revenues


To date, we have not generated any product sales. The 2020 revenue was generated by the completion of a feasibility study with Nocion Therapeutics and by the collaboration agreement and license agreement with Cipla Technologies, LLC ("Cipla") and Johnson & Johnson Enterprise Innovation, Inc. ("JJEI"), respectively, with respect to the collaboration on the Pulmazole program and licensing our PUR1800 kinase inhibitor, respectively. For more discussion on the collaboration agreement, please see Note 6 of the consolidated financial statements in the Company's annual report on Form 10-K filed with the SEC on March 26, 2020.

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 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 clinical regulatory
    operations

  ? consulting and professional fees associated with research and development
    activities



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 (78% 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.





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General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs such as share-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, expenses related to a publicly-traded company and professional fees for consulting, auditing and tax services.

We anticipate that our general and administrative expenses will increase in the future as they relate 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.





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 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 current report on Form 10-K filed with the SEC on March 26, 2020, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.





Revenue Recognition


Effective January 1, 2019, the Company adopted ASU No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." The adoption of Topic 606 did not have any material impact on the Company's 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.

Our principal sources of revenue during the reporting period were income that resulted through our collaborative arrangements and license agreements that related to the development and commercialization of Pulmazole and from reimbursement of clinical study costs. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and collectability of the resulting receivable is reasonably assured.

During the three months ended March 31, 2020, our principal source of revenue was income that resulted from the Cipla Agreement and the JJEI License Agreement.





18






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 March 31, 2020, the Company has an active arrangement that contains a research or development milestone.





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.





Use of Estimates



In preparing 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 fair value of equity instruments recorded as derivative liabilities, estimating the useful lives of depreciable and amortizable assets, valuation allowance against deferred tax assets, goodwill impairment, and estimating the fair value of long-lived assets to assess whether impairment charges may apply.

Research and Development Costs

Research and development costs are expensed as incurred and include: salaries, benefits, bonus, share-based compensation, license fees, milestone payments due under license agreements, costs paid to third-party contractors to perform research, conduct clinical trials, and develop drug materials and delivery devices; and associated overhead and facilities costs. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors, CROs and CMOs. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of fees and costs associated with the contract that were rendered during the period and they are expensed as incurred. Research and development costs that are paid in advance of performance are capitalized as prepaid expenses and amortized over the service period as the services are provided. As of March 31, 2020, the Company has an active arrangement with JJEI that contains a research or development milestone. For more discussion on the milestones related to the JJEI agreement, please see Note 6 of the consolidated financial statements in the Company's annual report on Form 10-K filed with the SEC on March 26, 2020.

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 our 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 our reporting unit below our 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. The impact of the novel coronavirus ("COVID-19") pandemic was considered in the Company's qualitative assessment. Currently, there has not been a significant impact on the carrying value of the Company, but this factor will continue to be evaluated.

Based on the qualitative assessment for the three months ended March 31, 2020, there was no impairment necessary. Given the Company's common stock value decline during the three months ended March 31, 2019, and based on the quantitative assessment, we determined that goodwill was impaired as of March 31, 2019, and a charge of $794 was recorded.





19






Results of Operations


Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

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





                                        For the Three Months Ended
                                                 March 31,
                                         2020                2019          Change
       Revenues                      $       2,762       $           -     $ 2,762
       Operating expenses
       Research and development              5,287               2,176       3,111
       General and administrative            2,212               1,987         225
       Impairment of goodwill                    -                 794        (794 )
       Total operating expenses              7,499               4,957       2,542
       Loss from operations                 (4,737 )            (4,957 )       220
       Other income (expense)
       Interest income                          52                   4          48
       Settlement expense                        -                (200 )       200
       Other income (expense), net              (1 )                (3 )         2
       Net loss                      $      (4,686 )     $      (5,156 )   $   470

Revenue - For the three months ended March 31, 2020, $2.1 million and $0.7 million were recorded in revenue which were the result of the collaboration and licensing agreements with Cipla and JJEI, respectively. There was no revenue recorded for the three months ended March 31, 2019.

Research and development expenses - For the three months ended March 31, 2020, research and development expense was $5.3 million compared to $2.2 million for the three months ended March 31, 2019, an increase of $3.1 million. The increase was primarily due to increased spend of $1.9 million on the PUR1800 project due primarily to manufacturing costs, $0.9 million on the Phase 2 Pulmazole clinical trial, and $0.3 million on employment costs in support of our programs.

General and administrative expenses - General and administrative expenses were $2.2 million for the three months ended March 31, 2020 compared to $2.0 million for the three months ended March 31, 2019, an increase of $0.2 million. The increase was primarily due to increased consulting cost of $0.2 million.

