We are offering
950,000 shares of our common stock to institutional investors pursuant to this prospectus supplement and the accompanying prospectus and a securities purchase agreement with such investors.
Our common stock is listed on the NASDAQ Global Market under the symbol PULM. On February 3, 2017, the last reported sale
price of our common stock was $3.86 per share. As of that date, the aggregate market value of our common stock held by non-affiliates, or our public float, was approximately $34,900,000 based on a total number of 16,850,526 shares of common
stock outstanding, of which at least 9,149,971 shares of common stock were held by non-affiliates. Pursuant to General Instruction I.B.6. of
Form S-3,
in no event will we sell the securities
covered hereby in a public primary offering with a value exceeding more than one-third of the aggregate market value of our common stock in any 12-month period so long as the aggregate market value of our outstanding common stock held by
non-affiliates remains below $75 million. During the 12 calendar months prior to and including the date of this prospectus, we have offered and sold $5 million of shares of common stock pursuant to General Instruction I.B.6. of
Form S-3.
We are an emerging growth company as that term is used in the Jumpstart Our
Business Startups Act of 2012 (the JOBS Act) and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus supplement, the accompanying prospectus and our filings with the Securities
and Exchange Commission.
We retained
H.C. Wainwright & Co., LLC as our exclusive placement agent to use their reasonable best efforts to solicit offers to purchase the securities in this offering. The placement agent has no obligation to buy any of the securities from us
or to arrange for the purchase or sale of any specific number or dollar amount of the securities. There is no required minimum number of securities that must be sold as a condition to completion of this offering. We expect that delivery of the
securities being offered pursuant to this prospectus supplement and the accompanying prospectus will be made on or about February 8, 2017, subject to customary closing conditions.
The placement agent has agreed to purchase 23,750 shares of our common stock upon the same terms as the investors purchasing our shares
of common stock in this offering for a total purchase price of $83,125.
RISK FACTORS
An investment in our common stock involves a high degree of risk. Before deciding whether to invest in our common stock, you should
consider carefully the risks described below, together with other information in this prospectus supplement, the accompanying prospectus, the information and documents incorporated by reference. If any of these risks actually occurs, our business,
financial condition, results of operations or cash flow could be seriously harmed. This could cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. Please also read carefully the section below entitled Special Note Regarding
Forward-Looking Statements.
Risks Related to Our Business
We are a clinical development stage biotechnology company and have never been profitable. We expect to incur additional losses in the future and may
never be profitable.
We are a clinical development stage biotechnology company. We have not commercialized any product candidates
or recognized any revenues from product sales. All of our product candidates are still in the preclinical or clinical development stage, and none have been approved for marketing or are being marketed or commercialized. Our product candidates will
require significant additional development, clinical studies, regulatory clearances and additional investment before they can be commercialized. We cannot be certain when or if any of our product candidates will obtain the required regulatory
approval.
We have never been profitable or generated positive cash flow from operations. We have incurred net losses each year since our
inception, including net losses of $26.2 million and $24.1 million for years ended December 31, 2015 and 2014, respectively. In addition, we had a net loss of $18.0 million for the nine-month period ended September 30, 2016.
As of September 30, 2016, we had an accumulated deficit of $146.1 million. Our losses are principally as a result of research and development and general administrative expenses in support of our operations. We may incur significant
additional losses as we continue to focus our resources on prioritizing, selecting and advancing our product candidates. Our ability to generate revenue and achieve profitability depends mainly upon our ability, alone or with others, to successfully
develop our product candidates, obtain the required regulatory approvals in various territories and commercialize our product candidates. We may be unable to achieve any or all of these goals with regard to our product candidates. As a result, we
may never be profitable or achieve significant and/or sustained revenues.
All of our product candidates are still under development, and there can
be no assurance of successful commercialization of any of our products.
In general, our research and development programs are in
developmental stages. One or more of our product candidates may fail to meet safety and efficacy standards in human testing, even if those product candidates are found to be effective in animal studies. To develop and commercialize inhaled
therapeutic treatment for chronic obstructive pulmonary disease and cystic fibrosis and other iSPERSE-based product candidates, we must provide the U.S. Food and Drug Administration (the FDA) and foreign regulatory authorities with human
clinical and non-clinical animal data that demonstrate adequate safety and effectiveness. To generate these data, we will have to subject our product candidates to significant additional research and development efforts, including extensive
non-clinical studies and clinical testing. Our approach to drug discovery may not be effective or may not result in the development of any drug. Currently our development efforts are primarily focused on our lead anti-infective product candidate,
PUR1900, and a bronchodilator therapy for COPD, PUR0200. Even if PUR1900 or our other product candidates are successful when tested in animals, such success would not be a guarantee of the safety or effectiveness of such product candidates in
humans. It can take several years for a product to be approved and we may not be successful in bringing any therapeutic candidates to the market. A new drug may appear promising at
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an early stage of development or after clinical trials and never reach the market, or it may reach the market and not sell, for a variety of reasons. The drug may:
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be shown to be ineffective or to cause harmful side effects during preclinical testing or clinical trials;
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fail to receive regulatory approval on a timely basis or at all;
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be difficult to manufacture on a large scale;
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not be prescribed by doctors or accepted by patients;
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fail to receive a sufficient level of reimbursement from government or third-party payors; or
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infringe on intellectual property rights of another party.
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If our delivery platform
technologies or product development efforts fail to generate product candidates that lead to the successful development and commercialization of products, our business and financial condition will be materially adversely affected.
Drug development is a long, expensive and inherently uncertain process with a high risk of failure at every stage of development, and results of earlier
studies and trials may not be predictive of future trial results.
We have a number of proprietary drug candidates in research and
development ranging from the early discovery research phase through preclinical testing and clinical trials. Preclinical testing and clinical trials are long, expensive and highly uncertain processes. It will take us several years to complete
clinical trials. The start or end of a clinical trial is often delayed or halted due to changing regulatory requirements, manufacturing challenges, required clinical trial administrative actions, slower than anticipated patient enrollment, changing
standards of care, availability or prevalence of use of a comparator drug or required prior therapy, clinical outcomes, or financial constraints of us and our partners.
