Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2018March 31, 2019

or

For the transition period from to

Commission file number 000-26422

Windtree Therapeutics, Inc.

 (Exact name of registrant as specified in its charter)

(215) 488-9300

(Registrant’s telephone number, including area code)

__________________

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.001 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES ☒    NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒    NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐    NO ☒

As of August 3, 2018,May 10, 2019, there were outstanding 3,769,08832,188,855 shares of the registrant’s common stock, par value $0.001 per share.

Table of Contents

PART I - FINANCIAL INFORMATION

PART II - OTHER INFORMATION

Windtree Therapeutics, Inc. (referred to as “we,” “us,” or the “Company”) is a biotechnology and medical device company focused on developing noveldrug product candidates and medical device technologies to address acute pulmonary and cardiovascular diseases. Historically, our focus has been on the development of our proprietary KL4 surfactant therapies for respiratory diseasestechnology and other potential applications. Surfactants are produced naturally in the lung and are essential for normal respiratory function and survival. Our proprietary technology platform includes a synthetic, peptide-containing surfactant (KL4 surfactant) that is structurally similar to endogenous pulmonary surfactant, and novel drug delivery technologies, including our proprietary aerosol delivery system (ADS), being developed to enable noninvasive administration of aerosolized KL4 surfactant. We recently completed design verification technology for our new phase 3 ADS (which we previously referred to as the “NextGen ADS”), which we plan to use in our remaining AEROSURF® clinical development activities and, if approved, initial commercial activities. We believe that our proprietary technologies may make it possible to develop a pipeline of surfactant products to address a variety of respiratory diseases for which there are few treatment and/or no approved therapies.

Our lead development program is AEROSURF(lucinactant for inhalation), an investigational combination drug/device product that we are developing to improve the managementprevention of respiratory distress syndrome (RDS) in premature infants who may require surfactant therapyinfants. On December 21, 2018, we entered into an Agreement and Plan of Merger (the CVie Acquisition) with CVie Investments Limited (CVie Investments), an exempted company with limited liability incorporated under the laws of the Cayman Islands, pursuant to sustain life. The currently-available surfactantswhich we issued shares of our common stock, par value $0.001 per share (common stock), to CVie Investments’ former shareholders, at an exchange ratio of 0.3512 share of common stock for each share of CVie Investments outstanding prior to the merger, resulting in the United States (U.S.) are administered using invasive endotracheal intubationissuance of 16,265,060 shares of common stock in exchange for the outstanding shares of CVie Investments. Since the CVie Acquisition, which closed on December 21, 2018, we have operated CVie Investments, and mechanical ventilation, eachits wholly-owned subsidiary, CVie Therapeutics Limited (CVie Therapeutics), a Taiwan corporation organized under the laws of whichthe Republic of China, as a business division (the entities may result in serious respiratory conditions and other complications. To avoid these risks, many premature infants are initially treated with noninvasive respiratory support such as nasal continuous positive airway pressure (nCPAP). Because nCPAP does not address the underlying surfactant deficiency, many premature infants respond poorly to nCPAP alone (typically within the first 72 hours of life) and may require delayed surfactant therapy administered with invasive intubation (an outcomebe collectively referred to herein as “nCPAP failure”). If surfactant therapy could be administered noninvasively, neonatologists would be able to provide surfactant therapy to premature infants earlier in their courseCVie) focused on development of treatmentdrug product candidates for cardiovascular diseases, including acute heart failure and without exposing them to the riskshypertension and associated with invasive endotracheal intubation and mechanical ventilation.organ dysfunction.

AEROSURF is designed to administer aerosolized KL4 surfactant noninvasively and potentially meaningfully reduce the use of invasive endotracheal intubation and mechanical ventilation. We believe that AEROSURF, if approved, will allowOur four lead development programs are (1) istaroxime for earlier treatment of premature infants who currently receive delayed surfactant therapy, decrease the morbidities and complications currently associated with surfactant administration, and reduce the numberacute decompensated heart failure (ADHF), (2) AEROSURF® (lucinactant for inhalation) for non-invasive delivery of premature infants who are subjected to invasive intubation and delayed surfactant therapy following nCPAP failure. We also believe that AEROSURF has the potential to address a serious unmet medical need and potentially provide transformative clinical and pharmacoeconomic benefits. Consistent with our belief, FDA has granted Fast Track designation for our KL4 surfactant (including AEROSURF) to treat RDS.

