NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
(in
thousands, except share and per share data)
1. Organization
Pulmatrix, Inc. and its subsidiaries (the Company) is a clinical stage biotechnology company focused on the discovery and development of a novel class of
inhaled therapeutic products. The Companys proprietary dry powder delivery platform, iSPERSE (inhaled Small Particles Easily Respirable and Emitted), is engineered to deliver small, dense particles with highly efficient dispersibility
and delivery to the airways, which can be used with an array of dry powder inhaler technologies and can be formulated with a variety of drug substances. The Company is developing a pipeline of iSPERSE-based therapeutic candidates targeted at
prevention and treatment of a range of respiratory diseases and infections with significant unmet medical needs.
Liquidity
At September 30, 2016, the Company had unrestricted cash and cash equivalents of $7,313, an accumulated deficit of $146,116 and working capital of $4,230.
The Company will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels.
The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds
by issuing equity securities, the Companys stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Companys ability to conduct business. If unable to raise
additional capital when required or on acceptable terms, the Company may have to (i) delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product
candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize ourselves on unfavorable terms.
The Companys ability to continue as a going concern is
dependent upon its ability to obtain additional equity or debt financing and, ultimately, to generate revenue. Those factors raise substantial doubt about the Companys ability to continue as a going concern. The Companys condensed
consolidated financial statements as of September 30, 2016 do not include any adjustments that might result from the outcome of this uncertainty.
2. Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial reporting and as
required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and
recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and nine months ended
September 30, 2016, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2016. For further information, refer to the financial statements and footnotes
included in the Companys annual financial statements for the fiscal year ended December 31, 2015, which are included in the Companys annual report on Form 10-K filed with the SEC on March 10, 2016.
7
3. Summary of Significant Accounting Policies
In the nine months ended September 30, 2016, there were no changes to the Companys significant accounting policies identified in the Companys
most recent annual financial statements for the fiscal year ended December 31, 2015, which are included in the Companys current report on Form 10-K filed with the SEC on March 10, 2016, except as noted below.
Recent Accounting Pronouncements
The Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee
should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or
less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of
the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
(i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance. The adoption of this standard is not expected to have a material impact on
the Companys condensed consolidated financial position and results of operations.
In March 2016, the FASB issued ASU No. 2016-09 (ASU
2016-09), CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will affect all entities that issue share-based payment awards to their employees and is effective for
annual periods beginning after December 15, 2016 for public entities. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the effect that ASU 2016-09 will have on the Companys financial position and results of
operations.
In April 2016, the FASB issued ASU No. 2016-10 (ASU 2016-10), Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing. ASU 2016-10 will affect all entities that enter into contracts with customers to transfer goods or services (that are an output of the entitys ordinary activities) in exchange for
consideration. The amendments in this update affect the guidance in ASU 2014-09 which is not yet effective, the amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing
implementation guidance, while retaining the related principles for those areas. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for ASU 2014-09. The
Company is currently evaluating the effect that ASU 2016-10 will have on the Companys financial position and results of operations.
In May 2016,
the FASB issued ASU No. 2016-12 (ASU 2016-12), Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 will affect all entities that enter into contracts with
customers to transfer goods or services (that are an output of the entitys ordinary activities) in exchange for consideration. The amendments in this update affect the guidance in ASU 2014-09 which is not yet effective, the amendments in this
update affect narrow aspects of Topic 606 including among others: assessing collectability criterion, noncash consideration, and presentation of sales taxes and other similar taxes collected from customers. The effective date and transition
requirements for the amendments in this update are the same as the effective date and transition requirements for ASU 2014-09. The Company is currently evaluating the effect that ASU 2016-12 will have on the Companys financial position and
results of operations.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic
230), Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company is currently evaluating the ASU 2016-15 and does not believe this ASU will have a material impact on its condensed consolidated financial statements
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 fair value of net assets acquired in business combinations,
estimating the useful lives of depreciable and amortizable assets, valuation allowance against deferred tax assets, goodwill impairment, and estimating the fair value of long-lived assets to assess whether impairment charges may apply.