Drug development is a highly uncertain scientific and medical endeavor, and failure can unexpectedly occur at any stage of preclinical and
clinical development. Typically, there is a high rate of attrition for drug candidates in preclinical and clinical trials due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables. The risk of failure
increases for our drug candidates that are based on new technologies, such as the application of our dry powder delivery platform, iSPERSE, including PUR1900, PUR0200, PUR1500 and other iSPERSE-based drug candidates currently in discovery research
or preclinical development. The failure of one or more of our iSPERSE-based drug candidates could have a material adverse effect on our business, financial condition and results of operations.
In addition, the results of preclinical studies and clinical trials of previously published iSPERSE-based products may not necessarily be
indicative of the results of our future clinical trials. The design of our clinical trials is based on many assumptions about the expected effects of inhaled drugs used historically in the industry and if those assumptions are incorrect, the trials
may not produce statistically significant results. Preliminary results may not be confirmed upon full analysis of the detailed results of an early clinical trial. Product candidates in later stages of clinical trials may fail to show safety and
efficacy sufficient to support intended use claims despite having progressed through initial clinical trials. The data collected from clinical trials of our product candidates may not be sufficient to obtain regulatory approval in the United States
or elsewhere. Because of the uncertainties associated with drug development and regulatory approval, we cannot determine if, or when, we may have an approved product for commercialization or whether we will ever achieve sales of or profits on our
product candidates or those we may pursue in the future.
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We may not be able to attract, retain, or manage highly qualified personnel, which could adversely impact
our business.
Our future success and ability to compete in the biotechnology industry is substantially dependent on our ability to
identify, attract, and retain highly qualified key managerial, scientific, medical, and operations personnel. The market for key employees in the pharmaceutical and biotechnology industries can be competitive. The loss of the services of any of our
principal members of management or key employees without an adequate replacement or our inability to hire new employees as needed could delay our product development efforts, harm our ability to sell our products or otherwise negatively impact our
business.
The scientific, research and development personnel upon whom we rely to operate our business have expertise in certain aspects
of drug development and clinical development, and it may be difficult to retain or replace these individuals. We conduct our operations at our facilities in Lexington, Massachusetts, within the greater Boston area, and this region is headquarters to
many other biotechnology, pharmaceutical, and medical technology companies, as well as many academic and research institutions, and, therefore, we face increased competition for technical and managerial personnel in this region.
In addition, we have scientific, medical and clinical advisors who assist us in designing and formulating our products and with development
and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in
the development of products that may compete with ours.
Despite our efforts to retain valuable employees, members of our management and
scientific and development teams may terminate their employment with us at any time. Although we have written employment offer letter agreements with our executive officers, these employment agreements provide for at-will employment, which means
that our executive officers can leave their employment at any time, for any reason, with or without cause and with or without notice. The loss of the services of any of our executive officers or our other key employees and our inability to find
suitable replacements could potentially harm our business, financial condition and prospects. We do not maintain key man insurance policies on the lives of these individuals or the lives of any of our other employees.
We face substantial competition in the development of our product candidates and may not be able to compete successfully, and our product candidates may
be rendered obsolete by rapid technological change.
The pharmaceutical and biotechnology industry is highly competitive, and we
face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and marketing products designed to address the indications for which we are currently developing therapeutic candidates or for
which we may develop product candidates in the future.
Many of our existing or potential competitors have, or have access to,
substantially greater financial, research and development, production, and sales and marketing resources than we do and have a greater depth and number of experienced managers. As a result, our competitors may be better equipped than us to develop,
manufacture, market and sell competing products. In addition, gaining favorable reimbursement is critical to the success of our product candidates. We are aware of many established pharmaceutical companies in the United States and other parts of the
world that have or are developing technologies for inhaled drug delivery for the prevention and treatment of respiratory diseases, including Savara Pharmaceuticals, Cardeas Pharma Corp., SkyePharma PLC and Respira Therapeutics Inc., which we
consider our potential competitors in this regard. If we are unable to compete successfully with these and other potential future competitors, we may be unable to grow or generate revenue.
The rapid rate of scientific discoveries and technological changes could result in one or more of our product candidates becoming obsolete or
noncompetitive. Our competitors may develop or introduce new products that
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render our iSPERSE delivery technology and other product candidates less competitive, uneconomical or obsolete. Some of these technologies may have an entirely different approach or means of
accomplishing similar therapeutic effects compared to our drug candidates. Our future success will depend not only on our ability to develop our product candidates but to improve them and keep pace with emerging industry developments. We cannot
assure you that we will be able to do so.
We also expect to face increasing competition from universities and other non-profit research
organizations. These institutions carry out a significant amount of research and development in the areas of respiratory diseases. These institutions are becoming increasingly aware of the commercial value of their findings and are more active in
seeking patent and other proprietary rights as well as licensing revenues.
The potential acceptance of therapeutics that are alternatives
to ours may limit market acceptance of our product candidates, even if commercialized. Respiratory diseases, including our targeted diseases and conditions, can also be treated by other medication or drug delivery technologies. These treatments may
be widely accepted in medical communities and have a longer history of use. The established use of these competitive drugs may limit the potential for our product candidates to receive widespread acceptance if commercialized.
If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually
required or expected, we may not be able to obtain regulatory clearance or approval for or commercialize our products.
We do not
have the ability to independently conduct our pre-clinical and clinical trials for our products and we must rely on third parties, such as CROs, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these
third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the
failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory
approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in
conducting our clinical trials for reasons outside of our control.
We rely on third party contract vendors to manufacture and supply us with high
quality active pharmaceutical ingredients and manufacture our therapeutic candidates in the quantities we require on a timely basis.
