HOOKIPA PHARMA INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biopharmaceutical company developing a new class of immunotherapeutics based on our proprietary arenavirus platform that is designed to target and amplify T cell immune responses to fight diseases. We believe that our technologies can meaningfully leverage the human immune system for prophylactic and therapeutic purposes by inducing CD8+ T cell response levels previously not achieved by other immunotherapy approaches.
We are building a proprietary immuno-oncology pipeline by targeting oncoviral cancer antigens, self-antigens and next-generation antigens. Our oncology portfolio includes three disclosed programs, HB-200, HB-300 and HB-700, all of which use our replicating technology. HB-200 is in clinical development for the treatment of Human Papillomavirus 16-positive cancers (HPV16+) in an ongoing Phase 1/2 clinical trial. HB-300 is in development for the treatment of prostate cancer and expected to move into the clinic in the first quarter of 2023. HB-700 is our newest asset in preclinical development for treatment of KRAS mutated cancers, including, lung, colorectal and pancreatic cancers.
Our HB-200 program is comprised of potential therapeutic agents for people with cancers caused by the Human Papillomavirus (HPV), specifically HPV16+ and includes HB-201 single-vector therapy and HB-202/HB-201 dual-vector therapy. Both therapies are being evaluated in an ongoing HB-200 Phase 1/2 clinical trial. In the second quarter of 2022, data presented at scientific conferences showed that HB-202/HB-201 alternating dual-vector candidate induced immune and clinical responses, as well as stable disease in some HPV16+ advanced metastatic/recurrent head and neck cancer patients who failed prior standard of care therapy. We believe that these early-stage data establish proof of concept for our replicating viral vector immunotherapy candidate in oncology.
Based on the safety profile, anti-tumor activity and T cell response data observed to date, we are evaluating HB-202/HB-201 in combination with pembrolizumab in 1st line and 2nd line patients with advanced/metastatic head and neck cancer.
While our strategic priority is the development of our oncology portfolio, we believe that our platform is also uniquely positioned to provide value from the prophylactic and therapeutic use against infectious diseases. We plan to continue developing infectious disease therapies in partnership with other companies.
We have funded our operations to date primarily from public offerings of common stock and convertible preferred stock, including our initial public offering, as well as private placements of our redeemable convertible preferred stock, grant funding and loans from an Austrian government agency, upfront, milestone and initiation payments from Gilead in connection with a research collaboration and license agreement, and upfront payments from Roche in connection with a research collaboration and license agreement.
On
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per share, for net proceeds of
We do not expect to generate revenue from any product candidates that we develop until we obtain regulatory approval for one or more of such product candidates, if at all, and commercialize our products or enter into additional collaboration agreements with third parties. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
All of our product candidates, including our most advanced oncology product candidate, HB-200, will require substantial additional development time and resources before we would be able to apply for and receive regulatory approvals and begin generating revenue from product sales. Before launching our first products, if approved, we plan to establish our own manufacturing facility to reduce or eliminate our reliance on contract manufacturing organizations (CMOs) which will require substantial capital expenditures and cause additional operating expenses. We currently have no marketing and sales organization and have no experience in marketing products; accordingly, we will incur significant expenses to develop a marketing organization and sales force in advance of generating any commercial product sales. As a result, we will need substantial additional capital to support our operating activities. In addition, we expect to continue to incur legal, accounting and other expenses in operating our business, including the costs associated with operating as a public company.
We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as government grants and additional collaboration agreements with third parties. Adequate funding may not be available to us on acceptable terms, or at all. If sufficient funds on acceptable terms are not available when needed, we will be required to significantly reduce our operating expenses and delay, reduce the scope of, or eliminate one or more of our development programs.
We have incurred net losses each year since our inception in 2011, including net
losses of
We believe that our cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements at least through the next 12 months from the issuance date of the consolidated financial statement. See "-Liquidity and Capital Resources."
