UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

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

For the transition period from ___________ to __________

Commission file number: 001-36199

PULMATRIX, INC.

(Exact name of registrant as specified in its charter)

Delaware		46-1821392
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

99 Hayden Avenue, Suite 390 Lexington, MA		02421
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

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

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

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

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

As of August 9, 2021, the registrant had 56,249,062 shares of common stock outstanding.

PULMATRIX, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020	3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	4
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Six months Ended June 30, 2021 and 2020 (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	27
Item 4. Controls and Procedures	27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	31
SIGNATURES	32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

PULMATRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	At June 30,			At December 31,
	2021			2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	56,903		$	31,657
Restricted cash		204			-
Accounts receivable		1,766			84
Prepaid expenses and other current assets		1,596			797
Total current assets		60,469			32,538
Property and equipment, net		379			361
Operating lease right-of-use asset		1,008			1,489
Long-term restricted cash		-			204
Goodwill		3,577			3,577
Total assets	$	65,433		$	38,169
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,508		$	925
Accrued expenses		1,191			2,028
Operating lease liability		1,184			1,135
Deferred revenue		3,034			4,166
Total current liabilities		6,917			8,254
Deferred revenue, net of current portion		5,423			6,168
Operating lease liability, net of current portion		-			608
Total liabilities		12,340			15,030
Commitments (Note10)
Stockholders’ equity:
Preferred stock, $0.0001 par value — 500,000 authorized and 0 issued and outstanding at June 30, 2021 and December 31, 2020		-			-
Common stock, $0.0001 par value — 200,000,000 shares authorized; 56,249,062 and 36,105,097 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively.		6			4
Additional paid-in capital		295,512			257,604
Accumulated deficit		(242,425	)		(234,469	)
Total stockholders’ equity		53,093			23,139
Total liabilities and stockholders’ equity	$	65,433		$	38,169

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)

	2021			2020			2021			2020
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Revenues	$	2,254		$	3,500		$	3,644		$	6,262
Operating expenses:
Research and development		4,541			3,184			8,397			8,471
General and administrative		1,562			1,490			3,181			3,702
Total operating expenses		6,103			4,674			11,578			12,173
Loss from operations		(3,849	)		(1,174	)		(7,934	)		(5,911	)
Other income (expense):
Interest income		2			13			5			65
Other expense, net		(5	)		(9	)		(27	)		(10	)
Net loss	$	(3,852	)	$	(1,170	)	$	(7,956	)	$	(5,856	)
Net loss per share attributable to common stockholders-basic and diluted	$	(0.07	)	$	(0.05	)	$	(0.16	)	$	(0.26	)
Weighted average shares of common stock used to compute basic and diluted net loss per share		56,249,062			24,376,571			51,319,680			22,423,014

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, 2021 and 2020

(in thousands, except share data)

	Shares		Amount		Capital		Deficit			Total
					Additional
	Common Stock				Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance — January 1, 2021		36,105,097	$	4	$	257,604	$	(234,469	)	$	23,139
Issuance of common stock, net of issuance costs		20,000,000		2		37,077		-			37,079
Exercise of warrants		143,965		-		204		-			204
Share-based compensation		-		-		328		-			328
Exercise of pre-funded warrants
Exercise of pre-funded warrants, shares
Exercise of common stock options
Exercise of common stock options, shares
Net loss		-		-		-		(4,104	)		(4,104	)
Balance — March 31, 2021		56,249,062	$	6	$	295,213	$	(238,573	)	$	56,646

Share-based compensation		-		-		299		-			299
Net loss		-		-		-		(3,852	)		(3,852	)
Balance — June 30, 2021		56,249,062	$	6	$	295,512	$	(242,425	)	$	53,093

					Additional
	Common Stock				Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance — January 1, 2020		19,994,560	$	2	$	226,178	$	(215,161	)	$	11,019
Exercise of pre-funded warrants		300,000		-		-		-			-
Exercise of common stock options		19,997		-		21		-			21
Exercise of warrants		206,747		-		239		-			239
Share-based compensation		-		-		343		-			343
Net loss		-		-		-		(4,686	)		(4,686	)
Balance — March 31, 2020		20,521,304	$	2	$	226,781	$	(219,847	)	$	6,936

