Pulmatrix, Inc. - Quarter Report: 2015 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2015

For the transition period from                      to                     

Commission file number: 001-36199

PULMATRIX, INC.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

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

As of October 31, 2015, the registrant had 14,516,010 shares of common stock outstanding excluding 180,090 shares of common stock deliverable on a delayed basis pursuant to restricted stock units that have vested.

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PULMATRIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

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EXPLANATORY NOTE

This report is the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 of Pulmatrix, Inc., which was formerly known as Ruthigen, Inc., prior to the consummation on June 15, 2015 of the merger described below.

On June 15, 2015, pursuant to the previously announced Agreement and Plan of Merger, dated March 13, 2015 (the “Merger Agreement”), by and among Pulmatrix, Inc., a Delaware corporation previously known as Ruthigen, Inc. (the “Company”), Ruthigen Merger Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Pulmatrix Operating Company, a Delaware corporation previously known as Pulmatrix Inc. (“Pulmatrix Operating”), Merger Sub was merged with and into Pulmatrix Operating, with Pulmatrix Operating continuing after the merger as the surviving entity and a wholly owned subsidiary of the Company (the “Merger”). At the effective time of the Merger (the “Effective Time”), without any action on the part of any stockholder, each issued and outstanding share of Pulmatrix Operating’s common stock, par value $0.01 per share (the “Pulmatrix Operating Common Stock”), was converted into the right to receive 0.148187124066461 shares (the “Exchange Ratio”) of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”). Immediately following the effective time of the Merger, the Company effected a 1-for-2.5 reverse stock split of the issued and outstanding Company Common Stock (the “Reverse Stock Split”). Following the Merger, former Pulmatrix Inc. equity holders owned approximately 81.7% of the Company’s outstanding shares of Company Common Stock, and former Ruthigen, Inc. equity holders, including those who purchased shares of the Company in a private placement that the Company closed prior to the Merger, owned approximately 18.3% of the Company’s outstanding shares of Company Common Stock, in each case excluding shares of Company Common Stock held in escrow to secure indemnification obligations under the Merger Agreement.

The Merger has been accounted for as a “reverse merger” under the acquisition method of accounting for business combinations with Pulmatrix Operating being treated as the accounting acquirer of Pulmatrix. As such, the historical financial statements of Pulmatrix Operating will be treated as the historical financial statements of the combined company. Accordingly, the financial results for the nine months ended September 30, 2015 presented in this Form 10-Q reflect the operations of Pulmatrix Operating for the period January 1, 2015 through June 15, 2015, and the operations of post-combination Company for the period of June 16, 2015 through September 30, 2015. The results of the Company for the three and nine months ended September 30, 2015 are compared to the financial results for Pulmatrix Operating for the three and nine months ended September 30, 2014. Pulmatrix’s third quarter ended September 30, 2015 reflects a full quarter of combined entity operating results.

See Notes 1, 2 and 5 of the notes to the condensed consolidated financial statements for additional information.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

PULMATRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

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

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PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

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

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PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands, except share data)

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

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PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

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

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PULMATRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(unaudited)

(in thousands, except share and per share data)

1. Organization

On June 15, 2015 (the “Effective Time”), Pulmatrix Operating Company, Inc., a Delaware corporation previously known as Pulmatrix Inc. (“Pulmatrix Operating”), completed its merger with Ruthigen Merger Corp. (“Merger Sub”), a wholly owned subsidiary of Pulmatrix, Inc., a Delaware corporation previously known as Ruthigen, Inc. (“Ruthigen”), pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated March 13, 2015, by and among Pulmatrix Operating, Merger Sub and Pulmatrix, Inc. (the “Merger”).

Prior to the Merger, Ruthigen was a biopharmaceutical company focused on pioneering new hypochlorus acid, or HOCl, based therapies designed to improve patient outcomes and reduce healthcare costs associated with infections related to post-operative invasive procedures. Following the Merger, Pulmatrix, Inc. is a clinical stage biotechnology company focused on the discovery and development of a novel class of inhaled therapeutic products intended to prevent and treat respiratory diseases and infections that have significant unmet medical needs. Pulmatrix Operating’s proprietary dry powder delivery platform, the 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. Pulmatrix, Inc. is developing a pipeline of iSPERSE-based therapeutic candidates targeted at prevention and treatment of a range of rare or orphan respiratory diseases and infections, including chronic obstructive pulmonary disease, cystic fibrosis and idiopathic pulmonary fibrosis.

The term “Company” as used in these notes to the condensed consolidated financial statements refers to Pulmatrix Operating prior to the completion of the Merger and Pulmatrix, Inc. subsequent to the completion of the Merger.

2. 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 (“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 three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2015. 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, 2014, which are included in the Company’s current report on Form 8-K/A filed with the SEC on August 14, 2015.

Merger and Exchange Ratio

The Merger has been accounted for as a “reverse merger” under the acquisition method of accounting for business combinations with Pulmatrix Operating treated as the accounting acquirer of Ruthigen. The historical financial statements of Pulmatrix Operating have become the historical financial statements of the Company, or

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the combined company, and are included in this filing labeled Pulmatrix, Inc. As a result of the Merger, historical common stock, stock options and additional paid-in capital, including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the combined company, including the effect of the Merger exchange ratio and the common stock par value of $0.0001 per share. See Note 5, “Merger,” for additional discussion of the Merger and the exchange ratio.

Reverse Stock Split

On June 15, 2015, following the Effective Time, the Company effected a 1-for-2.5 reverse stock split (the “Reverse Stock Split”) of its outstanding common stock, par value $0.0001 per share (“Company Common Stock”). The accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements, including the Merger exchange ratio (Note 5) applied to historical Pulmatrix Operating common stock and stock options unless otherwise noted, give retroactive effect to the Reverse Stock Split for all periods presented. The shares of Company Common Stock retained a par value of $0.0001 per share.

3. Correction of Previously Issued Financial Data

Due to an error in the calculation of the weighted average shares for each of the periods disclosed in the Form 10-Q for the quarterly period ended June 30, 2015, the reported net loss per share and weighted average shares were incorrect. The following tables set forth the effects of the corrected calculation for three and six months ended June 30, 2015 and June 30, 2014, respectively.

Due to an error in the calculation thereof, the reported potentially dilutive securities outstanding prior to the use of the treasury stock method relating to options to purchase common stock and convertible notes and accrued interest as of June 30, 3014 were incorrect. The following table sets forth the effects of the corrected calculation for June 30, 2014.

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After consideration of the quantitative and qualitative factors surrounding the errors and use of the impacted information, the Company determined the misstatements were not material to the financial statements included in the Form 10-Q for the quarterly period ended June 30, 2015.

4. Summary of Significant Accounting Policies

In the nine months ended September 30, 2015, 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, 2014, which are included in the Company’s current report on Form 8-K/A filed with the SEC on August 14, 2015, except as noted below:

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 must perform the first step of the goodwill impairment test. The Company has determined that goodwill was not impaired as of September 30, 2015.

In-process Research & Development

In-process research & development (“IPR&D”) represents the fair value assigned to research and development assets that were not fully developed at the date of acquisition. IPR&D acquired in a business combination or recognized from the application of push-down accounting is capitalized on the Company’s consolidated balance sheet at its acquisition-date fair value. Until the project is completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. Upon completion of a project, the carrying value of the related IPR&D is reclassified to intangible assets and is amortized over the estimated useful life of the asset.

When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of its acquired IPR&D. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of acquired IPR&D is less than its carrying amount, it calculates the asset’s fair value. If the carrying value of the Company’s acquired IPR&D exceeds its fair value, then the intangible asset is written down to its fair value. For the nine months ended September 30, 2015, the Company determined that there was no impairment of its IPR&D.

