2. Significant Accounting Policies

Basis of Presentation

The unaudited interim financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair statement of the balance sheets, operating results and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. The Company’s financial position, results of operations and cash flows are presented in U.S. Dollars.

The accompanying unaudited financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018, which are included in the Company’s Form 10-K (File No. 001-38601).

With the exception of accounting for leases, there have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2019, as compared to the significant accounting policies disclosed in Note 2 of the financial statements for the years ended December 31, 2018 and 2017.

Variable Interest Entities

The Company identifies entities (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support or (ii) in which the equity investors lack an essential characteristic of a controlling financial interest as variable interest entities (“VIE” or “VIEs”). The Company performs an initial and ongoing evaluation of the entities with which the Company has variable interests to determine if any of these entities are VIEs. If an entity is identified as a VIE, the Company performs an assessment to determine whether the Company has both (i) the power to direct activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, the Company is identified as the primary beneficiary of the VIE and the entity must be consolidated. As of September 30, 2019 and December 31, 2018, the Company determined that Envisia Therapeutics Inc. (“Envisia”) was a VIE, although the Company does not consolidate it as the Company is not the primary beneficiary for Envisia. Envisia is accounted for under the equity method. There have been no activities between Envisia and the Company in the nine months ended September 30, 2019 or during the year ended December 31, 2018.

Going Concern

The Company’s financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company's operations have consisted primarily of developing its technology, developing products, prosecuting its intellectual property and securing financing. The Company has incurred recurring losses and cash outflows from operations, has an accumulated deficit, and has debt principal payments commencing in the first quarter of 2020. The Company expects to continue to incur losses in the foreseeable future and will require additional financial resources to continue to advance its products and intellectual property, in addition to repaying its maturing debt and other obligations. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern.

The Company will need to raise substantial additional capital to continue its business operations and remain in compliance with the minimum cash covenant on its debt during and beyond the first quarter of 2020, in addition to commercialize LIQ861, if approved. Such capital may not be available on a timely basis, on terms that are favorable to the Company, or at all. Alternatively, in light of the Company's current limited cash resources, the recent trading price of the Company's common stock, outstanding debt and associated minimum cash covenant, and based on a review of the status of its programs, resources and capabilities, the Company continues to explore a wide range of strategic alternatives with the support of its financial advisor, Jefferies LLC, that could maximize stockholder value. The Company's efforts have been and continue to be focused primarily upon the potential formation of a partnership or a licensing transaction with respect to its lead program, LIQ861 for the treatment of PAH. Strategic alternatives may also include the sale of some of the Company’s assets or proprietary technologies, or a potential merger or sale of the Company.

There can be no assurance that the Company will be able to enter into such a transaction or transactions on a timely basis, on terms that are favorable to the Company, or at all. If the Company is unable to successfully raise capital or conclude an appropriate strategic transaction, it may determine to dissolve and liquidate its assets or seek protection under the bankruptcy laws. If the Company decides to dissolve and liquidate its assets or to seek protection under the bankruptcy laws, it is unclear to what extent the Company will be able to pay its obligations, and, accordingly, it is further unclear whether and to what extent any resources will be available for distributions to stockholders. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

Cash

The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. The Company had no cash equivalents as of September 30, 2019 and December 31, 2018.

Accounts Receivable – Trade and Other

Accounts receivable are stated at historical cost less an allowance for doubtful accounts as of each Balance Sheet date. The Company does not accrue interest on trade receivables. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance based on its history of collections and write offs and the current status of all receivables. The Company writes off customer receivables when it becomes apparent, based upon customer facts and circumstances, that such amounts will not be collected. As of September 30, 2019, substantially all of the balance recorded in accounts receivable consists of amounts owed to the Company from its landlord for the reimbursement of tenant improvements in accordance with the Company’s lease agreement. The allowance for doubtful accounts was $0 and $0 as of September 30, 2019 and December 31, 2018, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. The Company is exposed to credit risk, subject to federal deposit insurance, in the event of default by the financial institutions holding its cash to the extent of amounts recorded on the Balance Sheet. With regards to cash, 100% of the Company’s cash is held on deposit with Pacific Western Bank. With regards to revenues, GlaxoSmithKline plc (“GSK” and “GSK Inhaled”) accounted for 0% and 0% of the Company’s revenues for the three months ended September 30, 2019 and 2018, respectively, and 100% and 20% of the Company’s revenues for the nine months ended September 30, 2019 and 2018, respectively.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases, as amended (Topic 842) (“ASU 2016-02”). The provisions of ASU 2016-02 set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The Company has elected to account for leases with a term of 12 months or less in a similar manner as under existing guidance for operating leases. ASU 2016-02 supersedes the previous lease standard, Topic 840, Leases. The guidance is effective for public companies with annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company adopted Topic 842, as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach in the year of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of net lease assets and lease liabilities of approximately $6.4 million and $9.1 million respectively, as of January 1, 2019. The standard had no impact on cash flows. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows classified as an operating activity in the Statement of Cash Flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the Statement of Operations and the repayment of the principal portion of the lease liability will be classified as a financing activity, while the interest component will be classified as an operating activity in the Statement of Cash Flows.