Balance, March 31, 2020		20,521,304	$	2	$	226,781	$	(219,847	)	$	6,936
Issuance of common stock, net of issuance costs		4,787,553		1		7,313		-			7,314
Exercise of common stock options		2,500		-		3		-			3
Exercise of warrants		437,999		-		536		-			536
Share-based compensation		-		-		266		-			266
Net loss		-		-		-		(1,170	)		(1,170	)
Balance — June 30, 2020		25,749,356	$	3	$	234,899	$	(221,017	)	$	13,885
Balance, June 30, 2020		25,749,356	$	3	$	234,899	$	(221,017	)	$	13,885

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

PULMATRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	2021			2020
	For the Six Months Ended
	June 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(7,956	)	$	(5,856	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		88			103
Amortization of operating lease right-of-use asset		481			359
Share-based compensation		627			609
Changes in operating assets and liabilities:
Accounts receivable		(1,682	)		6,847
Prepaid expenses and other current assets		(799	)		(671	)
Accounts payable		495			(321	)
Accrued expenses		(837	)		931
Operating lease liability		(559	)		(317	)
Deferred revenue		(1,877	)		(5,884	)
Net cash used in operating activities		(12,019	)		(4,200	)
Cash flows from investing activities:
Purchases of property and equipment		(18	)		(98	)
Net cash used in investing activities		(18	)		(98	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs		37,079			7,314
Proceeds from exercise of common stock options		-			24
Proceeds from exercise of warrants		204			775
Proceeds from Paycheck Protection Program loan		-			617
Repayment of Paycheck Protection Program loan		-			(617	)
Net cash provided by financing activities		37,283			8,113
Net increase in cash, cash equivalents and restricted cash		25,246			3,815
Cash, cash equivalents and restricted cash — beginning of period		31,861			23,644
Cash, cash equivalents and restricted cash — end of period	$	57,107		$	27,459

Supplemental disclosures of non-cash investing and financing information:
Fixed asset purchases in accounts payable	$	88		$	12

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

PULMATRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

(unaudited)

(in thousands, except share and per share data)

1. Organization

Pulmatrix, Inc. (the “Company”) was incorporated in 2013 as a Delaware corporation. The Company is a clinical stage biotechnology company focused on the discovery and development of a novel class of inhaled therapeutic products. The Company’s proprietary dry powder delivery platform, iSPERSE™ (inhaled Small Particles Easily Respirable and Emitted), is engineered to deliver small, dense particles with highly efficient dispersibility and delivery to the airways, which can be used with an array of dry powder inhaler technologies and can be formulated with a variety of drug substances. The Company is developing a pipeline of iSPERSE^™- based therapeutic candidates targeted at prevention and treatment of a range of respiratory 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, 2020, filed with the SEC on March 23, 2021, and amended on March 26, 2021 and May 14, 2021 (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, 2021, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2021. 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, 2020, which are included in the Annual Report.

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 valuing equity securities in share-based payments, valuing future expected costs in order to derive and recognize revenue, 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.

	2021		2020
	Six months ended June 30
	2021		2020
Cash and cash equivalents	$	56,903	$	27,255
Restricted cash		204		204
Total cash, cash equivalents and restricted cash	$	57,107	$	27,459

Revenue Recognition

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

Our principal sources of revenue during the reporting period were income that resulted through our collaborative arrangements and license agreements that related to the development and commercialization of Pulmazole and PUR1800, 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 and six months ended June 30, 2021, our principal source of revenue was income that resulted from the Cipla Agreement and the JJEI License Agreement described in Note 6, and immaterial royalties from the Sensory Cloud Agreement.

Milestone Payments

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

Royalties.

For arrangements that include sales-based royalties, including milestone payments upon first commercial sales and milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has recognized immaterial royalty revenue that resulted from the Sensory Cloud licensing arrangement.

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, 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 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. 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.

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 Issued Accounting Pronouncements

There have been no new, or existing recently issued, accounting pronouncements that are of significance, or potential significance, that impact the Company’s condensed consolidated financial statements.