5. Merger 

As described in Note 1, on June 15, 2015, the Company completed the Merger with Pulmatrix Operating. Pursuant to the Merger Agreement, each outstanding share of capital stock of Pulmatrix Operating was exchanged for 0.148187124066461 pre-Reverse Stock Split shares of Company Common Stock (the “Exchange Ratio”). All Pulmatrix Operating stock options granted under the Pulmatrix Operating stock option plans (whether or not then exercisable) that were outstanding prior to the Effective Time converted into options to purchase Company Common Stock at the same ratio as described below. Immediately prior to the Effective Time, the outstanding shares of convertible preferred stock of Pulmatrix Operating converted into an aggregate of 70,105,854 shares (pre-Reverse Stock Split and before giving effect to the Exchange Ratio) of Pulmatrix

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Operating common stock, which shares were exchanged in the Merger for an aggregate of 4,155,539 shares of Company Common Stock, and convertible debt of Pulmatrix Operating converted into an aggregate of 86,118,402 shares of Pulmatrix Operating common stock (pre-Reverse Stock Split and before giving effect to the Exchange Ratio), which shares were exchanged in the Merger for an aggregate of 5,104,655 shares of Company Common Stock. All outstanding Pulmatrix Operating preferred stock warrants were cancelled immediately prior to the Effective Time. In addition, immediately following the Effective Time the Company issued 664,559 shares of Company Common Stock in exchange for $4,500 aggregate principal amount of notes assumed by the Company in the Merger.

All Pulmatrix Operating stock options granted under the Pulmatrix Operating stock option plans (whether or not then exercisable) that were outstanding at the Effective Time converted into options to purchase Company Common Stock. After the Effective Time, all outstanding and unexercised Pulmatrix Operating stock options assumed by the Company may be exercised solely for shares of Company Common Stock. The number of shares of Company Common Stock subject to each Pulmatrix Operating stock option assumed by the Company was determined by multiplying (a) the number of shares of Pulmatrix Operating common stock that were subject to such Pulmatrix Operating stock option, as in effect immediately prior to the Effective Time, by (b) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Company Common Stock. The per share exercise price for the Company Common Stock issuable upon exercise of each Pulmatrix Operating stock option assumed by the Company was determined by dividing (a) the per share exercise price of Pulmatrix Operating common stock subject to such Pulmatrix Operating stock option, as in effect immediately prior to the Effective Time, by (b) the Exchange Ratio and rounding the resulting exercise price up to the nearest whole cent.

As a result of the Merger, the vesting of 67,732 restricted stock units and 24,400 options granted prior to the Merger by Ruthigen under the Ruthigen 2013 Employee, Director and Consultant Equity Incentive Plan was accelerated. The acceleration clause was included as part of the original terms of the equity awards.

The Merger has been accounted for as a reverse acquisition under the acquisition method of accounting with Pulmatrix Operating treated as the accounting acquirer and Ruthigen treated as the acquired company for financial reporting purposes. Pulmatrix Operating was determined to be the accounting acquirer based upon the terms of the Merger and other factors, such as relative voting rights and the composition of the combined company’s board of directors and senior management. Accordingly, the Ruthigen tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the excess consideration transferred recorded as goodwill.

See Note 12, “Stock-Based Compensation,” for additional details regarding the accounting treatment for the equity awards of Pulmatrix Operating and Ruthigen.

The acquisition-date fair value of the consideration transferred is as follows:

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and the liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from June 15, 2015, the acquisition date.

For acquired working capital accounts such as prepaid expenses and other current assets, property and equipment, accounts payable and certain accrued expenses, the Company determined that no fair value adjustments were required due to the short timeframe until settlement for these assets and liabilities.

The acquired IPR&D consisted of RUT58-60, a proprietary formulation of HOC1 and Ruthigen’s lead drug candidate, which was designed to prevent and treat infection in invasive applications. RUT58-60 was developed in collaboration with Ruthigen’s former parent, Oculus Innovative Sciences, Inc. (“Oculus”), under a license agreement. Concurrent with entering into the Merger Agreement, Pulmatrix, Ruthigen and Oculus entered into a side letter agreement that clarified certain rights and obligations of each party following the closing date of the Merger with respect to certain agreements previously executed between Ruthigen and Oculus, including the license agreement. Under the terms of the side letter agreement, the Company’s obligation to develop and commercialize RUT58-60 was waived for one year following the Merger closing date. Also under the terms of the agreement, the Company may sell its rights to develop RUT58-60 if it receives at least $1,000 therefor, and Oculus has a right of first refusal with respect to any offers to purchase RUT58-60, such that Oculus could elect to purchase RUT58-60 for identical terms negotiated with a prospective buyer. In the event that the Company sells its rights to develop RUT58-60 for an amount in excess of $10,000, the Company must pay 10% of the gross consideration received to Oculus. If, at the end of the one year waiver period, the Company has not been successful in finding a buyer for RUT58-60, Oculus will have the right to cancel the license agreement and reclaim all rights to RUT58-60.

The fair value of the IPR&D was determined using a discounted cash flow analysis of the expected cash flows to be generated by the IPR&D over its remaining life, net of returns on contributory assets including working capital and real and personal property assets. A discount rate of 26.6% was used in the analysis. The resulting present value of the cash flows was combined with the estimated present value of the amortization tax benefit that a purchaser of the asset could be expected to receive to arrive at the estimated fair value of the IPR&D. The Company believes the assumptions used are consistent and representative of those a market participant would use in estimating the fair value of the IPR&D. The Company will not begin amortizing the IPR&D asset until the research and development is complete and the asset is reclassified to a finite-lived amortizing asset.

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Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

The deferred tax liability of $2,959 relates to the temporary difference associated with the $7,534 value of the IPR&D asset, which is not deductible for tax purposes. The deferred tax liability was recorded based on a 39.28% effective tax rate.

The operating results of Ruthigen for the period from June 16, 2015 to September 30, 2015, including operating losses of $108 and $1,373 have been included in the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2015, respectively.

The Company incurred a total of $6,863 in transaction costs in connection with the Merger, excluding Ruthigen transaction costs, which were included in general and administrative expense within the consolidated statements of operations for the nine months ended September 30, 2015. The following supplemental unaudited pro forma information presents the Company’s financial results as if the acquisition of Ruthigen had occurred on January 1, 2014:

The above unaudited pro forma information was determined based on the historical GAAP results of the Company and Ruthigen. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been if the acquisition was completed on January 1, 2014. The unaudited pro forma consolidated net loss includes pro forma adjustments primarily relating to the following non-recurring items directly attributable to the business combination:

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6. Goodwill and IPR&D

The Company recognized $15,942 of goodwill in connection with the Merger as discussed in Note 5. As of September 30, 2015, there were no accumulated impairment losses. Goodwill has been assigned to the Company’s single reporting unit, which is the single operating segment by which the chief decision maker manages the Company.

The Company recognized $7,534 of IPR&D in connection with the Merger as discussed in Note 5. The acquired IPR&D consisted of RUT58-60, a proprietary formulation of HOC1 and Ruthigen’s lead drug candidate, which was designed to prevent and treat infection in invasive applications. The IPR&D will be classified as an intangible asset on the condensed consolidated balance sheet and until the project is completed, the assets will be accounted for as indefinite-lived intangible assets. As of September 30, 2015, there was no accumulated impairment losses associated with intangible assets.

7. Significant Agreements

Palladium Advisory Agreement

On February 8, 2015, the Company entered into an agreement with Palladium Capital Advisors, LLC (“Palladium”), whereby Palladium agreed to (i) act as the non-exclusive placement agent for the Bridge Loan financing that occurred on February 26, 2015 (Note 8) and (ii) serve as the Company’s non-exclusive advisor in connection with a merger. As consideration for Palladium’s services under the engagement agreement, the Company paid Palladium a commission on the proceeds received from the issuance of the 2015 Bridge Notes (Note 8) of approximately $315, and issued to Palladium 235,844 shares of the Company’s common stock. On June 16, 2015, the Company paid Palladium $1,080 in commissions, based on a percentage of the unencumbered cash acquired in the Merger (Note 5), a percentage of the amount borrowed under the term loan (Note 8) and a percentage of the cash proceeds raised by the Company in connection with the Merger. The Company recognized expense of $4,378 equal to the sum of the cash payments totaling $1,395 and the fair value of the common stock issued to Palladium of $2,983 within general and administrative expenses in the condensed consolidated statements of operations for the nine months ended September 30, 2015.

