Note

–

Liquidity Risks and Management

’s Plans

expect that we will continue to incur significant losses and will require significant additional capital to advance our AEROSURF clinical development program and support our

operations. As of September 30, 2016, we had cash and cash equivalents of $12.4 million, current accounts payable and accrued expenses of $1

4.1 million, including $4.0 million (including $0.3 million of accrued interest) due to Battelle Memorial Institute (Battelle) under our collaboration agreement, and $25 million of long-term debt under a secured loan (Deerfield Loan) with affiliates of Deerfield Management, L.P. (Deerfield). Before any additional financings or other transactions, we believe that we will have sufficient cash resources to support our development programs, business operations and debt service obligations through February 2017.

As a result of changes that we recently implemented in our AEROSURF phase 2 clinical program, the time required to complete our phase 2b clinical trial in premature infants 29 to 32 week gestational age has been extended, with results currently anticipated in mid-2017. Based on this revised time line, our current cash resources will not be sufficient to fund our development activities through completion of our phase 2b clinical trial and release of top-line results and

we will require additional capital to be able to complete our AEROSURF phase 2b clinical trial.

ven if we are able to raise the capital required

to complete our AEROSURF phase 2b clinical trial, our ability to fund our activities thereafter will be

highly dependent upon whether our clinical trial is successful and we achieve results that are sufficiently positive to support a strategic transaction or equity financing. Our clinical trials are subject to other significant risks and uncertainties, such that there can be no assurance that we will be successful in completing the phase 2b clinical trial within our planned time, if at all. If our clinical trial should be further delayed for any reason, our capital needs will likely increase. Moreover, if the results of our clinical trial are inconclusive, or present an unacceptable benefit / risk profile due to suboptimal efficacy and / or safety profile, we may be unable to secure the additional capital that we will require.

If we are unable to successfully complete enrollment and release top line data in accordance with our plan, or if the results of our clinical trial are inconclusive, or present an

unacceptable benefit / risk profile due to suboptimal efficacy and / or safety profile, we may be unable to secure the additional capital that we will require to support our research and development activities and operations and have sufficient cash resources to service and repay debt, which could have a material adverse effect on our business and our ability to continue as a going concern.

To secure the additional capital that we will require, we plan to pursue all or a combination of potential strategic alliances, including potentially with respect to markets outside the U.S., collaboration agreements and other strategic transactions (including potential merger, acquisition or other

corporate transaction). We also plan to seek additional capital through public or private equity offerings (including pursuant to the ATM Program with Stifel, Nicolaus & Company, Incorporated (Stifel)). If none of these alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we may be forced to limit

our development activities, including potentially by reducing the size of our clinical trial or ending the trial earlier than planned, which could have an adverse impact on the results. Ultimately, without sufficient capital, we may be forced to

cease our development activities.

Even if we are able to secure additional capital, such transactions and financings may only be available on unattractive terms, or could result in significant dilution of stockholders

’ interests, and the issuance or even potential issuance of shares could have a negative effect on the market price of our common stock. Moreover, our ability to secure additional capital at a time when we would like or require also may be affected by negative conditions in the broader financial and geopolitical markets or be constrained by the following factors: (i) our use of the 2014 Universal Shelf on Form S-3 is limited to no more than one third of our public float in any 12 month period (discussed below), (ii) in May 2016, we received a deficiency notice from The NASDAQ Stock Market (“Nasdaq”) that we are no longer in compliance with the minimum stockholders’ equity listing requirement (discussed below), and (iii) our stockholders may not approve, as required under Nasdaq listing rules, a strategic transaction recommended by our Board that is valued at a discount to the then-current market value of our common stock and involves greater than 20% of our outstanding common stock. Other potential risks and uncertainties affecting our ability to fund our business and development activities are described in our 2015 Form 10-K, as updated and supplemented in this Quarterly Report on Form 10-Q.

Our ability to secure needed capital using our 2014 Universal Shelf on Form S-3 is constrained by requirements affecting companies that have an aggregate market value of common stock held by nonaffiliated persons (public float) of less than $75

million. Form S-3

includes a “limited offering” rule that

limits the size of primary securities offerings conducted by such

smaller

companies in any 12-month period to no more than one third of their public float (measured

by reference to a closing price of our common stock

within 60 days of a transaction).

With respect to our ATM Program, on

May 24, 2016, we filed a Prospectus Supplement to our 2014 Universal Shelf for approximately $10.5 million in securities

, representing one third of our public float within 60 days of the date of the Prospectus Supplement. Accordingly, under the ATM Program, we could raise up to an aggregate of $10.5 million reduced by any other proceeds raised in the previous 12 months under the limited offering rule. For other public offerings that we may conduct under our 2014 Universal Shelf, we will be limited to one third of our public float (measured on a date within 60 days of the transaction) reduced by any amount raised in the previous 12 months under the limited offering rule.

For example, based on the closing price per share of our common stock on October 24, 2016 ($3.24), our public float was approximately $27.2 million. As a result, we currently could raise up to an aggregate of $9.1 million under the

limited offering rule, reduced by any amounts raised under the limited offering rule in the previous 12 months

, including under the ATM Program and any other potential transaction. In addition, to raise additional capital, we may be required to seek other methods of completing primary offerings, including, for example, under a registration statement on Form S-1, the preparation and maintenance of which would be more time-consuming and costly, or private placements, potentially with registration rights or priced at a discount to the market value of our stock, or other transactions, any of which could result in substantial equity dilution of stockholders’ interests.