3. Prepaid Expenses and Other Current Assets

Prepaid expenses consisted of the following:

	June 30, 2021		December 31, 2020
	At		At
	June 30, 2021		December 31, 2020
Prepaid insurance	$	632	$	276
Prepaid clinical trials		531		317
Deferred operating costs		283		74
Prepaid other		150		130
Total prepaid and other current assets	$	1,596	$	797

4. Property and Equipment, Net

Property and equipment consisted of the following:

Summary of Property and Equipment

	At			At
	June 30, 2021			December 31, 2020
Laboratory equipment	$	1,741		$	1,702
Computer equipment		304			302
Office furniture and equipment		216			217
Leasehold improvements		600			596
Capital in progress		87			25
Total property and equipment		2,948			2,842
Less accumulated depreciation and amortization		(2,569	)		(2,481	)
Property and equipment, net	$	379		$	361

5. Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following:

Schedule of Accrued Expenses

	June 30, 2021		December 31, 2020
	At		At
	June 30, 2021		December 31, 2020
Accrued vacation	$	117	$	56
Accrued wages and incentive		409		813
Accrued clinical & consulting		449		1,010
Accrued legal & patent		164		129
Accrued other expenses		52		20
Total accrued expenses	$	1,191	$	2,028

6. Significant Agreements

License, Development and Commercialization Agreement with Johnson & Johnson Enterprise Innovation, Inc. (“JJEI”)

On December 26, 2019, the Company entered into a License, Development and Commercialization Agreement (the “JJEI License Agreement”) with Johnson & Johnson Enterprise Innovation, Inc. Under the terms of the JJEI License Agreement, the Company has granted JJEI an option to acquire (1) the Company’s rights to an intellectual property portfolio of materials and technology related to narrow spectrum kinase inhibitor compounds (the “Licensed Product”) and (2) an exclusive, worldwide, royalty bearing license to PUR1800, the Company’s inhaled iSPERSE drug delivery system as formulated with one of the kinase inhibitor compounds. The Company is currently conducting a clinical and chronic toxicology program focused on chronic obstructive pulmonary diseases (“COPD”) and lung cancer interception.

JJEI exercised its option to terminate the Company’s license, development, and commercialization agreement in April 2021. All rights to the kinase inhibitor portfolio, including PUR1800 and PUR5700, reverted to Pulmatrix when the termination of the contract became effective on July 6, 2021. The Company intends to continue the development of PUR1800, with ongoing clinical and toxicology studies to support programs in acute exacerbation of chronic obstructive pulmonary disease (“AECOPD”) and other chronic airway diseases.

Accounting Treatment

Revenue associated with the combined research and development services for the Licensed Product and the irrevocable license to the Assigned Assets (as defined below) is recognized as revenue as the research and development services are provided using an input method, according to the ratio of costs incurred to the total costs expected to be incurred in the future to satisfy the performance obligation. In management’s judgment, this input method is the best measure of the transfer of control of the performance obligation. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed consolidated balance sheet. During the six months ending June 30, 2021, the Company recognized $2,688 in revenue related to the license agreement and reimbursed expenses in the Company’s condensed consolidated statement of operations. As of June 30, 2021, $647 was recorded as deferred revenue resulting from the license agreement and $413 as deferred revenue resulting from deferred reimbursed expenses, all of which are current. The Company expects to recognize the deferred revenue according to costs incurred, through the termination date of the contract, which was July 6, 2021.

Collaborations - Development and Commercialization Agreement with Cipla Technologies LLC (“Cipla”)

The Company received a non-refundable upfront payment of $22,000 (the “Upfront Payment”) under the Development and Commercialization Agreement (the “Cipla Agreement”). Upon receipt of the Upfront Payment, the Company irrevocably assigned to Cipla the following assets, solely to the extent that each covers the Product in connection with any treatment, prevention, and/or diagnosis of diseases of the pulmonary system (“Pulmonary Indications”): all existing and future technologies, current and future drug master files, dossiers, third-party contracts, regulatory filings, regulatory materials and regulatory approvals, patents, and intellectual property rights, as well as any other associated rights and assets directly related to the Product, specifically in relation to Pulmonary Indications (collectively, the “Assigned Assets”), excluding most specifically the Company’s iSPERSE technology.