8
Revenue Recognition
Our principal sources of revenue are income from fees for services. In all instances, revenue is recognized only when the price is fixed or determinable,
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and collectability of the resulting receivable is reasonably assured.
Goodwill
Goodwill represents the excess of the
purchase price over the estimated fair value of identifiable net assets acquired in a business combination. Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying
value may not be recoverable. The Company initially performs a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit. No
further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. The Company completed a qualitative assessment and determined that there was no impairment of
goodwill as of September 30, 2016.
In-process Research & Development
In-process research & development (IPR&D) represents the fair value assigned to research and development assets that were not fully
developed at the date of acquisition. IPR&D acquired in a business combination or recognized from the application of push-down accounting is capitalized on the Companys consolidated balance sheet at its acquisition-date fair value. Until
the project is completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. Upon completion of a project, the carrying value of the related IPR&D is reclassified to intangible assets and is
amortized over the estimated useful life of the asset.
When performing the impairment assessment, the Company first assesses qualitative factors to
determine whether it is necessary to recalculate the fair value of its acquired IPR&D. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of acquired IPR&D is less than its
carrying amount, it calculates the assets fair value. If the carrying value of the Companys acquired IPR&D exceeds its fair value, then the intangible asset is written down to its fair value.
4. Goodwill and IPR&D
The Company recognized
$15,942 of goodwill in connection with the Merger. As of September 30, 2016, there were no accumulated impairment losses. Goodwill has been assigned to the Companys single reporting unit, which is the single operating segment by which the
chief decision maker manages the Company.
Pulmatrix was unsuccessful in selling the rights to RUT58-60 and the related license rights expired on
June 15, 2016. With the expiration of the term for the license agreement, the IPR&D and related deferred tax liability were written off on June 15, 2016. At September 30, 2016, the Company performed a goodwill qualitative
assessment and concluded that it was more likely than not that there was no impairment of goodwill.
The Company recognized $7,534 of IPR&D in
connection with the Merger. The acquired IPR&D consisted of RUT58-60, a proprietary formulation of HOC1 and Ruthigens lead drug candidate, which was designed to prevent and treat infection in invasive applications. The Company determined
that there was a full write-off of its IPR&D of $7,534 and the related deferred tax liability of $2,959. As of Sept 30, 2016, a full write-off was recorded that totaled a net $4,575.
5. Prepaid Expenses and Other Current Assets
Prepaid
expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
|
|
At December 31, 2015
|
|
Prepaid Insurance
|
|
$
|
280
|
|
|
$
|
220
|
|
Prepaid Clinical Trials
|
|
|
355
|
|
|
|
169
|
|
Prepaid Other
|
|
|
181
|
|
|
|
92
|
|
Accounts Receivable
|
|
|
|
|
|
|
275
|
|
Deferred Costs
|
|
|
|
|
|
|
598
|
|
Other current assets
|
|
|
206
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Total prepaid and other current assets
|
|
$
|
1,022
|
|
|
$
|
1,560
|
|
|
|
|
|
|
|
|
|
|
9
6. Debt
Loan and Security Agreement and Warrant Agreement
On
June 11, 2015, the Company entered into a Loan and Security Agreement (LSA) with Hercules Technology Growth Capital, Inc. (Hercules), for a term loan in a principal amount of $7,000 (Term Loan). On
June 15, 2015, following the completion of the Merger, the Company signed a joinder agreement with Hercules making it a co-borrower under the LSA. The entire term loan was funded on June 16, 2015. The term loan is secured by substantially
all of the Companys assets, excluding intellectual property.
The term loan bears interest at a floating annual rate equal to the greater of
(i) 9.50% and (ii) the sum of (a) the prime rate as reported by The Wall Street Journal minus 3.25% plus (b) 8.50%. The Company is required to make interest payments in cash on the first business day of each month, beginning on
July 1, 2015. Beginning on August 1, 2016, the Company will be required to make monthly payments on the first business day of each month consisting of principal and interest based upon a 30-month amortization schedule, and any unpaid
principal and interest is due on the maturity date of July 1, 2018. Upon repayment of the term loan, the Company is also required to pay an end of term charge to the Lenders equal to $245.
