Note

–

Summary of Significant Accounting Policies

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:

(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 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

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 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

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

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 Liability – Contingent Milestone Payment

In conjunction with the

November 2017

restructuring and retirement of long-term debt (s

ee,

Note

– Restructured 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.

Research and Development

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 ASC Topic

730,

Research and 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

March 31, 2019

and

2018,

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

15.2

million and

1.0

million shares, respectively. For the

three

months ended

March 31, 2019

and

2018,

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

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.

Recently Adopted Accounting Standards

February 2016,

the FASB issued Accounting Standards Update (ASU)

No.

2016

02,

Leases (ASU

2016

). ASU

2016

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

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.

The adoption of this standard resulted in the recognition of operating lease liabilities and related right-of-use assets on our condensed consolidated balance sheets of

$2.2

million and

$2.0

million, respectively, related to our operating leases. The adoption of ASC

842

also resulted in the elimination of deferred rent of approximately

$72,000

and

$139,000

in accrued expenses and other long-term liabilities, respectively, in our condensed consolidated balance sheets. The adoption of the standard did

not

have a material impact on our condensed consolidated statements of operations and comprehensive loss or condensed consolidated statements of cash flows. Refer to Note

– Leases, for our current lease commitments.

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 effective 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 our annual impairment test, and any interim impairment tests during the year ending

December 31, 2019.

Recently Issued Accounting Standards

August 2018,

the FASB issued ASU

No.

2018

13,

Fair Value Measurement (Topic

820

): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU

2018

), which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic

820.

Companies will

longer be required to disclose the amount of and reasons for transfers between Level

and Level

of the fair value hierarchy as well as the valuation processes of Level

fair value measurements. However, companies will be required to additionally disclose the changes in unrealized gains and losses included in other comprehensive income for recurring Level

fair value measurements and the range and weighted average of assumptions used to develop significant unobservable inputs for Level

fair value measurements. ASU

2018

is effective for fiscal years, and interim periods within those 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 presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the impact that the adoption of ASU

2018

will have on our consolidated financial statements.