We currently do not manufacture any active pharmaceutical ingredients (APIs). Instead, we rely on third-party vendors for the
manufacture and supply of our APIs that are used to formulate our therapeutic candidates. We also do not currently own or operate manufacturing facilities and therefore rely, and expect to continue to rely, on third parties to manufacture clinical
and commercial quantities of our therapeutic candidates and for quality assurance related to regulatory compliance. If these suppliers or manufacturers are incapable or unwilling to meet our current or future needs at our standards or on acceptable
terms, if at all, we may be unable to locate alternative suppliers or manufacturers on acceptable terms, if at all, or produce necessary materials or components on our own.
While there may be several alternative suppliers of API in the market, changing API suppliers or finding and qualifying new API suppliers can
be costly and take a significant amount of time. Many APIs require significant lead time to manufacture. There can also be challenges in maintaining similar quality or technical standards from one manufacturing batch to the next. For PUR0200 and
PUR1900, we place purchase orders with a single supplier to supply the API, and we could experience a delay in conducting clinical trials of or obtaining regulatory approval for PUR0200 and PUR1900 and incur additional costs if we changed from this
supplier for any reason. Similarly, replacing our manufacturers could cause us to incur added costs and experience delays in identifying, engaging, qualifying and training any such replacements.
S-8
If we are not able to find stable, affordable, high quality, or reliable supplies of the APIs, or
if we are unable to maintain our existing or future third party manufacturing arrangements, we may not be able to produce enough supply of our therapeutic candidates or commercialize any therapeutic candidates on a timely and competitive basis,
which could adversely affect our business, financial condition or results of operations.
We may be required to take write-downs or write-offs,
restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and stock price, which could cause our investors to lose some or all of their investment.
There can be no assurance that diligence conducted in connection with the Merger revealed all material issues that may be present or that
factors outside of our control will not later arise. As a result, we may be forced to later write-down or write-off assets relating to Ruthigens assets which would result in losses. Even if due diligence successfully identified certain risks,
unexpected risks may arise and previously known risks may materialize in a manner not consistent with each companys preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on liquidity, the
fact that we report charges of this nature could contribute to negative market perceptions about our securities. In addition, charges of this nature may make future financing difficult to obtain on favorable terms or at all.
We may not receive an appropriate price in a future sale or assignment of our rights related to our current drug candidates.
We may seek to sell or assign our rights related to our current drug candidates. If completed, any such sale or assignment may be at a
substantial discount, the consideration received may not accurately represent the value of the assets sold or assigned and our stockholders may not be entitled to participate in the future prospects of such drug candidates.
Our failure to successfully acquire, develop and market additional drug candidates or approved drug products could impair our ability to grow.
As part of our growth strategy, we may evaluate, acquire, license, develop and/or market additional product candidates and
technologies. However, our internal research capabilities are limited, and we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of
this strategy depends partly upon our ability to identify, select and acquire promising pharmaceutical product candidates and products. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or
approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have
limited resources to identify and execute the acquisition or in-licensing of third party products, businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or
in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.
Any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical
testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown
to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we acquire will be manufactured profitably or achieve market
acceptance.
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We may be subject to claims that our employees, independent consultants or agencies have wrongfully used or
inadvertently disclosed confidential information of third parties.
We employ individuals and contract with independent consultants
and agencies that may have previously worked at or conducted business with third parties; and, we may be subject to claims that we or our employees, consultants or agencies have inadvertently or otherwise used or disclosed confidential information
of our employees former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims.
There is no guarantee of success in defending these claims, and if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.
Market and economic conditions may negatively impact our business, financial condition and share price.
Concerns over inflation, low energy prices, geopolitical issues, the U.S. financial markets and a declining real estate market, unstable global
credit markets and financial conditions, and volatile oil prices have led to periods of significant economic instability, diminished liquidity and credit availability, declines in consumer confidence and discretionary spending, diminished
expectations for the global economy and expectations of slower global economic growth going forward, increased unemployment rates, and increased credit defaults in recent years. Our general business strategy may be adversely affected by any such
economic downturns, volatile business environments and continued unstable or unpredictable economic and market conditions. If these conditions continue to deteriorate or do not improve, it may make any necessary debt or equity financing more
difficult to complete, more costly, and more dilutive. In addition, there is a risk that one or more of our current and future service providers, manufacturers, suppliers, hospitals and other medical facilities, our third party payors, and other
partners could be negatively affected by difficult economic times, which could adversely affect our ability to attain our operating goals on schedule and on budget or meet our business and financial objectives.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which
could harm our operating results, our ability to operate our business and investors views of us.
Ensuring that we have
adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of
the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires public companies to conduct an annual review and evaluation of their internal controls. This Annual Report does not include a report of managements assessment
regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies. Our failure to maintain the effectiveness of our internal controls in accordance with the requirements of the
Sarbanes-Oxley Act could have a material adverse effect on our business. We could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the price of our common stock.
Risks Related to Regulatory Matters
Our product
candidates must undergo rigorous nonclinical and clinical testing, and we must obtain regulatory approvals, which could be costly and time-consuming and subject us to unanticipated delays or prevent us from marketing any products. We cannot be
certain that any of our current and future product candidates will receive regulatory approval, and without regulatory approval we will not be able to market our product candidates.
Our ability to generate revenue related to product sales, if ever, will depend on the successful development and regulatory approval of our
product candidates. We currently have no products approved for sale, and we cannot guarantee that we will ever have marketable products. The development of a product candidate and issues relating to its approval and marketing are subject to
extensive regulation, including regulation for safety, efficacy and quality, by the FDA in the United States and comparable regulatory authorities in other countries, with
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regulations differing from country to country. The FDA regulations and the regulations of comparable foreign regulatory authorities are wide-ranging and govern, among other things:
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product design, development, manufacture and testing;
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product storage and shipping;
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pre-market clearance or approval;
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advertising and promotion; and
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product sales and distribution.
