Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

 Note 3 – Summary of Significant Accounting Policies

Basis of Presentation.

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered for fair presentation have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. There have been no changes to our critical accounting policies since December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 that we filed with the Securities and Exchange Commission (SEC) on March 15, 2013 (2012 Form 10-K). Readers are encouraged to review those disclosures in conjunction with this Quarterly Report on Form 10-Q.

Inventory

Inventories are determined at the lower of cost or market value with cost determined under the specific identification method. We assess the potential capitalization of inventory and the timing of when the related costs are expected to be recoverable through the commercialization of our products. Costs incurred prior to FDA approval of SURFAXIN and the registration of our initial AFECTAIR device have been recorded in our statement of operations as research and development expense. Due to the delay in the commercial launch of SURFAXIN, previously capitalized raw material costs of $195,072 were charged to research & development expense in the first quarter of 2013, as these raw materials will no longer be used for commercial production.

Research and development expense

We track research and development expense by activity, as follows: (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical programs. Research and development expense includes personnel, facilities, manufacturing and quality operations, pharmaceutical and device development, research, clinical, regulatory, other preclinical and clinical activities and medical affairs. Research and development costs are charged to operations as incurred. For the quarter ended March 31, 2012, research and development expense includesa $0.5 million charge related to a milestone payment that became payable to Johnson & Johnson (J&J) upon FDA approval of SURFAXIN, in accordance with terms of our license agreement with J&J.

Net loss per common share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. For the quarters ended March 31, 2013 and 2012, the number of shares of common stock potentially issuable upon the exercise of certain stock options and warrants was 15.8 million and 13.2 million shares, respectively. As a result of the Company's net losses for the periods presented, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.

Recent accounting pronouncements

There were no new accounting pronouncements issued during the three months ended March 31, 2013 that are expected to have a material impact on the Company's financial position, operating results or disclosures.