Pulmatrix, Inc. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2020

or

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

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

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

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

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

As of August 5, 2020, the registrant had 32,592,668 shares of common stock outstanding.

PULMATRIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

TABLE OF CONTENTS

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.

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.

PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three and six months ended June 30, 2020 and 2019

(in thousands, except share data)

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

PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

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

PULMATRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(unaudited)

(in thousands, except share and per share data)

1. Organization

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

2. Summary of Significant Accounting Policies and Recent Accounting Standards

Basis of Presentation

Principles of Consolidation

The condensed consolidated financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “Annual Report”). 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 six months ended June 30, 2020, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2020. 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, 2019, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 26, 2020.

Use of Estimates

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

Concentrations of Credit Risk and Off-Balance Sheet Arrangements

Cash is a financial instrument that potentially subjects the Company to concentrations of credit risk. For all periods presented, substantially all of the Company’s cash was deposited in an account at a single financial institution that management believes is creditworthy. The Company is exposed to credit risk in the event of default by these financial institutions for amounts in excess of the Federal Deposit Insurance Corporation insured limits. The Company has not incurred any losses to date.

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

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash, checking accounts and money market accounts. Restricted cash consists of two security deposits with a financial institution.

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

Goodwill

Goodwill represents the difference between the consideration transferred and the fair value of the net assets acquired, and liabilities assumed under the acquisition method of accounting for push-down accounting. Goodwill is not amortized but is evaluated for impairment within the Company’s single reporting unit on an annual basis during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount. When performing the impairment assessment, the accounting standard for testing goodwill for impairment permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill is impaired. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of goodwill is impaired, the Company then must perform a quantitative analysis to determine if the carrying value of the reporting entity exceeds its fair value. The impact of the novel coronavirus (“COVID-19”) pandemic was considered in the Company’s qualitative assessment. Currently, there has not been a significant impact on the carrying value of the Company, but this factor will continue to be evaluated.

Recently Adopted Accounting Standards

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard will align the requirements for capitalizing implementation costs for hosting arrangements (services) with costs for internal-use software (assets). As a result, certain implementation costs incurred in hosting arrangements will be deferred and amortized. The new standard became effective for the Company on January 1, 2020. The Company has adopted ASU 2018-13 and adoption of this ASU has no significant impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 became effective for fiscal years beginning after December 15, 2019. The Company has adopted ASU 2018-13 and adoption of this ASU has no significant impact on its condensed consolidated financial statements.

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

5. Common Stock

Registered Direct Offering

On April 20, 2020, the Company sold 4,787,553 shares at $1.671 per share, pursuant to a securities purchase agreement, dated as of April 16, 2020, by and among the Company and certain institutional investors, for gross proceeds of approximately $8,000 prior to deducting fees and expenses of approximately $686. In a concurrent private placement, the Company issued warrants to purchase an aggregate of up to 4,787,553 shares of its common stock to investors with an exercise price of $1.55 per share and an expiration date of April 20, 2022. In addition, the Company issued warrants to purchase up to 311,191 shares of its common stock to the designees of the placement agent with an exercise price of $2.0888 per share and an expiration date of April 20, 2022. The investor and placement agent warrants have a fair value of approximately $0.64 and $0.54 per share, respectively.

Exercise of Warrants

During the three months ended June 30, 2020 and 2019, the Company issued 437,999 and 8,277,112 shares of common stock, respectively, upon exercise of warrants to purchase 524,353 and 8,277,112 shares of common stock, respectively. The Company collected proceeds of $536 and $83 upon the exercise of these warrants during the three months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020 and 2019, the Company issued 944,746 and 8,974,612 shares of common stock, respectively, upon exercise of warrants to purchase 1,147,184 and 8,974,612 shares of common stock, respectively. The Company collected proceeds of $775 and $153 upon the exercise of these warrants during the six months ended June 30, 2020 and 2019, respectively.

Exercise of Stock Options

During the three and six months ended June 30, 2020, stock options to buy 2,500 and 22,497 shares were exercised, respectively, and the Company collected proceeds of $3 and $24, respectively.

6. Warrants

A rollforward of the common stock warrants outstanding at June 30, 2020 is as follows.

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

7. Share-Based Compensation

The Company sponsors the Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan). As of June 30, 2020, the 2013 Plan provides for the grant of up to 4,060,000 shares of common stock, of which 1,011,381 shares remain available for future grant.