The net impact of applying Topic 842 was recorded as an adjustment to accumulated deficit of $0.6 million as follows:


	Balance at		Adjustments		Balance at
	December 31,		Due to		January 1,
	2018		Topic 842		2019
Balance Sheet:
Assets
Property, plant and equipment, net	$	8,130,708	$	(107,734)	$	8,022,974
Operating lease right-of-use assets, net		—		3,985,071		3,985,071

Liabilities
Deferred rent		2,674,683		(2,674,683)		—
Operating lease liabilities		—		6,659,725		6,659,725
Finance lease liabilities		828,785		1,636,185		2,464,970
Long-term debt		11,944,549		(1,141,792)		10,802,757

Stockholders’ equity (deficit)
Accumulated deficit		(167,053,897)		(602,098)		(167,655,995)

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASC 606” or “Topic 606”). The FASB issued Topic 606 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer and certain contract fulfillment costs. The Company adopted this standard and all the related amendments (“new revenue standard”) on January 1, 2018, applying the modified retrospective method. The modified retrospective transition method is applied on a prospective basis from the adoption date and does not recast historical financial statement periods. Any contracts with customers that were not complete as of the adoption date are reviewed and the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit as of January 1, 2018.

This adoption primarily affected the recognition of non-refundable up-front fees and milestone payments. The Company previously recognized non-refundable up-front fees as deferred revenue which was recognized into revenue on a straight-line basis over the estimated period of the Company’s substantive performance obligations, as a component of a multiple element arrangement. Milestone payments were previously accounted for under Accounting Standards Codification (“ASC”) 605-28-50-2(e), which had required recognition of a milestone payment when the applicable event was considered to be both substantive and achieved. The adoption of the new revenue standard generally requires licenses that are not considered distinct performance obligations from other goods or services within a contract to be bundled with those goods or services as a combined performance obligation. Revenue associated with the combined performance obligation is recognized over time as those goods or services are delivered.

The adoption of the new revenue standard also impacted the deferral of sublicense payments related to the milestone payments, which were previously expensed when the milestone payments were recognized, and the timing of recognition of deferred sublicense payments related to up-front license payments. Under the new revenue standard, the incremental sublicense payments related to milestone payments will be deferred as contract fulfillment costs and amortized over time, consistent with the method of recognition for the related revenues.

Segment Data

In accordance with ASC 280-10-50, Segment Reporting, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company operates in one reportable segment.

Segment information by asset is not disclosed as it is not reviewed by the Chief Operating Decision Maker or used to allocate resources or to assess the Company’s operating results and financial performance. All long-lived assets are domiciled within the United States and all revenues were earned within the United States.

Research and Development Expense

Research and development costs are expensed as incurred and include direct costs incurred to third parties related to the salaries of, and stock-based compensation for, personnel involved in research and development activities, contractor fees, grant expenses, administrative expenses and allocations of research-related overhead costs. Administrative expenses and research-related overhead costs included in research and development expense consist of allocations of facility and equipment lease charges, depreciation and amortization of assets and insurance directly related to research and development activities.

Patent Maintenance

The Company is responsible for all patent costs, past and future, associated with the preparation, filing, prosecution, issuance, maintenance, enforcement and defense of United States patent applications. Such costs are recorded as general and administrative expenses as incurred. To the extent that the Company’s licensees share these costs, such benefit is recorded as a reduction of the related expenses.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based awards on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recorded as expense over the requisite service periods in the Company’s Statements of Operations and Comprehensive Loss.

The Company recognizes compensation costs related to stock options granted to non-employees based on the estimated fair value of the awards on the date of grant in the same manner as employees. Prior to the adoption of ASU 2018-07 on January 1, 2019, the fair value of the stock options granted to non-employees was re-measured each reporting period until the service was complete, and the resulting increase or decrease in value, if any, was recognized as expense or income, respectively, during the period the related services were rendered. After the adoption of ASU 2018-07, stock options granted to non-employees are no longer re-measured each reporting period.

On May 8, 2019, the Company’s stockholders approved the Liquidia Technologies, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). A total of 300,000 shares of the Company’s common stock have been reserved for issuance under the ESPP. Subject to any plan limitations, the ESPP allows eligible employees to contribute through payroll deductions up to $25,000 per year of their earnings for the purchase of the Company’s common stock at a discounted price per share. The offering periods are six months each and begin in March and September of each year, with the initial offering period commencing on September 1, 2019. Unless otherwise determined by the administrator, the Company’s common stock will be purchased for the accounts of employees participating in the ESPP at a price per share that is 85% of the fair market value of the Company’s common stock on the last trading day of the offering period.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.

Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares adjusted for the dilutive effect of common equivalent shares outstanding during the period. Common stock equivalents consist of preferred stock, stock options and stock warrants. Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of the Company’s common shares and participating securities. The Company’s convertible preferred stock contains participating rights in any dividend paid by the Company and are deemed to be participating securities. Net loss attributable to common stockholders and participating preferred shares are allocated to each share on an as-converted basis as if all of the earnings for the period had been distributed. The participating securities do not include a contractual obligation to share in the losses of the Company and are not included in the calculation of net loss per share in the periods that have a net loss. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect on net loss per share.

Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted method. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Due to their anti-dilutive effect, the calculation of diluted net loss per share for the three and nine months ended September 30, 2019 and 2018 does not include the following common stock equivalent shares:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Stock Options	2,037,003	1,642,004	2,037,003	1,642,004
Warrants	106,274	198,870	106,274	198,870
Total	2,143,277	1,840,874	2,143,277	1,840,874

For the three and nine months ended September 30, 2019 and 2018, the only reconciling item between basic and diluted net loss per share is the impact of the common stock warrants that are included in the calculation of basic net loss per share since their exercise price is de minimis, but excluded from the calculation of diluted net loss per share since the impact of such warrants is antidilutive. For all periods presented, there were no other reconciling items between basic and diluted net loss per share.

Fair Value of Financial Instruments

The carrying values of cash, accounts receivable, and accounts payable at September 30, 2019 and December 31, 2018 approximated fair value due to the short maturity of these instruments.

The Company’s valuation of financial instruments is based on a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities;

Level 2 — Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly; and

Level 3 — Unobservable inputs for the asset and liability used to measure fair value, to the extent that observable inputs are not available.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following tables present the placement in the fair value hierarchy of financial liabilities measured at fair value as of September 30, 2019 and December 31, 2018:

Significant

Quoted Prices

Other

in Active

Observable

Significant

Markets

Inputs

Unobservable

Carrying

September 30, 2019

(Level 1)

(Level 2)

Inputs (Level 3)

Value

Pacific Western Bank note - A&R LSA

—

15,977,222

—

15,859,247


			Significant
	Quoted Prices		Other
	in Active		Observable		Significant
	Markets		Inputs		Unobservable		Carrying
December 31, 2018	(Level 1)		(Level 2)		Inputs (Level 3)		Value
Pacific Western Bank Tranche I note - A&R LSA	$	—	$	10,412,650	$	—	$	10,802,355
CSC build-to-suit equipment financing		—		1,311,135		—		1,142,194
Total	$	—	$	11,723,785	$	—	$	11,944,549

The fair value of debt was measured as the present value of the respective future cash outflows discounted at a current interest rate as of the end of the reporting period, taking into account the remaining term of liabilities.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such equity financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of proceeds generated as a result of the offering. As of September 30, 2019 and December 31, 2018, the Company recorded deferred offering costs relating to its financing activities of $141,314 and $110,365, respectively, which is included in Prepaid Expenses and Other Assets in the accompanying Balance Sheets.

Income Taxes

The Company did not record a federal or state income tax benefit for the three and nine months ended September 30, 2019 and 2018, as a result of the establishment of a full valuation allowance being required against the Company’s net deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. This new law includes significant changes to the U.S. corporate income tax system, including a permanent reduction in the corporate income tax rate from 35% to 21%, limitations on the deductibility of interest expense and executive compensation and the transition of U.S. international taxation from a worldwide system to a territorial tax system. For taxpayers with revenues over a certain threshold, the TCJA also limits interest expense deductions to 30% of taxable income before interest, depreciation and amortization from 2018 to 2021 and then taxable income before interest thereafter. The TCJA permits disallowed interest expense to be carried forward indefinitely.

Recent Accounting Pronouncements

In June 2016, the FASB issued new accounting guidance that significantly changes how companies will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual reporting periods beginning after December 15, 2018 and must be adopted using a cumulative effect adjustment to accumulated deficit. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with “down round” features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted this standard effective January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). The provisions of ASU 2018-13 set out modifications to the disclosure requirements regarding fair value measurements. The modifications removed certain disclosure requirements regarding transfers between levels of the fair value hierarchy and valuation processes for Level 3 fair value measurements. In addition, the modifications added requirements to disclose changes in unrealized gains and losses for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for public companies with annual periods and interim periods within those annual periods beginning after December 15, 2019, and will be effective for the Company for the year ending December 31, 2020. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.

In October 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 ("ASU 2018-17"). The provisions of ASU 2018-18 clarify when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, with early adoption permitted, and is effective for the Company for the year ending December 31, 2020. The Company is currently evaluating the impact that the implementation of this standard will have on the Company's financial statements.