Note

–

Accounting Policies and Recent Accounting Pronouncements

Principles of consolidation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the US (US GAAP) and include accounts of Windtree Therapeutics, Inc. and its wholly-owned subsidiaries, CVie Investments Limited and its wholly-owned subsidiary, CVie Therapeutics Limited; and a presently inactive subsidiary, Discovery Laboratories, Inc. (formerly known as Acute Therapeutics, Inc.).

Business

ombinations

We follow the acquisition method for an acquisition of a business where the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess of the fair value of purchase consideration over the fair value the assets acquired and liabilities assumed is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management’s estimate of fair value is based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and as such, actual results

may

differ materially from estimates.

Goodwill and

ntangible

ssets

We record acquired identified intangibles, which includes intangible assets (such as goodwill and other intangibles), based on estimated fair value. The acquired in-process research and development (“IPR&D”) assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. IPR&D is

not

amortized but reviewed for impairment at least annually, or when events or changes in the business environment indicate the carrying value

may

be impaired. The following table represents identifiable intangible assets as of

December 31, 2018:

(in thousands)	Estimated Fair Value

Istaroxime drug candidate	$	22,340
Rostafuroxin drug candidate		54,750
Total	$	77,090

Goodwill represents the excess of the purchase price over the fair value assets acquired and liabilities assumed in a business combination and is

not

amortized. We perform an annual impairment test for goodwill and evaluates the recoverability whenever events or changes in circumstances indicate that the carrying value of goodwill

may

not

be fully recoverable. In making such assessment, qualitative factors are used to determine whether it is more likely than

not

that our fair value is less than our carrying value. If the estimated fair value is less than our carrying value, then an impairment loss is recorded.

Foreign

urrenc

y transactions

The functional currency for our foreign subsidiaries is US Dollars. We remeasure monetary assets and liabilities that are

not

denominated in the functional currency at exchange rates in effect at the end of each period. Gains and losses from the remeasurement of foreign currency transactions are recognized in other income (expense). Foreign currency transactions resulted in losses of approximately

$0.1

million for the year ended

December 31, 2018.

There were

foreign currency transaction gains or losses for the year ended

December 31, 2017.

Use of estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the U. S., requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents are held in at domestic and foreign financial institutions and consist of liquid investments and money market funds with a maturity from date of purchase of

days or less that are readily convertible into cash.

Marketable securities

Marketable securities consist of investments in US Treasury securities. Management determines the appropriate classification of these securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. We classify investments as available-for-sale pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)

320,

Investments—Debt and Equity Securities. Investments are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive loss in stockholders’ equity and a component of total comprehensive loss in the consolidated statements of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were

realized gains or losses on marketable securities for the years ended

December 31, 2018

and

2017.

There were

unrealized gains or losses on investments for the years ended

December 31, 2018

and

2017.

We review investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is

not

recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if we have experienced a credit loss, have the intent to sell the investment, or if it is more likely than

not

that we will be required to sell the investment before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with our investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.

Available-for-sale marketable securities are classified as marketable securities, current or marketable securities, non-current depending on the contractual maturity date of the individual available-for-sale security.

Fair value of financial instruments

Our financial instruments consist principally of cash and cash equivalents and restricted cash. The fair values of our cash equivalents are based on quoted market prices. The carrying amount of cash equivalents is equal to their respective fair values at

December 31, 2018

and

2017,

respectively. We determine the fair value of marketable securities on quoted market prices or other relevant information generated by market transactions involving identical or comparable assets. Accounts payable and accrued expenses are carried at cost, which approximates fair value because of their short maturity. The carrying amount of loan payable (including current installments) approximates fair value based on a comparison of interest rates on the loan to current market rates considering our credit risk.

Property and equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally

three

ten

years). Leasehold improvements are amortized over the shorter of the estimated useful lives or the remaining term of the lease. Repairs and maintenance costs are charged to expense as incurred.