Impacts of Coronavirus and Market Conditions on Our Business
We have been actively monitoring the coronavirus pandemic situation and its
impact globally. We believe our financial results for the years ended
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Effects of Inflation
We do not believe that inflation has had a material impact on our business or operating results during the periods presented. However, inflation, has had, and may continue to have, an impact on the labor costs we incur to attract and retain qualified personnel, costs to conduct clinical trials and other operational costs. Inflationary costs could adversely affect our business, financial condition and results of operations. In addition, increased inflation has had, and may continue to have, an effect on interest rates. Increased interest rates may adversely affect our borrowing rate and our ability to obtain, or the terms under which we can obtain, any potential additional funding.
Components of Our Results of Operations
Revenue from collaboration and licensing
To date, we have not generated any revenue from product sales and do not expect to do so in the near future, if at all. All of our revenue to date has been derived from research collaboration and license agreements with Gilead and Roche.
Gilead Collaboration Agreement
On
Under the Gilead Collaboration Agreement, we granted Gilead an exclusive,
royalty-bearing license to our technology platform for researching, developing,
manufacturing and commercializing products for HIV or HBV. We received a
non-refundable
We determined that our performance obligations under the terms of the original Gilead Collaboration Agreement included one combined performance obligation for each of the HBV and HIV research programs, comprised of the transfer of intellectual property rights and providing research and development services. Accordingly, we recognized these amounts as revenue over the performance period of the respective services on a percent of completion basis using total estimated research and development labor hours for each of the performance obligations. The terms of the Restated Gilead Collaboration Agreement added an additional performance obligation to us to perform research and development work for the HIV program. We recognize the amounts of revenue allocated to the performance obligation
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resulting from the Restated Gilead Collaboration Agreement on a percent of completion basis over the performance period, using total estimated research and development costs as the measure of progress.
Roche Collaboration Agreement
On
Under the Roche Collaboration Agreement, we granted Roche an exclusive,
royalty-bearing license to our technology platforms. Upon signing the Roche
Collaboration Agreement in
We determined that our performance obligations under the terms of the Roche
Collaboration Agreement included one combined performance obligation for the
transfer of intellectual property rights (licenses) and providing research and
development services for the HB-700 program, and a second, separate performance
obligation during the UCA Option period to perform research and development
services with respect to the UCA Program. Accordingly, we allocated the
non-refundable upfront payment of
Operating Expenses
Our operating expenses since inception have only consisted of research and development costs and general administrative costs.
Research and Development Expenses
Since our inception, we have focused significant resources on our research and development activities, including establishing our arenavirus platform, conducting preclinical studies, developing a manufacturing process, conducting Phase 1 and Phase 2 clinical trials for HB-101 as well as the ongoing HB-200 Phase 1/2 study, and an investigational new drug (IND) application for HB-300. Research and development activities account for a significant portion of our operating expenses. Research and development costs are expensed as incurred. These costs include:
? salaries, benefits and other related costs, including stock-based compensation,
for personnel engaged in research and development functions;
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expenses incurred in connection with the preclinical development of our
? programs and clinical trials of our product candidates, including under
agreements with third parties, such as consultants, contractors, academic
institutions and contract research organizations (CROs);
? the cost of manufacturing drug products for use in clinical trials, including
under agreements with third parties, such as CMOs, consultants and contractors;
? laboratory costs;
? leased facility costs, equipment depreciation and other expenses, which include
direct and allocated expenses; and
? third-party license fees.
The majority of our research and development costs are external costs, which we track on a program-by-program basis. We do not track our internal research and development expenses on a program-by-program basis as they primarily relate to shared costs deployed across multiple projects under development.