In addition to advancing AEROSURF, we are assessing potential development pathways to potentially gain marketing approval for lyophilized KL4 surfactant as an intratracheal instillate for the treatment and/or prevention of RDS. Lyophilizedto treat RDS in premature infants, (3) lyophilized KL4 surfactant may potentially provide benefits related to use, including longer shelf life, reduced cold-chain requirementsintratracheal suspension for RDS, and lower viscosity. We have discussed with the FDA a potential development plan, trial design and regulatory plan(4) rostafuroxin for approval. If we can define an acceptable development program that is achievable from a cost, timing and resource perspective, we might seek approval to treat premature infants who, because they are unable to breathe on their own or other reason, cannot benefit from AEROSURF.genetically associated hypertension.

We also believe that our KL4 surfactant technology may potentially support a product pipeline to address a broad range of serious respiratory conditions in children and adults. We have received support, and plan to seek additional support, from the National Institutes of Health (NIH) and other government funding sources to explore the utility of our KL4 surfactant to address a variety of such respiratory conditions as acute lung injury (ALI), including acute radiation exposure to the lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI; as well as chronic rhinosinusitis, complications of certain major surgeries, mechanical ventilator-induced lung injury (often referred to as VILI), pneumonia, and diseases involving mucociliary clearance disorders, such as chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF). Although there can be no assurance, we may in the future support development activities to establish a proof-of-concept and, if successful, thereafter determine whether to seek strategic alliances or collaboration arrangements or pursue other financial alternatives to fund further development and, if approved, commercialization of additional KL4 surfactant indications.

To leverage our capabilities, maximize the use of our resources and potentially reduce our dependency on a single product candidate, we also seek to enter into strategic alliances, collaboration agreements and other strategic transactions (including without limitation, by merger, acquisition or other corporate transaction). We are currently engaged in discussions for a potential strategic transaction that could diversify our assets and bring in additional capital. There can be no assurance, however, that we will be able to reach agreement on terms and within the time frame acceptable to all parties. Moreover, even if we reach agreement and complete a transaction, there can be no assurance that we will have sufficient resources to fund the continued development of AEROSURF or any other product candidates, that any of our development efforts would be successful, or that we would obtain regulatory approvals needed to commercialize our product candidates in the world’s markets.

As of June 30,The reader is referred to, and encouraged to read in its entirety, Item 1 – Business in our Annual Report on Form 10-K for the year ended December 31, 2018 that we had cashfiled with the Securities and cash equivalents of $0.6 million and current liabilities of $15.2 million. On July 2,Exchange Commission (SEC) on April 16, 2019, as amended by the Form 10-K/A that we filed with the SEC on April 23, 2019 (collectively, 2018 we were able to secure $1.5 million in additional capital (see below)10-K), and as of August 3, 2018 we had cash and cash equivalents of $0.7 million, which we believe is sufficient to maintain our operations through mid-August 2018.  We are currently engaged in discussions forcontains a potential strategic transaction that could diversify our assets and bring in additional capital to fund our activities. As we seek to finalize that transaction, Lee’s Pharmaceutical Holdings Limited (Lee’s), the majority holderdiscussion of our common stock, has indicated to us that it will provide us interim financial support while we work to complete a strategic transaction; however, we have not executed agreements for any additional advances at this timebusiness and there can be no assurance that additional interim support will be forthcoming.  Moreover, in connection with these activities, we are incurring and will continue to incur potentially significant legal, accounting, and other professional fees that represent an additional financial burden for which we will require additional capital.