The Company may elect to prepay all, but not less than all, of the outstanding principal balance of the term loan, subject to a prepayment fee of 1%
3%, depending on the date of repayment. Contingent on the occurrence of several events, including that the Companys closing stock price exceed $11.73 per share for the seven days preceding a payment date, the Company may elect to pay, in whole
or in part, any regularly scheduled installment of principal up to an aggregate maximum amount of $1,000 by converting a portion of the principal into shares of the Companys common stock at a price of $11.73 per share. Hercules may elect to
receive payments in the Company Common Stock by requiring the Company to effect a conversion option whereby Hercules can elect to receive a principal installment payment in shares of the Company Common Stock based on a price of $11.73 per share,
subject to an aggregate maximum principal amount of $1,000.
The Company determined that the Companys provisions allowing conversion of all or a
portion of the LSA contained a beneficial conversion feature (BCF). The BCF is contingent upon the occurrence of certain events and as such, the Company will not record the BCF until the contingency is resolved. Through September
30, 2016 the contingency was not resolved.
The credit facility includes affirmative and negative covenants. The affirmative covenants include, among
others, covenants requiring the Company to maintain its legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on transferring
collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and undergoing a change in control, in each case subject to
certain exceptions. In general, the Term Loan prohibits the Company from (i) repurchasing or redeeming any class of capital stock, including common stock or (ii) declaring or paying any cash dividend or making cash distribution on any
class of capital stock, including common stock.
In connection with the making of the term loan the Company agreed that Hercules shall have the right to
purchase up to $1,000 of securities, under terms and conditions equal to those afforded to other investors, in the event that the Company conducts a private placement for $10,000 or more of securities after the closing date.
On June 16, 2015, in connection with the LSA, the Company granted to Hercules a warrant to purchase 25,150 shares of the Companys common stock at
an exercise price of $8.35 per share. The warrants are exercisable in whole or in part any time prior to the expiration date of June 16, 2020. At any point prior to the expiration of the warrants, Hercules may elect to convert all or a portion
of the warrants into Company Common Stock on a net basis. In the event the warrants are not fully exercised and the fair market value of one share of Company Common Stock is greater than the exercise price of the warrant, upon the expiration date
any outstanding warrants will be automatically exercised for shares of Company Common Stock on a net basis.
The LSA includes provisions requiring the
embedded interest rate reset upon an event of default and the put option upon an event of default or qualified change of control each represent an embedded derivative instrument requiring bifurcation from the loan. The embedded derivatives were
bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The fair value of the compound derivative at issuance of $11 was recorded as a derivative liability and as a discount to
the debt. The derivative liability is remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the statements of operations (Note 11). The net debt discounts resulting from the embedded
compound derivative and lender fees are being amortized as interest expense from the date of issuance through the maturity date using the effective interest method. The Company incurred interest expense of $225 and $673 during the three and nine
months ended September 30, 2016, respectively of which $169 and $516, respectively, was payable in cash. The Company incurred interest expense
10
of $220 and $254 during the three and nine months ended September 30, 2015, respectively of which $170 and $198, respectively, was payable in cash. The carrying amounts of the Companys
Term Loan as of September 30, 2016 and December 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules
Term
Loan
|
|
|
Debt
Discount
|
|
|
Issuance
Costs
|
|
|
Total
|
|
Balance January 1, 2016
|
|
$
|
7,000
|
|
|
$
|
(248
|
)
|
|
$
|
(31
|
)
|
|
$
|
6,721
|
|
Accretion of debt discount
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
Accretion of issuance costs
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
Principal payments
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2016
|
|
$
|
6,588
|
|
|
$
|
(166
|
)
|
|
$
|
(18
|
)
|
|
$
|
6,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt, net of debt discount and carrying costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,511
|
|
