| 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Basis of Presentation
The Company follows accounting standards set by the Financial Accounting Standards Board (FASB). The accompanying
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America, GAAP. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,
sometimes referred to as the Codification or ASC. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading, certain information normally included in the footnotes
prepared in accordance with GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission
(SEC). The accompanying financial statements should be read in conjunction with the audited financial statements
and notes thereto included in the Companys Annual Report on Form 10−K for the fiscal year ended December 31, 2014
filed with the SEC on March 16, 2015. The results for the three and six month periods ended June 30, 2015 are not necessarily
indicative of the results that may be expected for the fiscal year ending December 31, 2015, or any future period. The
accompanying consolidated financial statements have been prepared in conformity with GAAP which contemplate continuation of the
Company as a going concern. Managements plans to continue as a going concern contemplate raising additional capital including
the execution of an underwritten secondary offering completed in the second quarter of 2015 that resulted in approximately $28.4
million in net proceeds, and the prior execution of an agreement for a $30 million equity line in late June 2014, of which approximately
$5.8 million remains available as of June 30, 2015. The Company believes that its current cash balance, and the $5,822,405 available
under the Lincoln Park financing arrangement as of June 30, 2015, will be sufficient to fund operations into the second half of
2016. There can be no assurances that management can raise the necessary additional capital on favorable terms or at all. The accompanying
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Principles of Consolidation
The accounts of the Company and its wholly-owned subsidiary Mytogen, Inc. are included in the accompanying consolidated financial
statements. All intercompany balances and transactions were eliminated in consolidation. Segment Reporting
ASC 280, requires use of the management approach
model for segment reporting. The management approach model is based on the way a companys management organizes segments
within the company for making operating decisions and assessing performance. The Company determined it has one operating segment. Use of Estimates
These consolidated financial statements have been prepared in accordance with GAAP and, accordingly, require 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. In addition, management has estimated variables used
to calculate the Black-Scholes option pricing model used to value derivative instruments, including outstanding warrants. Also,
management has estimated the expected economic life and value of the Companys licensed technology, the Companys net
operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment banks,
and the useful lives of the Companys fixed assets. Actual results could differ from those estimates. Reclassifications
Certain prior period financial statement balances have been reclassified to conform to the current period presentation. Items include
the presentation of net loss applicable to common stock and net loss applicable to common share on the face of the statement of
operations. Cash and Cash Equivalents
Cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The
Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced
any losses related to this concentration of risk. As of June 30, 2015 and December 31, 2014, the Company had deposits in excess
of federally-insured limits totaling $31,601,475 and $4,325,886, respectively. Commitments and Contingencies
The Company recognizes liabilities for contingencies and commitments when a loss is probable and can be reasonably estimated. Relating
to loss contingencies the Company accrues the best estimate of a loss within a range. If no estimate in a range is better than
any other, the minimum amount is accrued. The Company discloses a reasonably possible loss in excess of the amount accrued, if
applicable. For reasonably possible loss contingencies, the Company discloses the nature of the loss contingency and provides a
range of the estimate of possible loss or state that an estimate cannot be made. Included
in the other liabilities balance as of December 31, 2014 is approximately $1,200,000, primarily related to the acquisition of Mytogen
which the Company did not expect to settle during 2015. This balance was reclassified to the accounts payable balance as of June
30, 2015 as the Company expects to settle within the coming year. Grants Receivable
The Company periodically assesses its grants receivable for collectability on a specific identification basis. If collectability
of an account becomes unlikely, the Company records an allowance for that doubtful account. Once the Company has exhausted efforts
to collect, management writes off the grants receivable against the allowance it has already created. Property and Equipment
The Company records its property and equipment at historical cost. The Company expenses maintenance and repairs as incurred. Upon
disposition of property and equipment, the gross cost and accumulated depreciation are written off and the difference between the
proceeds and the net book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital
leases, the assets are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital
lease are pledged as collateral for the related lease. The
Company provides for depreciation over the assets estimated useful lives as follows:
Machinery & equipment 4 years
Computer equipment 3 years
Office furniture 4 years
Leasehold improvements Lesser of remaining lease life or economic life
Capital leases Lesser of lease life or economic life Patents
The Company follows ASC 350-30, (ASC
350-30), in accounting for its patents. ASC 350-30 provides that costs of internally developing, maintaining, or restoring
intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business
and related to an entity as a whole, shall be recognized as an expense when incurred. The Company has expensed as research and
development expense all costs associated with developing its patents. Equity Method Investment
The Company follows ASC 323, in
accounting for its investment in the joint venture. In the event the Companys share of the joint ventures net losses
reduces the Companys investment to zero, the Company will discontinue applying the equity method and will not provide for
additional losses unless the Company has guaranteed obligations of the joint venture or is otherwise committed to provide further
financial support for the joint venture. If the joint venture subsequently reports net income, the Company will resume applying
the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity
method was suspended. Long-Lived Assets
The Company follows ASC 360-10, which established
a primary asset approach to determine the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount
or fair value less cost to sell. For the six months ended June 30, 2015, the Company had not experienced impairment losses on its
long-lived assets. Fair Value Measurements The
Company applies the provisions of ASC 820-10, (ASC
820-10) ASC 820-10 defines fair value, and establishes a three-level
valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For
certain financial instruments, including cash and cash equivalents, grants receivable, prepaid expenses, accounts payable and accrued
expenses, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amount of senior secured
convertible debentures approximated fair value as the interest rate charged on the debentures was based on the prevailing rate.
The three levels of valuation hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. The
Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, and ASC 815, Derivative
liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded
in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives
are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values
of freestanding derivative instruments such as warrant derivatives are valued using the Black-Scholes model. The
Company uses Level 3 inputs for its valuation methodology for the fair value of certain embedded conversion options and other warrant
derivative liabilities.
The expected volatility of the Companys common stock is estimated from the historical volatility of daily returns in the Companys common stock price. The Company monitors the volatility of its common stock on a quarterly basis to observe trends that may impact the fair value of the notes.
The discount for illiquidity is measured using an average-strike option that calculates the discount as the opportunity cost for not being able to sell a large block of the Companys common stock immediately at prevailing observable market prices. Inputs to the average-strike option model include the expected volatility of the Companys common stock and time to sell a large block of the Companys stock as Level 3 inputs and other observable inputs. The time to sell the stock is estimated considering the historical daily trading volume of our common stock and market maker estimates of the amount of shares that can be offered for sale above the daily trading volume without depressing the price of the Companys common stock. At
June 30, 2015, the Company identified the following assets and liabilities that are required to be presented on the balance sheet
at fair value:
Description Fair Value As of June 30, 2015 Fair Value Measurements at June 30, 2015 Using Fair Value Hierarchy
Level 1 Level 2 Level 3
Warrant liabilities $ 10,827,517 10,827,517
Warrant overallotment liability 614,535 614,535
Total $ 11,442,052 $ $ $ 11,442,052 The
following tables reconcile the change in fair value for measurements categorized within Level 3 of the fair value hierarchy:
Warrant Liabilities
Balance at December 31, 2014 $ 16,255
Addition of warrant liability 11,140,771
Total change in fair value for the period included in earnings (329,509)
Balance at June 30, 2015 $ 10,827,517
Warrant Overallotment Liabilities
Balance at December 31, 2014 $
Addition of warrant overallotment liability 628,767
Total change in fair value for the period included in earnings (14,232)
Balance at June 30, 2015 $ 614,535 Gains included in
earnings for the six months ended June 30, 2015 are reported as follows:
Adjustments to fair value of derivatives
Total gain included in earnings $ 343,741
The following table
provides quantitative information about measurements categorized within Level 3 of the fair value hierarchy:
Fair Value at
June 30, Valuation
Description 2015 Technique Unobservable Input Value
Warrant derivative liabilities $11,442,052 Black Scholes Model Expected volatility of the Company's common stock 45% - 93% For
the three and six months ended June 30, 2015, the Company recognized gains of $337,738 and $343,741, respectively, for the changes
in the valuation of derivative liabilities. For the three and six months ended June 30, 2014, the Company recognized gains of $389,771