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Clinical testing can be costly and take many years, and the
outcome is uncertain and susceptible to varying interpretations. We cannot predict whether our current or future trials and studies will adequately demonstrate the safety and efficacy of any of our product candidates or whether regulators will agree
with our conclusions regarding the preclinical studies and clinical trials we have conducted to date, including the Phase I clinical trials for PUR0200. The clinical trials of our product candidates may not be completed on schedule, the FDA or
foreign regulatory agencies may order us to stop or modify our research, or these agencies may not ultimately approve any of our product candidates for commercial sale. The data collected from our clinical trials may not be sufficient to support
regulatory approval of our various product candidates. Even if we believe the data collected from our clinical trials are sufficient, the FDA has substantial discretion in the approval process and may disagree with our interpretation of the data.
We are not permitted to market our product candidates in the United States until we receive approval of a NDA from the FDA. Obtaining
approval of a NDA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. The FDA review processes can take years to complete and approval is never guaranteed. We cannot be certain that any of our
submissions will be accepted for filing and review by the FDA.
The requirements governing the conduct of clinical trials and
manufacturing and marketing of our product candidates outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can require, among other things, additional testing and different
clinical trial designs. Foreign regulatory approval processes include essentially all of the risks associated with the FDA approval processes. Some of those agencies also must approve prices of the products. Approval of a product by the FDA does not
ensure approval of the same product by the health authorities of other countries, or vice versa. In addition, changes in regulatory policy in the United States or in foreign countries for product approval during the period of product development and
regulatory agency review of each submitted new application may cause delays or rejections.
If we are unable to obtain approval from the
FDA or other regulatory agencies for our product candidates, or if, subsequent to approval, we are unable to successfully market and commercialize our product candidates, we will not be able to generate sufficient revenue to become profitable.
We have limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may impede our ability to obtain timely
approvals from the FDA or foreign regulatory agencies, if at all.
As a company, we have no experience in late-stage regulatory
filings, such as preparing and submitting NDAs, which may place us at risk of delays, overspending and human resources inefficiencies. Any delay in obtaining, or inability to obtain, regulatory approval could harm our business.
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Any failure by us to comply with existing regulations could harm our reputation and operating results.
We will be subject to extensive regulation by U.S. federal and state and foreign governments in each of the markets where we
intend to sell our product candidates if and after we are approved. If we fail to comply with applicable regulations, including FDA pre-or post-approval current Good Manufacturing Practice (cGMP) requirements, then the FDA or other
foreign regulatory authorities could sanction us. Even if a drug is FDA-approved, regulatory authorities may impose significant restrictions on a products indicated uses or marketing or impose ongoing requirements for potentially costly
post-marketing studies.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of
unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of the product, the regulatory agency may impose restrictions on that product or us,
including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may:
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impose civil or criminal penalties;
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suspend regulatory approval;
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suspend any of our ongoing clinical trials;
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refuse to approve pending applications or supplements to approved applications submitted by us;
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impose restrictions on our operations, including closing our contract manufacturers facilities; or
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seize or detain products or require a product recall.
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Any government investigation of alleged
violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to
commercialize and generate revenue from our product candidates. If regulatory sanctions are applied or if regulatory approval is withdrawn, our value and operating results will be adversely affected. Additionally, if we are unable to generate
revenue from sales of our product candidates, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.
Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses, divert managements attention from the operation of our business and damage our reputation. We expend significant resources on compliance efforts and such expenses are unpredictable and might adversely affect our results. Changing
laws, regulations and standards might also create uncertainty, higher expenses and increase insurance costs.
We and our third-party manufacturers
are, and will be, subject to regulations of the FDA and other foreign regulatory authorities.
We and our contract manufacturers
are, and will be, required to adhere to laws, regulations and guidelines of the FDA or other foreign regulatory authorities setting forth current good manufacturing practices. These laws, regulations and guidelines cover all aspects of the
manufacturing, testing, quality control and recordkeeping relating to our therapeutic candidates. We and our third-party manufacturers may not be able to comply with applicable laws, regulations and guidelines. We and our contract manufacturers are
and will be subject to unannounced inspections by the FDA, state regulators and similar foreign regulatory authorities outside the United States. Our failure, or the failure of our third party manufacturers, to comply with applicable laws,
regulations and guidelines could result in the imposition of sanctions on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our therapeutic candidates, delays, suspension or
withdrawal of approvals, license revocation, seizures or recalls of our therapeutic candidates,
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operating restrictions and criminal prosecutions, any of which could significantly and adversely affect regulatory approval and supplies of our therapeutic candidates, and materially and
adversely affect our business, financial condition and results of operations.
Even if we obtain regulatory approvals, our therapeutic candidates
will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and applicable foreign laws, regulations and guidelines, we could lose those approvals, and our business would be seriously harmed.
Even if our therapeutic candidates receive regulatory approval, we or our commercialization partners, as applicable, will be subject to ongoing
reporting obligations, including pharmacovigilance, and the therapeutic candidates and the manufacturing operations will be subject to continuing regulatory review, including inspections by the FDA or other foreign regulatory authorities. The
results of this ongoing review may result in the withdrawal of a therapeutic candidate from the market, the interruption of the manufacturing operations and/or the imposition of labeling and/or marketing limitations. Since many more patients are
exposed to drugs following their marketing approval, serious but infrequent adverse reactions that were not observed in clinical trials may be observed during the commercial marketing of the therapeutic candidate. In addition, the manufacturer and
the manufacturing facilities that we or our commercialization partners use to produce any therapeutic candidate will be subject to periodic review and inspection by the FDA and other foreign regulatory authorities. Later discovery of previously
unknown problems with any therapeutic candidate, manufacturer or manufacturing process, or failure to comply with rules and regulatory requirements, may result in actions, including but not limited to the following:
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restrictions on such therapeutic candidate, manufacturer or manufacturing process;
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warning letters from the FDA or other foreign regulatory authorities;
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withdrawal of the therapeutic candidate from the market;
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suspension or withdrawal of regulatory approvals;
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refusal to approve pending applications or supplements to approved applications submitted by us or our commercial partners;
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voluntary or mandatory recall;
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refusal to permit the import or export of our therapeutic candidates;
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product seizure or detentions;
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injunctions or the imposition of civil or criminal penalties; or
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If we or our commercialization partners, suppliers, third party
contractors or clinical investigators are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or the adoption of new regulatory requirements or policies, we or our commercialization partners may lose marketing
approval for any of our therapeutic candidates if any of our therapeutic candidates are approved, resulting in decreased or lost revenue from milestones, product sales or royalties.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider
trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional
failures to comply with any regulations applicable to us, to provide accurate information to regulatory authorities, to comply with manufacturing standards we may have established, to comply with federal and state
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healthcare fraud and abuse laws and regulations, or to report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of
pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which
could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this
activity may not be effective in controlling unknown or unmanaged risk.