Long term portion of debt, net of current portion and carrying costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future principal payments in connection with the Term Loan are as follows:
|
|
|
|
|
Remainder of 2016
|
|
$
|
634
|
|
2017
|
|
|
2,698
|
|
2018
|
|
|
3,256
|
|
|
|
|
|
|
|
|
$
|
6,588
|
|
|
|
|
|
|
Interest expense for the three and nine months ended September 30, 2016 and 2015 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Hercules Term Loan
|
|
$
|
225
|
|
|
$
|
220
|
|
|
$
|
673
|
|
|
$
|
254
|
|
Notes, including 5X Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
2015 Bridge Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
225
|
|
|
$
|
220
|
|
|
$
|
673
|
|
|
$
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
|
|
At December 31, 2015
|
|
Accrued vacation
|
|
$
|
64
|
|
|
$
|
45
|
|
Accrued wages and incentive
|
|
|
583
|
|
|
|
673
|
|
Accrued clinical & consulting
|
|
|
285
|
|
|
|
622
|
|
Accrued legal & patent
|
|
|
74
|
|
|
|
62
|
|
Accrued end of term fee
|
|
|
131
|
|
|
|
55
|
|
Deferred Rent
|
|
|
36
|
|
|
|
4
|
|
Accrued other expenses
|
|
|
20
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
1,193
|
|
|
$
|
1,486
|
|
|
|
|
|
|
|
|
|
|
11
8. Common Stock
Pulmatrix Operating Private Placement
On June 15,
2015, immediately prior to the Merger, pursuant to a securities purchase agreement between the Company and certain existing investors of the Company dated March 13, 2015, the Company sold to such investors 24,538,999 units, with each unit
consisting of (i) one share of Pulmatrix Operatings common stock and (ii) a warrant representing the right to purchase 2.193140519 shares of Pulmatrix Operating common stock at an exercise price of $0.448266 per share (each
pre-Reverse Stock Split and before giving effect to the Exchange Ratio), for aggregate gross proceeds of $10,000 (the Pulmatrix Operating Private Placement). Upon the Effective Time, the Pulmatrix Operating common stock underlying the
units was exchanged for an aggregate of 1,454,553 shares of Company Common Stock, and the warrants underlying the units were converted into warrants to purchase an aggregate of 3,190,030 shares of Company Common Stock at an exercise price of $7.563
per share. The proceeds from the issuance of the units were allocated between the Company Common Stock and the warrants based on their relative fair values.
Ruthigen Private Placement
Immediately after the Merger,
the Company closed a private placement of 379,387 shares of Company Common Stock at a price of $6.875 per share in a private placement for aggregate gross proceeds of approximately $2.6 million (the Ruthigen Private Placement).
9. Warrants
Common Stock Warrants Issued in Pulmatrix
Operating Private Placement
At September 30, 2016, the Company had outstanding warrants to purchase 3,190,030 shares of Company Common Stock at
an exercise price of $7.563 per share. The warrants were issued on June 15, 2015 immediately prior to the Effective Time in connection with the Pulmatrix Operating Private Placement.
Each warrant issued in the Pulmatrix Operating Private Placement has a five-year term and becomes exercisable at the earliest to occur of the date that
(i) the Company enters into a strategic license agreement with a third party related to any of the Companys products whereby the Company is guaranteed to receive consideration having a value of at least $20,000, (ii) the Company
consummates a public or private offering of common stock or securities convertible into common stock that results in aggregate gross proceeds of at least $20,000 and the per share value of such consideration is equal to at least $10.00 per share,
subject to certain adjustments, (iii) for a period of sixty consecutive trading days, the volume weighted average price per share of common stock exceeds $12.50, subject to certain adjustments, and the average daily trading volume on such
trading market exceeds 40,000 shares per trading day, subject to certain adjustments, or (iv) a change of control transaction occurs. The number of shares of common stock underlying each warrant and the exercise price per share are subject to
adjustment in the case of standard dilutive events.
Each warrant provides that, following it initially becoming exercisable, if (i) the volume
weighted average price of common stock exceeds one hundred fifty percent (150%) of the exercise price of the warrant for thirty (30) consecutive trading days, (ii) the daily trading volume for common stock exceeds 80,000 shares per
trading day, subject to certain adjustments, for thirty (30) consecutive trading days and (iii) there is an effective registration statement under the Securities Act of 1933, as amended, covering the resale of the shares of common stock
issuable upon the exercise of the warrant, then the Company shall cancel the unexercised portion of the warrant for consideration equal to $0.001 per share of common stock underlying the warrant.