Consulting Agreements

On June 15, 2015, Ruthigen entered into consulting agreements with three individuals for services relating to business development, strategic relationships and strategic planning. The agreements were contingent upon the completion of the Merger. The term of the agreements commenced upon the closing of the Merger and expire on August 31, 2016. On June 15, 2015, in connection with the closing of the Merger, the Company issued a total of 100,000 shares of unregistered restricted common stock to the three parties as consideration for services to be provided under the agreements as well as services previously provided. The shares are restricted and cannot be sold or transferred until the contract term has ended. Although the stock was issued as compensation for future services, under the terms of the agreements, the issuance of the stock was issued as non-refundable and without recourse. The Company recognized expense equal to the fair value of the common stock issued of $1,265 within general and administrative expenses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2015.

Material Transfer Agreement

On November 5, 2013, the Company entered into the Material Transfer Agreement (the “MTA”) with Mylan N.V. (“Mylan”). The focus of the MTA is to further the development of PUR0200, the Company’s clinical stage bronchodilator therapy candidate. Under the MTA, the Company has agreed to share materials for the research and development of PUR0200 and Mylan has agreed to share the results of such research activities. The agreement will remain in effect for seven years from the effective date of the agreement or until the completion of Mylan research activities. The agreement is cancelable by either party upon 30 days’ written notice.

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On June 9, 2015, the Company amended the MTA with Mylan. Under the amended terms of the MTA, the MTA terminates on June 30, 2016 or sooner upon 30 days’ written notice by either party. Additionally under the amended agreement the Company is eligible to receive up to $77 in expense reimbursement to cover the costs to manufacture materials that are transferred under the MTA. The Company recognized $39 of revenue in the condensed consolidated financial statements in connection with this agreement during the nine months ended September 30, 2015.

Long-Acting Muscarinic Agent Collaboration Agreement

On March 24, 2015, the Company entered into the long-acting muscarinic agent (LAMA) collaboration agreement (the “Mylan Agreement”) with Mylan. The focus of the Mylan Agreement is to continue the evaluation of the LAMA project (the “Product”) for the further development and manufacture as well as the commercialization and marketing of the Product by Mylan in territories outside the United States.

Under the terms of the Mylan Agreement, the Company agreed to conduct certain clinical trials related to the Product and is eligible to receive reimbursement of up to $1,500 for third-party out-of-pocket expenses directly related to trial expenses. As consideration for the funding received, the Company agreed to grant to Mylan an option to negotiate for the exclusive right to develop, manufacture, commercialize and market any resulting products outside the United States for 180 days following the delivery of a clinical studies report, in exchange for a tiered share of gross profit of up to 20% of such pharmaceutical company’s sales. The Company recognized $651 and $821 of revenue under the Mylan Agreement during the three and nine months ended September 30, 2015, respectively.

8. Debt

Convertible Notes, Including 5X Notes

As of December 31, 2014, the Company had outstanding unsecured convertible promissory notes payable to certain existing stockholders with aggregate principal values totaling $29,088 (the “Notes”), including promissory notes with aggregate principal values totaling $2,658 for which, upon settlement of the notes, the note holders would receive five times the stated principal value of the notes, five times the shares into which the rest of the notes would be convertible, or five times the value in new equity shares upon an automatic conversion in a qualified financing (the “5X Notes”). The Notes had a stated annual interest rate of 6%, and the outstanding principal balance of all of the Notes, including the effective principal value of the 5X Notes, and accrued interest were payable on demand by at least a majority of the holders of the Notes, at any time following January 15, 2015, the maturity date, as amended in October 2014, or upon an event of default, as defined within the agreement, at the request of Note holders representing at least a majority of the aggregate principal amount then outstanding under all the Notes. The Notes were unsecured and were issued on various dates during the years ended December 31, 2011, 2012, 2013, and 2014.

The Notes had an optional conversion feature where in the event that a qualified financing or a liquidation event, as defined in the Notes, did not occur prior to January 15, 2015, a majority of the Note holders could elect to put the Notes back to the Company for their effective principal amounts, including the five times stated principal amount for the 5X Notes, plus accrued but unpaid interest or to convert all, but not less than all, of the unpaid principal amount of the Notes, plus accrued but unpaid interest through the date of such conversion, into shares of the Company’s Series B Preferred Stock at $0.50 per share. No such qualified financing occurred prior to January 15, 2015 and as such, the Note holders were entitled to put the Notes back to the Company or convert all of the unpaid principal plus interest at any time.

In connection with entering into the Merger Agreement (Note 5), the Company and the investors agreed that the Notes would cease to accrue interest as of December 31, 2014. The Company determined that the amendment to cease accrual of interest represented a modification to the Notes. The modification did not give rise to any adjustments to the classification or carrying amounts related to the Notes.

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On March 13, 2015, pursuant to the Merger Agreement, and as a condition to closing the Merger, the Company entered into a Note Conversion and Warrant Termination Agreement with the holders of the outstanding Notes, including the 5X Notes. Under the terms of the Note Conversion and Warrant termination Agreement, on June 15, 2015, immediately prior to the Effective Time, the outstanding Notes, including the 5X Notes, plus accrued and unpaid interest were automatically converted into 86,118,402 shares (pre-Reverse Stock Split and before giving effect to the Exchange Ratio) of Pulmatrix Operating common stock and all of Pulmatrix Operating’s outstanding warrants to purchase shares of preferred stock were cancelled. No gain or loss was recognized on the conversion of the Notes. These 86,118,402 shares (pre-Reverse Stock Split and before giving effect to the Exchange Ratio) of Pulmatrix Operating common stock were exchanged for 5,104,655 shares of Company Common Stock pursuant to the Exchange Ratio in the Merger.

Promissory Note

On January 21, 2015, Barry Honig provided the Company with a bridge loan of $350 evidenced by a promissory note. On February 19, 2015, the Company repaid Mr. Honig in full for the promissory note.

2015 Bridge Notes

In February 2015, the Company issued and sold convertible promissory notes (the “2015 Bridge Notes”), in the aggregate principal amount of $4,500, of which none was issued to existing investors. The 2015 Bridge Notes had a stated interest rate of 5% per annum, which would reset to 15% upon an event of default, as defined in the agreement, and were due and payable on February 26, 2016. Upon the completion of the Merger, subject to certain limitations, the unpaid principal amount of the 2015 Bridge Notes, plus accrued but unpaid interest through the date of such transaction, automatically converted into shares of common stock of the Company equal to the principal and unpaid accrued interest dollar value divided by $6.875. Upon an event of default, including a change of control other than as defined in the Merger Agreement, at any time or if the Merger had not occurred by February 26, 2016, a majority of the holders of the 2015 Bridge Notes could elect to put the notes back to the Company for the unpaid principal amount of the 2015 Bridge Notes, plus unpaid accrued interest, plus an amount equal to 25% of the outstanding principal balance would become due and payable immediately.

The provisions requiring the embedded interest rate reset upon an event of default, automatic conversion of the convertible promissory notes upon the Merger and the put option upon an event of default or failure to close the Merger each represent an embedded derivative instrument requiring bifurcation from the notes. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The fair value of the compound derivative at issuance of $1,547 was recorded as a derivative liability and as a discount to the 2015 Bridge Notes. The derivative liability was remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the statements of operations (Note 13). The net debt discounts resulting from the embedded compound derivative and lender fees were being amortized as interest expense from the date of issuance through the maturity date using the effective interest method. The Company recorded a discount on the 2015 Bridge Notes of $1,547. Amortization of the discount totaled $0 and $386 for the three and nine months ended September 30, 2015, respectively.