In addition, the Company has two legacy plans: The Pulmatrix Operating’s 2013 Employee, Director and Consultant Equity Incentive Plan (the “Original 2013 Plan”) and Pulmatrix Operating’s 2003 Employee, Director, and Consultant Stock Plan (the “2003 Plan”). As of June 30, 2020, a total of 8,627 shares of common stock may be delivered under options outstanding under the Original 2013 Plan and the 2003 Plan, however no additional awards may be granted under the Original 2013 Plan or the 2003 Plan.

Stock Options

During the three months ended June 30, 2020, the Company granted 105,000 options to employees and directors. The awards vest over four years, expire ten years from the grant date and on the date of the grant have a fair value of $117.

During the six months ended June 30, 2020, the Company granted 2,249,104 options to employees, directors, and consultants. The awards vest over four years, expire ten years from the grant date and on the date of grant have a fair value of $2,615.

During the three and six months ended June 30, 2019, the Company granted 651,600 options to employees and directors. The awards vest over four years, expire ten years from the grant date and on the date of the grant have a fair value of $456.

The following table summarizes stock option activity for the six months ended June 30, 2020:

The estimated fair values of employee stock options granted during the three months and six months ended June 30, 2020 and 2019, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Company’s expected volatility was based upon the average of the historical volatility for industry peers and its own volatility. The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity. The dividend yield considers that the Company has not historically paid dividends and does not expect to pay dividends in the foreseeable future.

As of June 30, 2020, there was $2,711 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 3.0 years.

The following table presents total stock-based compensation expense for the three and six months ended June 30, 2020 and 2019:

8. Commitments and Contingencies

Research and Development Activities

The Company contracts with various other organizations to conduct research and development activities. As of June 30, 2020, the Company had aggregate commitments to pay approximately $4,701 remaining on these contracts. The scope of the services under contracts for research and development activities may be modified and the contracts, subject to certain conditions, may generally be cancelled by the Company upon written notice. In some instances, the contracts, subject to certain conditions, may be cancelled by the third party.

Operating Leases

The Company has limited leasing activities as a lessee and are primarily related to its corporate headquarters located at 99 Hayden Avenue, Suite 390, Lexington, Massachusetts. The Company currently leases approximately 22 thousand square feet of office and lab space in Lexington, Massachusetts under a lease that expires on December 31, 2020. On April 23, 2020, an extension to the Company’s operating lease for office and lab space was signed between the Company and 99 Hayden LLC. The extension to the original lease executed on May 31, 2007, has a base rent of $1,194 which is adjusted annually by 3%, and will expire on June 30, 2022. The lease provides for base rent, and the Company is responsible for real estate taxes, maintenance, and other operating expenses applicable to the leased premises.

Operating lease liabilities and corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as prepaid rent. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. To estimate the Company’s specific incremental borrowing rates over the respective lease terms, a comparable market yield curve consistent with the Company’s credit quality was used. As of June 30, 2020, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 5.23% and 2 years, respectively.

The components of lease expense for the Company as of June 30, 2020 were as follows:

Maturities of lease liabilities due under these lease agreements as of June 30, 2020 are as follows:

SBA Loan

On April 10, 2020, the Company received a loan of $617 through the Paycheck Protection Program. Administered through the U.S. Small Business Administration, the loan was made possible through the Coronavirus Aid, Relief and Economic Security Act. On April 28, 2020, the Company repaid the loan in full.

9. 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 six months ended June 30, 2020 and 2019, respectively, resulted in net losses attributable to common stockholders, there is no income allocation required under the two-class method or dilution attributed to weighted average shares outstanding in the calculation of diluted net loss per share.

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

10. Subsequent Events

On July 10, 2020, the joint steering committee established by the Company and Cipla Technologies, LLC, with whom the Company entered into a development and commercialization agreement on April 15, 2019 for the development and commercialization of Pulmazole, terminated the Company’s Phase 2 clinical study of Pulmazole.