We expect our research and development expenses to increase substantially in the future as we advance our existing and future product candidates into and through clinical trials and pursue regulatory approval. The process of conducting the necessary clinical studies to obtain regulatory approval is costly and time-consuming. Clinical trials generally become larger and more costly to conduct as they advance into later stages and, in the future, we will be required to make estimates for expense accruals related to clinical trial expenses.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of any product candidates that we develop from our programs. We are also unable to predict when, if ever, material net cash inflows will commence from sales of product candidates we develop, if at all. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
? successful completion of preclinical studies and clinical trials;
? sufficiency of our financial and other resources to complete the necessary
preclinical studies and clinical trials;
? acceptance of INDs for our planned clinical trials or future clinical trials;
? successful enrollment and completion of clinical trials;
? successful data from our clinical program that support an acceptable
risk-benefit profile of our product candidates in the intended populations;
? receipt and maintenance of regulatory and marketing approvals from applicable
regulatory authorities;
? scale-up of our manufacturing processes and formulation of our product
candidates for later stages of development and commercialization;
establishing our own manufacturing capabilities or agreements with third-party
? manufacturers for clinical supply for our clinical trials and commercial
manufacturing, if our product candidate is approved;
? entry into collaborations to further the development of our product candidates;
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? obtaining and maintaining patent and trade secret protection or regulatory
exclusivity for our product candidates;
? successfully launching commercial sales of our product candidates, if and when
approved;
? acceptance of the product candidates benefits and uses, if and when approved,
by patients, the medical community and third-party payors;
? the prevalence and severity of adverse events experienced with our product
candidates;
? maintaining a continued acceptable safety profile of the product candidates
following approval;
? effectively competing with other therapies;
? obtaining and maintaining healthcare coverage and adequate reimbursement from
third-party payors; and
? qualifying for, maintaining, enforcing and defending intellectual property
rights and claims.
A change in the outcome of any of these variables with respect to the
development of a product candidate could mean a significant change in the costs
and timing associated with the development of that product candidate. For
example, if the
The following table summarizes our research and development expenses by product candidate or program (in thousands):
Year ended December 31,
2022 2021
HB-200 program $ 28,409 $ 35,876
HB-300 program 9,938 7,491
Gilead partnered programs(1) 13,529 17,208
Other and earlier-stage programs 14,815 18,504
Other unallocated research and development expenses 1,954 3,774
Total research and development expenses $ 68,645 $ 82,853 (1) Expenses incurred in connection with Gilead partnered programs were fully reimbursed by Gilead in 2021 and partially reimbursed in 2022, and such reimbursements were accounted for as revenue.
Other unallocated research and development expenses include stock-based compensation expense, certain lease expenses and other operating expenses that we do not track on a program-by-program basis, since our research and development employees and infrastructure resources are utilized across our programs.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs in our executive, finance and investor relations, business development and administrative functions. Other general and administrative expenses include consulting fees and professional service fees for auditing, tax and legal services, lease expenses related to our offices, premiums for directors and officers liability insurance, intellectual property costs incurred in connection with filing and prosecuting patent applications, depreciation and other costs. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for potential commercialization of our current and future product candidates, increase our headcount and investor relations activities
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and maintain compliance with requirements of the Nasdaq Global Select Market and
the
Grant Income
Since inception, we have received grants from the
We participate in a research incentive program provided by the Austrian
government under which we are entitled to reimbursement of a percentage of
qualifying research and development expenses and capital expenditures incurred
in
Interest Income
Interest income results of interest earned on our cash, cash equivalents, and restricted cash.