The proceeds from the issuance of the units were allocated between the Company Common Stock and the warrants based on their relative fair values. The value
allocated to the warrants was classified within equity on Companys condensed consolidated balance sheet.
Warrants Assumed in Merger.
Between March 2014 and May 2014, in connection with its initial public offering (IPO), Ruthigen issued warrants to purchase an aggregate of units
(the Series A Warrants). The Series A Warrants were originally each exercisable at a price of $18.125 per warrant for (x) 0.4 shares of common stock and (y) a warrant (the Series B Warrant) to purchase 0.4 shares of
common stock at an exercise price of $22.65625 per share. The Series A Warrants are exercisable from the date of issuance and terminate on the second anniversary of the date of issuance. The exercise price and the number of shares for which each
Series A Warrant may be exercised is subject to adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting the Companys common stock. In addition, subject to certain exceptions, the exercise price of
each the Series A Warrants and the Series B Warrants is subject to a weighted average reduction if the Company issues shares of common stock (or securities convertible into common stock) in the future at a price below both (a) the current
exercise price of the Series A Warrant; and (b) the current market price of the Companys common stock. The Series A Warrants may be called by the Company, for consideration equal to $0.00025 per Series A Warrant, on not less than 10
business days notice if the closing price of the common stock is above 150% of the $18.125 IPO price per unit for any period of 20 consecutive business days ending not more than three business days prior to the call notice date. The Series B
Warrants will be exercisable upon issuance and will terminate on the fifth anniversary of the date of issuance. The Company agrees that, during the period the Series A Warrants are outstanding, it will maintain the effectiveness of the registration
statement such that the holder may exercise the Series A Warrants to receive registered shares of common stock and registered Series B Warrants (and the shares of common stock underlying the Series B Warrants). The Company determined that the Series
A and Series B Warrants are equity instruments because the warrants are (a) freestanding financial instruments; (b) indexed to the Companys own stock; (c) not permitted to be settled for cash; and (d) exercisable into
common stock for which the Company has sufficient authorized and unissued shares.
12
Immediately following the Merger, the Company issued 136,000 shares of its common stock to Ruthigens
financial advisor and an aggregate of 379,387 shares in the Ruthigen Private Placement at a price of $6.875 per share. Pursuant to the weighted average exercise price reduction provisions of the Series A Warrants and the Series B Warrants, these
issuances caused the exercise price per unit of the Series A Warrants and the exercise price per share of the Series B Warrants to drop to $17.83 and $22.28, respectively.
1,219,000 Series A Warrants were outstanding at December 31, 2015. There were no exercises of any Series A Warrants prior to March 26, 2016 and they
expired according to their terms on March 26, 2016. As no Series A Warrants were exercised, no Series B Warrants were issued. There are no Series A nor Series B Warrants outstanding at September 30, 2016.
Ruthigen issued to the representative of the underwriters in the IPO warrants to purchase 37,100 shares of the Companys common stock at an exercise
price of $22.65625 per share (the Representatives Warrants). The Representatives Warrants are exercisable commencing on March 21, 2015 and expire on March 21, 2019.
Following the closing of the IPO and in connection with the IPO, the underwriters exercised a portion of the over-allotment option. In connection with the
underwriters partial exercise of the over-allotment option, Ruthigen issued to the representative of the underwriters a five-year warrant to purchase an additional 2,160 shares of the Companys common stock at an exercise price of
$22.65625 per share (Underwriters Warrant). The Underwriters Warrant is exercisable commencing one year from the date of issuance and expire on March 21, 2019.