On July 9, 2020, the Company entered into letter agreements with certain existing accredited investors to exercise certain existing and outstanding warrants (“Existing Warrants”) to purchase up to an aggregate of 10,085,741 shares of the Company’s common stock at the existing exercise price per share of $1.35. The Existing Warrants were issued in an underwritten public offering pursuant to a registration statement on Form S-1 (File No. 333-230395) and an additional registration statement on Form S-1 filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (File No. 333-230714) that was consummated in April 2019. In consideration for the exercise of the Existing Warrants for cash, we agreed to issue the exercising holders new unregistered warrants to purchase up to an aggregate of 10,085,741 shares of common stock at an exercise price of $1.80 per share and with an exercise period of five years from the closing date. The gross proceeds to the Company from the exercise are expected to be approximately $13,616, prior to deducting placement agent fees and offering expenses. In addition, we agreed to issue placement agents 655,573 unregistered warrants at an exercise price of $2.25 and with an exercise period of five years from the closing date.

On July 8, 2020, 270,000 warrants issued in April 2019 were exercised. The Company collected $365 and issued 270,000 shares of common stock.

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

The information set forth below should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q as well as the audited financial statements and the notes thereto contained in our current report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2020. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “us,” “we,” “our,” or our “Company” and similar terms refer to Pulmatrix, Inc., a Delaware corporation and its subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact contained herein, including statements regarding our business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results, are forward-looking statements. Words such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,” “plans,” “seeks,” “projects,” “targets,” and “would,” and their opposites and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will actually be achieved. Forward-looking statements are based on information we have when those statements are made or our management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

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

Overview

Business

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

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

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

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

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

Recent Developments

COVID-19 Developments

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

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

The COVID-19 pandemic directly impacted the Pulmazole Phase 2 clinical study by both causing certain trial sites to suspend enrolling patients or us voluntarily suspending enrollment at other sites, as described in more detail below. We do not yet know the full extent of potential delays or impact on our business, our relationships with our business partners, our clinical trials or the global economy as a whole. However, any one or a combination of these events could have an adverse effect on the operation of and results from our clinical trials and on our other business operations.

Pulmazole

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

Due to delays in patient enrollment in the Phase 2 clinical study, exacerbated by the ongoing COVID-19 pandemic, Cipla Technologies, LLC (“Cipla”), with whom we entered into a development and commercialization agreement on April 15, 2019 for the development and commercialization of Pulmazole, informed us that it desired to amend the current agreement. In connection with our renegotiation of this agreement, on July 10, 2020, the joint steering committee established by us and Cipla terminated the Phase 2 study in order to facilitate the commencement of a newly designed Phase 2b study that would supersede the prior Phase 2 study. The Phase 2b study design is anticipated to include up to 4 months of dosing and efficacy endpoints, whereas the terminated Phase 2 study was of 28-day duration with safety and tolerability as its primary endpoint. The longer dosing regimen of the Phase 2b study is supported by the recently completed 6-month inhalation toxicology study in dogs. We anticipate that the study will start (site activation) during Q3 2021 and that top line data is anticipated to be available 18 months subsequent to the study start, provided that the Covid-19 pandemic, or other events that cannot reasonably be predicted or are outside of our control, do not significantly impact regulatory approvals or study operations. While we have not yet entered into a definitive amendment with Cipla, we anticipate that, among other possible amendments, that we could bear a greater share of our employee overhead costs and the costs for consultants needed to run the Phase 2b study, which we currently share equally with Cipla. Additionally, we would bear the risk of any cost overruns related to employee overhead or consulting costs. We anticipate all other program expenses, such as clinical and Chemistry, Manufacturing and Controls (“CMC”) costs, would continue to be shared equally between us and Cipla as per the current agreement.

In addition, we anticipate that we would grant Cipla the exclusive right to develop and commercialize Pulmazole, at Cipla’s sole expense, in India, South Africa, Sri Lanka, Nepal, Iran, Yemen, Myanmar and Algeria, and that we would forego any royalty payments from the sale of Pulmazole in those countries (under our current agreement with Cipla we are entitled to one-half of worldwide net sales of Pulmazole).

If Cipla does not agree to initiate a new Phase 2b study or we and Cipla cannot agree on how the costs of the Phase 2b study should be allocated among us and Cipla, and Cipla does not continue funding its share of costs for our current Phase 2 clinical study, including its agreed upon shutdown, we may be forced to suspend the continued development of Pulmazole. Furthermore, our failure to successfully renegotiate the development and commercialization agreement with Cipla may result in the initiation of arbitration proceedings between us and Cipla. Any arbitration proceedings between and us and Cipla may have a negative impact on our business, including the diversion of management attention from our other product candidates or result in rulings from the arbitration panel that are adverse to our interests or the continued development of Pulmazole.

