Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a biotechnology company developing novel small molecule therapeutics to treat diseases across several therapeutic areas, including, central nervous system (“CNS”) disorders, lysosomal storage disorders (“LSDs”), metabolic disorders, and other diseases that can be targeted through protein degradation, such as oncology.
GT-02287 - our lead product candidate: for the treatment of GBA1 Parkinson’s disease and other synucleinopathies
Our clinical stage product candidate, GT-02287, is being developed for the treatment of GBA1 Parkinson’s disease. We have generated an extensive preclinical data package providing evidence of the mechanism of action and safety of GT-02287. In preclinical models of GBA1 Parkinson’s disease, GT-02287 has been shown to restore glucocerebrosidase, or GCase, function in the lysosome, reduce toxic lipid substrates and toxic forms of alpha-synuclein, improve survival of dopaminergic neurons, increase dopamine levels, completely restore locomotor function, and reduce plasma-based neurodegeneration maker, neurofilament light chain, or NfL, back to the level of healthy animals.
In September 2023, we initiated the first-in-human Phase 1 clinical trial to assess the safety, tolerability, pharmacokinetics, and food effect of GT-02287 in healthy participants. The study design includes a single ascending dose part during which the study participants receive one dose of GT-02287 at different dose levels, and a multiple ascending dose part during which the study participants receive one daily dose of GT-02287 for 14 days at different dose levels. In February 2024, we initiated the multiple ascending dose part of this Phase 1 clinical trial, which we anticipate completing in the second quarter of 2024, with the availability of the quality assurance audited interim report in the third quarter of 2024. We are planning to expand the scope of this Phase 1 clinical trial by amending the study protocol to include a cohort of 12-15 patients with Parkinson’s disease. These patients will be treated for a period of three months to evaluate safety, tolerability, and pharmacokinetics in patients, as well as to assess the effect of GT-02287 on certain biomarkers of the GCase disease cascade.
In preparation for the treatment of Parkinson’s disease patients, in September 2023, we initiated the sub chronic (13 weeks treatment) preclinical toxicity study. The in-vivo phase of the preclinical toxicity study was concluded in January 2024 with the final, quality assurance audited, report expected by the beginning of the second quarter of 2024. In addition, we are planning to initiate the chronic (6 months in rodents and 9 months in non-rodents) preclinical toxicity study in the second half of 2024, enabling the conduct of clinical studies in patients with a GT-02287 treatment duration beyond three months .
On June 1, , 2023 our Australian subsidiary (Gain Therapeutics Australia PTY LTD or “Gain Therapeutics Australia” ) was established. Gain Therapeutics Australia is our wholly owned subsidiary with the business purpose to conduct and supervise the Phase 1 clinical trial of our lead product candidate GT-02287.
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Financial Condition
Since our inception in 2017, we have devoted substantially all of our resources to identify and develop next-generation brain-penetrant allosteric small molecules for the treatment of devastating diseases with high-unmet medical needs using our Magellan™ platform. Our operations have consisted primarily of organizing and staffing the Company, expanding its operations, securing financing, performing research, conducting preclinical studies and acquiring, developing and securing our in-licensed technology. To date, we do not have any product candidates approved for sale and have not generated any revenue from product sales, and as a result, we face risks associated with early-stage biotechnology companies whose product candidates are in development. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. We expect our research and development expenses to remain significant and to increase to support progress in our research and development activities. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. These efforts require significant amounts of additional capital for us to complete our research and development, achieve our research and development objectives, defend our intellectual property rights, and recruit and retain skilled personnel, and key members of management. Even if our product development efforts are successful, it is uncertain when, if ever, we will realize significant revenue from product sales.
In May 2022, we filed a shelf registration statement on Form S-3, which covers the offering, issuance and sale of up to a maximum aggregate offering price of $100.0 million of any combination of our common stock, preferred stock, debt securities and/or warrants from time to time in one or more offerings (the “Shelf Registration Statement”).
