2. Condensed summary of significant accounting policies

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated and combined financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Unless indicated otherwise, all amounts herein are expressed in thousands of United States dollars.

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2015, and results of operations and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

(b) Use of estimates and assumptions

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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring management estimates are the valuation of stock options and warrants, amortization and depreciation, accrual of expenses, valuation allowance for deferred income taxes, and contingencies. Actual results could differ from those estimates.

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The eventual profitability of the Company and its ability to continue as a going concern is dependent upon many factors, including its ability to obtain sufficient financing, the successful development of its product candidates, and receiving regulatory approvals. The Company’s cash resources are sufficient, in management’s opinion, to support its current operations for the next 12 months. However, the Company will need to raise substantial financing in the future to continue funding its operations. In order to meet its cash requirements, the Company may seek to sell additional equity or convertible debt securities that may result in dilution to stockholders. If the Company raises additional funds through the issuance of convertible debt securities, these securities could have rights senior to common stockholders and could contain restrictive covenants. There can be no assurance that additional equity or debt financing will be available or available on terms acceptable to the Company, if at all. Failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on the Company’s business, results of operations, financial condition, cash flows and future prospects.

(c) Short and long-term investments

Short-term investments consist of bank term deposits and U.S. government agency securities with initial maturities of less than a year. Long-term investments consist of U.S. treasury securities with initial maturities of greater than a year but less than two years. Short-term investments and long-term investments are both classified as available-for-sale and carried at their estimated fair value with unrealized gains and losses recorded as a component of other comprehensive income. Realized gains and losses are recorded in net loss. The Company periodically reviews its investments for impairment and when a decline in market value is deemed to be other than temporary, the loss is recognized in net loss.

(d) Derivative liabilities and fair value of financial instruments

The Company accounts for currently outstanding detachable warrants to purchase common stock as liabilities as they are freestanding derivative financial instruments. The warrants are recorded as liabilities at fair value, estimated using a Black-Scholes option pricing model, and marked to market at each balance sheet date, with changes in the fair value of the derivative liabilities recorded in the consolidated statements of operations. The Company allocated the total consideration received for issuing preferred stock and warrants based on the relative fair value of each security at the date of issuance. This allocation resulted in a discount to the initial carrying amount of the preferred stock at the date of issuance amortized over the life of the preferred stock and was recorded as “amortization of discount on preferred stock” in the consolidated statements of operations and comprehensive loss.

The Company applies the residual value method to record the fair value of warrants issued with loans as a discount to the initial carrying amount of loans at the date of issuance. Loans are measured at amortized cost using the effective interest method which is a method of calculating the amortized cost of a financial liability and allocating the effective interest expense over the term of the financial liability. Interest expense is recorded in bank charges and financing costs in the consolidated statements of operations and comprehensive loss. The interest rate is the rate that exactly discounts estimated future cash payments throughout the term of the financial instrument to the net carrying amount of the financial liability. Debt issuance costs are capitalized, recorded as deferred financing costs, and are amortized into financing costs in the consolidated statements of operations and comprehensive loss using the effective interest method.

ASC 820, Fair Value Measurements requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value. ASC 820 defines fair value as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The guidance also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:


Level 1	–	Quoted prices in active markets for identical assets or liabilities.

Level 2	–	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3	–	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

(e) Accounting for stock-based compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. All share-based payments to employees are recognized in the financial statements based upon their respective grant date fair values.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. Prior to the completion of the Company’s initial public offering (the “IPO”) in March 2014, the Company’s common stock was not publicly traded. As a result, the expected volatility assumption is based on industry peer information. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation was used.

(f) Segment reporting

The Company operates in one segment, the identification and development of therapeutics for inflammatory diseases and cancer. All of the Company’s operations are performed in Canada. Total assets held in the U.S., comprised primarily of cash and cash equivalents, short-term investments and long-term investments, were $25,321 as of June 30, 2015 (December 31, 2014 – $31,099).

(g) Net loss per share

Basic net loss per common share is computed by dividing loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

(h) Recently issued and recently adopted accounting standards

In August 2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements – Going Concern,” outlining management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern, along with the required disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016 with early adoption permitted. The Company does not anticipate a material impact to the Company’s financial statements as a result of this change.

In April 2015, the FASB issued ASU 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” which changes the presentation of debt issuance costs in the balance sheet to be a direct deduction from the related debt liability rather than as an asset. ASU 2015-03 is effective for fiscal years beginning after December 31, 2015, and interim periods within those fiscal years. Early adoption permitted for financial statements that have not been previously issued. The Company does not anticipate a material impact to the Company’s financial statements as a result of this change.

(i) Risks and uncertainties

The Company is subject to numerous risks and uncertainties. These risks, among others, included the following:

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the Company has no source of revenue, has an accumulated deficit of $100,577 as of June 30, 2015, may never become profitable and expects to incur substantial and increasing net losses for the foreseeable future as it continues development of, seeks regulatory approvals for, and potentially begins to commercialize AQX-1125, its lead product candidate, and any future product candidates;

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the Company will require additional capital to finance its future operations which may not be available to it on acceptable terms, or at all;

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the Company’s success is primarily dependent on the regulatory approval and commercialization of AQX-1125, its lead product candidate, and any future product candidates;

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the Company’s ability to obtain favorable results in its ongoing and anticipated clinical trials for AQX-1125 in Atopic Dermatitis (AD) and Bladder Pain Syndrome/Interstitial Cystitis (BPS/IC);

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SHIP1 has not been validated as a target and to date, no drug which specifically targets SHIP1 has been approved by any regulatory authority for the treatment of disease;

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the Company is subject to regulatory approval processes that are lengthy, time consuming and inherently unpredictable; the Company may not be able to obtain approval for AQX-1125 or any future product candidates from the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities;

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the Company’s intellectual property rights can be difficult and costly to protect;

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the Company may not be able to recruit or retain key employees, including its senior management team;

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the Company depends on the performance of third parties, including contract research organizations and third-party manufacturers; and

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the Company faces competition from other pharmaceutical and biotechnology companies, academic institutions, government agencies, and public and private research institutions, among others.