Further, if we conduct an offering of our common stock at a price per share that represents a discount to the then-current market value of our common stock and that involves the issuance of more than 20% of the shares of common stock then outstanding, we may be required under Nasdaq listing rules to seek stockholder approval before we can proceed. There can be no assurance that we would be successful in obtaining such approvals. Failure to secure the additional capital that we will need, whether from non-dilutive sources or from equity offerings, would have a material adverse impact on our business and our ability to continue as a going concern.

In addition, we have from time to time collaborated with research organizations and universities to assess the potential utility of our KL

surfactant in studies funded in part through non-dilutive grants issued by U.S. Government-sponsored drug development programs, including grants in support of initiatives related to our AEROSURF clinical program. We also have received grants that have supported medical and biodefense-related initiatives under programs that encourage private sector development of medical countermeasures against chemical, biological, radiological and nuclear terrorism threat agents, and pandemic influenza, and provide a mechanism for federal acquisition of such countermeasures. Although there can be no assurance, we expect to pursue potential additional funding opportunities as they arise and expect that we may qualify for similar programs in the future.

Moreover, if we fail in the future to make any required payment under the Deerfield Loan or fail to comply with any commitments contained in the loan documents, Deerfield would be able to declare a default under the loan agreement, which could result in the acceleration of the payment obligations under all or a portion of our indebtedness. Since we have pledged substantially all of our assets to secure our obligations under the Deerfield Loan, a debt default would enable the lenders to foreclose on our assets securing the debt and could significantly diminish the market value and marketability of our common stock.

Unless we are successful in

securing the additional capital that we require to support our research and development activities, ongoing operations, and service and repay debt, management believes there is substantial doubt about our ability to continue as a going concern within one year after the filing date of this Form 10-Q. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2016, the financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

As of September 30, 2016, we had outstanding 2.9 million pre-funded warrants issued in a July 2015 public offering, of which the entire exercise price was pre-paid upon issuance. Upon exercise of the pre-funded warrants, we would issue the shares to the holders and receive no additional proceeds. In addition, as of September 30, 2016, there were 60 million shares of common stock and 5 million shares of preferred stock authorized under our Amended and Restated Certificate of Incorporation and approximately 40.8 million shares of common stock and 5 million shares of preferred stock were available for issuance and not otherwise reserved.

Nasdaq Deficiency Notice

On May 19, 2016, we received a notification letter from the Staff notifying us that we are no longer in compliance with the minimum stockholders

’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. In our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, we reported stockholders’ deficit of $5.0 million. The Staff noted that, as of May 19, 2016, we also did not meet either of the alternative compliance standards under Nasdaq Listing Rule 5550(b) of (i) a market value of listed securities of at least $35 million, or (ii) net income of $500,000 from continuing operations. As of September 30, 2016, we had stockholders’ deficit of $22.9 million and a market value of listed securities of $21.7 million and as of November 11, 2016, remained out of compliance with the Nasdaq Listing Rules.

The deficiency notice had, and continues to have, no immediate effect on our listing status with the Nasdaq Capital Market.

In July 2016, we submitted a plan to regain compliance and the Staff granted us an extension until November 15, 2016 to evidence our compliance with the minimum stockholders’ equity rule. The elements of the plan that we submitted included potential debt modifications, strategic alliances and collaboration agreements, and transactions to secure additional capital through public or private equity offerings (including our ATM Program). Under the terms of the extension, we must regain compliance with the minimum stockholders’ equity rule no later than November 15, 2016, provide to the Staff a publicly available report that evidences such compliance and otherwise complies with conditions included in the extension notice. If after publicly reporting that we have regained compliance on or before November 15, 2016, should we fail to evidence compliance in the filing with the SEC of our periodic report on Form 10-K for the year ending December 31, 2016, we may be subject to delisting. If we fail to satisfy the terms of the extension on or before November 15, 2016 and we also are not in compliance with an alternative listing requirement (minimum value of listed securities of at least $35 million) under Nasdaq Listing Rule 5550(b), the Staff will provide a written delisting notification that our common stock will be delisted. There can be no assurance that we will be able to regain compliance with either the minimum stockholders’ equity rule or the minimum value of listed securities rule within the extension period, or at all. If the Staff issues a delisting notice, we will be entitled to request that the Staff’s determination be reviewed by a Nasdaq Hearings Panel. In that event, the Staff’s delisting determination would be stayed pending issuance of a written Hearings Panel decision and our common stock would continue to trade on Nasdaq at least until the Hearings Panel has issued its determination. A hearing would generally be scheduled within 45 days of our request for a hearing. Among other things, a Hearings Panel may affirm the Staff’s determination and delist our common stock or grant an exception to the listing standards for a limited time (up to 180 days from the Staff delisting determination), as permitted by Nasdaq Listing Rule 5815(c)(1)(A). If we were to request a review of a Staff delisting determination, there can be no assurance that a Hearings Panel would grant us a further exception for an additional period of time. If our common stock were delisted, the liquidity and trading price of our common stock may be adversely affected. Moreover, if our common stock is delisted, broker dealers may become subject to certain regulatory burdens that could discourage them from effecting transactions in our common stock, further limiting the liquidity of our common stock in the market.