In May 2022, we entered into a Controlled Equity OfferingSM Sales Agreement, or Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, pursuant to which we were able to offer and sell shares of our common stock having an aggregate offering price of up to $16.0 million from time to time through or to Cantor, acting as our agent or principal, in a series of one or more at-the-market equity offerings, which we refer to as our ATM Program. During the year ended December 31, 2023, we sold an aggregate of 862,535 shares of common stock at an average price of $4.60 per share, raising gross proceeds of $3.9 million, which includes $0.4 million in sales and commissions and other offering expenses. The Sales Agreement and the ATM Program were terminated in conjunction with the public offering and concurrent private placement of shares of the Company’s common stock in November 2023, as described below.
In November 2023, we completed the public offering of 2.5 million shares of our common stock and warrants to purchase 1.3 million shares of our common stock. The warrants have an exercise price of $2.75 per share and were sold at the rate of one warrant for every two shares of common stock purchased in the public offering. The public offering price for each set of two shares of common stock and accompanying warrant to purchase one share of commons stock was $4.01 (with an effective price of $2.00 per share and $0.01 per warrant). In a private placement that was completed concurrently with the public offering we also issued to accredited investors 2.5 million of shares of our common stock (or pre-funded warrants in lieu thereof) and private warrants to purchase 2.5 million shares of our common stock with an exercise price of $2.75 per share. The private offering price per share and accompanying warrant in the private placement was $2.00 per set of securities sold privately. The public offering and the concurrent private placement resulted in combined gross proceeds of $10.1 million, which includes $1.2 million of underwriting commissions, placement agent’s fees and other expenses connected with the financing round. As of December 31, 2023 $0.9 million of the costs associated with the financing round had already been paid or deducted from the gross proceeds, while the reminder of the amount has been paid in the first quarter of 2024.
From inception through December 31, 2023, we have raised an aggregate of $74 million of gross proceeds through equity financings, including the issuance of convertible preferred stock, our IPO and sales under our ATM Program.
As of December 31, 2023, we had cash, cash equivalents and marketable securities of $16.8 million. We have incurred recurring losses and negative cash flows from operations since inception and as of December 31, 2023 and December 31, 2022, had an accumulated deficit of $60.8 million and $38.5 million, respectively. We anticipate incurring additional losses until such time, if ever, that we can generate sales of our product candidates currently in development. We have not generated any product revenues and have not achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, we will need significant additional financing to fund our operations and to develop our product candidates.
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Our ability to continue operations after our current cash resources are exhausted depends on our ability to obtain additional financing or to achieve profitable operations, as to which no assurances can be given. Cash requirements may vary materially from those now planned because of changes in direction of our research and development programs, competitive and technical advances, patent developments, regulatory changes or other developments. If adequate additional funds are not available when required, or if we are unsuccessful in entering into partnership agreements for further development of our pipeline, management may need to curtail our development efforts and planned operations to conserve cash.
Going Concern
As of December 31, 2023 and December 31, 2022, we had an accumulated deficit of $60.8 million and $38.5 million, respectively, and as of December 31, 2023, we had cash, cash equivalents and marketable securities of $16.8 million. During the year ended December 31, 2023, we incurred net losses of $22.3 million and generated negative cash flows from operations of $18.9 million. Our current operating plan indicates that it will continue to incur losses from operations and generate negative cash flows from operating activities. Our projected cash outflows for the upcoming periods raise substantial doubt about our ability to continue as a going concern for at least 12 months from the issuance of the financial statements included elsewhere in this Annual Report on Form 10-K. We will need to raise additional capital to fund continued operations beyond the first quarter of 2025. We plan to address our liquidity needs by taking steps to improve our operations and cash position, including identifying access to future capital and potential cost-reduction measures. Investors should read the section below titled “Liquidity and Capital Resources” for additional information regarding our financial condition and ability to continue operations.