We expect to continue to incur significant losses and will require significant additional capital to support our operations, advance our AEROSURF clinical development program, and satisfy existing obligations, and we do not currently have sufficient cash and cash equivalents for at least the next year following the date that the financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

To alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, managementbusiness plans, to raise additional capital through one or more of the following: (i) strategic transactions, including potential alliances and collaborations focused on markets outside the U.S., as well as potential combinations (including by merger or acquisition) or other corporate transactions;information concerning our proprietary technologies and (ii) through private placements of our equity securities, although there can be no assurance that we will be able to secure such transactions or complete a private placement on acceptable terms, if at all. Although we are currently engaged in active diligencecurrent and discussions for a potential strategic transaction, there is no guarantee we will be able to complete the strategic transaction. In addition, if none of the other alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we will not have sufficient cash resources and liquidity to fund our business operations for at least the next year following the date that the financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of the accompanying financial statements.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

In April 2018, we completed a $2.6 million private placement offering with LPH II Investments Limited (LPH II), a wholly-owned subsidiary of Lee’s, from which we received net proceeds of approximately $2.5 million. In June 2018, we entered into a Guaranty and Replenishment Agreement with Lee’s pursuant to which Lee’s agreed to replenish amounts  up to $1 million expended by us that reduce our cash resources to an amount that is less than our planned minimum cash (the amount that would otherwise be required to cover estimated wind-down costs should we be unable at any time to continue as a going concern). Lee’s secured its obligation to us by delivering an Irrevocable Stand-by Letter of Credit (the Letter of Credit) in the amount of $1 million in favor of the Company, which expires on October 31, 2018. As of August 3, 2018, we have not drawn on the Letter of Credit.development programs. 

On July 2, 2018, we issued to Panacea Venture Management Company Ltd. (Panacea), a Secured Convertible Promissory Note (the Note) with respect to a loan facility in the aggregate amount of up to $1.5 million. In connection with the issuance of the Note, Panacea made two loans (individually, each a Loan and collectively, the Loans) to us, the first of which was in the amount of $1.0 million and paid on the date of the Note and the second of which was in the amount of $500,000 and received on July 23, 2018. The Loans bear interest on the outstanding principal amount at a rate of 15% per annum until the Note is paid in full or converted into shares of our common stock at a price per share of $4.00. In addition, in lieu of converting the Note, Panacea may deliver the Note into a private placement in which Panacea Venture Healthcare Fund I L.P., an affiliate of Panacea, may participate. There can be no assurance that such a private placement will be completed. In connection with these Loans, we granted to Panacea a security interest in substantially all our assets. The proceeds of these Loans are being used to support our operations while we pursue a potential strategic transaction that could diversify our assets and bring in additional capital.

(See, “– Note 12 – Subsequent Events”). 

As of June 30, 2018, there were 120 million shares of common stock and 5 million shares of preferred stock authorized under our Certificate of Incorporation, and approximately 113.5 million shares of common stock and 5.0 million shares of preferred stock available for issuance and not otherwise reserved.

These interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S.US (US GAAP) for interim financial information in accordance with the instructions to Form 10-Q.10-Q and include accounts of Windtree and its wholly-owned subsidiaries. Accordingly, they do not include all of the information and footnotes required by U.S.US GAAP for complete consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered for fair presentation have been included. When necessary, the prior year interim unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation. Operating results for the three and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.2019. There have been no changes to our critical accounting policies since December 31, 2017. For a discussion of our accounting policies, see, “– Note 4 – Summary of Significant Accounting Policies” in this Quarterly Report on Form 10-Q, and, in the Notes to Consolidated Financial Statements in our 2017 Form 10-K, “– Note 4 – Accounting Policies and Recent Accounting Pronouncements.”  Readers are encouraged to review those disclosures2018. The accompanying interim unaudited condensed financial statements should be read in conjunction with this Quarterly Report onannual audited financial statements and related notes as of and for the year ended December 31, 2018 contained in the Company’s 2018 Form 10-Q.10-K.

As of March 31, 2019, we had cash and cash equivalents of $2.1 million and available-for-sale, marketable securities of $13.5 million, and current liabilities of $17.0 million, including $7.5 million of Loan payable (see, Note 7 - Loan Payable).  As of May 10, 2019, we believe that we have sufficient resources (including marketable securities) available to support our development activities, business operations and debt service through October 2019.