Interest Expense
Interest expense results primarily from loans under funding agreements with the
Income Taxes
Income tax expense results from
Results of Operations
Comparison of Years Ended
The following table summarizes our results of operations for the years ended
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Results of Operations" Part II, Item 7 of our Annual Report on Form 10-K for the
fiscal year ended
Year ended December 31,
2022 2021
Revenue from collaboration and licensing $ 14,249 $ 18,448
Operating expenses:
Research and development (68,645) (82,853)
General and administrative (18,759) (17,269)
Total operating expenses (87,404) (100,122)
Loss from operations (73,155) (81,674)
Other income (expense):
Grant income 7,916 9,724
Interest income 1,633 27
Interest expense (687) (898)
Other income and expenses, net (392) (2,843)
Total other income (expense), net 8,470 6,010
Net loss before tax (64,685) (75,664)
Income tax expense (230) (1)
Net loss $ (64,915) $ (75,665) Revenue from Collaboration and Licensing
Revenue was
The decrease of
For the year ended
For the year ended
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completed the recognition of the deferred revenue related to the upfront payment
of
Research and Development Expenses
For the year ended
The decrease of
General and Administrative Expenses
General and administrative expenses for the year ended
The increase of
Grant Income
In the year ended
Interest Income and Expense
Interest income was
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Interest expenses for loans from government agencies were
Other Income and Expenses
Other expenses were
Liquidity and Capital Resources
Since our inception in 2011, we have funded our operations primarily from public offerings and private placements of common stock and convertible preferred stock, including our initial public offering, as well as private placements of our redeemable convertible preferred stock, grant funding and loans from an Austrian government agency, and upfront, milestone and initiation payments from Gilead and Roche in connection with research collaboration agreements.
Prior to our IPO, we raised gross proceeds of approximately
On
We entered into various funding agreements with the
Because the FFG Loans bear interest at below market rates we account for the imputed benefit arising from the difference between an estimated market rate of interest and the contractual interest rate as grant funding from FFG, which is included in grant income. On the date that FFG Loan proceeds are received, we recognize the portion of the
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loan proceeds allocated to grant funding as a discount to the carrying value of
the loan and as unearned income. As of
We entered into arrangements with contract manufacturing organizations. As of
We do not expect positive cash flows from operations in the foreseeable future, if at all. Historically, we have incurred operating losses as a result of ongoing efforts to develop our arenavirus technology platform and our product candidates, including conducting ongoing research and development, preclinical studies, clinical trials, providing general and administrative support for these operations and developing our intellectual property portfolio. We expect to continue to incur net operating losses for at least the next several years as we progress clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization of our most advanced oncology product candidate HB-200, continue our research and development efforts relating to our other and future product candidates, and invest in our manufacturing capabilities and our own manufacturing facility.
Future Funding Requirements
We have no products approved for commercial sale. To date, we have devoted
substantially all of our resources to organizing and staffing our company,
business planning, raising capital, undertaking preclinical studies and clinical
trials of our product candidates. As a result, we are not profitable and have
incurred losses in each period since our inception in 2011. As of
? pursue the clinical and preclinical development of our current and future
product candidates;
? leverage our technologies to advance product candidates into preclinical and
clinical development;
? seek regulatory approvals for product candidates that successfully complete
clinical trials, if any;
? attract, hire and retain additional clinical, quality control and scientific
personnel;
establish our manufacturing capabilities through third parties or by ourselves
? and scale-up manufacturing to provide adequate supply for clinical trials and
commercialization;
expand our operational, financial and management systems and increase
? personnel, including personnel to support our clinical development,
manufacturing and commercialization efforts and our operations as a public
company;
? expand and protect our intellectual property portfolio;
establish a sales, marketing, medical affairs and distribution infrastructure
? to commercialize any products for which we may obtain marketing approval and
intend to commercialize on our own or jointly;
? acquire or in-license other product candidates and technologies; and
incur additional legal, accounting and other expenses in operating our
? business, including ongoing costs associated with operating as a public
company.
Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses
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and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders' equity and working capital.
We will require substantial additional financing and a failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.
Since our inception, we have invested a significant portion of our efforts and financial resources in research and development activities for our non-replicating and replicating technologies and our product candidates derived from these technologies. Preclinical studies and clinical trials and additional research and development activities will require substantial funds to complete. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the development of our current product candidates and programs as well as any future product candidates we may choose to pursue, as well as the gradual gaining of control over our required manufacturing capabilities and other corporate uses. These expenditures will include costs associated with conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current or future product candidates.