Financing Requirements; Current Financing Environment
Until such time, if ever, as we can generate substantial product revenues to support our business and corporate strategy, we expect to finance our cash needs through a combination of public and private equity offerings, including an at-the-market offering, debt financings, government or private party grants, collaborations, strategic alliances and licensing arrangements. We may not be able to obtain financing on acceptable terms, or at all, and we may not be able to enter into strategic alliances or other arrangements on favorable terms, or at all. The terms of any financing may adversely affect our holdings or the rights of our stockholders. If we are unable to obtain funding, we could be required to delay, limit, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, or grant rights to develop, sell and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves, which could adversely affect our business prospects.
The war in Ukraine, the conflict between Hamas and Israel, global geopolitical tension, and the post COVID-19 environment continue to have unpredictable impacts on global societies, economies, financial markets, and business practices. Recently worsening global macroeconomic conditions, liquidity concerns at and failures of banks and other financial institutions, volatility in the capital markets, and related market uncertainty, may impact our ability to obtain additional financing when needed on favorable terms or at all. For additional discussion of our financing requirements, see “—Liquidity and Capital Resources” and “—Funding Requirements” below.
Strategic Transactions; Collaboration and Licensing Arrangement
In connection with our business development activities, we enter into collaboration and licensing arrangements with third parties, to use our licensed Magellan™ computational platform technology to discover novel allosteric sites on proteins and identify proprietary small molecules that bind these sites and may be developed into pharmaceutical products. We expect to continue to identify and evaluate collaboration, co-development and licensing opportunities that may be similar to or different from the collaboration and licenses arrangements that we have entered into.
Components of Our Consolidated Results of Operations
Revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future, if at all. If we fail to complete the development of our product candidates in a timely manner or fail to obtain their regulatory approval and successfully commercialize them, we will not generate
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revenues in the future. Historically, we have received limited collaboration revenue pursuant to a collaboration agreement with Zentalis Pharmaceuticals which has been concluded in the year ended December 31, 2023.
Operating Expenses
Our operating expenses since inception have consisted solely of research and development and general and administrative costs.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include:
● expenses incurred under collaborations with third parties, including contract research organizations (“CROs”) and Universities, that conduct research, preclinical and clinical studies, such as in-vitro and in-vivo absorption, distribution, metabolism and excretion (“ADME”), cell model studies, in-vivo pharmacology and pharmacokinetic studies, toxicology studies and chemical synthesis, stability studies, manufacturing and control materials, process characterization, scale-up and transfer, clinical trial expenses, on our behalf;
● employee salaries, benefits and other related costs, including share-based compensation expenses, for employees engaged in research and development functions and overhead allocations consisting of various support and facilities-related expenses, which include rent, utilities and maintenance of our facilities, depreciation, travel and conference expenses;
● fees paid to consultants who assist with research and development activities and related travel expenses; and
● the cost of sponsored research, which includes laboratory materials and supplies, manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical studies.
The following table provides a breakout of our research and development expenses by major categories of expense:
Year Ended
December 31,
2023
2022
Change
Pre-clinical activities, clinical activities and outside services
7,535,538
5,192,868
2,342,670
Personnel expenses
3,956,187
2,969,038
987,149
Other
628,958
297,517
331,441
Research grants
(600,070)
(82,133)
(517,937)
Total research and development expenses
$
11,520,613
$
8,377,290
$
3,143,323
We recognize research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. We anticipate that our research and development expenses will increase substantially in future periods to support progress in our research and development activities, including the progressing of the clinical trials for product candidates we are developing. These increases will likely also result from expanded infrastructure and increased insurance costs. Such expenses are offset by contributions from research grants, which are recorded as a reduction to research and development expenses based on our best estimate of the periods in which the related expenditures are incurred and activities performed.
Our primary research and development focus since inception has been the application of our Magellan™ platform to various indications and targets, and more recently the development of our clinical stage lead product candidate GT-02287 for the treatment of Parkinson’s diseae and other neurodegenerative diseases.