On June 15, 2015, at the Effective Time, Pulmatrix Operating’s obligations under the 2015 Bridge Notes were assumed by Company, and immediately after the Effective Time, the 2015 Bridge Notes, including accrued and unpaid interest, were exchanged for an aggregate of 664,559 shares of Company Common Stock. The exchange of the 2015 Bridge Notes for shares of Company Common Stock resulted in the extinguishment of the embedded compound derivative. Following the exchange, the Company’s obligation to repay the 2015 Bridge Notes was satisfied. Immediately prior to the exchange, the Company recorded a loss of $2,692 for the increase in the estimated fair value of the derivatives. The Company recorded a loss upon the conversion of the 2015 Bridge Notes, including the extinguishment of the embedded compound derivative, of $1,170, equal to the difference between the fair value of the shares issued and the sum of the carrying amount of the 2015 Bridge

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Notes, including accrued and unpaid interest, and the carrying amount of the compound derivatives at the time of the conversion. The Company incurred interest expense of $0 and $459 during the three and nine months ended September 30, 2015, respectively.

Loan and Security Agreement and Warrant Agreement

On June 11, 2015, Pulmatrix Operating entered into a Loan and Security Agreement (“LSA”) with Hercules Technology Growth Capital, Inc. (“Hercules”), for a term loan in a principal amount of $7,000 (“Term Loan”). On June 15, 2015, following the completion of the Merger, the Company signed a joinder agreement with Hercules making it a co-borrower under the LSA. The entire term loan was funded on June 16, 2015. The term loan is secured by substantially all of the Company’s assets, excluding intellectual property.

The term loan bears interest at a floating annual rate equal to the greater of (i) 9.50% and (ii) the sum of (a) the prime rate as reported by The Wall Street Journal minus 3.25% plus (b) 8.50%. The Company is required to make interest payments in cash on the first business day of each month, beginning on July 1, 2015. Beginning on August 1, 2016, the Company will be required to make monthly payments on the first business day of each month consisting of principal and interest based upon a 30-month amortization schedule, and any unpaid principal and interest is due on the maturity date of July 1, 2018. Upon repayment of the term loan, the Company is also required to pay an end of term charge to the Lenders equal to $245.

The Company may elect to prepay all, but not less than all, of the outstanding principal balance of the term loan, subject to a prepayment fee of 1% – 3%, depending on the date of repayment. Contingent on the occurrence of several events, including that the Company’s closing stock price exceed $11.73 per share for the seven days preceding a payment date, the Company may elect to pay, in whole or in part, any regularly scheduled installment of principal up to an aggregate maximum amount of $1,000 by converting a portion of the principal into shares of the Company’s common stock at a price of $11.73 per share. Hercules may elect to receive payments in the Company Common Stock by requiring the Company to effect a conversion option whereby Hercules can elect to receive a principal installment payment in shares of the Company Common Stock based on a price of $11.73 per share, subject to an aggregate maximum principal amount of $1,000.

The Company determined that the Company’s provisions allowing conversion of all or a portion of the LSA contained a beneficial conversion feature (“BCF”). The BCF is contingent upon the occurrence of certain events and as such, the Company will not record the BCF until the contingency is resolved. Through September 30, 2015 the contingency was not resolved.

The credit facility includes affirmative and negative covenants. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and undergoing a change in control, in each case subject to certain exceptions. In general, the Term Loan prohibits the Company from (i) repurchasing or redeeming any class of capital stock, including common stock or (ii) declaring or paying any cash dividend or making cash distribution on any class of capital stock, including common stock.

In connection with the making of the term loan the Company agreed that Hercules shall have the right to purchase up to $1,000 of securities, under terms and conditions equal to those afforded to other investors, in the event that the Company conducts a private placement for $10,000 or more of securities after the closing date.

On June 16, 2015, in connection with the LSA, the Company granted to Hercules a warrant to purchase 25,150 shares of the Company’s common stock at an exercise price of $8.35 per share. The warrants are exercisable in whole or in part any time prior to the expiration date of June 16, 2020. At any point prior to the

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expiration of the warrants, Hercules may elect to convert all or a portion of the warrants into Company Common Stock on a net basis. In the event the warrants are not fully exercised and the fair market value of one share of Company Common Stock is greater than the exercise price of the warrant, upon the expiration date any outstanding warrants will be automatically exercised for shares of Company Common Stock on a net basis.

The LSA includes provisions requiring the embedded interest rate reset upon an event of default and the put option upon an event of default or qualified change of control each represent an embedded derivative instrument requiring bifurcation from the loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The fair value of the compound derivative at issuance of $11 was recorded as a derivative liability and as a discount to the debt. The derivative liability is remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the statements of operations (Note 13). The net debt discounts resulting from the embedded compound derivative and lender fees are being amortized as interest expense from the date of issuance through the maturity date using the effective interest method. The Company incurred interest expense of $220 and $253 during the three and nine months ended September 30, 2015, respectively of which $170 and $198, respectively, was payable in cash.

The carrying amounts of the Company’s Notes, including the 5X conversion liability, and the Term Loan as of September 30, 2015 and December 31, 2014 were as follows:

Debt discount activity during the nine months ended September 30, 2015 was as follows:

Future principal payments in connection with the Term Loan are as follows:

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Related to the accretion of the debt discount, the Company recognized interest expense of $20 and $430 during the three and nine months ended September 30, 2015, respectively, and $7,375 and $13,339 during the three and nine months ended September 30, 2014, respectively.

9. Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following:

10. Redeemable Convertible Preferred Stock and Common Stock

Redeemable Convertible Preferred Stock consisted of the following at December 31, 2014:

On March 13, 2015, pursuant to the Merger Agreement, and as a condition to closing the Merger, the Company entered into a Preferred Stock Conversion Agreement, under the terms of which, immediately prior to the completion of the Merger, each series of the Pulmatrix Operating’s preferred stock would be automatically converted into shares of Pulmatrix Operating’s common stock.

On June 15, 2015, prior to the Effective Time, Pulmatrix Operating had 63,413,042 shares of Redeemable Convertible Preferred Stock outstanding, which were convertible into 70,105,854 shares (pre-Reverse Stock Split and before giving effect to the Exchange Ratio) of Pulmatrix Operating common stock. Immediately prior to the completion of the Merger, the outstanding shares of Redeemable Convertible Preferred Stock were converted into 70,105,854 shares (pre-Reverse Stock Split and before giving effect to the Exchange Ratio) of Pulmatrix Operating common stock.

Pulmatrix Operating Private Placement

On June 15, 2015, immediately prior to the Effective Time, pursuant to a securities purchase agreement between the Company and certain existing investors of the Company dated March 13, 2015, the Company sold to such investors 24,538,999 units, with each unit consisting of (i) one share of Pulmatrix Operating’s common stock and (ii) a warrant representing the right to purchase 2.193140519 shares of Pulmatrix Operating common stock at an exercise price of $0.448266 per share (each pre-Reverse Stock Split and before giving effect to the Exchange Ratio), for aggregate gross proceeds of $10,000 (the “Pulmatrix Operating Private Placement”). Upon

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the Effective Time, the Pulmatrix Operating common stock underlying the units was exchanged for an aggregate of 1,454,553 shares of Company Common Stock, and the warrants underlying the units were converted into warrants to purchase an aggregate of 3,190,030 shares of Company Common Stock at an exercise price of $7.563 per share. The proceeds from the issuance of the units were allocated between the Company Common Stock and the warrants based on their relative fair values.

Ruthigen Private Placement

Immediately after the Effective Time, the Company closed a private placement of 379,387 shares of Company Common Stock at a price of $6.875 per share in a private placement for aggregate gross proceeds of approximately $2.6 million (the “Ruthigen Private Placement”).

11. Warrants

Preferred Stock Warrants Issued with Notes Payable to Stockholders

Pulmatrix Operating issued warrants to purchase preferred stock in connection with the issuance of Notes to stockholders (Note 8) on various dates in 2011 through 2014 (the “Preferred Stock Warrants”). The number and type of shares issuable upon exercise of the warrants was variable based on the following: (a) upon the completion of a qualified financing, the warrants would be exercisable into a number of qualified financing shares determined by multiplying 0.25 by the quotient obtained by dividing the original principal amount of the Notes by the issuance price in the qualified financing or, (b) upon the completion of an optional conversion of the Notes into shares of Series B Preferred stock by the Note holders, the warrants would be exercisable into a number of shares of Series B Preferred stock determined by multiplying 0.25 by the quotient obtained by dividing the original principal amount of the Notes by $0.50 (subject to any adjustments for any stock splits, combinations, reclassifications, and the like). If the Preferred Stock Warrants had become exercisable into a number of qualified financing shares, the exercise price per share would have been the per share issuance price of the qualified financing shares. If the Preferred Stock Warrants had become exercisable into shares of Series B Preferred stock, the exercise price would have been $0.50 per share.