Common Stock Warrants Issued with Term Loan
As described
in Note 6, on June 11, 2015, Pulmatrix Operating entered into a LSA with Hercules for a Term Loan in the principal amount of $7,000. On June 16, 2015, in connection with the LSA, the Company granted to Hercules a warrant to purchase 25,150
shares of Company Common Stock (the Hercules Warrants) at an exercise price of $8.35 per share. The warrants are exercisable in whole or in part any time prior to the expiration date of June 16, 2020. In the event the warrants are
not fully exercised and the fair market value of one share of Company Common Stock is greater than the exercise price of the warrant, upon the expiration date any outstanding warrants will be automatically exercised for shares of Company Common
Stock on a net basis. A portion of the proceeds from the Term Loan were allocated to the warrants based on their grant date fair value. The value allocated to the warrants of $198 was classified within equity on Companys condensed consolidated
balance sheet, with a corresponding amount recorded as a discount to the debt. The fair value of the warrants was determined using the Black-Scholes option pricing model, using the following assumptions:
|
|
|
|
|
Exercise price
|
|
$
|
8.35
|
|
Fair value of underlying stock
|
|
$
|
11.80
|
|
Expected volatility
|
|
|
72.52
|
%
|
Contractual term
|
|
|
5 years
|
|
Risk-free interest rate
|
|
|
1.68
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Common Stock Warrant Issued for Consulting Services
On August 31, 2015, the Company issued a warrant to purchase 30,000 shares of Company Common Stock (the MTS Warrants) at an exercise price of
$11.80 per share to MTS Health Partners, L.P. in exchange for consulting services. The warrant is fully vested and is exercisable in whole or in part any time prior to the expiration date of August 31, 2020. The Company recognized $211 of
stock-based compensation expense which was recorded to equity at the time of issuance. The fair value of the warrant was determined using the Black-Scholes option pricing model, using the following assumptions:
|
|
|
|
|
Exercise price
|
|
$
|
11.80
|
|
Fair value of underlying stock
|
|
$
|
11.80
|
|
Expected volatility
|
|
|
72.0
|
%
|
Contractual term
|
|
|
5 years
|
|
Risk-free interest rate
|
|
|
1.54
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
13
The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys
expected volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical
data regarding the Companys activity. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Underlying Warrants
|
|
Warrants
|
|
Issue Date
|
|
|
Classification
|
|
|
Exercisable For
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Private Placement Warrants
|
|
|
June 15, 2015
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
|
3,190,030
|
|
|
|
3,190,030
|
|
Hercules Warrants
|
|
|
June 15, 2015
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
|
25,150
|
|
|
|
25,150
|
|
MTS Warrants
|
|
|
August 31, 2015
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
|
30,000
|
|
|
|
30,000
|
|
Warrants Assumed in Merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Warrants
|
|
|
March - May 2014
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
1,219,000
|
|
Representatives Warrants
|
|
|
March 21, 2014
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
|
37,100
|
|
|
|
37,100
|
|
Underwriters Warrants
|
|
|
March 21, 2014
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
|
2,160
|
|
|
|
2,160
|
|
10. Stock-Based Compensation
The Company sponsors the Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the 2013 Plan). The 2013 Plan was amended
and restated at the Effective Time to, among other things, (i) increase the number of shares of Company Common Stock authorized under the plan, (ii) comply with the requirements imposed by Section 162(m) of the Internal Revenue Code
of 1986, as amended, and (iii) provide an increase in the number of shares of Company Common Stock available for issuance under the 2013 Plans evergreen provision. As of September 30, 2016, the 2013 Plan provides for the
grant of up to 3,450,549 shares of Company Common Stock, of which 542,465 shares remained available for future grant.
At the Effective Time, the Company
assumed Pulmatrix Operatings 2013 Employee, Director and Consultant Equity Incentive Plan (the Original 2013 Plan) and Pulmatrix Operatings 2003 Employee, Director, and Consultant Stock Plan (the 2003 Plan). At
the Effective Time, the Company terminated the Original 2013 Plan as to future awards. A total of 644,054 shares of Company Common Stock may be delivered under options outstanding as of September 30, 2016 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.
In connection with the Merger, all outstanding
stock options of Pulmatrix Operating converted into stock options to purchase Company Common Stock, subject to the Exchange Ratio. The conversion of the Pulmatrix Operating stock options for stock options to purchase Company Common Stock was treated
as a modification of the awards. The modification of the stock options did not result in any incremental compensation expense as the modification did not increase the fair value of the stock options.