PUR 1800

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

Sensory Cloud Agreement

On April 9, 2020, we entered into a Collaboration and License Agreement (the “Agreement”) with Sensory Cloud, Inc. (“Sensory Cloud”). Under the terms of the Agreement, we have granted Sensory Cloud an exclusive, worldwide, royalty bearing license to PUR 003 and PUR 006, the Company’s proprietary aerosol salt solution for delivery or administration to or through the nasal passages also known as NasoCalm, as well as related patents and know-how, for use in the field (the “Sensory Licensed Product”).

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

In July 2020, we announced that Sensory Cloud plans to commence commercial sales of FEND in September 2020. FEND is the Sensory Cloud brand name for NasoCalm, an OTC nasal hygiene product that is comprised of sodium chloride and calcium chloride salts. NasoCALM was designed to provide, among other potential benefits, an ability to suppress the exhalation of droplets of airway lining fluid, which can transmit airborne infection.

Pulmatrix’s development data and additional data generated by Sensory Cloud utilizing its Nimbus delivery device were recently published in the Quarterly Reviews of Biophysics Discovery, demonstrating a reduction in airborne particles in exhaled air over time following FEND administration. Taken together, these data demonstrate that FEND provides potential hygienic benefit which may augment current social distancing and hygiene measures for addressing COVID-19 and other airborne pathogens.

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

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

Leases

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

Financial Overview

Revenues

To date, we have not generated any product sales. The 2020 revenue was generated by the completion of a feasibility study with Nocion Therapeutics and by the collaboration agreement and license agreement with Cipla and Johnson & Johnson Enterprise Innovation, Inc. (“JJEI”, and such agreement with JJEI, the “JJEI License Agreement”), respectively, with respect to the collaboration on the Pulmazole program and licensing our PUR1800 kinase inhibitor, respectively. For more discussion on the collaboration agreements, please see Note 6 of the consolidated financial statements in our annual report on Form 10-K filed with the SEC on March 26, 2020 and “—Recent Developments—Pulmazole” under this Item 2.

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. To move these programs forward along our development timelines, a large portion, approximately (78% of staff) are research and development employees. In addition, we maintain a 12,000 square foot research and development facility which includes capital equipment for the manufacture and characterization of our iSPERSE^™ powders for our pipeline programs. As we identify opportunities for iSPERSE^™ in respiratory indications, we anticipate additional head count, capital, and development costs will be incurred to support these programs.

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

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs such as share-based compensation for personnel and consultants in executive, finance, business development, intellectual property, 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 expenses related to a publicly-traded company, travel expenses, professional fees for consulting, auditing and tax services.

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

Critical Accounting Policies

This management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements appearing elsewhere in this Form 10-Q and in our audited financial statements included in our current report on Form 10-K filed with the SEC on March 26, 2020, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Effective January 1, 2019, we adopted ASU No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” The adoption of Topic 606 did not have any material impact on our consolidated financial statements. We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

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

During the three months and six months ended June 30, 2020, our principal source of revenue was income that resulted from the Cipla Agreement and the JJEI License Agreement.

Milestone Payments

At the inception of each arrangement that includes research or development milestone payments, we evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. As of June 30, 2020, we have an active arrangement that contains a research or development milestone.

Royalties.

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

Use of Estimates

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

Research and Development Costs

Research and development costs are expensed as incurred and include: salaries, benefits, bonus, share-based compensation, license fees, milestone payments due under license agreements, costs paid to third-party contractors to perform research, conduct clinical trials, and develop drug materials and delivery devices; and associated overhead and facilities costs. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors, CROs and CMOs. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of fees and costs associated with the contract that were rendered during the period and they are expensed as incurred. Research and development costs that are paid in advance of performance are capitalized as prepaid expenses and amortized over the service period as the services are provided. As of June 30, 2020, we have an active arrangement with JJEI that contains a research or development milestone. For more discussion on the milestones related to the JJEI License Agreement, please see Note 6 of the consolidated financial statements in the Company’s annual report on Form 10-K filed with the SEC on March 26, 2020.