If we are found in violation of federal or state fraud and
abuse laws, we may be required to pay a penalty and/or be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition and results of operations.
In the United States, we will be subject to various federal and state health care fraud and abuse laws, including anti-kickback
laws, false claims laws and other laws intended to reduce fraud and abuse in federal and state health care programs, which could affect it, particularly upon successful commercialization of our products in the United States. The federal
Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on our behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral
of business, including the purchase, order or prescription of a particular drug for which payment may be made under a federal health care program, such as Medicare or Medicaid. Under federal government regulations, some arrangements, known as safe
harbors, are deemed not to violate the federal Anti-Kickback Statute. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine
precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute. False claims laws prohibit anyone from knowingly and willfully presenting or
causing to be presented for payment to third-party payers, including government payers, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically
unnecessary items or services. Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks has resulted in the submission of false claims to governmental health care
programs. Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any health care benefit program, including private payers, or knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Violations of fraud and abuse laws
may be punishable by criminal and/or civil sanctions, including fines and/or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition,
private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.
Many states have adopted laws similar to the federal anti-kickback statute, some of which apply to the referral of patients for health care
services reimbursed by any source, not just governmental payers. Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused
on enforcing these laws, and if we are found in violation of one of these laws, we could be required to pay a penalty and could be suspended or excluded from participation in federal or state health care programs, and our business, results of
operations and financial condition may be adversely affected.
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Risks Related to Our Financial Position and Need for Additional Capital
We will be required to raise additional capital to fund our operations, and our inability to do so could raise substantial doubt about our ability to
continue as a going concern.
Pharmaceutical product development, which includes research and development, pre-clinical and
clinical studies and human clinical trials, is a time-consuming and expensive process that takes years to complete. We expect that our expenses will increase substantially as we advance PUR1900 into Phase I/Ib trials and PUR0200 into further
clinical trials in Europe and initiate U.S. clinical trials and pursue development of other iSPERSE-based product candidates and/or pursue development of iSPERSE-based pharmaceuticals in additional indications. Based upon our current expectations,
we believe that our existing capital resources, including the net proceeds from this offering, will enable us to continue planned operations through mid-2017. We cannot assure you, however, that our plans will not change or that changed
circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. We will need to raise additional funds, whether through the sale of equity or debt securities, the entry into strategic business
collaborations, the establishment of other funding facilities, licensing arrangements, or asset sales or other means, in order to continue our research and development and clinical trial programs for our iSPERSE-based product candidates and to
support our other ongoing activities. However, it may be difficult for us to raise additional funds through these planned measures if we are able to at all. Since inception, we have incurred losses each year and, since inception through
September 30, 2016, have an accumulated deficit of $146.1 million, which may raise concerns about our solvency and affect our ability to raise additional capital.
The amount of additional funds we need will depend on a number of factors, including:
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rate of progress and costs of our clinical trials and research and development activities, including costs of procuring clinical materials and operating our manufacturing facilities;
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our success in establishing strategic business collaborations or other sales or licensing of assets, and the timing and amount of any payments we might receive from any such transactions we are able to establish;
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actions taken by the FDA and other regulatory authorities affecting our products and competitive products;
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our degree of success in commercializing any of our product candidates;
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the emergence of competing technologies and products and other adverse market developments;
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the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending against claims of infringement by others;
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the level of our legal expenses; and
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the costs of discontinuing projects and technologies.
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We have raised capital in the past
primarily through debt and private placements of stock. We may in the future pursue the sale of additional equity and/or debt securities, or the establishment of other funding facilities including asset based borrowings. There can be no assurances,
however, that we will be able to raise additional capital through such an offering on acceptable terms, or at all. Issuances of additional debt or equity securities could impact the rights of the holders of our common stock and may dilute their
ownership percentage. Moreover, the establishment of other funding facilities may impose restrictions on our operations. These restrictions could include limitations on additional borrowing and specific restrictions on the use of our assets, as well
as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. We also may seek to raise additional capital by pursuing opportunities for the licensing or sale of certain intellectual property and other assets.
We cannot offer assurances, however, that any strategic collaborations, sales of securities or sales or licenses of assets will be available to us on a timely basis or on acceptable terms, if at all.
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In the event that sufficient additional funds are not obtained through strategic collaboration
opportunities, sales of securities, funding facilities, licensing arrangements and/or asset sales on a timely basis, we will be required to reduce expenses through the delay, reduction or curtailment of our projects, including PUR1900 and PUR0200
development activities, or reduction of costs for facilities and administration. Moreover, if we do not obtain such additional funds, there will be substantial doubt about our ability to continue as a going concern and increased risk of insolvency
and loss of investment to the holders of our securities. If we are or become insolvent, investors in our stock may lose the entire value of their investment.
Our long-term capital requirements are subject to numerous risks.
Our long-term capital requirements are expected to depend on many potential factors, including, among others:
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the number of product candidates in development;
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the regulatory clarity and path of each of our product candidates;
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the progress, success and cost of our clinical trials and research and development programs, including manufacturing;
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the costs, timing and outcome of regulatory review and obtaining regulatory clarity and approval of our product candidates and addressing regulatory and other issues that may arise post-approval;
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the costs of enforcing our issued patents and defending intellectual property-related claims;
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the costs of manufacturing, developing sales, marketing and distribution channels;
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our ability to successfully commercialize our product candidates, including securing commercialization agreements with third parties and favorable pricing and market share; and
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our consumption of available resources more rapidly than currently anticipated, resulting in the need for additional funding sooner than anticipated.