Options
During the first nine months of 2016, the
Company granted options to purchase 703,550 shares of Company Common Stock to employees and options to purchase 52,800 shares of Company Common Stock to directors. At the date of grant the fair value of those options aggregated to $1,982 and $137
respectively. The stock options granted vest over 48 months (the Time Based Options). Subject to the grantees continuous service with the Company, Time Based Options vest 25% on the option grant date and the remainder in 36 equal
monthly installments beginning in the month after the Vesting Start Date. Stock options generally expire ten years after the date of grant.
The following
table summarizes stock option activity for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding January 1, 2016
|
|
|
2,316,569
|
|
|
$
|
8.59
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
756,350
|
|
|
$
|
2.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(277
|
)
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(63,662
|
)
|
|
$
|
4.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2016
|
|
|
3,008,980
|
|
|
$
|
7.21
|
|
|
|
8.14
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable September 30, 2016
|
|
|
1,195,276
|
|
|
$
|
6.53
|
|
|
|
6.83
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The estimated fair values of total stock options granted during the three and nine months ended
September 30, 2016 and 2015, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
2015
|
Expected option life (years)
|
|
|
6.22
|
|
|
|
6.22
|
|
|
6.22
|
|
6.22
|
Risk-free interest rate
|
|
|
1.60
|
%
|
|
|
1.94
|
%
|
|
1.60% - 1.94%
|
|
1.79% - 2.12%
|
Expected volatility
|
|
|
87
|
%
|
|
|
77
|
%
|
|
70% - 87%
|
|
76.0% - 132.0%
|
Forfeiture Rate
|
|
|
|
|
|
|
.021
|
%
|
|
.017% - .022%
|
|
.021% - 6.80%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
0%
|
|
0%
|
The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys expected
volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical data
regarding the Companys activity. The forfeiture rate is calculated for non-performance grants based on actual forfeiture historical values. The dividend yield considers that the Company has not historically paid dividends, and does not expect
to pay dividends in the foreseeable future As of September 30, 2016 there was $4,978 of unrecognized stock-based compensation expense related to unvested stock options granted under the Companys stock award plans. This expense is expected
to be recognized over a weighted-average period of approximately 2.6 years.
Restricted Stock Units
In connection with the Merger, the Company signed one-year employment agreements with the former CEO and CFO of Ruthigen pursuant to which the Company granted
such persons 329,052 restricted stock units (the RSUs) of which 130,435 RSUs were immediately vested upon the date of the grant and 99,309 RSUs vested during the remainder of 2015. 0 and 99,308 RSUs vested during the three months and
nine months ended September 30, 2016, respectively. The shares of common stock underlying the RSUs held by the former CEO and CFO of Ruthigen are deliverable one year after the applicable vesting date of the respective RSU. In August 2015, the
Company granted 10,374 RSUs to other employees that vest over a two year period. The Company recorded stock-based compensation expense of $7 and $1,171 for the RSUs that vested during the three and nine months ended September 30, 2016,
respectively.
The following table summarizes RSU activity for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
Total
Grant Date Fair Value
|
|
Outstanding January 1, 2016
|
|
|
109,682
|
|
|
$
|
11.97
|
|
|
$
|
1,314
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(104,495
|
)
|
|
$
|
12.30
|
|
|
|
(1,285
|
)
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2016
|
|
|
5,187
|
|
|
$
|
5.50
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents total stock-based compensation expense for the three and nine months ended September 30,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
63
|
|
|
$
|
164
|
|
|
$
|
502
|
|
|
$
|
225
|
|
General and administrative
|
|
|
413
|
|
|
|
2,277
|
|
|
|
2,376
|
|
|
|
4,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
476
|
|
|
$
|
2,441
|
|
|
$
|
2,878
|
|
|
$
|
4,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
11. Fair Value Measurements
Information about the liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, and the input
categories associated with those liabilities, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded compound derivative
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded compound derivative
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Compound Derivatives LSA with Hercules
As described in Note 6, the LSA contains an interest rate reset upon an event of default and a put option upon an event of default or qualified change of
control. Each of these features represents an embedded derivative instrument requiring bifurcation from the Term Loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance
for derivatives and hedging. The proceeds from the issuance of the Term Loan were allocated first to the warrant and compound derivative at their respective fair values, with the residual going to the carrying amount of the loan resulting in a
discount to the face value of the debt. The fair value of the compound derivative upon issuance of $11 was recognized as a derivative liability and will be adjusted to fair value at each reporting date. The fair value of the derivative instruments
is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used an income approach to estimate the fair value of the derivative liability and estimated the
probability of an event of default occurring at various dates and then estimates the present value of the amount the holders would receive upon an event of default.
