Note

–

Subsequent Events

July 13, 2017,

we implemented a reduction in workforce by

employees, representing approximately

42%

of our total workforce, from

employees. The reduction was across all functions of the Company. Affected employees are eligible for certain severance and other benefits. In addition, the Company expects to record a

one

-time charge of approximately

$0.2

million in the

third

quarter of

2017.

Effective as of

August 14, 2017,

we entered into a loan agreement with Lee

’s, pursuant to which Lee’s has agreed to lend us up to a potential

$3.9

million that will be funded in Lee’s sole discretion in

three

equal installments on

August 15,

September 10

and

October 10, 2017,

and will be used to support our AEROSURF development activities and sustain our operations through

October 31, 2017,

while we negotiate the potential Share Purchase and related agreements. The Lee's Loan will accrue interest at a rate of

12%

per annum. We received the initial installment of

$1.3

million from Lee's on

August 15, 2017.

Under the Share Purchase as currently contemplated, but subject to further negotiation, Lee’s would invest

$10

million in our Company and acquire a controlling interest of a majority of the outstanding shares of our common stock at a price per share based on the average

-day volume-weighted average price per share (VWAP) up to and including the closing date, plus a premium up to, but

not

exceeding

15%,

but in

event greater than

$0.25

per share. As partial consideration for the Share Purchase, the outstanding principal balance of the Lee's Loan would be applied in full satisfaction of a like amount of cash consideration payable by Lee’s at the closing of such Share Purchase, and the Lee's Loan would be discharged in full. In connection with the Lee's Loan, Deerfield, which holds a security interest in substantially all of our assets to secure its

$25

million Deerfield Loan, entered into a Subordination Agreement, dated as of

August 14, 2017,

with us and Lee’s generally granting Lee’s a

first

right through

October 31, 2017,

to any cash payments (other than regularly scheduled interest payments under the Deerfield Loan) and to the proceeds of sales of assets in a bankruptcy proceeding for up to

$3.9

million principal amount plus related interest and expenses, subject to the exceptions set forth in the Subordination Agreement.

As partial consideration for the Lee's Loan, we and Lee

’s also entered into Amendment

No.

to the License Agreement (Amendment) pursuant to which reductions have been made to certain of the milestone and royalty payments. As a result, we

may

receive up to

$35.8

million (previously,

$37.5

million) in potential clinical, regulatory and commercial milestone payments. The options to add Japan to the Licensed Territory (as defined in the License Agreement) and to manufacture our aerosol delivery device in and for the Licensed Territory have been made effective immediately. In addition, Zhaoke Pharmaceutical (Hefei) Co. Ltd., an affiliate of Lee’s, has been made a party to the License Agreement. Except as set forth in the Amendment, all other terms and conditions of the License Agreement shall remain in full force and effect.

In addition, to facilitate the Share Purchase, we are negotiating with Deerfield to restructure the Deerfield Loan

(Loan Restructuring), effective as of the closing of the Share Purchase. Under the Loan Restructuring as currently contemplated, but subject to further negotiation, the notes issued in connection with the Deerfield Loan would be retired in exchange for (i)

$2.5

million of cash, which would be paid out of the proceeds of the Share Purchase, and (ii) a number of newly-issued shares of our common stock that equals

of our outstanding common stock on a fully-diluted basis (to be defined) as of the closing of the Share Purchase and Loan Restructuring. In addition, Deerfield would be entitled to receive future regulatory and commercial milestones related to the development and commercialization of AEROSURF potentially totaling

$15

million.

The Share Purchase and Loan Restructuring agreements are expected to include such customary representations, warranties, covenants, conditions and indemnities for certain losses and other terms as are acceptable to the parties.

While we believe that we will be able to reach agreement with Lee’s and Deerfield and close the Share Purchase and Loan Restructuring agreements in a timely manner, there can be

assurance that we will be successful.