Note 6 - Collaboration and Device Development Payable

3 Months Ended

12 Months Ended

Mar. 31, 2020

Dec. 31, 2019

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

Note 6 – Collaboration and Device Development Payable

Restructuring of the Battelle Payables

In

March 2020,

we entered into the

first

amendment to the

December 2018

payment restructuring agreement, or the Amendment, with Battelle Memorial Institute, or Battelle, in which we agreed to amend the payment terms of

two

milestone payments previously due

no

later than

January 2020.

Under the Amendment, we agreed that (i) the

first

milestone payment would continue to be due upon enrollment of the

first

patient in the next AEROSURF clinical study but

no

later than

April 15, 2020;

and, (ii) the

second

milestone payment would continue to be due upon completion of technology transfer of our device manufacturing process for the phase

3

ADS to our new medical device manufacturer but

no

later than

September 1, 2020.

The Amendment is treated as a debt modification and, in accordance with debt modification accounting,

no

gain or loss was recognized.

In

April 2020,

we made the

first

milestone payment of

$0.8

million to Battelle and announced enrollment of the

first

patient into the AEROSURF phase

2

bridging study.

Note

9

- Collaboration and Device Development Payable

Collaboration and device development payable represents amounts due to Battelle under a collaboration agreement related to the development of our phase

3

ADS (see, Note

16

- Collaboration, Licensing and Research Funding Agreements) and a Research and Development Services Agreement (RDSA) dated

June 2012

for our prototype phase

2

ADS. As of

December 31, 2019

and

2018,

collaboration and device development payable was

$2.0

million and

$2.6

million, respectively, including accrued interest.

Restructuring of the Battelle Payables

On

December 7, 2018,

we entered into a payment restructuring agreement with Battelle Memorial Institute (Battelle) in which we agreed to the following: (i) the outstanding amounts owing under the Collaboration Agreement and RDSA (such amounts, the Battelle Payables) will continue to accrue interest at a rate of

6.0%

per annum and shall be payable on a monthly basis or any unpaid interest shall be added to the balance of the Battelle Payables, (ii) we and Battelle will continue the development activities relating to AEROSURF under the RDSA, and we will prepay for services to be provided by Battelle until we have repaid

$3.0

million of the Battelle Payables, after which time, services incurred shall be payable upon

30

days of receipt of the invoice, (iii) Battelle participated in the

December 2018

Private Placement Financing for

$1.0

million in a debt-equity exchange for a like amount of Battelle Payables (

see

, Note

14

- Stockholders’ Equity), (iv) upon the closing of the Private Placement Financing, we paid Battelle cash in the amount of

$1.0

million and thereafter initiated payments totaling an aggregate

$1.25

million payable in

five

equal, consecutive monthly installments of

$0.25

million, and (v) increased the royalty cap previously set forth in the collaboration agreement from

$25.0

million to

$35.0

million. In addition, under the terms of the Battelle Payment Restructuring, we agreed to make

two

milestone payments to Battelle as follows: (i) upon enrollment of the

first

patient in the next AEROSURF clinical study (First Milestone), an amount equal to

one

half of the then-outstanding Battelle Payables (including unpaid interest), and (ii) when we complete the device technology transfer for the phase

3

ADS to Mack (Second Milestone), an amount equal to the then-outstanding Battelle Payables, including unpaid interest. If any amounts of the Battelle Payables remained unpaid by

December 31, 2019,

then all unpaid Battelle Payables would be due on

January 7, 2020.

Neither milestone was achieved as of

December 31, 2019.

On

March 30, 2020,

we and Battelle entered into an amendment to the Battelle Payment Restructuring such that the First Milestone would be payable

no

later than

April 15, 2020

and the Second Milestone would be payable

no

later than

September 1, 2020.

Management determined the payment restructuring agreement of the Battelle Payables does

not

represent a troubled debt restructuring as Battelle did

not

grant us a concession. Further, the payment restructuring agreement constitutes a debt modification as the restructured terms do

not

result in a substantially different instrument.

In connection with the payment restructuring agreement, we also issued to Battelle Series E Warrants (Series E Warrants) to purchase

25,000

shares of common stock, at an exercise price equal to

$19.50

per share (the Exercise Price). The Series E Warrants

may

be exercised after the date of issuance through the

5

-year anniversary of the date of issuance on

December 11, 2023.

The Series E Warrants

may

not

be exercised to the extent that the holder thereof would, following such exercise or conversion, beneficially own more than

9.99%

(or other percent as designated by each holder) of our outstanding shares of common stock. The Series E Warrants contain customary provisions that adjust the Exercise Price and the number of shares of common stock into which the Series E Warrants are exercisable in the event of a corporate transaction.

The Series E Warrants are derivatives that qualify for an exemption from liability accounting as provided for in ASC Topic

815,

Derivatives and Hedging - Contracts in Entity’s own Equity, and have been classified as equity. The fair value at issuance of the Series E Warrants was determined using the Black-Scholes option-pricing model. The input assumptions used in the valuation are the historical volatility of our common stock price, the expected term of the warrants, and the risk-free interest rate based on the

five

-year treasury bill rate in effect at the measurement date.

Significant Input Assumptions of Warrant Valuation
Historical volatility	103	%
Expected term (in years)	5
Risk-free interest rate	2.70	%

As of

December 31, 2019,

we had accrued interest expense relating to the Battelle Payables of

$0.4

million.

Extinguishment of Collaboration and Device Development Payable

On

December 21, 2018,

as part of the Private Placement Financing, we converted

$1.0

million of existing Battelle Payables on the same terms as the Investors of the Private Placement Financing. In connection with the conversion of the Battelle Payables, we issued: (i)

100,607

shares of common stock based at

$9.9396

per share, (ii) Series F Warrants to purchase

17,103

shares of common stock, at an exercise price equal to

$11.04

per share, and (iii) Series G Warrants to purchase

33,201

shares common stock, at an exercise price equal to

$12.15

per share. The Series F Warrants are exercisable at any time after the date of issuance and through the

18

-month anniversary of the date of issuance and the Series G Warrants

may

be exercised through the

5

-year anniversary of the date of issuance.

The conversion of the Battelle Payables is treated as an extinguishment of outstanding liabilities. We recorded a loss on extinguishment of debt of approximately

$0.5

million. The loss was calculated as the difference between: (i) the aggregate fair value of approximately

$1.5

million, based on the fair value of the common stock and Warrants on

December 21, 2018

and (ii) the carrying value of the Battelle Payables of

$1.0

million.