The Preferred Stock Warrants were exercisable at any time on or after the earlier of a qualified financing or an optional conversion of the Notes and expire 10 years from the date of issuance.

As described more fully in Note 8, the Company entered into a Note Conversion and Warrant Termination Agreement with the holders of the outstanding Notes, under the terms of which all of the Company’s outstanding Preferred Stock Warrants were terminated on June 15, 2015, immediately prior to the Effective Time. As of September 30, 2015, there were no outstanding Preferred Stock Warrants.

A rollforward of the Preferred Stock Warrants is as follows:

For the three and nine months ended September 30, 2015, the Company recorded other income of $0 and $1,309, respectively, and for the three and nine months ended September 30, 2014, the Company recorded other expense of $(655) and other income of $620, respectively, in each case related to the change in the fair value of the warrants classified as liabilities.

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Common Stock Warrants Issued in Pulmatrix Operating Private Placement

As described in Note 10, at September 30, 2015, the Company had outstanding warrants to purchase 3,190,030 shares of Company Common Stock at an exercise price of $7.563 per share. The warrants were issued on June 15, 2015 immediately prior to the Effective Time in connection with the Pulmatrix Operating Private Placement.

Each warrant issued in the Pulmatrix Operating Private Placement has a five-year term and becomes exercisable at the earliest to occur of the date that (i) the Company enters into a strategic license agreement with a third party related to any of the Company’s products whereby the Company is guaranteed to receive consideration having a value of at least $20,000, (ii) the Company consummates a public or private offering of common stock or securities convertible into common stock that results in aggregate gross proceeds of at least $20,000 and the per share value of such consideration is equal to at least $10.00 per share, subject to certain adjustments, (iii) for a period of sixty consecutive trading days, the volume weighted average price per share of common stock exceeds $12.50, subject to certain adjustments, and the average daily trading volume on such trading market exceeds 40,000 shares per trading day, subject to certain adjustments, or (iv) a change of control transaction occurs. The number of shares of common stock underlying each warrant and the exercise price per share are subject to adjustment in the case of standard dilutive events.

Each warrant provides that, following it initially becoming exercisable, if (i) the volume weighted average price of common stock exceeds one hundred fifty percent (150%) of the exercise price of the warrant for thirty (30) consecutive trading days, (ii) the daily trading volume for common stock exceeds 80,000 shares per trading day, subject to certain adjustments, for thirty (30) consecutive trading days and (iii) there is an effective registration statement under the Securities Act of 1933, as amended, covering the resale of the shares of common stock issuable upon the exercise of the warrant, then the Company shall cancel the unexercised portion of the warrant for consideration equal to $0.001 per share of common stock underlying the warrant.

The proceeds from the issuance of the units were allocated between the Company Common Stock and the warrants based on their relative fair values. The value allocated to the warrants was classified within equity on Company’s condensed consolidated balance sheet.

Warrants Assumed in Merger

Between March 2014 and May 2014, in connection with its initial public offering (“IPO”), Ruthigen issued warrants to purchase an aggregate of 1,219,000 units (the “Series A Warrants”). The Series A Warrants were originally each exercisable at a price of $18.125 per warrant for (x) 0.4 shares of common stock and (y) a warrant (the “Series B Warrant”) to purchase 0.4 shares of common stock at an exercise price of $22.65625 per share. The Series A Warrants are exercisable from the date of issuance and terminate on the second anniversary of the date of issuance. The exercise price and the number of shares for which each Series A Warrant may be exercised is subject to adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting the Company’s common stock. In addition, subject to certain exceptions, the exercise price of each the Series A Warrants and the Series B Warrants is subject to a weighted average reduction if the Company issues shares of common stock (or securities convertible into common stock) in the future at a price below both (a) the current exercise price of the Series A Warrant; and (b) the current market price of the Company’s common stock. The Series A Warrants may be called by the Company, for consideration equal to $0.00025 per Series A Warrant, on not less than 10 business days’ notice if the closing price of the common stock is above 150% of the $18.125 IPO price per unit for any period of 20 consecutive business days ending not more than three business days prior to the call notice date. The Series B Warrants will be exercisable upon issuance and will terminate on the fifth anniversary of the date of issuance. The Company agrees that, during the period the Series A Warrants are outstanding, it will maintain the effectiveness of the registration statement such that the holder may exercise the Series A Warrants to receive registered shares of common stock and registered Series B Warrants (and the shares of common stock underlying the Series B Warrants). The Company determined that the Series A and Series B

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Warrants are equity instruments because the warrants are (a) freestanding financial instruments; (b) indexed to the Company’s own stock; (c) not permitted to be settled for cash; and (d) exercisable into common stock for which the Company has sufficient authorized and unissued shares.

Immediately following the Merger, the Company issued 136,000 shares of its common stock to Ruthigen’s financial advisor and an aggregate of 379,387 shares in the Ruthigen Private Placement at a price of $6.875 per share. Pursuant to the weighted average exercise price reduction provisions of the Series A Warrants and the Series B Warrants, these issuances caused the exercise price per unit of the Series A Warrants and the exercise price per share of the Series B Warrants to drop to $17.83 and $22.28, respectively.

Ruthigen issued to the representative of the underwriters in the IPO warrants to purchase 37,100 shares of the Company’s common stock at an exercise price of $22.65625 per share (the “Representative’s Warrants”). The Representative’s Warrants are exercisable commencing on March 21, 2015 and expire on March 21, 2019.

Following the closing of the IPO and in connection with the IPO, the underwriters exercised a portion of the over-allotment option. In connection with the underwriters’ partial exercise of the over-allotment option, Ruthigen issued to the representative of the underwriters a five-year warrant to purchase an additional 2,160 shares of the Company’s common stock at an exercise price of $22.65625 per share (“Underwriter’s Warrant”). The Underwriter’s Warrant is exercisable commencing one year from the date of issuance.

Common Stock Warrants Issued with Term Loan

As described in Note 8, on June 11, 2015, Pulmatrix Operating entered into a LSA with Hercules for a Term Loan in the principal amount of $7,000. On June 16, 2015, in connection with the LSA, the Company granted to Hercules a warrant to purchase 25,150 shares of Company Common Stock (the “Hercules Warrants”) at an exercise price of $8.35 per share. The warrants are exercisable in whole or in part any time prior to the expiration date of June 16, 2020. In the event the warrants are not fully exercised and the fair market value of one share of Company Common Stock is greater than the exercise price of the warrant, upon the expiration date any outstanding warrants will be automatically exercised for shares of Company Common Stock on a net basis. A portion of the proceeds from the Term Loan were allocated to the warrants based on their grant date fair value. The value allocated to the warrants of $198 was classified within equity on Company’s condensed consolidated balance sheet, with a corresponding amount recorded as a discount to the debt. The fair value of the warrants was determined using the Black-Scholes option pricing model, using the following assumptions:

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Common Stock Warrant Issued for Consulting Services

On August 31, 2015, the Company issued a warrant to purchase 30,000 shares of Company Common Stock (the “MTS Warrants”) at an exercise price of $11.80 per share to MTS Health Partners, L.P. in exchange for consulting services. The warrant is exercisable in whole or in part any time prior to the expiration date of August 31, 2020. The Company recognized $211 of stock-based compensation expense at the time of issuance. The fair value of the warrant was determined using the Black-Scholes option pricing model, using the following assumptions:

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

12. Stock-Based Compensation

The Company sponsors the Ruthigen, Inc. Amended and Restated 2013 Employee, Director and Consultant Equity Incentive Plan, and immediately following the Effective Time, renamed the plan the Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan”). The 2013 Plan was amended and restated at the Effective Time to, among other things, (i) increase the number of shares of Company Common Stock authorized under the plan, (ii) comply with the requirements imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended, and (iii) provide an increase in the number of shares of Company Common Stock available for issuance under the 2013 Plan’s “evergreen” provision. As of September 30, 2015, the 2013 Plan provides for the grant of up to 2,713,261 shares of Company Common Stock, of which 611,035 shares remained available for future grant at September 30, 2015.