Our future capital requirements depend on many factors, including:
the scope, progress, results and costs of researching and developing our
? current and future product candidates and programs, and of conducting
preclinical studies and clinical trials;
the number and development requirements of other product candidates that we may
? pursue, and other indications for our current product candidates that we may
pursue;
the stability, scale and yields of our future manufacturing process as we
? scale-up production and formulation of our product candidates for later stages
of development and commercialization;
the timing of, and the costs involved in, obtaining regulatory and marketing
? approvals and developing our ability to establish sales and marketing
capabilities, if any, for our current and future product candidates we develop
if clinical trials are successful;
? the success of our collaborations with Gilead and Roche;
? our ability to establish and maintain collaborations, strategic licensing or
other arrangements and the financial terms of such agreements;
? the cost of commercialization activities for our current and future product
candidates that we may develop, whether alone or with a collaborator;
the costs involved in preparing, filing, prosecuting, maintaining, expanding,
? defending and enforcing patent claims, including litigation costs and the
outcome of such litigation;
? the timing, receipt and amount of sales of, or royalties on, our future
products, if any; and
? the emergence of competing oncology and infectious disease therapies and other
adverse market developments.
A change in the outcome of any of these or other variables with respect to the development of any of our current and future product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will need additional funds to meet operational needs and capital requirements associated with such operating plans.
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We do not have any committed external source of funds or other support for our development efforts. Until we can generate sufficient product and royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements as well as grant funding. Based on our research and development plans, we expect that our existing cash and cash equivalents, including the funds received under the Restated Gilead Collaboration Agreement, and the funds received under the Roche Collaboration Agreement, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. These estimates are based on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.
If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, the ownership interest of our shareholders will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain additional funding on favorable terms when needed, we may have to delay, reduce the scope of or terminate one or more of our research and development programs or clinical trials.
Cash Flows
The following table sets forth a summary of the primary sources and uses of cash (in thousands):
Year ended December 31,
2022 2021
Net cash used in operating activities $ (19,997) $ (66,016)
Net cash used in investing activities (5,017) (12,581)
Net cash provided by (used in) financing activities 72,271 (235) Net increase (decrease) in cash and cash equivalents 47,257 (78,832)
Cash Used in Operating Activities
During the year ended
During the year ended
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operating assets and liabilities of
Cash Used in Investing Activities
During the years ended
Cash (Used in) Provided by Financing Activities
During the year ended
During the year ended
Intellectual Property Licenses
In
In
In
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In
In
In
In the year ended
For additional information on these license agreements, please see "Business-Intellectual Property-License Agreements."
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which we have
prepared in accordance with the rules and regulations of the
Our critical accounting policies and the methodologies and assumptions we apply
under them have not materially changed as compared to those disclosed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for
the year ended
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Recognition of revenue from contracts with customers
We have entered into the Restated Gilead Collaboration Agreement for the development and commercialization of certain of our product candidates. Our performance obligations under the terms of this agreement include one combined performance obligation for each research program comprised of the transfer of intellectual property rights (licenses) and providing research and development services. Payments by Gilead to us under this agreement included a non-refundable up-front payment, payments for research and development activities, and may include payments based upon the achievement of defined pre-clinical development and commercial milestones and royalties on product sales if certain future conditions are met.
We have entered into the Roche Collaboration Agreement for the development and commercialization of certain of our product candidates. Our performance obligations under the terms of this agreement include one combined performance obligation for the transfer of intellectual property rights (licenses) and providing research and development services for the HB-700 program, and a second, separate performance obligation to perform research and development services and to deliver a specified package of preclinical data and results with respect to targeting undisclosed cancer antigens ("UCA program"). Payments by Roche under the Roche Collaboration Agreement included a non-refundable up-front payment, payments based upon the achievement of defined milestones, an additional payment if the option for the UCA program is exercised and royalties on product sales if certain future conditions are met.
We evaluate our collaboration and licensing arrangements pursuant to Accounting Standards Codification 606 (ASC 606). To determine the recognition of revenue from arrangements that fall within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy a performance obligation. We present revenues from collaboration and licensing arrangements separately from other sources of revenue.
