| 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Basis of Presentation The accompanying consolidated financial
statements have been prepared in conformity with GAAP which contemplate continuation of the Company as a going concern. ManagementÂ’s
plans to continue as a going concern contemplate raising additional capital including the debt financing completed in the third
quarter of 2015 that resulted in approximately $6.0 million in net proceeds, 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 June 2014, of which approximately $5.8 million remains available as of September
30, 2015. The Company believes that its current cash balance, and the approximately $5.8 million available under the Lincoln Park
financing arrangement as of September 30, 2015, will be sufficient to fund operations into the second half of 2016. The Company,
as part of the debt financing completed in the third quarter of 2015, has the option, subject to the terms and conditions of the
Loan and Security Agreement described in Note 7, to exercise an additional term loan totaling $4.0 million. 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
Segment Reporting Segment Reporting Use of Estimates Cash and Cash Equivalents Commitments and Contingencies
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 September 30, 2015 as
the Company expects to settle these payables in the near-term. Grants Receivable Property and Equipment The Company provides for depreciation
over the assetsÂ’ 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 General Intangibles Other than Goodwill Equity Method Investment Investments-Equity Method and Joint Ventures, Long-Lived Assets Property, Plant, and Equipment, Fair Value Measurements Fair Value Measurements and Disclosures .
· 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, Distinguishing Liabilities from Equity, Derivatives and Hedging. 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 Company’s common stock is estimated
from the historical volatility of daily returns in the CompanyÂ’s 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 CompanyÂ’s
common stock immediately at prevailing observable market prices. Inputs to the average-strike option model include the expected
volatility of the CompanyÂ’s common stock and time to sell a large block of the CompanyÂ’s 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 CompanyÂ’s common stock. At September 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 September 30, 2015 Fair
Value Measurements at September 30, 2015 Using Fair Value Hierarchy
Warrant liabilities $ 7,843,106 – – 7,843,106
Total $ 7,843,106 $ – $ – $ 7,843,106 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 (3,313,920)
Balance at September 30, 2015 $ 7,843,106
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 (628,767)
Balance at September 30, 2015 $ – Gains included in earnings for the
nine months ended September 30, 2015 are reported as follows:
Adjustments
to fair value of derivatives
Total gain included in earnings $ 3,313,920 The following table provides quantitative
information about measurements categorized within Level 3 of the fair value hierarchy:
Fair Value at
September 30, Valuation
Description 2015 Technique Unobservable
Input Value
Warrant derivative liabilities $7,843,106 Black Scholes Model Expected volatility of the Company's
common stock 69% - 92% For the three and nine months ended
September 30, 2015, the Company recognized gains of $3,598,946 and $3,942,687, respectively, for the changes in the valuation
of derivative liabilities. For the three and nine months ended September 30, 2014, the Company recognized gains of $42,207 and
$719,007, 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. Revenue pursuant to grants are recorded in the period during which expenses are incurred. 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 $118,405 in license fee revenue for the three and nine months ended September 30, 2015, respectively,
in its consolidated statements of operations, and recorded $39,467 and $118,404 in license fee revenue for the three and nine
months ended September 30, 2014, respectively. The remainder of the license fees are included in deferred revenue at September
30, 2015 and December 31, 2014, respectively. Research and Development Costs
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 CompanyÂ’s
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 Compensation – Stock Compensation Income Taxes 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 At September 30, 2015 and 2014, approximately
5,667,750 and 2,735,815 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
Revenue from Contracts with Customers ( In April 2015, the FASB issued ASU
No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance
Costs |