At the Effective Time, the Company assumed 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”). At the Effective Time, the Company terminated the Original 2013 Plan as to future awards. A total of 665,202 shares of Company Common Stock may be delivered under options outstanding as of September 30, 2015 under the Original 2013 Plan and the 2003 Plan, respectively, however no additional awards may be granted under the Original 2013 Plan or the 2003 Plan.

In connection with the Merger, all outstanding stock options of Pulmatrix Operating converted into stock options to purchase Company Common Stock, subject to the Exchange Ratio. The conversion of the Pulmatrix Operating stock options for stock options to purchase Company Common Stock was treated as a modification of the awards. The modification of the stock options did not result in any incremental compensation expense as the modification did not increase the fair value of the stock options.

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Options

During the first nine months of 2015, the Company granted options to purchase 1,266,172 shares of Company Common Stock to employees, options to purchase 117,779 shares of Company Common Stock to directors, and options to purchase 156,437 shares of Company Common Stock to advisors. The stock options granted vest either over time (the “Time Based Options”) or based on achievement of defined milestones. Time Based Options vest over either 36 or 48 months. Subject to the grantee’s continuous service with the Company, Time Based Options vest in one of the following ways: (i) 48 equal monthly installments beginning on the monthly anniversary of the Vesting Start Date (as defined in the grant agreement), (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) 25% at the one year anniversary of the Vesting Start Date and the remainder in 36 equal monthly installments beginning in the thirteenth month after 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, 2015:

The estimated fair values of employee stock options granted during the nine months ended September 30, 2015 and 2014, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

As of September 30, 2015 there was $6,022 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 3.3 years.

Restricted Stock Units

In connection with the Merger, the Company signed one-year employment agreements with the former CEO and CFO of Ruthigen pursuant to which the Company granted such persons 329,052 restricted stock units (the “RSUs”) of which 130,435 RSUs were immediately vested upon the date of the grant and 49,655 RSUs vested during the three months ended September 30, 2015. The shares of common stock underlying the RSUs held by the former CEO and CFO of Ruthigen are deliverable one year after the applicable vesting date of the respective RSU. In August 2015, the Company granted 10,374 RSUs to other employees that vest over a two year period. The Company recorded stock-based compensation expense of $629 and $2,384 for the RSUs vested during the three and nine months ended September 30, 2015.

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The following table summarizes RSU activity for the nine months ended September 30, 2015:

The following table presents total stock-based compensation expense for the three and nine months ended September 30, 2015:

13. Fair Value Measurements

Information about the liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and the input categories associated with those liabilities, is as follows:

Preferred Stock Warrants

The fair values of the preferred stock warrants were determined using the Hybrid Model which consists of the guideline public company (“GPC”) analysis, a market-based approach to estimate the enterprise value of the Company, and the Option Pricing Model (“OPM”) to allocate the enterprise value to each security.

The GPC analysis is based upon the premise that indications of value for a given entity can be estimated based upon the observed valuation multiples of comparable public companies, the equity of which is freely-traded by investors in the public securities markets.

Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class and use inputs such as equity value, time to

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liquidity, volatility, risk-free rate, dividend yield and strike price. The warrants and underlying convertible redeemable preferred stock were subsequently valued using a back-solve method within the OPM framework to arrive at a concluded fair value of the common stock of the Company. The back-solve method is used when a recent financing has taken place which establishes a reference value for one or more classes of stockholders.

The issuance and sale of the Notes, which took place during 2014, was used as the basis for the valuation during the year ended December 31, 2014. The equity value was allocated to the various share classes based upon their respective claims on a series of call options with strike prices at various value levels depending upon the rights and preferences of each class. The exercise price and number of shares underlying the warrants were determined and the value calculated within the allocation model. The allocation factor was applied to the fair value of the warrants to determine their fair value at December 31, 2014. As described more fully in Note 7, on March 13, 2015, the Company entered into a Note Conversion and Warrant Termination Agreement with the holders of the outstanding warrants, under the terms of which all of the Company’s outstanding warrants to purchase shares of preferred stock were terminated on June, 15, 2015, the Effective Time of the Merger. As of September 30, 2015, there were no outstanding warrants to purchase preferred stock.

The following table provides quantitative information about the fair value measurements, including the range of assumptions for the significant unobservable inputs used in the hybrid method valuations of the warrant liability and “with and without” method used for the embedded compound derivative:

Embedded Compound Derivatives
— 2015 Bridge Notes

The 2015 Bridge Notes contained an embedded interest rate reset upon an event of default, automatic conversion of the convertible promissory notes upon a Merger or combination with Ruthigen and a put option upon an event of default or the failure to execute a Merger or combination with Ruthigen, each of which represented an embedded derivative instrument requiring bifurcation from the 2015 Bridge Notes. The embedded derivatives were bundled and valued as a single compound derivative. The fair value of the derivative upon issuance of $1,547 was recognized as a derivative liability and adjusted to fair value at each reporting date.

As described in Note 8, on June 15, 2015, immediately after the Effective Time, the embedded compound derivative was extinguished in connection with the exchange of the 2015 Bridge Notes, including accrued and unpaid interest, into shares of Company Common Stock. Immediately prior to the exchange, the Company remeasured the fair value of the derivatives. Management determined that the derivatives tied to the probability of events of default had no value, as the probability of defaulting on the 2015 Bridge Notes immediately prior to their exchange was zero. At the same time, management determined the probability of exchange of the 2015 Bridge Notes at 100%, thereby resulting in an increase in the fair value of the contingent automatic exchange feature. The Company recorded a loss of $2,692 for the increase in the estimated fair value of the contingent automatic exchange feature immediately prior to the exchange of the 2015 Bridge Notes. The Company recorded a loss upon the exchange of the 2015 Bridge Notes, including the extinguishment of the embedded compound derivative, of $0 and $1,170 during the three and nine months ended September 30, 2015, respectively.

Embedded Compound Derivatives — LSA with Hercules

As described in Note 8, the LSA contains an interest rate reset upon an event of default and a put option upon an event of default or qualified change of control. Each of these features represents an embedded derivative

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instrument requiring bifurcation from the Term Loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The proceeds from the issuance of the Term Loan were allocated first to the warrant and compound derivative at their respective fair values, with the residual going to the carrying amount of the loan resulting in a discount to the face value of the debt. The fair value of the compound derivative upon issuance of $11 was recognized as a derivative liability and will be adjusted to fair value at each reporting date. The fair value of the derivative instruments is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used an income approach to estimate the fair value of the derivative liability and estimated the probability of an event of default occurring at various dates and then estimates the present value of the amount the holders would receive upon an event of default.

The significant assumption used in the model is the probability of the following scenarios occurring:

A rollforward of the preferred stock warrant liability and derivative liability categorized with Level 3 inputs is as follows:

Gains and/or losses arising from changes in the estimated fair value of the warrants and embedded compound derivatives were recorded within other income, net, on the condensed consolidated statement of operations.

14. 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 and nine months ended September 30, 2015 and 2014 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.

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The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:

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.

In addition to the potentially dilutive securities noted above, as of September 30, 2014 the Company had outstanding warrants to purchase redeemable convertible preferred stock, for which the series of stock and number of shares were variable pending the outcome of a future financing event (see Note 11). Because the necessary conditions for determining the number of underlying shares had not been satisfied during the nine months ended September 30, 2014, the Company has excluded these warrants from the table above. The warrants were cancelled on June 15, 2015, the Effective Time of the Merger.