Goodwill

Goodwill represents the difference between the consideration transferred and the fair value of the net assets acquired, and liabilities assumed under the acquisition method of accounting for push-down accounting. Goodwill is not amortized but is evaluated for impairment within our single reporting unit on an annual basis during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below our carrying amount. When performing the impairment assessment, the accounting standard for testing goodwill for impairment permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill is impaired. If 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 then must perform a quantitative analysis to determine if the carrying value of the reporting entity exceeds its fair value. The impact of the COVID-19 pandemic was considered in our qualitative assessment. Currently, there has not been a significant impact on our carrying value, but this factor will continue to be evaluated.

Based on the qualitative assessment for the six months ended June 30, 2020, there was no impairment necessary. Given our common stock value decline during the six months ended June 30, 2019, and based on the quantitative assessment, we determined that goodwill was impaired as of June 30, 2019, and a charge of $7,268 was recorded.

Results of Operations

Three Months Ended June 30, 2020 Compared with Three Months Ended June 30, 2019

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

Revenue — Revenue of $3.5 million was recorded for the three months ended June 30, 2020 as compared to $4.8 million for the three months ended June 30, 2019, a decrease of $1.3 million. The decrease results from a reduction in revenue of $3.0 million recorded as a result of the Cipla Agreement, partially offset by an increase in revenue of $1.7 million as a result of the JJEI License agreement. For the three months ended June 30, 2019, $4.8 million was recorded in revenue which was the result of the Cipla Agreement.

Research and development expenses — Research and development expenses were $3.2 million for the three months ended June 30, 2020 and 2019 which includes pre-clinical toxicology costs for the PUR1800 program, clinical study costs incurred for the Phase 2 Pulmazole clinical trial and employment related costs in support of our programs.

General and administrative expenses — General and administrative expenses were $1.5 million for the three months ended June 30, 2020 compared to $3.1 million for the three months ended June 30, 2019, a decrease of $1.6 million. The decrease was primarily due to decreased employment costs of $1.1 million because of lower share-based compensation expense, $0.3 million of a milestone payment and $0.2 million in legal and patent expense.

Impairment of goodwill — There was no impairment charge for the three months ended June 30, 2020. For the three months ended June 30, 2019, due to the decline in the Company’s common stock value, we recorded approximately $6.5 million for impairment.

Six months ended June 30, 2020 Compared with Six Months Ended June 30, 2019

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

Revenue — Revenue of $6.3 million was recorded for the six months ended June 30, 2020 as compared to $4.8 million for the three months ended June 30, 2019, an increase of $1.4 million. The increase resulted from an increase in revenue recorded of $2.4 million as a result of the JJEI License Agreement partially offset by a decrease in revenue recorded of $1.0 million as a result of the Cipla Agreement. For the six months ended June 30, 2019, $4.8 million was recorded in revenue which was the result of the Cipla Agreement.

Research and development expenses — Research and development expenses were $8.5 million for the six months ended June 30, 2020 compared to $5.3 million for the six months ended June 30, 2019, an increase of $3.1 million. The increase was primarily due to increased spend of $2.9 million on the PUR1800 project due primarily to manufacturing and clinical study costs, $0.8 million on employment costs in support of our programs, and $0.2 in allocated fixed expenses which was partially offset by a decrease of $0.8 million on the Phase 2 Pulmazole clinical trial.

General and administrative expenses — General and administrative expenses were $3.7 million for the six months ended June 30, 2020 compared to $5.1 million for the six months ended June 30, 2019, a decrease of $1.4 million. The decrease was primarily due to decreased employment costs of $1.0 million because of lower share-based compensation expense, $0.3 million of a milestone payment and $0.1 million in legal and patent expense.

Impairment of goodwill — There was no impairment charge for the six months ended June 30, 2020. For the six months ended June 30, 2019, due to the decline in the Company’s common stock value, we recorded approximately $7.3 million for impairment.

Liquidity and Capital Resources

Through June 30, 2020, we have incurred an accumulated deficit of $221.0 million, primarily due to expenses incurred through a combination of research and development activities related to our various product candidates and general and administrative expenses supporting those activities. We have financed our operations since inception primarily through the sale of preferred and common stock, the issuance of convertible promissory notes, term loans and collaboration and license agreements. Our total cash and cash equivalents as of June 30, 2020 was $27.3 million.

We anticipate that we will continue to incur losses, and that such losses will increase over the next several years due to development costs associated with our iSPERSE^™ pipeline programs. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding and other collaborations and strategic alliances.

We expect that our existing cash and cash equivalents at June 30, 2020 and anticipated interest income will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months following the date of this Quarterly Report on Form 10-Q. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements.