Note 8 – Subsequent Event

We evaluated all events or transactions that occurred after June 30, 2015 through the date we issued these financial statements. During this period, we noted two subsequent events as described below:

July 2015 Registered Public Offering

On July 22, 2015, we completed a registered public offering of 25,083,332 Series A units and 42,000,000 Series B units each at a price per unit of $0.60, resulting in gross proceeds of $40.25 million ($37.6 million net after underwriting discount and estimated expenses), including the exercise in full by the underwriters of their option to purchase up to an additional 8,749,999 Series A units at a price per unit of $0.60 to cover over-allotments. The proceeds included $5.0 million in non-cash consideration from Deerfield in the form of a reduction in future interest payments due under the Deerfield Loan (see, “– Deerfield Loan Restructuring”). Each Series A unit consists of one share of common stock and a Series A warrant to purchase one share of common stock at an exercise price of $.70 per share. Each Series B unit consists of a fully paid pre-funded Series B warrant to purchase one share of common stock at an exercise price of $0.60 per share, and a Series B warrant to purchase one share of common stock at an exercise price of $.70 per share. The shares of common stock and warrants were immediately separable such that no units were issued. The warrants are exercisable immediately at the election of the holder for cash or through a net cashless exercise, provided that a holder may not exercise a warrant to the extent that after giving effect to such exercise, such holder would beneficially own in excess of 9.99% (or 4.99% as may be elected by such holder) of the shares of our common stock outstanding immediately after such exercise. All warrants will expire on the seventh anniversary of the issue date. The net proceeds will be used primarily (i) to advance the AEROSURF development program, and (ii) for general corporate purposes.

As the offering price in the July 2015 registered public offering ($0.60 per unit) was less than the then-current exercise price of the warrants we issued in a February 2011 public offering ($1.50 per share), the exercise price of the February 2011 warrants was adjusted in accordance with anti-dilution provisions contained in the warrant, which adjust the exercise price if we issue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price of the warrants. For a unit offering consisting of common stock and warrants, the terms of the February 2011 warrants provide that the common stock will be deemed to have been issued at a price per share equal to the difference between the aggregate consideration received ($0.60 per unit) less the value of the option determined using a Black Scholes option pricing model calculated using criteria and measured over the period set forth in the warrant. Based on these requirements, upon the closing of the July 2015 public offering, the exercise price of the February 2011 warrants was adjusted to $0.19 per share. There are currently outstanding 4.6 million February 2011 warrants which will expire in February 2016.

Deerfield Loan Restructuring

On July 9, 2015, we entered into an amendment to our Deerfield Loan agreement and Deerfield Notes to better align our Deerfield Loan principal repayment obligations with anticipated milestones under our clinical development program for AEROSURF. Under the terms of the amendment, upon execution, we prepaid in cash $2.5 million of the outstanding principal amounts under the Deerfield Loan. If within five business days after completion of a Strategic Transaction (as defined in the amendment) on or before December 31, 2015, we were to prepay an additional $2.5 million to be applied to the outstanding principal amounts, then the installment due in February 2017 would be eliminated and the installments due in each of February 2018 and 2019 would be adjusted to $12.5 million and $12.5 million, respectively. We also agreed to pay Deerfield’s expenses (including reasonable counsel fees and expenses of up to $15,000) incurred in connection with the amendment. All terms of the Deerfield Loan agreement and Deerfield Notes not otherwise amended remained in full force and effect.

On July 22, 2015, Deerfield and we entered into a second amendment to the Deerfield Loan agreement and Deerfield Notes. Under the second amendment, we agreed, upon the closing of the July 2015 offering, to effect the prepayment in cash of $2.5 million contemplated by the first amendment to be applied to the outstanding principal amounts due under the Deerfield Notes, and Deerfield agreed to purchase and accept $5 million of Series A and Series B units in the July 2015 public offering in satisfaction of $5 million of future interest obligations due to Deerfield under the Deerfield Loan agreement. Pursuant to the second amendment: (i) we agreed to pay in cash all accrued and unpaid interest on the Deerfield Loan for the period from June 30, 2015 to July 22, 2015 at the existing rate of 8.75% when due on September 30, 2015; (ii) the $5 million prepayment of interest will be applied, first, to interest accruing from and after July 23, 2015 on the $12.5 million principal installment due on February 13, 2019, and thereafter dollar for dollar to interest accruing from and after July 23, 2015 on the $12.5 million principal installment due on February 13, 2018, until fully allocated; and (iii) after such interest prepayment is fully allocated, any remaining interest due on the principal amount of the Deerfield Notes will thereafter accrue at a rate of 8.25% per annum and payable as otherwise provided in the Deerfield Loan agreement and Deerfield Notes. In addition, no credit will be given with respect to prepaid interest for periods subsequent to the date of a principal prepayment as a result of the voluntary or mandatory prepayment of the Deerfield Notes, in whole or in part, except for a prepayment at our election or a required prepayment in connection with a major transaction under and as defined in the Deerfield Loan agreement, in either case, in connection with a Qualified Major Transaction, which is defined as a change of control (as defined in the Deerfield Loan agreement) in which (i) we are not the surviving entity and (ii) our common stock valuation immediately prior to the change of control, equals or exceeds $100 million. All terms of the Deerfield Loan agreement and Deerfield Notes not otherwise amended remained in full force and effect.

The July 2015 public offering that we completed on July 22, 2015 qualified as a Strategic Transaction under the first amendment to the Deerfield Loan agreement. Accordingly, on July 22, 2015, we prepaid in cash an additional $2.5 million to be applied to the outstanding principal amount due under the Deerfield Loan agreement. Pursuant to the first amendment, upon such payment, the February 2017 installment has been eliminated and the installments due in each of February 2018 and 2019 have been adjusted to $12.5 million and $12.5 million, respectively. In addition, the $12.5 million installment currently due in February 2018 remains subject to potential deferral of one year if we achieve the market capitalization milestone set forth in the Deerfield Loan agreement (see, Note 6, “Deerfield Loan”). Pursuant to the terms of the second amendment, we have prepaid all interest due on the $12.5 million principal installment due on February 13, 2019 through the maturity date and interest due on the $12.5 million principal installment due on February 13, 2018 through the second quarter of 2016.

Common shares reserved for potential future issuance upon exercise of warrants

The chart below summarizes shares of our common stock reserved for future issuance upon the exercise of warrants as of July 22, 2015:

(in thousands, except price per share data)	Shares		Exercise Price		Expiration Date
Investors – February 2011 financing		4,550	$	0.19	2/22/16
Investors – July 2015 financing (pre-funded)⁽¹⁾		42,000	$	0.60	7/22/22
Investors – July 2015 financing		67,083	$	0.70	7/22/22
Deerfield – 2013 loan		7,000	$	2.81	2/13/19
Battelle – 2014 collaboration agreement		1,500	$	5.00	10/10/24
Former employee		30	$	3.20	3/18/16
PharmaBio – October 2010 financing		80	$	4.10	10/13/15
Kingsbridge – June 2010 CEFF		83	$	6.69	12/11/15
		122,326

⁽¹⁾	Investors in these warrants fully prepaid the $0.60 exercise price at the time of issuance.