Impairment of goodwill - There was no impairment charge for the three months ended March 31, 2020. For the three months ended March 31, 2019, due to the decline in the Company's common stock value, we recorded approximately $0.8 million for impairment.

Liquidity and Capital Resources

Through March 31, 2020, we have incurred an accumulated deficit of $220.0 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 those 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 and license agreements. Our total cash balance as of March 31, 2020 was $24.4 million.

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.

We expect that our existing cash and cash equivalents at March 31, 2020 and anticipated interest income will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months following the date of this Quarterly Report on Form 10-Q. 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.





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Impact of COVID-19 on the Company's Operations, Financial Condition and Liquidity

The ultimate impact of the COVID-19 pandemic on the Company's operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These include but are not limited to including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that regulators, or the board or management of the Company, may determine are needed.

The COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. The Company may not be able to raise sufficient additional capital and may tailor our drug candidate development program based on the amount of funding we are able to raise in the future. Nevertheless, there is no assurance that these initiatives will be successful.

Our future funding requirements will depend on many factors, including, but not limited to:





  ? the impact of the COVID-19 on the Company's ongoing and planned clinical
    trials;

  ? the geographic, social and economic impact of COVID-19 on the Company's
    ongoing and planned clinical trials;

  ? 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;

  ? 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

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





                                                             Three months ended
                                                                  March 31,
                                                             2020           2019
    Net cash provided by/(used in) operating activities    $    798       $ (3,456 )
    Net cash used in investing activities                       (96 )          (10 )
    Net cash provided by financing activities                   260          3,049
    Net increase/(decrease) in cash and cash equivalents   $    962       $   (417 )

Cash Flows from Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2020 was $0.8 million which was primarily the result of a net loss of $4.7 million, offset by $0.6 million of net non-cash adjustments and $4.9 million in cash inflows associated with changes in operating assets and liabilities. Our non-cash adjustments were primarily comprised of $0.3 million of share-based compensation expense, $0.2 million of amortization of operating lease right-of-use asset and $0.1 million of depreciation expense. The net cash inflows associated with changes in operating assets and liabilities was primarily due to $7.2 million in accounts receivable, $1.0 million in accrued expenses and $0.7 million in accounts payable partially offset by decreases of $2.7 million in deferred revenue, $1.1 million in prepaid expenses and other current assets and $0.2 million in operating lease liability.





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Net cash used in operating activities for the three months ended March 31, 2019 was $3.5 million, which was primarily the result of a net loss of $5.2 million, partially offset by $0.4 million in cash inflows associated with changes in operating assets and liabilities and $1.3 million of net non-cash adjustments. The net cash inflows associated with changes in operating assets and liabilities was primarily due to increases in accounts payable of $0.4 million and increases in accrued expenses of $0.5 million which were partially offset by increases in prepaid expenses and other current assets of $0.5 million. Our non-cash adjustments were primarily comprised of $0.8 million of goodwill impairment and $0.5 million of stock-based compensation expense.

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2020 and 2019 were entirely due to the purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2020 was $0.3 million as compared to $3.0 million for the three months ended March 31, 2019. Net cash provided for the three months ended March 31, 2020 were the result of warrant and stock option exercises. Net cash provided by financing activities for the three months ended March 31, 2019 resulted from the issuance of common stock of $3.0 million.





Financings



2020


Subsequent to the three months ended March 31, 2020, on April 16, 2020, we entered into a Securities Purchase Agreement with the Purchasers, pursuant to which on April 20, 2020, we sold in a registered direct offering an aggregate of 4,787,553 shares of common stock at an offering price of $1.671 per share, for gross proceeds of approximately $8.0 million before the deduction of placement agent fees and offering expenses. In a concurrent private placement, the Company issued to the Purchasers, for each share of common stock purchased in the Offering, a Common Warrant to purchase one share of Common Stock. The Common Warrants have an exercise price of $1.55 per share and are exercisable to purchase an aggregate of up to 4,787,553 shares of common stock. In addition, we issued to the placement agent for the Offering warrants to purchase 311,191 shares of common stock at an exercise price of $2.0888 per share. Both the Common Warrants and the placement agent warrants are exercisable immediately upon issuance and terminate on April 20, 2022.





2019


During the three months ended March 31, 2019, we sold 2,394,955 shares of our common stock in confidentially marketed public offerings and a registered direct offering. In addition, an institutional investor exercised pre-funded warrants to purchase 697,500 shares, and we issued 697,500 shares of our common stock. After giving effect to fees, commissions and other expenses of approximately $0.7 million, we recorded net proceeds of $3.0 million in connection with the transactions described above.

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.

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