Although we believe that the CVie Acquisition and a $39 million private placement financing that closed on the same date (the Private Placement Financing) have improved our financial position and may better position us to raise the capital needed to fund our business plans, we expect to continue to incur significant losses and require significant additional capital to advance our istaroxime and AEROSURF clinical development programs and other activities, support our operations and business development efforts, and satisfy our obligations beyond October 2019, and we do not have sufficient cash and cash equivalents for at least the next year following the date that the financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

To alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, management plans to raise additional capital through a combination of public or private equity offerings and strategic transactions, including but not limited to potential alliances and collaborations focused on various individual markets; however, none of these alternatives are committed at this time.  There can be no assurance that we will be able to complete any public or private equity offerings on acceptable terms, or in amounts required to support our operations, if at all, or identify and enter into any strategic transactions that will provide the capital that we will require. If none of these alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we will not have sufficient cash resources and liquidity to fund our business operations for at least the next year following the date that the financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to our ability to continue as a going concern through one year after the issuance of the accompanying financial statements.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

As of March 31, 2019, there were 120 million shares of common stock and 5 million shares of preferred stock authorized under our Certificate of Incorporation, and approximately 72.0 million shares of common stock and 5.0 million shares of preferred stock available for issuance and not otherwise reserved.

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, CVie Therapeutics, and a presently inactive subsidiary, Discovery Laboratories, Inc. (formerly known as Acute Therapeutics, Inc.).

Business Combinations

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 of 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 Intangible Assets

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 March 31, 2019:

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 evaluate 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 Currency 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 gains of approximately $0.2 million for the three months ended March 31, 2019. There were no foreign currency transaction gains or losses for the three months ended March 31, 2018.

Use of Estimates

The preparation of financial statements, in conformity with U.S.US GAAP, 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.

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 other income (expense) on a specific-identification basis. For the three months ended March 31, 2019, we had $11,000 in realized gains and $40,000 in unrealized gains on marketable securities. There were no realized or unrealized gains or losses on investments for the three months ended March 31, 2018.

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.

Leases

Effective January 1, 2019, we adopted ASC Topic 842, Leases (ASC 842), using the modified retrospective transition approach and utilizing the effective date as the date of initial application.  Consequently, prior period balances and disclosures have not been restated and are presented in accordance with the previous guidance in ASC Topic 840, Leases.

At the inception of an arrangement, we determine whether an arrangement is, or contains, a lease based on the unique facts and circumstances present in the arrangement. An arrangement is, or contains, a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Most leases with a term greater than one year are recognized on the balance sheet as operating lease right-of-use assets and current and non-current operating lease liabilities, as applicable. We elected not to recognize on the balance sheet leases with terms of 12 months or less. We typically only include the initial lease term in our assessment of a lease arrangement. Options to extend a lease are not included in our assessment unless there is reasonable certainty that we will renew. 

Operating lease liabilities and their corresponding operating lease right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in our leases is typically not readily determinable. As a result, we utilize our incremental borrowing rate, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, we utilized the remaining lease term of our leases in determining the appropriate incremental borrowing rates.

Restructured debt liabilityDebt Liability – contingent milestone paymentContingent Milestone Payment

In conjunction with the November 2017 restructuring and retirement of long-term debt ((sSee,ee, "– Note 98 – Restructured debt liability")Debt Liability), we established a $15 million long-term liability for contingent AEROSURF regulatory and commercial milestone payments, beginning with the filing for marketing approval in the United States, 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 12 months following the balance sheet date are classified as Deferred revenue – current portion.  Amounts not expected to be recognized as revenue within the 12 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 11 – Out-Licensing Agreement).

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 the we determine are within the scope of ASC Topic 606, we perform the following five steps:

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.

Research and developmentDevelopment

We account for research and development expense by the following categories: (a) product development and manufacturing, (b) clinical 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)ASC Topic 730, Research and Development.Development.

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. As of June 30,March 31, 2019 and 2018, and 2017, the number of shares of common stock potentially issuable upon the conversion of preferred stock or exercise of certain stock options and warrants was 1.115.2 million and 1.21.0 million shares, respectively. For the three and six months ended June 30,March 31, 2019 and 2018, and 2017, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.

Net loss per common share – basic and diluted and weighted average number of common shares outstanding for the three and six months ended June 30, 2017 have been corrected for immaterial calculation errors related to the conversion of preferred stock to common stock during those periods.

We do not have any components of other comprehensive income (loss).

Beneficial Conversion Feature

The issuance of Series A Convertible Preferred Stock (Preferred Shares) in the second quarter of 2017 (see, “– Note 5 – Stockholders’ Equity”) resulted in a beneficial conversion feature, which 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. We recognized the beneficial conversion 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, 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. No Preferred Shares were converted during the three or six months ended June 30, 2018. For the three months ended June 30, 2017, we recognized a non-cash deemed dividend to the preferred shareholders of $0.5 million related to the Preferred Shares converted during the period.

Income taxesTaxes

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.

Recently Adopted Accounting Standards

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (ASU 2016-02). ASU 2016-02 establishes ASC 842 which amends ASC 840, Leases, by introducing a lessee model that requires balance sheet recognition for most leases and the disclosure of key information about leasing arrangements. ASC 842 was subsequently amended during 2018. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. We adopted the new standard using the required modified retrospective approach on January 1, 2019 and used the effective date as its date of initial application. Consequently, financial information is not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019. Instead, the requirements of ASC 840 are presented for these prior periods.

ASC 842 provides several optional practical expedients in transition. We elected the package of practical expedients which allowed us to not reassess its existing conclusions on lease identification, classification, and initial direct costs. Further, we elected to utilize the short-term lease exemption for all leases with an original term of 12 months or less, for purposes of applying the recognition and measurement requirements of the new standard. We also elected the practical expedient to not separate lease and non-lease components for all our leases.

On December 22, 2017,The adoption of this standard resulted in the U.S. government enacted the 2017 Tax Cutsrecognition of operating lease liabilities and Jobs Act (the 2017 Tax Act), which significantly revises U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate to 21%, imposing a mandatory one-time transition taxrelated right-of-use assets on previously deferred foreign earnings,our condensed consolidated balance sheets of $2.2 million and eliminating or reducing certain income tax deductions. As of December 31, 2017, we recorded the provisional impact from the 2017 Tax Act in accordance with SAB 118. As of June 30, 2018, we have not adjusted any of our provisional amounts that were recorded as of December 31, 2017. We will finalize our adjustments during 2018.

Recently Adopted Accounting Standards

In 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$2.0 million, respectively, related to Topic 606 to, among other things, defer the effective date and clarify various aspectsour operating leases. The adoption of the new revenue guidance including principal versus agent considerations, identifying performance obligations, and licensing, and include other improvements and practical expedients. We adopted ASU 2014-09, as amended, effective January 1, 2018 using the modified retrospective transition method. In July 2017, we entered into a License Agreement with 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 revenuesASC 842 also resulted in the formelimination of regulatorydeferred rent of approximately $72,000 and commercial milestones,$139,000 in accrued expenses and sales-based milestone and royalty payments. We evaluated the License Agreement under ASU 2014-09 and determined that there was no material impact to revenues for any of the years presented upon adoption. Additionally, there were no revisions to anyother long-term liabilities, respectively, in our condensed consolidated balance sheet components of revenues such as deferred revenues or beginning retained earnings as a result of thesheets. The adoption of 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, which are included in Note 11 – Out-Licensing Agreement.

In 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 2017-09 effective January 1, 2018 and the adoptionstandard did not have a material impact on our unaudited condensed consolidated financial statements of operations and comprehensive loss or condensed consolidated statements of cash flows. Refer to Note 10 – Leases, for our current lease commitments.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is not expectedeffective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted this guidance on January 1, 2019 and will apply it to have a material impact onour annual impairment test, and any interim impairment tests during the annual 2018 financial statements.year ending December 31, 2019.

Recently Issued Accounting Standards

In August 2016,2018, the FASB issued ASU 2016-15, StatementNo. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. Companies will no longer be required to disclose the amount of Cash Flows (Topic 230), Classificationand reasons for transfers between Level 1 and Level 2 of Certain Cash Receiptsthe fair value hierarchy as well as the valuation processes of Level 3 fair value measurements. However, companies will be required to additionally disclose the changes in unrealized gains and Cash Payments. Thislosses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. 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 ASU2018-13 is effective retrospectively for the annual period ending December 31, 2018fiscal years, and interim periods within thatthose fiscal years, beginning after December 15, 2019. The amendments relating to additional disclosure requirements will be applied prospectively for only the most recent interim or annual period.period presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. We adopted ASU 2016-15 effective January 1, 2018 andare currently evaluating the impact that the adoption did notof ASU 2018-13 will have a material impact on our unaudited condensed consolidated financial statements and is not expected to have a material impact on the annual 2018 financial statements.

Table of Contents

On April 4, 2018, we completed a private placement offering pursuant to a Securities Purchase Agreement (SPA) and Registration Rights Agreement with LPH II Investments Limited (LPH II), a Cayman Islands company and wholly-owned subsidiary of Lee’s. Under this SPA, LPH II invested $2.6 million and acquired 541,667 shares of our common stock and warrants to purchase 135,417 shares of our common stock at an exercise price of $5.52 per share. The purchase price per share was $4.80. The warrants are exercisable after 6 months and through the seventh anniversary of the issue date. In addition, under the Registration Rights Agreement, we agreed to file an initial resale registration statement with the SEC to register for subsequent resale the shares and the warrant shares. We are required to seek registration of 25% of the shares and warrant shares on such initial resale registration statement. From time to time, following the 180th day from March 30, 2018, LPH II or a majority of the holders of the shares and warrant shares may require us to file additional registration statement(s) to register the resale of the balance of the shares and warrant shares, subject to certain limitations.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

Fair Value on a Recurring Basis

The tables below categorize assets and liabilities measured at fair value on a recurring basis for the periods presented:

In January 2018 and March 2018, LPH Investments Limited (LPH), an affiliate of Lee’s, agreed to lend us $1.5 million and $1.0 million, respectively, to support our AEROSURF development activities and sustain our operations while we seeksought to identify and advance one or more potential strategic initiatives as defined in the related loan agreements (Funding Event). The loans accrued interest at a rate of 6% per annum and would mature upon the earlier of the closing date of the Funding Event or December 31, 2018. To secure our obligations under these loans, we granted LPH a security interest in substantially all our assets.assets pursuant to the terms of a Security Agreement with LPH dated March 1, 2018 (LPH Security Agreement). Effective December 5, 2018, LPH assigned all outstanding loans to us to LPH II Investment Limited (LPH II). In connection with the Private Placement Financing, we converted $6.0 million of the then outstanding loan payable obligations to LPH II on the same terms as those of the investors in the private placement. Included in the conversion were the $1.5 million and $1.0 million loans.

Assumption of bank debt as part of the CVie Acquisition

As part of the CVie Acquisition, we assumed approximately $4.5 million in a bank credit facility due in March 2020.

In September 2016, CVie entered into a 12-month revolving credit facility of approximately $2.9 million with O-Bank Co., Ltd. to finance operating activities. The loans accruefacility was later renewed and increased to approximately $5.8 million in September 2017. The credit facility was guaranteed by Lee’s, which pledged bank deposits in the amount of 110% of the actual borrowing amount. The guaranty was part of the facility; however, we do not have a written commitment from Lee’s to maintain the collateral. Interest, payable in cash on a monthly basis, is determined based on 90-day TAIBOR (the Taipei Interbank Offer Rate) plus 0.91%. The credit facility will expire on September 11, 2019 and matures six months after the expiration date, on March 11, 2020. Although we reached an understanding with Lee’s that it would maintain the bank deposits securing its guaranty obligation under the credit facility, we do not have a written agreement with Lee’s requiring it to do so; therefore, the $4.5 million outstanding under the facility has been classified as a current liability on the condensed consolidated balance sheets.

As of March 31, 2019, the outstanding principal was approximately $4.5 million.

Assumption of Lee’s debt as part of the CVie Acquisition

As part of the CVie Acquisition, we assumed approximately $3.5 million of debt payable to Lee’s Pharmaceutical International Limited (Lee’s International).

From April 24, 2018 to November 16, 2018, CVie entered into four separate agreements to borrow an aggregate of approximately $3.5 million from Lee’s International. The terms of the loan agreements are identical where the interest, at a rate of 6%payable in cash upon maturity, is 4% per annum and mature upon the earliereach of the closingfour separate loans will mature one year from the effective date as follows: $0.5 million in April 2019; $0.3 million in September 2019; $0.2 million in October 2019; and $2.5 million in November 2019.

During the quarter ended March 31, 2019, we made payments of $0.45 million against the Funding Event or DecemberApril 2018 loan and paid the remaining $50,000 balance plus accrued interest in April 2019. As of March 31, 2018. We expect to apply2019, the outstanding principal balance of the loans in satisfaction of a like amount of cash consideration payable by LPH for its participation in the Funding Event, and the loans will thereby be fully discharged. with Lee’s was $3.0 million.

We recognize in our condensed consolidated financial statements all stock-based awards to employees and non-employee directors based on their fair value on the date of grant, calculated using the Black-Scholes option-pricing model. Compensation expense related to stock-based awards is recognized ratably over the vesting period, which for employees is typically three years. We recognize restricted stock unit awards to employees and non-employee directors based on their fair value on the date of grant.  Compensation expense related to restricted stock unit awards is recognized ratably over the vesting period, which typically has been between approximately six to 18 months.

A summary of activity under our long-term incentive plansplan is presented below:

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula based on the following weighted average assumptions:

The table below summarizes the total stock-based compensation expense included in the statements of operations for the periods presented:

Lee’s Pharmaceutical (HK) Ltd.Our operating leases consist primarily of facility leases for our operations in Warrington, Pennsylvania and Taipei, Taiwan.

In June 2017, we entered into a License, DevelopmentWe maintain our corporate headquarters and Commercialization Agreement (“License Agreement”) with Lee’s Pharmaceutical (HK) Ltd., a company organized under the laws of Hong Kong (“Lee’s”). Under the License Agreement, we granted to Lee’s an exclusive licenseoperations in Warrington, Pennsylvania, with a rightremaining non-cancelable term of approximately three years.  The facility serves as the main operating facility for drug and device development, regulatory, analytical technical services, research and development, and administration. We also maintain offices in Taipei, Taiwan, the former headquarters of CVie Therapeutics, where we perform certain manufacturing development and preclinical activities related to sublicense, (i) to develop and commercialize our KL4 surfactant products, including SURFAXIN®, which was approved by the U.S. Food and Drug Administration (“FDA”) in 2012 for the prevention of respiratory distress syndrome (“RDS”) in premature infants, SURFAXIN LS™, the lyophilized dosage form of SURFAXIN; and AEROSURF®, an investigative combination drug/devicecardiovascular drug product that is designed to deliver aerosolized KL4 surfactant noninvasively, and (ii) to register and manufacture SURFAXIN and SURFAXIN LS for use in the Licensed Territory, which includes the People’s Republic of China (“PRC”), Hong Kong, Thailand, Taiwan and 12 other countries (the “Licensed Territory”). In addition, we granted Lee’s options to potentially add Japan to the Licensed Territory and to manufacture our ADS in the Licensed Territory, in each case subject to conditions set forth in the License Agreement.candidates.

UnderThroughout the License Agreement, Lee’s made an upfront payment to usterm of $1 million. We also may receive up to $37.5 million in potential clinical, regulatory and commercial milestone payments and will share in any sublicense income Lee’s may receive at a rate equal to low double digits. In addition, Lee’s will beour leases, we are responsible for allpaying certain costs and expenses, in and foraddition to the Licensed Territory related to development activities,rent, as specified in the lease, including a planned AEROSURF phase 3 clinical trial, regulatory activities,proportionate share of applicable taxes, operating expenses and commercialization activities.

In August 2017, we entered into a Loan Agreement, pursuant to which Lee’s (HK) agreed to lend us up to $3.9 million to support our activities through October 31, 2017, while we and Lee’s worked to complete a $10 million securities purchase agreement (Lee’s SPA) pursuant to which Lee’s acquired a controlling interest in our Company effective on November 1, 2017. In connection with Lee’s SPA, we amended the License Agreement (Amendment No. 1) to expand certain of Lee’s (HK) rights, including by immediately adding Japan to the licensed territory, accelerating the right to manufacture the ADS in and for the licensed territory, reducing or eliminating certain of the milestone and royalty payments and adding an affiliate of Lee’s (HK) as a party to the License Agreement. As a result, the additional amounts for potential clinical, regulatory and commercial milestone were reduced to $35.8 million.

Accounting Analysis under ASC 606

In evaluating the License Agreement in accordance with ASC Topic 606, we concluded that the contract counterparty, Lee’s (HK), is a customer. We identified the following performance obligations: (i) a bundled performance obligation consisting of licensing rights to develop and commercialize our KL4 surfactant products and a technology transfer process for the manufacture of SURFAXIN and SURFAXIN LS; and (ii) a technology transfer process for the manufacture of our ADS. We determined that participation in the Joint Steering Committee (and other committees under its authority) and our ongoing product development, regulatory, and commercialization activities under the License Agreement were deemed immaterial in the context of the contract. Consistent with the guidance under ASC 606-10-25-16A, we disregarded immaterial promised goods and services when determining performance obligations.

We concluded that the licensing rights were not distinct within the context of the contract (i.e. separately identifiable) because the licensing rights do not have stand-alone value from other promised goods and services as Lee’s (HK) could not benefit from the licensing rights without the completion of the technology transfer process for the manufacture of SURFAXIN and SURFAXIN LS. The technology transfer process for the manufacture of our ADS is distinct within the context of the contract because it has stand-alone value from other promised goods and services as Lee’s (HK) could benefit from this right on a stand-alone basis. However, we determined that the ADS manufacturing right has a nominal stand-alone selling price at the time of Amendment No. 1 as the ADS is not yet verified and there is uncertainty with regard to the commercial value of the ADS given that the AEROSURF combination drug/device product is currently in clinical development.

With respect to Amendment No. 1, we elected to use the practical expedient for contract modifications that occur prior to the adoption of ASU 2014-09, and we determined that the impact was immaterial. Allocable arrangement consideration under the practical expedient comprised the upfront payment of $1 million and $0.3 million related to reductions in royalties and milestones in connection with Amendment No. 1. The $1.3 million was attributed in its entirety to the bundled performance obligation of licensing rights to develop and commercialize our KL4 surfactant products and a technology transfer process for the manufacture of SURFAXIN and SURFAXIN LS. Revenue associated with the bundled performance obligation was recognized beginning in November 2017 with the initiation of the technology transfer process for the manufacture of SURFAXIN and SURFAXIN LS and will be recognized over time as services are performed and based on the input method related to the level of effort expended. The expected completion date for the technology transfer is June 2019.

Regulatory and commercialization milestones were excluded from the transaction price, as all milestone amounts were fully constrained under the guidance. As part of our evaluation of the constraint, we considered a number of factors in determining whether there is significant uncertainty associated with the future events that would result in the milestone payments. Those factors include: our financial position; ongoing delays in our development activities and with initiating phase 3 clinical trial; our limited experience with successful drug development; our limited experience with clinical trials; our recent failure to achieve primary endpoints in our phase 2b clinical trial; our limited experience with commercialization; our decision in 2015 to cease manufacturing and commercializing of SURFAXIN; and the fact that the uncertainty about the related consideration is not expected to be resolved for a long period of time (see, Item 1A – Risk Factors).utilities.

Consideration relatedThe following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to sales-based milestones and royalties will be recognized whenour operating leases for the related sales occur, provided that the reported sales are reliably measurable and that we have no remaining performance obligations, as such sales were determined to relate predominantly to the license granted to Lee’s (HK) and therefore have also been excluded from the transaction price. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.three months ended March 31, 2019:

In connection with the Loans, we issued to Panacea warrants (the “Series D Warrants”) to purchase 187,500 shares (the “Warrant Shares”) at an exercise price of $4.00 per Warrant Share (the “Exercise Price”). The Warrants may be exercised at any time beginning six months after the date of issuance and through the fifth anniversary of the date of issuance. The Warrants may not be exercised to the extent that the holder thereof would, following such exercise, beneficially own more than 9.99% of the Company’s outstanding shares of Common Stock, which percentage may be increased, decreased or waived by such holder upon sixty-one days’ notice to the Company. The Warrants also contain customary provisions that adjust the Exercise Price and the number of Warrant Shares in the event of a corporate transaction.