The significant assumption used in the model is the probability of the following scenarios occurring:
|
|
|
|
|
|
|
At Issuance Date
|
|
At September 30, 2016
|
Probability of an event of default
|
|
10%
|
|
*
|
Prepayment penalties
|
|
1.0% - 3.0%
|
|
*
|
End of term payment
|
|
$245,000
|
|
*
|
Risk-free interest rate
|
|
1.01%
|
|
*
|
The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys expected
volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical data
regarding the Companys activity. The dividend yield considers that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future
*
|
Management determined that there were no changes in the assumptions underlying the value of the derivative instrument between the date of issuance, June 16, 2015, and September 30, 2016.
|
A roll-forward of the preferred stock warrant liability and derivative liability categorized with Level 3 inputs is as follows:
|
|
|
|
|
|
|
Derivative Instruments
|
|
Balance January 1, 2016
|
|
$
|
11
|
|
Change in fair value
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2016
|
|
$
|
11
|
|
|
|
|
|
|
Gains and/or losses (if any) arising from changes in the estimated fair value of the warrants and embedded compound
derivatives were recorded within other income, net, on the condensed consolidated statement of operations.
16
12. Net Loss Per Share
The Company computes basic and diluted net loss per share using a methodology that gives effect to the impact of outstanding participating securities (the
two-class method). As the three and nine months ended September 30, 2016 and 2015 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 table sets forth the computation of basic and
diluted net loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,157
|
)
|
|
$
|
(4,932
|
)
|
|
$
|
(18,013
|
)
|
|
$
|
(21,631
|
)
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,157
|
)
|
|
$
|
(4,932
|
)
|
|
$
|
(18,013
|
)
|
|
$
|
(21,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic and diluted
|
|
|
14,850,526
|
|
|
|
14,654,427
|
|
|
|
14,803,378
|
|
|
|
5,860,758
|
|
Net loss per share attributable to common stockholdersbasic and diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(1.22
|
)
|
|
$
|
(3.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following potentially dilutive securities outstanding prior to the use of the treasury stock method have been excluded
from the computation of diluted weighted-average shares outstanding, as they would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
3,008,980
|
|
|
|
2,224,270
|
|
Warrants to purchase common stock
|
|
|
3,284,440
|
|
|
|
4,503,440
|
|
Restricted Stock Units
|
|
|
5,187
|
|
|
|
159,336
|
|
Settlement of term loan
|
|
|
85,251
|
|
|
|
85,251
|
|
13. Commitments
On
October 27, 2015, the Company amended its operating lease for office and lab space to extend the termination date of the lease from December 2016 to December 2020, among other things. The amended lease provides for base rent, and the Company is
responsible for real estate taxes, maintenance, and other operating expenses applicable to the leased premises. The amended lease agreement provides for an increasing monthly payment over the lease term.
Future minimum lease payments under non-cancelable operating lease for office and lab space is as follows:
|
|
|
|
|
|
|
Amount
|
|
2016
|
|
|
153
|
|
2017
|
|
|
632
|
|
2018
|
|
|
654
|
|
2019
|
|
|
676
|
|
2020
|
|
|
698
|
|
|
|
|
|
|
Total
|
|
$
|
2,813
|
|
|
|
|
|
|
15. Subsequent Events
The Company has completed an evaluation of all subsequent events through the date of issuance. The Company concluded that no significant subsequent event has
occurred that requires disclosure.
17