Pulmatrix, Inc.

On May 10, 2021, the Company sent a letter to Cipla notifying Cipla that it is in material breach of the Cipla Agreement due to Cipla’s anticipatory breach of its obligation under the Agreement to fund 50% of the development costs for Pulmazole in accordance with the terms of the Cipla Agreement. Cipla has refused to approve the development plan and budget for the Phase 2b clinical study unless the Company accepts Cipla’s demands that the Company absorb a disproportionate amount of the costs and financial risks of the development plan. Accordingly, the Company has given Cipla 30 days from the date of the letter to reaffirm that it will perform the Cipla Agreement in accordance with its terms or the Company will exercise its contractual right to terminate the Cipla Agreement for Cipla’s material breach and reacquire all rights to Pulmazole for 25% of its fair market value.

On May 10, 2021, the Company sent a letter to Cipla notifying Cipla that it is in material breach of the Cipla Agreement due to Cipla’s anticipatory breach of its obligation under the Cipla Agreement to fund 50% of the development costs for Pulmazole (PUR 1900). Following the onset of the COVID-19 pandemic in March 2020, while the Company’s Phase 2a clinical trial was underway, Cipla notified the Company that it was no longer willing to continue the development of Pulmazole in accordance with the current cost sharing arrangements set forth in the Cipla Agreement and was seeking to amend the Cipla Agreement to shift a greater share of the development costs onto the Company. As a result of the COVID-19 pandemic, the Company, with Cipla’s consent, halted its Phase 2a clinical study for Pulmazole in July 2020. Since that time the Company has attempted to resolve Cipla’s demands through negotiation of an amendment to the Cipla Agreement while preparing to launch a new Phase 2b clinical study for Pulmazole. Based on the Company’s meeting with the FDA, the Company is in a position to commence work on the Phase 2b clinical study, however, despite several months of negotiations with Cipla, it has become apparent that the Company and Cipla will be unable to reach an agreement regarding an amendment to the Cipla Agreement. Cipla has refused to approve the development plan and budget for the Phase 2b clinical study unless the Company accepts Cipla’s demands that the Company absorb a disproportionate amount of the costs and financial risks of the development plan. Accordingly, the Company has given Cipla 30 days from the date of the letter to reaffirm that it will perform the Cipla Agreement in accordance with its terms or the Company will exercise its contractual right to terminate the agreement for Cipla’s material breach and reacquire all rights to Pulmazole for 25% of its fair market value.

As of the filing of this Quarterly Report, 5 patients have been dosed in a Phase 1b safety, tolerability and biomarker study that will enroll 15 patients with stable moderate-severe chronic obstructive pulmonary disease (“COPD”). The Phase 1b study is a randomized, three-way crossover double-blind study with 14 days of daily dosing with placebo and one of two doses of PUR1800, and a 28 day follow up period between each crossover. Top line data expected in Q4 of 2021. The COVID-19 pandemic could delay enrollment to the extent that patients remain or become subject to government “stay at home” mandates, patients could feel like they cannot safely visit trial sites, due to issues related to COVID-19, or patients could delay entry until vaccination is complete.  Toxicology studies for rats and dogs, with durations of 6 and 9 months respectively, have completed dosing, with data anticipated in Q3 2021. While the program is currently in development for treatment of acute exacerbation of chronic obstructive pulmonary disease (“AECOPD”), positive toxicology study results could expand potential indications to include chronic dosing for other respiratory disease such as asthma, COPD or idiopathic pulmonary fibrosis.

Cipla may disagree with our assertion that it is in breach of the Cipla Agreement, which may force us to arbitrate our contractual right to terminate the Cipla Agreement for Cipla’s breach. We cannot predict the outcome of any arbitration proceeding and an arbitration panel may not agree that we are entitled to terminate the Cipla Agreement for Cipla’s material breach. We expect that any arbitration proceeding against Cipla will be costly, time consuming and may distract management’s attention from the development of other drug candidates.

In addition, Cipla may make counterclaims against us and there is no guaranty we will be able to successfully defend any such counterclaims. If Cipla were to successfully prosecute any counterclaims against us we may be subject to monetary damages or the loss of the Pulmazole program to Cipla or both. Furthermore, the Cipla Agreement provides that the prevailing party is entitled to recover its costs incurred in connection with any arbitration. Accordingly, if we are forced to arbitrate with Cipla and are not successful, we may be forced to pay Cipla’s arbitration costs, which could be substantial.

In July of 2019, we initiated a Phase 2 clinical investigation for Pulmazole, our inhaled formulation of itraconazole, an anti-fungal drug commercially available as an oral drug that we are developing to treat and prevent pulmonary fungal infections. To date, five subjects have completed the 28-day dosing regimen, receiving either 10 mg, 20 mg, or 35 mg of Pulmazole or placebo in a randomized, double-blind treatment assignment. In the first quarter of 2020, we initiated the process of establishing additional study sites and amending the study protocol in order to improve enrollment. Also, January 28, 2020 the FDA granted Fast Track designation to Pulmazole. However, as the COVID-19 pandemic escalated in late March and early April 2020, we were notified that 11 out of 21 clinical sites suspended enrollment in the Pulmazole study due to issues associated with COVID-19. In July 2020, we terminated our Phase 2 clinical study for Pulmazole as a result of the disruptions and safety concerns caused by the COVID-19 pandemic. In January 2021, we completed a Type C Meeting with the FDA for the further clinical development of Pulmazole. Based on the feedback received, we intend to initiate a Phase 2b clinical study of Pulmazole in allergic bronchopulmonary aspergillosis (“ABPA”) in Q1 2022. Actual study start will be determined upon Cipla and Pulmatrix joint steering committee approval of final budget and assessment of COVID-19 impact on patient safety and study operations. To date, Cipla has refused to approve the budget and development plan for the Phase 2b clinical study unless we accept Cipla’s demands that we absorb a disproportionate amount of the costs and financial risks of the development plan. Accordingly, on May 10, 2021, we sent a letter to Cipla notifying Cipla that it is in material breach of our development and commercialization agreement due to Cipla’s anticipatory breach of its obligation under the Cipla Agreement to fund 50% of the development costs for Pulmazole in accordance with the terms of the Cipla Agreement. We have given Cipla 30 days from the date of the letter to reaffirm that it will perform the Cipla Agreement in accordance with its terms or we will exercise our contractual right to terminate the agreement for Cipla’s material breach and reacquire all rights to Pulmazole for 25% of its fair market value