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Risks Related to Our Intellectual Property
We may
be unable to adequately protect or enforce our rights to intellectual property, causing us to lose valuable rights. Loss of patent rights may lead us to lose market share and anticipated profits.
Our success, competitive position and future revenues depend, in part, on our ability to obtain patent protection for our products, methods,
processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. Despite our efforts to protect our
proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose proprietary technologies and processes.
We try to protect our proprietary position by, among other things, filing U.S., European and other patent applications related to our product
candidates, methods, processes and other technologies, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
Because the patent position of pharmaceutical companies involves complex legal and factual questions, we cannot predict the validity and
enforceability of patents with certainty. Our issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties or could be circumvented. Our competitors may
also independently develop inhaled drug delivery technologies or products similar to iSPERSE and iSPERSE-based product candidates or design around or otherwise circumvent patents issued to us. Thus, any patents that we own may not provide any
protection against competitors. Our pending patent applications, those we may file in the future or those we may license from third
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parties may not result in patents being issued. Even if these patents are issued, they may not provide us with proprietary protection or competitive advantages. The degree of future protection to
be afforded by our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
Patent rights are territorial, and accordingly, the patent protection we do have will only extend to those countries in which we have issued
patents. Even so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States and the European Union. Competitors may successfully challenge our patents, produce similar drugs
or products that do not infringe our patents, or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Furthermore, it is not possible to know the scope of claims that will be allowed in
published applications and it is also not possible to know which claims of granted patents, if any, will be deemed enforceable in a court of law.
After the completion of prosecution and granting of our patents, third parties may still manufacture and/or market therapeutic candidates in
infringement of our patent protected rights. Such manufacture and/or market of our product candidates in infringement of our patent protected rights is likely to cause us damage and lead to a reduction in the prices of our product candidates,
thereby reducing our anticipated profits.
In addition, due to the extensive time needed to develop, test and obtain regulatory approval
for our therapeutic candidates, any patents that protect our product candidate may expire early during commercialization. This may reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face
increased competition through the entry of generic products into the market and a subsequent decline in market share and profits.
In
addition, in some cases we may rely on our licensors to conduct patent prosecution, patent maintenance or patent defense on our behalf. Therefore, our ability to ensure that these patents are properly prosecuted, maintained, or defended may be
limited, which may adversely affect our rights in our therapeutic products. Any failure by our licensors or development partners to properly conduct patent prosecution, patent maintenance or patent defense could harm our ability to obtain approval
or to commercialize our products, thereby reducing our anticipated profits.
If we are unable to protect the confidentiality of our trade secrets or
know-how, such proprietary information may be used by others to compete against us.
In addition to filing patents, we generally
try to protect our trade secrets, know-how and technology by entering into confidentiality or non-disclosure agreements with parties that have access to us, such as our development and/or commercialization partners, employees, contractors and
consultants. We also enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees, advisors, research collaborators, contractors and
consultants while employed or engaged by us. However, these agreements can be difficult and costly to enforce or may not provide adequate remedies. Any of these parties may breach the confidentiality agreements and willfully or unintentionally
disclose our confidential information, or our competitors might learn of the information in some other way. The disclosure to, or independent development by, a competitor of any trade secret, know-how or other technology not protected by a patent
could materially adversely affect any competitive advantage we may have over any such competitor.
To the extent that any of our
employees, advisors, research collaborators, contractors or consultants independently develop, or use independently developed, intellectual property in connection with any of our products, disputes may arise as to the proprietary rights to this type
of information. If a dispute arises with respect to any proprietary right, enforcement of our rights can be costly and unpredictable and a court may determine that the right belongs to a third party.
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Legal proceedings or third-party claims of intellectual property infringement and other challenges may
require us to spend substantial time and money and could prevent us from developing or commercializing our product candidates.
The
development, manufacture, use, offer for sale, sale or importation of our product candidates may infringe on the claims of third-party patents or other intellectual property rights. The nature of claims contained in unpublished patent filings around
the world is unknown to us, and it is not possible to know which countries patent holders may choose for the extension of their filings under the PCT or other mechanisms. We may also be subject to claims based on the actions of employees and
consultants with respect to the usage or disclosure of intellectual property learned at other employers. The cost to us of any intellectual property litigation or other infringement proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation or defense of
intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Intellectual property litigation and other proceedings may also absorb significant management time.
Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale, sell or import our therapeutic candidates in the event of an infringement action.
In the event of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third party
and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which could potentially limit
our competitive advantage. Ultimately, we could be prevented from commercializing a product candidate or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement or other claims, we are
unable to enter into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly.
We may be subject
to other patent-related litigation or proceedings that could be costly to defend and uncertain in their outcome.
In addition to
infringement claims against us, we may in the future become a party to other patent litigation or proceedings before regulatory agencies, including interference, re-examination Inter Partes review, or post grant review proceedings filed with the
U.S. Patent and Trademark Office or opposition proceedings in other foreign patent offices regarding intellectual property rights with respect to our therapeutic candidates, as well as other disputes regarding intellectual property rights with
development and/or commercialization partners, or others with whom we have contractual or other business relationships. Post-issuance oppositions are not uncommon and we or our development and/or commercialization partners will be required to defend
these opposition procedures as a matter of course. Opposition procedures may be costly, and there is a risk that we may not prevail, which could harm our business significantly.
Risks Related to Our Common Stock and this Offering
The trading market in our common stock has been extremely limited.
Since our initial listing on the NASDAQ Capital Market on March 21, 2014 and subsequent listing on the NASDAQ Global Market on
December 18, 2015, the trading market in our common stock has been extremely limited. The quotation of our common stock on the NASDAQ Global Market does not assure that a meaningful, consistent and liquid trading market currently exists. We
cannot predict whether a more active market for our common stock will develop in the future. An absence of an active trading market could adversely affect our stockholders ability to sell our common stock at current market prices in short time
periods, or possibly at all. Additionally, market visibility for our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock. As of February 3, 2017, approximately 46% of our
outstanding shares of our common stock was controlled by our officers, directors, beneficial owners of 10% or more of our securities and their respective affiliates, which adversely affects the liquidity of the trading market
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for our common stock, inasmuch as federal securities laws restrict sales of our shares by these stockholders. If such persons continue to hold their shares of our common stock, there will be
limited trading volume in our common stock, which may make it more difficult for investors to sell their shares or increase the volatility of our stock price.