Amounts received by us as non-refundable upfront payment under the Restated Gilead Collaboration Agreement and the Roche Collaboration Agreement as well as success-based milestone payments under the Roche Collaboration Agreement prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets. Contingent milestone payments related to specified preclinical and clinical development milestones are not initially recognized within the transaction price as they are fully constrained under the guidance in ASC 606. Such amounts are recognized as revenue over the performance period of the respective services on a percent of completion basis for each of the obligations. We measure the progress toward complete satisfaction of the performance obligations based on the total cost of each collaboration program. This method of measuring progress results in recognizing revenue in proportion to the cost incurred during the quarter in relation to total expected cost for the respective program, according to the respective collaboration budget. Reimbursement of costs for our services under the Restated Gilead Collaboration Agreement and the Roche Collaboration Agreement are presented as revenue and not deducted from expenses. The Restated Gilead Collaboration Agreement and the Roche Collaboration Agreement also include certain sales-based milestone and royalty payments upon successful commercialization of a licensed product which we anticipate recognizing if and when sales from a licensed product are generated.
Leasing
The determination whether an arrangement is qualified as a lease is made at contract inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. We use the implicit rate when readily determinable and our incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments. The incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease. The lease payments used to determine operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable and are recognized as operating lease assets on the consolidated balance sheets. Certain of our arrangements contain lease and non-lease components. We applied an accounting policy choice to separate or not to separate lease payments for the identified assets from any non-lease payments included in the contract
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by asset class. Operating leases are reflected in operating lease assets, in accrued expenses and other current liabilities and in non-current operating lease liabilities in our consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, stock-based compensation, employee benefits, facilities costs, laboratory supplies, depreciation, manufacturing expenses and external costs of vendors engaged to conduct preclinical development activities and clinical trials as well as the cost of licensing technology. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
Upfront payments, milestone payments and annual payments made for the licensing of technology are generally expensed as research and development in the period in which they are incurred. Incremental sublicense fees triggered by contracts with customers are capitalized and expensed as research and development expenses over the period in which the relating revenue is recognized.
Stock-Based Compensation
We measure all stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We classify stock-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's payroll costs are classified. Generally, we issue stock options, with service-only vesting conditions and record expense using the graded-vesting method.
We estimate the fair value of each stock option award using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. We do not estimate and apply a forfeiture rate as we have elected to account for forfeitures as they occur.
Recognition of other income under government grant agreements and research incentives
We recognize income from grants, research incentives and the imputed benefit arising from the difference between an estimated market rate of interest and the contractual interest rate on loans received from Austrian government agencies. Income from grants and incentives is recognized in the period during which the related qualifying expenses are incurred, provided that the conditions under which the grants or incentives were provided have been met. For grants under funding agreements and for proceeds under research incentive programs, we recognize grant and incentive income in an amount equal to the qualifying expenses incurred in each period multiplied by the applicable reimbursement percentage.
Grant income that we have received in advance of incurring qualifying expenses is recorded in the consolidated balance sheets as deferred income. Grant and incentive income recognized upon incurring qualifying expenses in advance of receipt of grant funding or proceeds from research and development incentives is recorded in the consolidated balance sheets as prepaid expenses and other current assets.
We have received loans under funding agreements that bear interest below market rates. We account for the imputed benefit arising from the difference between an estimated market interest rate and the actual interest rate charged on such loans as additional grant income, and record interest expense for the loans at a market interest. On the date that loan proceeds are received, we recognize the portion of the loan proceeds allocated to grant funding as a discount to the
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carrying value of the loan and as unearned income, which is subsequently recognized as additional grant income over the term of the funding agreement.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements appearing in this Annual Report on Form 10-K.
Emerging Growth Company Status and Smaller Reporting Company
As an "emerging growth company," the Jumpstart Our Business Startups Act of 2012 allows us to delay adoption of new or revised accounting standards applicable to public companies until such standards are made applicable to private companies. However, we have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We are also a "smaller reporting company" meaning that the market value of our
stock held by non-affiliates is less than
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