15. Commitment

On October 27, 2015, the Company amended its operating lease for office and lab space to extend the termination date of the lease from December 2016 to December 2020, among other things. The amended lease provides for base rent, and the Company is responsible for real estate taxes, maintenance, and other operating expenses applicable to the leased premises. The amended lease agreement provides for an increasing monthly payment over the lease term.

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

16. Subsequent Events

The Company has completed an evaluation of all subsequent events through the date of issuance. The Company concluded that no subsequent event has occurred that requires disclosure, except as noted below:

On October 27, 2015, the Company entered into an agreement with a lessor to extend the existing operating lease agreement for its laboratory, office space and storage space. (See Note 15).

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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 8-K/A filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2015. 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. References to “Ruthigen” refer to our Company prior to the Merger (as defined below).

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:

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.

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Overview

Recent Developments

Merger

On June 15, 2015, pursuant to the previously announced Agreement and Plan of Merger, dated March 13, 2015 (the “Merger Agreement”), by and among us (previously known as Ruthigen, Inc.), Ruthigen Merger Corp., a Delaware corporation and our wholly owned subsidiary (“Merger Sub”), and Pulmatrix Operating Company, a Delaware corporation previously known as Pulmatrix Inc. (“Pulmatrix Operating”), Merger Sub was merged with and into Pulmatrix Operating, with Pulmatrix Operating continuing after the merger as the surviving entity and our wholly owned subsidiary (the “Merger”). At the effective time of the Merger, without any action on the part of any stockholder, each issued and outstanding share of Pulmatrix Operating’s common stock, par value $0.01 per share (the “Pulmatrix Operating Common Stock”), was converted into the right to receive 0.148187124066461 pre-reverse stock split shares (the “Exchange Ratio”) of our common stock, par value $0.0001 per share (the “Company Common Stock”). Following the Merger, former Pulmatrix Inc. equity holders owned approximately 81.7% of our outstanding shares of common stock, par value $0.0001 per share (“Company Common Stock”), and former Ruthigen, Inc. equity holders, including those who purchased shares of Company Common Stock in a private placement that we closed prior to the Merger, owned approximately 18.3% of the outstanding shares of Company Common Stock, in each case excluding shares of Company Common Stock held in escrow to secure indemnification obligations under the Merger Agreement.

The Merger has been accounted for as a “reverse merger” under the acquisition method of accounting for business combinations with Pulmatrix Operating treated as the accounting acquirer of Pulmatrix. As such, the historical financial statements of Pulmatrix Operating have become the historical financial statements of Pulmatrix, or the combined company, and are included in this filing labeled “Pulmatrix, Inc.” As a result of the Merger, historical common stock, stock options and additional paid-in capital, including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the combined company, including the effect of the Exchange Ratio and the Company Common Stock.

Presentation for Reverse Stock Split

On June 15, 2015, immediately following the Effective Time, we effected a 1-for-2.5 reverse stock split of our issued and outstanding Company Common Stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the per share exercise price of, and the number of shares of Company Common Stock underlying, our stock options and warrants outstanding immediately prior to the Reverse Stock Split were automatically proportionally adjusted based on the 1-for-2.5 split ratio in accordance with the terms of such options and warrants, as the case may be. Share and per-share amounts of Company Common Stock, options and warrants included herein have been adjusted to give effect to the Reverse Stock Split. The Reverse Stock Split did not alter the par value of Company Common Stock, $0.0001 per share, or modify any voting rights or other terms of the common stock. Unless otherwise noted, the accompanying condensed consolidated financial statements and notes thereto, including the Exchange Ratio applied to historical Pulmatrix Operating common stock and stock options, give retroactive effect to the Reverse Stock Split for all periods presented.

Business

Prior to the Merger, Ruthigen was a biopharmaceutical company focused on pioneering new hypochlorus acid, or HOCl, based therapies designed to improve patient outcomes and reduce healthcare costs associated with infections related to post-operative invasive procedures. Following the Merger, we are a clinical stage biopharmaceutical company developing innovative inhaled therapies to address serious pulmonary disease using its patented iSPERSE™ (inhaled Small Particles Easily Respirable and Emitted) technology. The Company’s proprietary product pipeline is focused on advancing treatments for rare diseases, including PUR1900, an inhaled anti-fungal for patients with cystic fibrosis (CF), as well as PUR1500, an inhaled product for the treatment of idiopathic pulmonary fibrosis. In addition, we intend to pursue opportunities in major pulmonary diseases

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through collaborations, which include PUR0200, a branded generic in clinical development for chronic obstructive pulmonary disease (COPD) in partnership with Mylan N.V. Our product candidates are based on iSPERSE™, our proprietary dry powder delivery platform, which seeks to improve delivery of small molecule drugs, macromolecules and potentially other biologics to the lungs by maximizing local concentrations and reducing systemic side effects to improve patient outcomes.

Our goal is to develop breakthrough therapeutic products that are safe, convenient and more efficient than the existing therapeutic products for the treatment of respiratory diseases. In support of this goal, we are focusing on developing inhaled anti-infective therapies to treat and prevent pulmonary infections in CF and 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 respiratory diseases with significant unmet medical needs to build our product pipeline beyond our three existing candidates. In order to advance our clinical trials for our therapeutic candidates for COPD 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.

Since our inception in 2003, we have devoted substantially all of our efforts to product research and development, market research, and raising capital. 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.

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:

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 limited revenues have been derived from feasibility work as part of agreements with other pharmaceutical companies and grants from government agencies. On

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March 24, 2015 we entered into the long-acting muscarinic agent collaboration agreement with Mylan N.V., or Mylan, under which we are eligible to receive reimbursement of up to $1.5 million for third-party out of pocket expenses directly related to clinical trials. As consideration for the funding received, we agreed to grant to Mylan an option for the exclusive right to develop, manufacture, commercialize and market any resulting products outside the United States for 180 days following the delivery of a clinical studies report, in exchange for a tiered share of gross profit of up to 20% of such pharmaceutical company’s sales on the resulting products. On July 31, 2014 we executed a Feasibility Study Agreement with Janssen Research and Development, LLC, or Janssen, under which we were eligible to receive payments totaling $0.4 million for certain pre-formulation screening, formulation development, method development and packaged stability activities in the development of our iSPERSE^TM technology. We may derive additional revenues from this agreement should the pharmaceutical partner elect to continue the feasibility study.

Under previously approved grants from the U.S. Department of Health & Human Services and the U.S. Department of Defense, we are reimbursed for certain qualifying capital investments and expenses incurred for research and development activities. We did not receive any grant funding during 2014 or the nine months ended September 30, 2015.

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:

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 including PUR1900, our lead CF anti-infective, PUR0200, our lead COPD bronchodilator, and PUR1500, our preclinical stage therapeutic for treatment of idiopathic pulmonary fibrosis (IPF). In order to move these programs forward along our development timelines, we maintain a significant staff of research and development employees (67% of staff). In addition, we maintain a 12,000 square foot research and development facility which includes capital equipment for the manufacture, characterization, and in vitro/in vivo evaluation 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

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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

Interest expense primarily reflects the amortization of debt discounts and interest expense accrued in connection with convertible notes and a term loan that were outstanding during the period. In connection with entering into the Merger Agreement, we and the holders of the convertible notes issued at various dates in 2011 through 2014 agreed that interest on the notes would cease to accrue after December 31, 2014. In connection with the Merger, all of our outstanding convertible notes, including the convertible notes issued in February 2015, and accrued and unpaid interest, were converted into, or exchanged for, equity. Following the Merger, we have been incurring and expect to continue to incur interest expense associated with the $7 million term loan executed in June 2015.

Other Expenses, Net

Other income, net is comprised primarily of gains and/or losses resulting from fair value adjustments on warrants for the purchase of our preferred stock and compound derivative instruments embedded within certain of our convertible notes.

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 8-K/A filed with the SEC on August 14, 2015, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

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Revenue Recognition

Our principal sources of revenue during the three and nine months ended September 30, 2015 and 2014 and the years ended December 31, 2014 and 2013 were income from grants and fees for services. 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.