The price of our common stock may fluctuate substantially.
The market price of our common stock may fluctuate as a result of, among other factors:
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the announcement of new products, new developments, services or technological innovations by us or our competitors;
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actual or anticipated quarterly increases or decreases in revenue, gross margin or earnings, and changes in our business, operations or prospects;
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announcements relating to strategic relationships, mergers, acquisitions, partnerships, collaborations, joint ventures, capital commitments, or other events by us or our competitors;
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conditions or trends in the biotechnology and pharmaceutical industries;
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changes in the economic performance or market valuations of other biotechnology and pharmaceutical companies;
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general market conditions or domestic or international macroeconomic and geopolitical factors unrelated to our performance or financial condition;
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purchase or sale of our common stock by stockholders, including executives and directors;
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volatility and limitations in trading volumes of our common stock;
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our ability to obtain financings to conduct and complete research and development activities including, but not limited to, our human clinical trials, and other business activities;
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any delays or adverse developments or perceived adverse developments with respect to the FDAs review of our planned pre-clinical and clinical trials;
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ability to secure resources and the necessary personnel to conduct clinical trials on our desired schedule;
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failures to meet external expectations or management guidance;
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changes in our capital structure or dividend policy, future issuances of securities, sales or distributions of large blocks of our common stock by stockholders;
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announcements and events surrounding financing efforts, including debt and equity securities;
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our inability to enter into new markets or develop new products;
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analyst research reports, recommendations and changes in recommendations, price targets, and withdrawals of coverage;
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departures and additions of key personnel;
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disputes and litigation related to intellectual property rights, proprietary rights, and contractual obligations;
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changes in applicable laws, rules, regulations, or accounting practices and other dynamics; and
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other events or factors, many of which may be out of our control.
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In addition, if the market for stocks in our industry or industries related to our industry, or
the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could fluctuate or decline for reasons unrelated to our business, financial condition and results of operations. If any of the foregoing
occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
You will experience immediate and substantial dilution.
The offering price per share in this offering exceeds the net tangible book value per share of our common stock outstanding prior to this
offering. After giving effect to (i) the issuance of 2,000,000 shares of common stock in our January Offering, and (ii) the offer and sale in this offering of 950,000 shares of common stock at the public offering price of $3.50 per share, and after
deducting the placement agent fees and estimated offering expenses payable by us, you will experience immediate dilution of $2.99 per share, representing the difference between our as adjusted net tangible book value per share as of
September 30, 2016, after giving effect to this offering and the public offering price. See the section entitled Dilution on
page S-27
below for a more detailed illustration of the
dilution you will incur if you participate in this offering.
Our management team may invest or spend the proceeds of this offering in ways with
which you may not agree or in ways which may not yield a significant return.
Our management will have broad discretion over the
use of proceeds from this offering. We intend to use the net proceeds from this offering (i) to pay our monthly principal and interest payments, pursuant to the loan and security agreement with Hercules, dated June 11, 2015, and
(ii) fund working capital and other general corporate purposes. However, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of
operations or enhance the value of our common stock. The failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to
decline and delay the development of our product candidates.
In the foreseeable future, we do not intend to pay cash dividends on shares of our
common stock so any returns will be limited to the value of our shares.
We currently anticipate that we will retain future
earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Our loan and security agreement with Hercules, dated June 11, 2015, prohibits us from
declaring or paying cash dividends or making any distributions on any class of our stock or equity interests. See Dividend Policy. Any return to stockholders will therefore be limited to the increase, if any, of our share price.
Financial reporting obligations of being a public company in the United States are expensive and time-consuming, and our management may be required to
devote substantial time to compliance matters.
As a publicly traded company, we incur significant additional legal, accounting and
other expenses that we did not incur as a privately held company and are not fully reflected in our results of operations. The obligations of being a public reporting company require significant expenditures, including costs resulting from public
company reporting obligations under the Securities Exchange Act of 1934, as amended (the Exchange Act), and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act, the Dodd-Frank
Wall Street Reform and Consumer Protection Act, and the listing requirements of the stock exchange on which our securities are listed. These rules require the establishment and maintenance of effective disclosure and financial controls and
procedures, internal control over financial reporting and corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. Moreover, despite recent reforms made possible by
the JOBS Act, the reporting requirements, rules, and regulations will make some activities more time-consuming and costly, particularly after we are no longer an emerging growth company. In addition, these rules and regulations make it
more difficult
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and more expensive for us to obtain director and officer liability insurance. Compliance with such requirements also places demands on managements time and attention.
We are an emerging growth company and our election to delay adoption of new or revised accounting standards applicable to public companies
may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive to
investors.
We are an emerging growth company, as defined in the JOBS Act, and we intend to take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards.
In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such
standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict whether investors will find our securities
less attractive because it will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take
advantage of these reporting exemptions until we are no longer an emerging growth company. We could remain an emerging growth company until the earliest to occur of earliest of (i) the last day of the fiscal year in
which we have total annual gross revenues of $1 billion or more; (ii) March 31, 2019; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date
on which we are deemed to be a large accelerated filer under the rules of the SEC.
We may be at risk of securities class action litigation.
We may be at risk of securities class action litigation. This risk is especially relevant due to our dependence on positive
clinical trial outcomes and regulatory approvals. In the past, biotechnology and pharmaceutical companies have experienced significant stock price volatility, particularly when associated with binary events such as clinical trials and product
approvals. If we face such litigation, it could result in substantial costs and a diversion of managements attention and resources, which could harm our business and result in a decline in the market price of our common stock.
We may issue additional equity securities in the future, which may result in additional dilution to existing investors.
We may seek the additional capital necessary to fund our operations through public or private equity offerings, debt financings, and
collaborative and licensing arrangements. To the extent we raise additional capital by issuing equity securities, including in a debt financing where we issue convertible notes or notes with warrants and any shares of our common stock to be issued
in a private placement, our stockholders may experience substantial dilution. We may, from time to time, sell additional equity securities in one or more transactions at prices and in a manner we determine. If we sell additional equity securities,
existing stockholders may be materially diluted. In addition, new investors could gain rights superior to existing stockholders, such as
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liquidation and other preferences. In addition, the exercise or conversion of outstanding options or warrants to purchase shares of capital stock may result in dilution to our stockholders upon
any such exercise or conversion.
As of February 3, 2017, we had outstanding warrants to purchase 3,190,030 shares of our common
stock at an exercise price of $7.563 per share. The warrants were issued on June 15, 2015, and has a five-year term and becomes exercisable at the earliest to occur of the date that (i) we enter into a strategic license agreement with a
third party related to any of our products whereby we are guaranteed to receive consideration having a value of at least $20.0 million (ii) we consummates a public or private offering of common stock or securities convertible into common
stock that results in aggregate gross proceeds of at least $20.0 million 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, covering
the resale of the shares of common stock issuable upon the exercise of the warrant, then we shall cancel the unexercised portion of the warrant for consideration equal to $0.001 per share of common stock underlying the warrant. In connection with
the Merger, we assumed five-year warrants to purchase 37,100 shares of common stock at an exercise price of $22.65625 and warrants to purchase 2,160 shares of common stock at an exercise price of $22.65625 Ruthigen issued to the
representative of the underwriters in connection with Ruthigens initial public offering in 2014. In addition, in connection with the loan and security agreement with Hercules, dated June 11, 2015, we issued to Hercules a warrant to
purchase 25,150 shares of 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. In the event the warrants are not fully exercised and
the fair market value of one share of our 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 our common stock on a net basis. On
August 31, 2015, we issued a warrant to purchase 30,000 shares of our common stock 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.
As of February 3, 2017,
722,144 shares remained available to be awarded under the Incentive Plan. Further, an aggregate of 2,834,488 shares of our common stock could be delivered upon the exercise or conversion of outstanding stock options or restricted stock
units under the Incentive Plan and other equity incentive plans assumed in the Merger. We may also issue additional options, warrants and other types of equity in the future as part of stock-based compensation, capital raising transactions,
technology licenses, financings, strategic licenses or other strategic transactions. To the extent these options are exercised, existing stockholders would experience additional ownership dilution. In addition, the number of shares available for
future grant under our equity compensation plans may be increased in the future, as our equity compensation plan contains an evergreen provision, pursuant to which additional shares may be authorized for issuance under the plan each
year.
The concentration of the capital stock ownership with our insiders will likely limit the ability of other stockholders to influence corporate
matters.
As of February 3, 2017, approximately 46% of our outstanding shares of our common stock was controlled by our
officers, directors, beneficial owners of 10% or more of our securities and their respective affiliates. As a result, these stockholders, if they acted together, may be able to determine or influence matters that require approval by our
stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of
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ownership might also have the effect of delaying or preventing a corporate transaction that other stockholders may view as beneficial.
Anti-takeover provisions under Delaware corporate law may make it difficult for our stockholders to replace or remove our board of directors and could
deter or delay third parties from acquiring us, which may be beneficial to our stockholders.
We are subject to the anti-takeover
provisions of Delaware law, including Section 203 of the General Corporation Law of Delaware (the DGCL). Under these provisions, if anyone becomes an interested stockholder, we may not enter into a business
combination with that person for three (3) years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control. For purposes of Section 203 of the DGCL,
interested stockholder means, generally, someone owning fifteen percent (15%) or more of our outstanding voting stock or an affiliate that owned fifteen percent (15%) or more of our outstanding voting stock during the past three
(3) years, subject to certain exceptions as described in Section 203 of the DGCL.
Protective provisions in our charter and bylaws could
prevent a takeover which could harm our stockholders.
Our certificate of incorporation and bylaws contain a number of provisions
that could impede a takeover or prevent us from being acquired, including, but not limited to, a classified board of directors and limitations on the ability of our stockholders to remove a director from office without cause. Each of these charter
and bylaw provisions give our board of directors the ability to render more difficult or costly the completion of a takeover transaction that our stockholders might view as being in their best interests.
Risks Related to our Indebtedness
Our obligations
under our outstanding term loan are secured by all of our assets other than intellectual property, so if we default on those obligations, the lender could foreclose on our assets. As a result of these security interests, such assets would only be
available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent at a time when the value of such assets exceeded the amount of our indebtedness and other obligations. In addition, the
existence of these security interests may adversely affect our financial flexibility.
Hercules, the lender under our term loan has
a security interest in all of our assets and those of Pulmatrix Operating Company, our wholly-owned subsidiary. As a result, if we default under our obligations to the lender, the lender could foreclose on its security interests and liquidate some
or all of these assets, which would harm our business, financial condition and results of operations. The current principal amount of the term loan as of February 3, 2017, was $5,739,557.
In the event of a default in connection with our bankruptcy, insolvency, liquidation, or reorganization, the lender would have a prior right
to substantially all of our assets to the exclusion of our general creditors. In that event, our assets would first be used to repay in full all indebtedness and other obligations secured by the lender, resulting in all or a portion of our assets
being unavailable to satisfy the claims of any unsecured indebtedness. Only after satisfying the claims of any unsecured creditors would any amount be available for our equity holders. These events of default include, among other things, our failure
to pay any amounts due under the credit facility, a breach of covenants under the credit facility, our insolvency, a material adverse effect occurring, the occurrence of certain defaults under certain other indebtedness or certain final judgments
against us.
The pledge of these assets and other restrictions may limit our flexibility in raising capital for other purposes. Because
substantially all of our assets are pledged under the term loan, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have an adverse effect on our financial flexibility.
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