2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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 such estimates.

Principles of Consolidation

The consolidated financial statements include the results of our operations and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Fair Value of Financial Instruments and Credit Risk

At December 31, 2014 and 2015, our financial instruments included cash and cash equivalents, short-term investments, restricted cash, accounts payable, accrued expenses, contingent consideration liabilities derivative liabilities and our 8% convertible notes. The carrying amount of cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximates fair value, given their short‑term nature. Short-term investments are carried at fair market value. The carrying value of the contingent consideration liabilities and derivative liabilities are the estimated fair value of the liabilities as more fully described below. See note 8 for a discussion of our 8% convertible notes.

Cash and cash equivalents and short-term investments subject us to concentrations of credit risk. However, we invest our cash and short-term investments in accordance with a policy objective that seeks to ensure both liquidity and safety of principal.

Cash and Cash Equivalents and Short-Term Investments

We consider all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. We consider our short-term investments to be “available-for-sale” and carry them at fair market value. Unrealized gains and losses have been recorded as a separate component of accumulated other comprehensive income included in stockholders’ equity. All realized gains and losses on our available-for-sale securities are recognized in results of operations.

Property and Equipment

Property and equipment consist of computer and laboratory equipment, furniture, and leasehold improvements and are recorded at cost. Property and equipment are depreciated on a straight‑line basis over their estimated useful lives. We estimate a life of three years for computer equipment, including software, and five years for laboratory equipment, office equipment, and furniture. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. When property and equipment are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in operating expenses.

Intangible Assets and Other Long‑Lived Assets

We review our indefinite lived intangible asset (which consists of our indefinite lived intangible asset acquired in our acquisition of SHAPE- Note 3) for impairment on an annual basis in the fourth quarter of each year, as well as whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value to the fair value of the asset, which is usually based on the present value of the expected future cash flows associated with the use of the asset. We review other long‑lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount an impairment loss would be recognized if the carrying value of the asset exceeded its fair value. Fair value is generally determined using discounted cash flows. Through December 31, 2015, no impairment of our indefinite-lived intangible assets has occurred.

Impairment of Goodwill

Goodwill represents the excess of consideration transferred over the fair value of net assets acquired. Goodwill and indefinite lived intangible assets are not amortized; rather, they are subject to a periodic assessment for impairment by applying a fair-value-based test. We perform an annual test of impairment of goodwill in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. We utilize a two-step method for determining goodwill impairment. In the first step, we compare the fair value of our single reporting unit with its carrying value. If the carrying value exceeds the fair value, then we would perform the second step of the impairment test and allocate the fair value to all assets and liabilities using the authoritative guidance for business combinations, with any residual fair value amount assigned to goodwill. An impairment charge would be recognized if the implied fair value of our goodwill is less than its carrying value.

We performed this two-step process as of December 31, 2015 and determined that a goodwill impairment existed, due primarily to the significant decrease in the fair value of our single reporting unit. Accordingly, we recorded a goodwill impairment charge of $16.9 million during the fourth quarter of 2015.

Research and Development

Research and development costs are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations, or information provided to us by our vendors with respect to their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development expense, as the case may be.

Income Taxes

We recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities and the expected benefits of net operating loss and credit carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences are expected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. At December 31, 2014 and 2015, we have concluded that a full valuation allowance is necessary for our net deferred tax assets. We have no amounts recorded for uncertain tax positions, interest or penalties in the accompanying financial statements.

Loss Per Share of Common Stock

Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period.

In accordance with ASC Topic 260, Earnings per Share, when calculating diluted net loss per common share, the gain associated with the decrease in the fair value of certain warrants classified as derivative liabilities results in an adjustment to the net loss; and the dilutive impact of the assumed exercise of the warrants results in an adjustment to the weighted average common shares outstanding. We utilize the treasury stock method to calculate the dilutive impact of the assumed exercise of the warrants. For the years ended December 31, 2014 and 2015, the effect of the adjustments for our 2006 Warrants and our 2009/2010 Warrants were dilutive.