Restricted cash

Restricted cash consists principally of a

$140,000

certificate of deposit held by our bank as collateral for a letter of credit in the same notional amount held by our landlord to secure our obligations under our Lease Agreement dated

May 26, 2004

for our headquarters location in Warrington, Pennsylvania and

$31,000

in deposits held by our landlord for our offices in Taipei, Taiwan, the former headquarters of CVie Therapeutics (

see,

– Note

– Commitments, for further discussion on our leases).

Long-lived assets

Our long-lived assets, primarily consisting of intangible assets, are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset

may

not

be recoverable, or its estimated useful life has changed significantly. When the undiscounted cash flows of an asset are less than its carrying value, an impairment is recorded and the asset is written down to estimated value.

impairment was recorded during the years ended

December 31, 2018

and

2017

as management believes there are

circumstances that indicate the carrying amount of the assets will

not

be recoverable.

Collaborative arrangements

We account for collaborative arrangements in accordance with applicable accounting guidance provided in ASC Topic

808,

Collaborative Arrangements

See,

– Note

– Collaboration, Licensing and Research Funding Agreements.

Restructured debt liability – contingent milestone payment

In conjunction with the

November 2017

restructuring and retirement of long-term debt (

see,

– Note

– Restructured debt liability), we have established a

$15

million long-term liability for contingent milestone payments potentially due under the Exchange and Termination Agreement dated as of

October 27, 2017 (

Exchange and Termination Agreement), between ourselves and affiliates of Deerfield Management Company L.P. (Deerfield). The liability has been recorded at full value of the contingent milestones and will continue to be carried at full value until the milestones are achieved and paid or milestones are

not

achieved and the liability is written off as a gain on debt restructuring.

Deferred revenue

Deferred revenue represents amounts received prior to satisfying the revenue recognition criteria (

see

, Revenue recognition) and are recognized as deferred revenue in our balance sheet. Amounts expected to be recognized as revenue within the

months following the balance sheet date are classified as Deferred revenue – current portion. Amounts

not

expected to be recognized as revenue within the

months following the balance sheet date are classified as Deferred revenue – non-current portion.

Deferred revenue primarily consists of amounts related to an upfront license fee received in

July 2017

in connection with the License Agreement with Lee’s. The revenue will be recognized as our performance obligations under the contract are met (

see

, Note

– Collaboration and Device Development Payment Restructuring, Licensing and Research Funding Agreements).

Revenue recognition

Effective

January 1, 2018,

we adopted Accounting Standards Codification (“ASC”) Topic

606,

Revenue from Contracts with Customers, using the modified retrospective transition method. Under this method, we recognize the cumulative effect of initially adopting ASC Topic

606,

if any, as an adjustment to the opening balance of retained earnings. Additionally, under this method of adoption, we apply the guidance to all incomplete contracts in scope as of the date of initial application. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

In accordance with ASC Topic

606,

we recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC Topic

606,

we perform the following

five

steps:

	(i)		identify the contract(s) with a customer;

	(ii)		identify the performance obligations in the contract;

	(iii)		determine the transaction price;

	(iv)		allocate the transaction price to the performance obligations in the contract; and

	(v)		recognize revenue when (or as) the entity satisfies a performance obligation.

We only apply the

five

-step model to contracts when we determine that it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic

606,

we assess the goods or services promised within a contract and determine those that are performance obligations, and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We have concluded that our government grants are

not

within the scope of ASC Topic

606

as they do

not

meet the definition of a contract with a customer. We have concluded that the grants meet the definition of a contribution and are non-reciprocal transactions, and have also concluded that Subtopic

958

605,

Not

-for-Profit-Entities-Revenue Recognition does

not

apply, as we are a business entity and the grants are with governmental agencies.

In the absence of applicable guidance under US GAAP, effective

January 1, 2018,

we developed a policy for the recognition of grant revenue when the related costs are incurred and the right to payment is realized.

We believe this policy is consistent with the overarching premise in ASC Topic

606,

to ensure that revenue recognition reflects the transfer of promised goods or services to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods or services, even though there is

exchange as defined in ASC Topic

606.

We believe the recognition of revenue as costs are incurred and amounts become realizable is analogous to the concept of transfer of control of a service over time under ASC Topic

606.