Multiple-Element Arrangements

Under the authoritative guidance for revenue recognition related to multiple-element revenue arrangements, each deliverable within a multiple-element revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially within our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Deliverables not meeting the criteria for being a separate unit of accounting are accounted for on a combined basis.

In the event that we enter into a contract in which the deliverables are required to be separated, we will allocate arrangement consideration to each deliverable in an arrangement based on its relative selling price. We determine selling price using vendor-specific objective evidence (“VSOE”), if it exists; otherwise, we use third-party evidence (“TPE”). If neither VSOE nor TPE of selling price exists for a deliverable, we use estimated selling price to allocate the arrangement consideration. We apply appropriate revenue recognition guidance to each unit of accounting.

Milestones

Contingent consideration from research and development activities that is earned upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. At the inception of each arrangement that includes milestone payments, we evaluate whether each milestone is substantive. This evaluation includes an assessment of whether: (a) the consideration is commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.

Collaborative research and development

We recognized upfront non-refundable fees ratably over the estimated non-contingent portion of the arrangement when the research and development activities related to the initial clinical studies were performed as there is no other discernible pattern of revenue recognition. At the end of each reporting period, we review and adjust, if necessary, the amounts recognized in revenue for any change in the estimated non-contingent period over which the research and development activities were performed.

Grant revenue

We recognize revenue from grants awarded by governmental agencies when there is reasonable assurance that we will comply with the conditions attached to the grant arrangement and the grant will be received. We evaluate the conditions of each individual grant as of each reporting period to ensure that we have reached

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reasonable assurance of meeting the conditions of each grant arrangement and that it is expected that the grant will be received as a result of meeting the necessary conditions. Grants are recognized in the statement of operations on a systemic basis over the periods in which we recognize the related costs for which the government grant is intended to compensate.

Accrued Research and Development Expenses

As part of the process of preparing financial statements, we are required to estimate and accrue expenses, which include research and development expenses related to ongoing clinical studies performed for us by CROs. This process involves:

Examples of estimated research and development expenses that we accrue include:

We base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements vary and may result in uneven payment flows. Certain of our service providers invoice us monthly in arrears for services performed. Payments under other contracts depend on factors, such as the successful enrollment of patients and the completion of clinical study milestones. In accruing service fees for these contracts, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period. However, due to the nature of estimates and the expected increased volume of services expected to be performed we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities.

Stock-Based Compensation

We account for grants of stock options based on their grant date fair value and recognize compensation expense over the vesting period. We estimate the fair value of stock options as of the date of grant using the Black-Scholes option-pricing model.

Stock-based compensation expense represents the cost of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. The expense is adjusted for actual forfeitures at year end. Stock-based compensation expense recognized in the consolidated financial statements is based on awards that are ultimately expected to vest.

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Total stock-based compensation expense is recognized for stock options granted to employees and nonemployees and has been reported in our consolidated statement of operations and comprehensive loss as follows (in thousands):

We estimated the fair value of each stock options award at the grant date using assumptions regarding the fair value of the underlying common stock on each grant date and the following additional assumptions:

Stock-based compensation expense recognized for options granted to consultants is also based upon the fair value of the options issued, as determined by the Black-Scholes option pricing model.

All options to purchase shares of our common stock are granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant as determined by our board of directors. Prior to the listing of our common stock on the NASDAQ Capital Market, our board of directors historically determined, with input from management, the assistance of a third party valuation specialist and the guidance outlined in the American Institute of Certified Public Accountants Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, also known as the Practice Aid, the estimated fair value of our common stock on the date of grant based on a number of objective and subjective factors, including:

If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share applicable to common stockholders could have been materially different.

Our board of directors consistently used the most recent valuation provided by management for determining the fair value of our common stock unless a specific event occurs that necessitates an interim valuation. We determined the fair value of our common stock at November 30, 2013 and November 30, 2014 utilizing the Hybrid Model, which consists of a market approach to estimate the enterprise value of the company, and the Option Pricing Model, or OPM, to allocate the enterprise value to each security. Under the market approach, we used a valuation based on bridge financing transactions completed by us in October 2013 and October 2014.

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The valuation based on a recent financing transaction assumes that the price paid for securities in the financing transaction represents the fair value of those securities on a non-marketable basis. This information is used to calculate the enterprise value, and a marketability premium is then applied to arrive at the enterprise value on a marketable basis.

Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class and use inputs such as equity value, time to liquidity, volatility, risk-free rate, dividend yield and strike price. The warrants and underlying convertible redeemable preferred stock were subsequently valued using a back-solve method within the OPM framework to arrive at a concluded fair value of our common stock. The back-solve method is used when a recent financing has taken place which establishes a reference value for one or more classes of stockholders.

Since the Merger and the listing of our common stock on the NASDAQ Capital Market, we have relied on the market price of our common stock to determine its fair value on the date of grant for purposes of determining our stock-based compensation expense.

Convertible Preferred Stock Warrants

Prior to the Merger on June 15, 2015, we had warrants outstanding to purchase shares of our convertible preferred stock. Freestanding warrants that are related to the purchase of redeemable preferred stock are classified as liabilities and recorded at fair value regardless of the timing of the redemption feature or the redemption price or the likelihood of redemption. The warrants are subject to re-measurement at each balance sheet date and any change in fair value is recognized in the statements of operations. We measure the fair value of the warrants using the Hybrid Model, which consists of a guideline public company analysis, or GPC, to estimate our enterprise value and then an OPM to allocate the enterprise value to each security.

Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class and use inputs such as equity value, time to liquidity, volatility, risk-free rate, dividend yield and strike price. The warrants and underlying convertible redeemable preferred stock were subsequently valued using a back-solve method within the OPM framework to arrive at a concluded fair value of our common stock.

The significant assumptions used in estimating the fair value of our warrant liability include the volatility of the stock underlying the warrant, risk-free interest rate, the time to liquidity event, minority discount and discount for lack of marketability. We derive these estimates by considering comparable public company benchmarks and market trends, as well as third-party valuation reports.

The preferred stock warrant liability increases or decreases each period based on fluctuations in the fair values of the underlying securities. Significant increases (decreases) in the significant unobservable inputs used in the fair value measurement of the warrant liability in isolation result in significantly higher (lower) fair value measurements.

On June 15, 2015, in connection with the Merger, all of our outstanding warrants to purchase convertible preferred stock were cancelled for no consideration. Immediately prior to the closing of the Merger, the fair value of the warrants was determined to be zero, and accordingly, we recorded the change in the fair value of the warrants as income within other income (expense) in our condensed consolidated statement of operations.

Income Taxes

We account for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences

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between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date.

We recognize net deferred tax assets through the recording of a valuation allowance to the extent that we believe these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that we would be able to realize our deferred tax assets in the future, in excess of its net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We assess the probability that the positions taken or expected to be taken in our income tax returns will be sustained by taxing authorities. A “more likely than not” (more than 50%) recognition threshold must be met before a tax benefit can be recognized. Tax positions that are more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position, are reflected in our financial statements. Tax positions are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The difference between the benefit recognized for a position and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense.

In-process Research & Development

We acquired in-process research & development, or IPR&D, in connection with the Merger on June 15, 2015. IPR&D represents the fair value assigned to research and development assets that were not fully developed at the date of acquisition. IPR&D acquired in a business combination or recognized from the application of push-down accounting is capitalized on our consolidated balance sheet at its acquisition-date fair value. Until the project is completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. Upon completion of a project, the carrying value of the related IPR&D is reclassified to intangible assets and is amortized over the estimated useful life of the asset.

When performing the impairment assessment, we first assess qualitative factors to determine whether it is necessary to recalculate the fair value of the acquired IPR&D. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of acquired IPR&D is less than its carrying amount, we calculate the asset’s fair value. If the carrying value of our acquired IPR&D exceeds its fair value, then the intangible asset is written down to its fair value. For the nine months ended September 30, 2015, we determined that there was no impairment of our IPR&D.

Goodwill

In connection with the Merger on June 15, 2015, we recognized $15.9 million of 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 first step of the goodwill impairment test. We have determined that goodwill was not impaired as of September 30, 2015.

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Results of Operations

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014

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