The following table sets forth the computation of diluted earnings per share for the years ended December 31, 2014 and 2015:


	Year Ended December 31,
	2014		2015
Numerator:
Net loss	$	(35,958,979)	$	(49,724,054)
Less: income from change in fair value of warrant liability		(418,198)		(191,150)
Numerator for diluted net loss per common share	$	(36,377,177)	$	(49,915,204)
Denominator:
Basic weighted average common shares outstanding		22,290,069		23,692,327
Dilutive common shares from assumed warrant exercises		61,620		38,048
Diluted weighted average shares of common stock outstanding		22,351,689		23,730,375
Diluted net loss per share of common stock	$	(1.63)	$	(2.10)

The following potentially dilutive securities outstanding at December 31, 2014 and 2015 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:


	December 31,
	2014	2015
Warrants	23,747	23,747
Stock options	3,270,363	3,649,046
Common shares issuable upon conversion of the 8% Notes	7,137,031	8,058,271
	10,431,141	11,731,064

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non‑owner sources. Comprehensive loss for the years ended December 31, 2014 and 2015 comprised net loss, foreign currency losses, and net unrealized gains and losses on available-for-sale securities.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision‑making group, in deciding how to allocate resources and in assessing performance. We view our operations and manage our business in one segment, which is the identification and development of novel small molecule therapies in oncology and infectious diseases.

Stock‑Based Compensation

We account for stock‑based compensation in accordance with the provisions of ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which requires the recognition of expense related to the fair value of stock‑based compensation awards in the Statements of Operations and Comprehensive Loss.

In January 2015, we granted stock options for 600,000 shares of our Common Stock to certain of our executive officers that include both a service condition and a market condition. The awards vest monthly at a rate of 2% per month (service condition) and the vesting is subject to acceleration if, at any time during the vesting period, the closing price of our Common Stock on NASDAQ is equal to or greater than $20.00 per share for 5 consecutive trading days (market condition). Should this market condition occur, all remaining unvested options shall vest immediately at that time. We calculated the fair value of these options using fair value models that consider both the market condition and service condition of the awards, and we will recognize compensation expense over the vesting period using the accelerated attribution method. Should the market condition be reached during the vesting period, all remaining unamortized compensation expense will be recognized at that time.

For all other stock options issued to employees and members of our board of directors for their services on our board of directors, we estimate the grant date fair value of each option using the Black‑Scholes option pricing model. The use of the Black‑Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk‑free interest rates, the value of the common stock and expected dividend yields of the common stock. For awards subject to service‑based vesting conditions, we recognize stock‑based compensation expense, net of estimated forfeitures, equal to the grant date fair value of stock options on a straight‑line basis over the requisite service period, which is generally the vesting term. For awards subject to performance‑ based vesting conditions, we recognize stock‑based compensation expense using the accelerated attribution method when it is probable that the performance condition will be achieved. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock‑ based payments issued to non‑employees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period in accordance with the provisions of ASC 718 and ASC Topic 505, Equity.

Clinical Trial Expense Accruals

As part of the process of preparing our financial statements, we are required to estimate our expenses resulting from our obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. Our objective is to reflect the appropriate trial expenses in our financial statements by matching those expenses with the period in which services are performed and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. We determine accrual estimates through financial models taking into account discussion with applicable personnel and outside service providers as to the progress or state of consummation of trials. During the course of a clinical trial, we adjust our clinical expense recognition if actual results differ from its estimates. We make estimates of our accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. Our clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third‑party vendors. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low for any particular period. For the years ended December 31, 2014 and 2015, there were no material adjustments to our prior period estimates of accrued expenses for clinical trials.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the standard will have on the financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 simplifies the balance sheet classification of deferred taxes and requires that all deferred taxes be presented as noncurrent. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted. The adoption of this update is not expected to have a material effect on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires entities to present debt issuance costs related to a recognized liability in the balance sheet as a direct deduction from that liability rather than as an asset. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, with early adoption permitted. We have elected to early adopt ASU 2015-03 effective December 31, 2015 on a retrospective basis. The adoption of ASU 2015-03 resulted in the reclassification of $1.7 million of debt issuance costs from total assets to a reduction of the convertible notes payable liability on the consolidated balance sheet as of December 31, 2014. Other than the reclassification, the adoption of ASU 2015-03 did not have an impact on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company beginning in the first quarter of 2016 with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2014-15 on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities. This Update eliminates the distinction between development stage entities and other reporting entities under GAAP and also eliminates the requirement to present inception-to-date information in financial statements. The Update is effective for reporting periods beginning after December 31, 2014, but early adoption is permitted. We have elected to adopt this Update beginning with the quarterly period ended June 30, 2014.