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

The Company conducted a Type C meeting with the U.S. Food and Drug Administration (the “FDA”) on January 27, 2021, and, leveraging the insights gained from this meeting, now plan to commence the Phase 2b clinical study when the risks of study conduct presented by the ongoing COVID-19 pandemic is reduced to an acceptable level. The Phase 2b clinical study design includes a 16-week dosing regimen as well as an exploration of potential efficacy endpoints, whereas the terminated Phase 2 study comprised only a 4 week dosing regimen with safety and tolerability as its primary endpoint. The longer dosing regimen of the planned new Phase 2b clinical study is supported by the 6-month inhalation toxicology study in dogs completed in April 2020.

On May 10, 2021, the Company sent a letter to Cipla notifying Cipla that it is in material breach of the Cipla Agreement due to Cipla’s anticipatory breach of its obligation under the Agreement to fund 50% of the development costs for Pulmazole in accordance with the terms of the Cipla Agreement. Cipla has refused to approve the development plan and budget for the Phase 2b clinical study unless the Company accepts Cipla’s demands that the Company absorb a disproportionate amount of the costs and financial risks of the development plan. In the letter, the Company stated that Cipla had 30 days from the date of the letter to reaffirm that it will perform the Cipla Agreement in accordance with its terms.

Since the date of the Company’s letter to Cipla, the Company has received several correspondences from Cipla disputing that Cipla is in material breach of the Cipla Agreement and that the Company is entitled to terminate the Agreement. Accordingly, Cipla and the Company have initiated certain mandatory dispute resolution procedures under the Cipla Agreement, which remain ongoing. As of the date of this report, the Company has not terminated the Agreement and the Agreement remains in full force and effect. However, the Company intends to continue to seek Cipla’s reaffirmation of all of its obligations under the Cipla Agreement and, in the absence of such reaffirmation, to pursue all available remedies.

Accounting Treatment

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

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

The Company received the $22,000 upfront payment in May 2019. During the six months ended June 30, 2021, the Company recognized $755 in revenue related to the research and development services and $189 in revenue for the irrevocable license to the Assigned Assets in the Company’s condensed consolidated statements of operations. The aggregate amount of the transaction price related to the Company’s unsatisfied performance obligations and at June 30, 2021 the Company recorded $7,397 in deferred revenue, $1,974 of which is current. The Company expects to recognize the deferred revenue according to costs incurred over the remaining research term.

7. Common Stock

2021

At-the-Market Offering

On May 26, 2021, the Company entered into an At-The-Market Sales Agreement (the “Sales Agreement”) with H.C. Wainwright and Co., LLC (“HCW”) to act as the Company’s sales agent with respect to the issuance and sale of up to $20,000 of the Company’s shares of common stock, from time to time in an at-the-market public offering (the “Offering”). Sales of common stock under the Sales Agreement are made pursuant to an effective shelf registration statement on Form S-3, which was filed with the SEC on May 26, 2021, and subsequently declared effective on June 9, 2021 (File No. 333-256502), and a related prospectus. HCW acts as the Company’s sales agent on a commercially reasonable efforts basis, consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and the rules of The NASDAQ Capital Market. If expressly authorized by the Company, HCW may also sell the Company’s common stock in privately negotiated transactions. There is no specific date on which the Offering will end, there are no minimum sale requirements and there are no arrangements to place any of the proceeds of this offering in an escrow, trust or similar account. HCW is entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of the Company’s common stock pursuant to the Sales Agreement.

There have been no sales of the Company’s common stock during the three months ended June 30, 2021 under the Sales Agreement.

On February 16, 2021, the Company closed on a registered direct offering with certain healthcare-focused institutional investors for the sale of 20,000,000 shares of its common stock for gross proceeds of $40,000, prior to deducting placement agent’s fees and other offering expenses. In connection with the offering, 1,300,000 warrants with a five-year expiry were issued to placement agent designees at an exercise price of $2.50 per share. The fair value of the placement agent warrants was $1.57 per share. The shares of common stock were offered by the Company pursuant to a “shelf” registration statement on Form S-3 (File No. 333-230225) previously filed with the SEC on March 12, 2019, and declared effective by the SEC on March 15, 2019. After giving effect to approximately $2,921 of fees and expenses related to the sale, the Company recorded net proceeds of $37,079.

2020

In 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

2021

During the three months ended June 30, 2021, no warrants were exercised to purchase shares of common stock.

During the six months ended June 30, 2021, warrants to purchase 25,000 shares of common stock issued in July 2020, 100,000 shares of common stock issued in February 2019 and 18,965 shares of common stock issued in April 2019, were exercised for cash and the Company collected aggregate proceeds of $204.

2020

During the three months ended June 30, 2020, the Company issued 437,999 shares of common stock, upon exercise of warrants to purchase 524,353 shares of common stock. The Company collected proceeds of $536 upon the exercise of these warrants.

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

Exercise of Stock Options

During the three and six months ended June 30, 2021, no stock options were exercised.

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

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

8. Warrants

A rollforward of the common stock warrants outstanding at June 30, 2021 is as follows.

	Number of Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding January 1, 2021		23,284,813		$	3.41		3.3	$	-
Warrants exercised		(143,965	)	$	1.42				-
Warrants issued		1,300,000		$	2.50				-
Outstanding June 30, 2021		24,440,848		$	3.37		2.9	$	-

There were no warrants issued during the three months ended June 30, 2021. The estimated fair values of warrants granted during the six months ended June 30, 2021, and the three and six months ended June 30, 2020, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Schedule of Warrants Assumptions

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2021		2020			2021			2020
Expected life (years)		-		2			5			2
Risk-free interest rate		-		0.20	%		0.57	%		0.20	%
Expected volatility		-		98.51	%		105.77	%		98.51	%
Expected dividend yield		-		0	%		0	%		0	%

The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Company’s expected volatility was based upon the weighted average of the historical volatility for industry peers and our own volatility. The dividend yield considers that the Company has not historically paid dividends and does not expect to pay dividends in the foreseeable future.

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

Schedule of Warrants Outstanding

					Number of Shares Underlying Warrants
					For the Period Ended June 30
Issue Date	Classification	Exercise Price		Expiration Date	2021		2020
February 16, 2021	Equity	$	2.50	February 11, 2026		1,300,000		—
August 07, 2020	Equity	$	1.80	July 14, 2025		1,814,815		—
August 07, 2020	Equity	$	2.25	July 14, 2025		218,713		—
July 23, 2020	Equity	$	1.80	July 14, 2025		1,550,000		—
July 13, 2020	Equity	$	2.25	July 14, 2025		436,860		—
July 13, 2020	Equity	$	1.80	July 14, 2025		6,695,926		—
April 20, 2020	Equity	$	1.55	April 20, 2022		4,787,553		4,787,553
April 20, 2020	Equity	$	2.0888	April 20, 2022		311,191		311,191
April 8, 2019	Equity	$	1.35	April 8, 2024		1,317,812		11,692,518
April 8, 2019	Equity	$	1.6875	April 3, 2024		797,334		797,334
February 12, 2019	Equity	$	1.8313	February 7, 2024		110,922		110,922
February 12, 2019	Equity	$	1.34	August 12, 2024		1,333,447		1,433,447
February 04, 2019	Equity	$	2.125	January 30, 2024		34,605		34,605
January 31, 2019	Equity	$	2.125	January 26, 2024		10,151		10,151
December 3, 2018	Equity	$	3.90	June 3, 2024		937,500		937,500
April 3, 2018	Equity	$	7.50	April 3, 2023		2,350,011		2,350,011
April 4, 2018	Equity	$	7.50	April 4, 2023		115,000		115,000
August 31, 2015	Equity	$	118.00	August 31, 2020		—		3,000
June 15, 2015	Equity	$	75.50	Five years after milestone achievement		319,008		319,008
Total Outstanding						24,440,848		22,902,240

9. Share-Based Compensation

The Company sponsors the Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan). As of June 30, 2021, the 2013 Plan provides for the grant of up to 5,865,254 shares of common stock, of which 1,859,348 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, 2021, a total of 6,048 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, 2021, the Company granted 64,000 options to employees and the fair value of the awards on the date of grant was $53. During the six months ended June 30, 2021, the Company granted 1,057,587 options to employees and directors and the fair value of the awards on the date of grant was $1,228.

During the three months ended June 30, 2020, the Company granted 105,000 options to employees, directors, or consultants and the fair value of the awards on the date of grant was $117. During the six months ended June 30, 2020, the Company granted 2,249,104 options to employees, directors and consultants and the fair value of the awards on the date of grant was $2,615. The options vest over four years and expire ten years from the grant date for all options awarded during both years.

The following table summarizes stock option activity for the six months ended June 30, 2021:

Summary of Stock Option Activity

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding January 1, 2021		2,899,837		$	3.22		8.75	$	60
Granted		1,057,587		$	1.44
Forfeited or expired		(22,284	)	$	2.39
Outstanding - June 30, 2021		3,935,140		$	2.75		8.58	$	1
Exercisable - June 30, 2021		1,488,568		$	4.87		8.02	$	-

The estimated fair values of employee stock options granted during the three and six months ended June 30, 2021, and June 30, 2020, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Contractual term		6.06			6.03			5.97			5.92
Risk-free interest rate		0.97	%		0.45	%		0.60	%		1.62	%
Expected volatility		106.11	%		94.40	%		104.89	%		93.90	%
Expected dividend yield		0	%		0	%		0	%		0	%

The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Company’s expected volatility was based upon the weighted average of the historical volatility for industry peers and our 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, 2021, there was $2,687 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 2.8 years. The following table presents total share-based compensation expense for the three and six months ended June 30, 2021 and 2020:

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

Research and development	$	55	$	49	$	111	$	96
General and administrative		244		217		516		513
Total share-based compensation expense	$	299	$	266	$	627	$	609

10. Commitments and Contingencies

Research and Development Activities

The Company contracts with various other organizations to conduct research and development activities. As of June 30, 2021, we had aggregate commitments to pay approximately $933 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 us 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 22,000 square feet of office and lab space in Lexington, Massachusetts under a lease that expires 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.

The components of lease expense for the Company as of June 30, 2021, are as follows:

Schedule of Components of Lease Expense

	2021		2020		2021		2020
	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Lease Cost:
Fixed lease cost	$	259	$	228	$	518	$	391
Variable lease cost		96		99		222		218
Total lease cost	$	355	$	327	$	740	$	609

Maturities of lease liabilities due under these lease agreements as of June 30, 2021 are as follows:

	Operating Leases
Maturity of lease liabilities:
2021	$	597
2022 (half year)		615
Total lease payments		1,212
Less: interest		(28	)
Total lease liabilities	$	1,184

11. Net Loss Per Share

The Company computes basic and diluted net loss per share using a methodology that gives effect to the impact of outstanding participating securities (the “two-class method”). As the three and six months ended June 30, 2021 and 2020, respectively, resulted in net losses attributable to common shareholders, there is no income allocation required under the two-class method or dilution attributed to weighted average shares outstanding in the calculation of diluted net loss per share. The following potentially dilutive securities outstanding prior to the use of the treasury stock method have been excluded from the computation of diluted weighted-average shares outstanding, as they would be anti-dilutive.

	As of June 30,
	2021		2020

Options to purchase common stock		3,935,140		2,980,432
Warrants to purchase common stock		22,440,848		22,902,240
Total		26,375,988		25,882,672

12. Subsequent Events

During July, 2021, the Company granted 34,900 stock options to employees and 30,000 stock options to a director.

The Company has evaluated its events subsequent to June 30, 2021 to the date these condensed consolidated financial statements were issued, and has determined that, other than what was disclosed above, it does not have any subsequent events to disclose in these condensed consolidated financial statements.

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 23, 2021, and amended on March 26, 2021 and May 14, 2021. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “us,” “we,” “our,” or our “Company” and similar terms refer to Pulmatrix, Inc., a Delaware corporation and its subsidiaries.

Forward-Looking Statements

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

	●	the impact of the novel coronavirus (“COVID-19”) on the Company’s ongoing and planned clinical trials;

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

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

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

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

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

	●	our collaborators’ inability to successfully carry out their contractual duties;

	●	termination of certain license agreements;

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

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

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

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

	●	adverse market and economic conditions;

	●	loss of one or more key executives or scientists; and

	●	difficulties in securing regulatory approval to market our product candidates.

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

Overview

Business

We are a clinical stage biotechnology company focused on the discovery and development of novel inhaled therapeutic products intended to prevent and treat respiratory and other diseases 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 efficacy, safety, and tolerability profiles. Our goal is to develop breakthrough therapeutic products that are safe, convenient, and more effective than the existing therapeutic products for respiratory and other diseases where iSPERSE properties are advantageous.

Our current pipeline is aligned to this goal as we develop iSPERSE-based therapeutic candidates which target the prevention and treatment of a range of diseases. These therapeutic candidates include Pulmazole for the treatment of allergic bronchopulmonary aspergillosis (“ABPA”) in patients with asthma, and in patients with cystic fibrosis (“CF”), PUR1800 for the treatment of acute exacerbations of chronic obstructive pulmonary disease (“AECOPD”), and PUR3100 for the treatment of acute migraine. Each program is enabled by its unique iSPERSE formulation designed to achieve specific therapeutic objectives.

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 clinical trials for our therapeutic candidates and leverage the iSPERSE platform to enable delivery of partnered compounds, we intend to form strategic alliances with third parties, including pharmaceutical and 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:

	●	continue Pulmazole clinical trials focused on the development of an inhaled anti-fungal therapy to prevent and treat allergic/hypersensitivity response to fungus in the lungs of patients with asthma and CF;

	●	continue ongoing clinical and non-clinical trials for PUR1800, focusing on the development of an inhaled kinase inhibitor for treatment of AECOPD;

	●	initiate and complete non-clinical studies for PUR3100, an orally inhaled dihydroergotamine (“DHE”) to support planned Ph1 and Ph2 clinical studies for the treatment of acute migraine;

	●	seek regulatory approval for our product candidates;

	●	capitalize on our proprietary iSPERSE technology and our expertise in inhaled therapeutics and particle engineering to identify new product candidates for prevention and treatment of diseases with significant unmet medical needs;

	●	invest in protecting and expanding our intellectual property portfolio and file for additional patents to strengthen our intellectual property rights and

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

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

Pulmazole

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

We initiated a Phase 2 study in 2019, entitled: “A Randomized, Double-Blind, Multicenter, Placebo-Controlled, Phase 2 Study to Evaluate the Safety, Tolerability, and Pharmacokinetics of Itraconazole Administered as a Dry Powder for Inhalation (PUR1900) in Adult Asthmatic Patients with ABPA. This study was terminated in July 2020 due to the ongoing impact of the COVID-19 pandemic on patient enrollment and study conduct.

We conducted a Type C meeting with the U.S. Food and Drug Administration (the “FDA”) on January 27, 2021 and leveraging the insights gained from this meeting, now plan to commence the Phase 2b clinical study when the risks of study conduct presented by the ongoing COVID-19 pandemic are reduced to an acceptable level. The Phase 2b clinical study design includes a 16-week dosing regimen as well as an exploration of potential efficacy endpoints, whereas the terminated Phase 2 study comprised only a 4-week dosing regimen with safety and tolerability as its primary endpoint. The longer dosing regimen of the planned new Phase 2b clinical study is supported by the 6-month inhalation toxicology study in dogs completed in April 2020.

On May 10, 2021, we sent a letter to Cipla notifying Cipla that it is in material breach of the Cipla Agreement due to Cipla’s anticipatory breach of its obligation under the Cipla Agreement to fund 50% of the development costs for Pulmazole in accordance with the terms of the Cipla Agreement. Cipla has refused to approve the development plan and budget for the Phase 2b clinical study unless we accept Cipla’s demands that we absorb a disproportionate amount of the costs and financial risks of the development plan. In the letter we stated that Cipla had 30 days from the date of the letter to reaffirm that it will perform the Cipla Agreement in accordance with its terms.

Since the date of our letter to Cipla, we have received several correspondences from Cipla disputing that Cipla is in material breach of the Cipla Agreement and that we are entitled to terminate the Agreement. Accordingly, Cipla and we have initiated certain mandatory dispute resolution procedures under the Cipla Agreement, which remain ongoing. As of the date of this report, we have not terminated the Agreement and the Agreement remains in full force and effect. However, we intend to continue to seek Cipla’s reaffirmation of all of its obligations under the Cipla Agreement and, in the absence of such reaffirmation, to pursue all available remedies.

PUR1800

On December 26, 2019, Pulmatrix entered into a License, Development and Commercialization Agreement (the “JJEI License Agreement”) with and Johnson & Johnson Enterprise Innovation, Inc. (“JJEI”). Under the JJEI License Agreement, the Company has granted JJEI an option to acquire (1) the Company’s rights to an intellectual property portfolio of materials and technology related to narrow spectrum kinase inhibitor compounds and (2) an exclusive, worldwide, royalty bearing license to PUR1800. In April 2021, JJEI exercised their option to terminate the Company’s license, development and commercialization agreement. All rights to the in-licensed kinase inhibitor portfolio, including PUR1800 and PUR5700, reverted to Pulmatrix upon the effective date of the termination, which was July 6, 2021. We are continuing the development of PUR1800, with ongoing clinical and toxicology studies to support programs in AECOPD and other chronic airway diseases.

As of the filing of this Quarterly Report, 18 patients have been dosed in a fully enrolled Phase 1b safety, tolerability and biomarker study targeting approximately 12 patients completing the study. Study subjects have stable moderate-severe chronic obstructive pulmonary disease (“COPD”). The Phase 1b study is a randomized, three-way crossover double-blind study with 14 days of daily dosing with placebo and one of two doses of PUR1800, and a 28 day follow up period between each crossover.

The Ph1b study is being conducted at the Medicines Evaluation Unit in Manchester United Kingdom (“UK”), where the UK vaccination rollout included 3 months between the first and second vaccination. This slowed the Ph1b enrollment rate during the first half of 2021. With many potential study subjects having completed their second vaccination, the Ph1b enrollment rate has accelerated, and top line data is expected in Q1 of 2022.

The toxicology studies for rats and dogs, with durations of 6 and 9 months respectively, are complete. The data from both studies demonstrated that PUR1800 is safe and well tolerated with chronic dosing, with little to no progression of findings from 28-day studies. This indicates potential for chronic dosing of PUR1800, enabling Pulmatrix to explore PUR1800 therapy for chronic respiratory disease such as steroid resistant asthma, COPD, or idiopathic pulmonary fibrosis. While the program is currently in development for treatment of acute exacerbation of AECOPD, these positive toxicology study results could expand potential indications and value of the program.

PUR3100

Nonclinical pharmacokinetic (“PK”) and good laboratory practices (“GLP”) toxicology studies are underway to support a planned Ph1/Ph2 study. Pulmatrix intends to dose the first patients in a Ph1/ Ph2 study in Q1 2022 with data anticipated in Q4 2022.

Financial Overview

Revenues

To date, we have not generated any product sales. The 2021 revenue was generated by the collaboration agreement and license agreement with Cipla on our Pulmazole program, the JJEI License Agreement for our PUR1800 kinase inhibitor, and immaterial royalties recorded from the Sensory Cloud agreement. In April, 2021, JJEI notified us that JJEI was exercising its option to terminate the Company’s license, development, and commercialization agreement. The agreement remained in effect until the termination date of July 6, 2021 and all revenues pursuant to the agreement will be recognized as of that date. We do not expect to receive any further revenue under the Cipla Agreement from the non-refundable upfront payment until the ongoing contractual dispute with Cipla has been resolved.

For more discussion on the collaboration or licensing agreements, please see Note 5 of the condensed consolidated financial statements in the Company’s annual report on Form 10-K filed with the SEC on March 23, 2021 and amended on March 26, 2021 and May 14, 2021.

Research and Development Expenses

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

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

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

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

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

	●	costs associated with preclinical activities and clinical regulatory operations, and

	●	consulting and professional fees associated with research and development activities

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

Research and development activities are central to our business model. We utilize a combination of internal and external efforts to advance product development from early stage work to clinical trial manufacturing and clinical trial support. External efforts include work with consultants and substantial work at CROs and CMOs. We support an internal research and development team and facility for our pipeline programs. To move these programs forward along our development timelines, a large portion, approximately (81% of staff) are research and development employees. In addition, we maintain approximately a 22,000 square foot office and 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, corporate communications and human resource functions, facility costs not otherwise included in research and development expenses, patent filing fees and professional legal fees. Other general and administrative expenses include travel expenses, expenses related to a publicly traded company and professional fees for consulting, auditing and tax services.

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

Critical Accounting Policies

This management’s discussion and analysis of our financial condition and results of operations is based on our

SEC Form 10-Q filed by Pulmatrix, Inc.