and $676,800, respectively, for the changes in the valuation of derivative liabilities. The
Company did not identify any non-recurring assets and liabilities that were recorded at fair value during the periods presented. Revenue Recognition and
Deferred Revenue License
fee revenue begins to be recognized in the first full month following the effective date of the license agreement. Deferred revenue
represents the portion of the license and other payments received that has not been earned. Costs associated with license revenue
are deferred and recognized over the same term as the revenue. Reimbursements of research expense pursuant to grants are recorded
in the period during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval. In
some cases, the Company is entitled to receive royalty payments from licensees. In such cases, the Company recognizes the royalties
when they are earned and collectability of those royalty payments is reasonably assured. In
connection with its license agreements, the Company recorded $39,468 and $78,936 in license fee revenue for the three and six months
ended June 30, 2015, respectively, in its consolidated statements of operations, and recorded $39,469 and $78,937 in license fee
revenue for the three and six months ended June 30, 2014, respectively. The remainder of the license fees are included in deferred
revenue at June 30, 2015 and December 31, 2014, respectively. Research and Development Costs
Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses
consist of (i) employee-related expenses, including salaries, benefits, travel and stock compensation expense; (ii) external
research and development expenses incurred under arrangements with third parties, such as contract research organizations, investigational
sites and consultants; (iii) the cost of acquiring, developing and manufacturing clinical study materials; (iv) facilities
and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and laboratory and other
supplies; and (v) costs associated with pre-clinical and clinical activities and regulatory operations. The
Company enters into consulting, research and other agreements with commercial firms, researchers, universities and others for the
provision of goods and services. Under such agreements, the Company may pay for services on a monthly, quarterly, project or other
basis. Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred. Costs are considered incurred
based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided
to us by the Companys clinical sites and vendors. These costs consist of direct and indirect costs associated with specific
projects, as well as fees paid to various entities that perform certain research on behalf of the Company. Reimbursements of research
expense pursuant to grants are recorded in the period during which collection of the reimbursement becomes assured, because the
reimbursements are subject to approval. In
certain circumstances, the Company is required to make advance payments to vendors for goods or services that will be received
in the future for use in research and development activities. In such circumstances, the advance payments are deferred and are
expensed when the activity has been performed or when the goods have been received. Stock Compensation
The Company records stock compensation in accordance with ASC 718, (ASC
718). ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the measurement
date (generally the grant date) and recognize the expense over the employees requisite service period. The Company recognizes
in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees
and non-employees. Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of the changes in tax laws and rates at the date of enactment. When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on the weight
of available evidence, management believes it is more likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized
tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. Applicable
interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of
operations. Net Loss Per Share
Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders
by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss
per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding
for the period, determined using the treasury-stock method and the if-converted method. For purposes of the diluted net loss per
share calculation, convertible preferred stock, stock options, unvested restricted stock, and warrants are considered to be common
stock equivalents but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive
for all periods presented. Therefore, basic and diluted net loss per share was the same for all periods presented. Additionally,
dividends associated with the preferred stock, all of which has been extinguished as of June 30, 2015, has been added back in order
to calculate the net loss applicable to common stockholders. At
June 30, 2015 and 2014, approximately 5,834,337 and 1,330,357 potentially dilutive shares, respectively, were excluded from the
shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard
requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration
that the company expects to receive for those goods or services. In July 2015, the FASB voted to approve a one-year deferral of
the effective date of ASU No. 2014-09. The new standard will now be effective for the Company on January 1, 2018. The Company is
currently evaluating the potential impact that Topic 606 may have on its financial position and results of operations and its method
of adoption. |
