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 financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 9, 2017. Unless indicated otherwise, all amounts herein are expressed in thousands of United States dollars, except per share and share amounts.

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 March 31, 2017, 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 include 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.

(c) Short and long-term investments

Short-term investments consist of bank term deposits and U.S. government securities with initial maturities of less than a year. Long-term investments consist of U.S. government securities with initial maturities of greater than a year. 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 loss. 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) 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 consolidated 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 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 due to insufficient trading history of the Company’s common stock. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation is used.

(e) Segment reporting

The Company operates in one segment, the identification and development of therapeutics for inflammatory diseases and cancer. The Company has significant Canadian operations but its assets are mostly held in the United States with an immaterial amount of long lived assets in Canada.

(f) Net loss per common stock

Basic net loss per common stock is computed by dividing loss by the weighted-average number of common stock outstanding during the period. Diluted net loss per common stock is determined using the weighted-average number of common stock 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 shares of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

(g) Recently issued and recently adopted accounting standards

The Company adopted FASB ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” effective January 1, 2017 which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The previous guidance required entities to separately present deferred tax assets and deferred tax liabilities as current or noncurrent in a classified balance sheet. This change did not have a material impact on the Company’s financial statements as a full valuation allowance has been applied against the deferred tax assets.

The Company adopted FASB ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017 which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company has elected to change its accounting policy to account for forfeitures as they occur instead of on an estimated basis as this will more accurately reflect the cost of forfeitures. The change has been applied on a modified retrospective approach with a cumulative-effect adjustment to retained deficit of an immaterial amount as of January 1, 2017. The provisions relating to the accounting for income taxes has no significant impact on the consolidated financial statements as the Company applies a full valuation allowance against its deferred tax assets.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company is currently assessing the impact of ASU 2016-01 on the Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires the recognition of right-of-use assets and lease liabilities by lessees for those leases with a lease term of greater than 12 months. Upon the adoption of ASU 2016-02, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of ASU 2016-02 on the Company’s financial statements and whether to elect to apply the optional practical expedients under the modified retrospective approach.

(h) 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, had an accumulated deficit of $156,635 as of March 31, 2017, may never become profitable and may 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 is likely to require additional capital to finance its 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 successful development, regulatory approval and commercialization of AQX-1125, its lead product candidate, and any future product candidates;

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SHIP1 has not been validated as a target;

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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 may be subject to claims by third parties and 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, governmental agencies, and public and private research institutions, among others.