2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of ASU No. 2014-09 by one year allowing early adoption as of the original effective date January 1, 2017. The deferral results in the new revenue standard being effective for the Company as of January 1, 2018. Additional ASUs have been issued to amend or clarify the new guidance in ASC Topic 606 as follows:

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ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) was issued in March 2016. ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal or agent designation.

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ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing was issued in April 2016. ASU No. 2016-10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition concerning identifying performance obligations and accounting for licenses of intellectual property.

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ASU No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients was issued in May 2016. ASU No. 2016-12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, measuring noncash consideration, presenting sales taxes and certain transition matters.

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ASU No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers was issued in December 2016. ASU No. 2016-20 provides additional clarification on 13 issues or corrects unintended application of FASB Accounting Standards Codification (Topic 606).

The standard permits the use of either the retrospective or cumulative effect transition method. The Company is analyzing the impacts of the new revenue standards with the assistance of a third-party professional services firm. The Company expects to adopt the requirements of the new standard in the first quarter of 2018 using the modified retrospective method with the likely impact per revenue stream as follows:

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Product Revenue – the Company believes there will not be an impact. Product revenues comprise of a single performance obligation for the delivery of goods for which transfer of control occurs at the shipping point.

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Grant and Contract Research Revenue – the Company believes there will not be an impact. Grant and contract research revenue will continue to be accounted for as a single performance obligation for which revenues are recognized over time using the input method (e.g. costs incurred to date relative to the total estimated costs at completion).

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License Agreement Revenue – the Company believes there will be an impact. The Company believes its license agreements are licenses of functional intellectual property consisting of a single performance obligation. A functional license requires point in time revenue recognition, which may impact this revenue stream. This is primarily due to the various payment terms of the license agreements:

Up-front license fees – the Company believes there will be a significant impact. The up-front fees will be recognized at a point in time rather than over the estimated commercialization period. The balances of unearned revenues on the balance sheet related to up-front license fees and any associated deferred tax assets are expected to be derecognized through an opening adjustment to retained earnings on January 1, 2018. The Company believes new license agreements executed in 2018 will have up-front license fees recognized as revenue upon execution of the agreement.

Annual license fees – the Company believes there will be an impact. Annual license fees will be variable consideration that is initially constrained and recognized only when it is probable that such amounts would not be reversed. The Company will need to design and implement a process to assess when renewal of annual license fees are probable in order to determine the timing of revenue recognition for annual license fees.

Milestone fees – the Company believes there will be an impact. Milestone fees will be variable consideration that is initially constrained and recognized only when it is probable that such amounts would not be reversed. The Company will need to design and implement a process to assess when achievement of milestones are probable in order to determine the timing of revenue recognition for milestone fees.

Commercial Value Sharing Fees – the Company believes there will not be an impact to revenue recognition as no license agreements within our portfolio have commercialized. Commercial value share fees will be recognized based on subsequent sales by the licensee.

Internal Revenue Service rules currently allow for a one-year deferral of revenue on cash receipts, which the Company has taken. Upon adoption of Topic 606, tax recognition will follow book recognition for up-front and commercial value sharing fees. Annual license fees and milestone fees may continue to be recognized differently for book and tax to the extent that revenue recognized for book is prior to cash receipts.

In August 2014, The FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the condensed consolidated financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the condensed consolidated financial statements are issued. An entity must provide certain disclosure if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The update applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Refer to Note 1.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impacts classification, additional fair value measurement, impairment assessment of equity investments and current required disclosures. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted if the entity meets certain early application guidance. The Company is evaluating the impact of the adoption of ASU No. 2016-01 on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Based on the new standard, lessees would recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2016-02 on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of ASU No. 2016-13 on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments address cash flow issues such as debt prepayment or debt extinguishment costs and zero-coupon debt instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The amendments are to be applied using a retrospective transition method to each period presented. If it is impractical to retrospectively apply, it can be applied prospectively as of the earliest date practicable. The Company is evaluating the impact of the adoption of ASU No. 2016-15 on its condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments affect any entity that changes the terms or conditions of a share-based payment award. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued and be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of the adoption of ASU No. 2017-09 on its condensed consolidated financial statements.