Prior to

January 1, 2018,

we recognized revenue as related costs were incurred under the grants given that persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured. Recognized amounts reflected our performance under the grants and equal direct and indirect costs incurred. Revenue and expenses under these arrangements were presented gross. Revenue recognition under this new policy is

not

materially different than would have been calculated under the old guidance. As a result of the adoption of this policy, there was

change to the amounts we have historically recorded in our financial statements.

Research and development

We account for research and development expense by the following categories: (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical development 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 in accordance with Accounting Standards Codification (ASC) Topic

730,

Research and Development

Stock-based compensation

Stock-based compensation is accounted for under the fair value recognition provisions of ASC Topic

718,

Stock Compensation

(ASC Topic

718

See

, – Note

– Stock Options and Stock-based Employee Compensation, for a detailed description of our recognition of stock-based compensation expense. The fair value of stock option grants is recognized evenly over the vesting period of the options or over the period between the grant date and the time the option becomes non-forfeitable by the employee, whichever is shorter.

Warrant accounting

We account for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic

815,

Derivatives and Hedging – Contracts in Entity’s Own Equity

(ASC Topic

815

), as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement.

Income taxes

We account for income taxes in accordance with ASC Topic

740,

Accounting for Income Taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.

We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is

not

assured.

Beneficial Conversion Feature

A beneficial conversion feature arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in the money) at inception due to the conversion option having an effective conversion price that is less than the fair value of the underlying stock at the commitment date.

Preferred Stock

The issuance of Series A Convertible Preferred Stock (Preferred Shares) in the

first

quarter of

2017

(see, “– Note

– Stockholders’ Equity”) resulted in a beneficial conversion feature. We recognized this feature by allocating the intrinsic value of the beneficial conversion feature, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the Preferred Shares. As the Preferred Shares are immediately convertible by the holders, the discount allocated to the beneficial conversion feature was immediately accreted and recognized as a

$3.6

million

one

-time, non-cash deemed dividend to the preferred shareholders during the

first

quarter of

2017.

An additional discount to the Preferred Shares of

$4.5

million was created due to the allocation of proceeds to the Warrants which were issued with the Preferred Shares. This discount is amortized proportionately as the Preferred Shares are converted. For the years ended

December 31, 2018

and

December 31, 2017,

we recognized a non-cash deemed dividend to the preferred shareholders of

$1.7

million and

$2.8

million, respectively, related to the Preferred Shares converted during the period. As of

December 31, 2018,

there were

Preferred Shares remaining to be converted.

Convertible Note

The issuance on

July 2, 2018

of a Secured Convertible Promissory Note (the Note) to Panacea Venture Management Company Ltd. (Panacea) with respect to a loan facility in the aggregate amount of

$1.5

million resulted in a beneficial conversion feature. We recognized this feature by allocating the relative fair value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the Note. We recorded the Note as current debt at its face value of

$1.5

million less debt discount consisting of (i)

$0.4

million related to the beneficial conversion feature and (ii)

$0.4

million in fair value of the warrants issued in connection with the Note. The discount was accreted to the

$1.5

million loan over its term using the effective interest method (

see

, – Note

– Loan Payable). On

December 27, 2018,

we repaid the Note in its entirety in cash of

$1.5

million. As part of the extinguishment of debt, we recorded a gain on extinguishment of debt of approximately

$0.4

million, relating to the reacquisition of the beneficial conversion option. The gain was calculated using the intrinsic value of the beneficial conversion option, which is the product of: (i) the difference between the common stock price on the date of extinguishment of

$5.11

and the conversion price of

$4.00,

and (ii)

375,000

shares convertible into common stock.

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. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period. For the years ended

December 31, 2018

and

2017,

the number of shares of common stock potentially issuable upon the conversion of preferred stock or the exercise of certain stock options and warrants was

14.4

million and

1.0

million shares, respectively. As of

December 31, 2018

and

2017,

all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.

We do

not

have any components of other comprehensive income (loss).

Concentration of Suppliers

We currently obtain the active pharmaceutical ingredients (APIs) of our

KL4

surfactant drug products from single-source suppliers. In addition, we rely on a number of

third

-party institutions and laboratories that perform various studies as well as quality control release and stability testing and other activities related to our

KL4

surfactant development and manufacturing activities. At the present time, several of these laboratories are single-source providers. The loss of

one

or more of our single-source suppliers or testing laboratories could have a material adverse effect upon our operations.

Business segments

We currently operate in

one

business segment, which is the research and development of products focused on acute pulmonary and cardiovascular diseases, and the manufacture and commercial sales of approved products. We are managed and operated as

one

business. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. We do

not

operate separate lines of business with respect to our product candidates.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

May 2014,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

2014

09,

Revenue from Contracts with Customers (Topic

606

)

, which was subsequently amended by several other ASUs related to Topic

606

to, among other things, defer the effective date and clarify various aspects of the new revenue guidance including principal versus agent considerations, identifying performance obligations, licensing, and other improvements and practical expedients. We adopted ASU

2014

09,

as amended, effective

January 1, 2018

using the modified retrospective transition method. In

June 2017,

we entered into a License Agreement with Lee’s Pharmaceutical (HK) Ltd. (Lee’s (HK)), granting Lee’s (HK) rights to develop and commercialize our products in a specific Asian territory. The consideration we are eligible to receive under this agreement includes an upfront payment, contingent revenues in the form of regulatory and commercial milestones, and sales-based milestone and royalty payments. We evaluated the License Agreement under ASU

2014

and determined that there was

material impact to revenues for any of the years presented upon adoption. Additionally, there were

revisions to any balance sheet components of revenues such as deferred revenues or beginning retained earnings as a result of using the modified retrospective method. The primary impact on our financial statements is related to revised or additional disclosures with respect to revenues and cash flows arising from contracts with customers (

See,

“– Note

– Collaboration, Licensing and Research Funding Agreements).

May 2017,

the FASB issued ASU

2017

09,

Compensation—Stock Compensation (Topic

718

), Scope of Modification Accounting

. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective prospectively for the annual period ending

December 31, 2018

and interim periods within that annual period. We adopted ASU

2017

effective

January 1, 2018

and the adoption did

not

have a material impact on our annual

2018

financial statements.

August 2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

), Classification of Certain Cash Receipts and Cash Payments

. This ASU clarifies clarify how entities should classify certain cash receipts and cash payments related to

eight

specific cash flow issues, including debt prepayment or extinguishment costs, with the objective of reducing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than

one

class of cash flows. The ASU is effective retrospectively for the annual period ending

December 31, 2018

and interim periods within that annual period. We adopted ASU

2016

effective

January 1, 2018

and the adoption did

not

have a material impact on our annual

2018

financial statements.

January 2017,

the FASB issued ASU

2017

01,

Business Combinations (Topic

805

), Clarifying the Definition of a Business

. The FASB changed its definition of a business in an effort to help entities determine whether a set of transferred assets and activities is a business. The guidance requires an entity to

first

evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is

not

a business. If the threshold is

not

met, the entity evaluates whether the set meets the requirements of a business, which includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The ASU is effective for the annual period ending

December 31, 2018

and interim periods within that annual period. We adopted ASU

2017

effective

January 1, 2018

and the adoption did

not

have a material impact on our annual

2018

financial statements.

Recent Accounting Pronouncements

February 2016,

the FASB issued ASU

2016

02,

Leases

(Topic

842

). This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting standards. The ASU is effective

January 1, 2019.

Early adoption is permitted. The standard requires a modified retrospective approach; however, the FASB recently added a transition option to the leases standard that allows entities to apply the new guidance in the year of transition rather than at the beginning of the earliest period presented. We have

not

elected to early adopt this standard. While we continue to assess all the effects of adoption, we believe the most significant effect relates to the recognition of right-of-use assets and corresponding liabilities on our consolidated balance sheet, primarily related to existing facility operating leases, and providing new disclosures with regards to our leasing activities.

January 2017,

the FASB issued ASU

2017

04,

Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment

. ASU

2017

simplifies the subsequent measurement of goodwill by removing the

second

step of the

two

-step impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU

2017

is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after

December 15, 2019;

early adoption is permitted. We currently anticipate that the adoption of ASU

2017

will

not

have a material impact on our financial statements.