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Research and development activities are central to our business model. Product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will continue to increase in the foreseeable future as we (i) increase personnel costs, including stock-based compensation, (ii) continue preclinical development of our lead compounds, (iii) progress our clinical trials for certain product candidates, (iv) continue to discover and develop additional product candidates, and (v) pursue later stages of clinical development of product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, bonus and other related costs, including share-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters, professional fees for accounting, auditing, tax and consulting services, insurance costs, travel expenses, and facility-related expenses, and other operating costs.
We will continue to focus on preserving our liquidity resources while we seek to maximize shareholders’ value. We expect to continue the efforts started during the year ended December 31, 2023 to limit administrative expenses.
Other Financial Income (Expense)
Other financial income (expense) consists of interest income, interest expense and foreign exchange gain or loss, net.
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Consolidated Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the periods indicated, together with the changes in those items.
Year Ended
December 31,
Increase
2023
2022
(Decrease)
Revenues:
Collaborative Agreements
55,180
132,640
(77,460)
Other income
—
7,468
(7,468)
Total revenues
$
55,180
$
140,108
$
(84,928)
Operating expenses:
Research and development
(11,520,613)
(8,377,290)
3,143,323
General and administrative
(10,787,700)
(9,539,863)
1,247,837
Total operating expenses
$
(22,308,313)
$
(17,917,153)
$
4,391,160
Loss from operations
$
(22,253,133)
$
(17,777,045)
$
4,476,088
Interest income, net
494,234
375,357
118,877
Foreign exchange loss, net
(429,346)
(96,074)
(333,272)
Loss before income tax
$
(22,188,245)
$
(17,497,762)
$
4,690,483
Income tax
(79,275)
(92,976)
(13,701)
Net loss
$
(22,267,520)
$
(17,590,738)
$
4,676,782
Net loss per ordinary share:
Basic and diluted loss per share
(1.71)
(1.48)
0.23
Weighted-average common stock used in per share calculations – basic and diluted
13,011,361
11,883,368
Comparison of the Years ended December 31, 2023 and 2022
Revenues
For the years ended December 31, 2023 and 2022, total revenues were $55 thousand and $140 thousand, respectively, and consisted mainly of income from a collaboration agreement with Zentalis Pharmaceuticals.
Research and Development Expenses
Research and development expenses increased by $3.1 million to $11.5 million for the year ended December 31, 2023, from $8.4 million for the year ended December 31, 2022. The increase in research and development expenses for the year ended December 31, 2023 was primarily attributable to increases in external R&D services and external expenses related to the commencement and conduct of our Phase 1 clinical trial with our lead drug candidate GT-02287 for the treatment of GBA1 Parkinson’s disease.
General and Administrative Expenses
General and administrative expenses increased by $1.3 million to $10.8 million for the year ended December 31, 2023 from $9.5 million for the year ended December 31, 2022. The increase in general and administrative expenses for the year ended December 31, 2023 was primarily attributable to increases in professional fees for corporate compliance consulting and non cash costs related to share based compensation.
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Interest income, net
Interest income net increased by $0.12 million to $0.49 million for the year ended December 31, 2023 from $0.37 million for the year ended December 31, 2022. The increase in interest income, net is mainly attributable to interest income derived from our investment in available for sale treasury securities.
Foreign exchange loss, net
Foreign exchange loss, net increased by $0.34 million to $0.43 million for the year ended December 31, 2023 from $96 thousand for the year ended December 31, 2022. The increase is mainly attributable to the Swiss Franc strengthening its value against the US dollar.
Income Taxes
Income Taxes are $80 thousand and $93 thousand for year ended December 31, 2023 and 2022, respectively. Income Taxes are mainly related to taxable income that was generated in Spain.
Liquidity and Capital Resources
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We have not yet received approval for or commercialized any products or technologies, and we do not expect to generate revenue from sales of any products in the near term, if at all. As described in additional detail under “Financial Condition” above, we have funded our operations to date primarily through a combination of sales of our securities and research grants.
As of December 31, 2023, and December 31, 2022, we had $16.8 million and $22.1 million in cash and cash equivalents and marketable securities, respectively, and an accumulated deficit of $60.8 million and $38.5 million, respectively. We had indebtedness of $0.56 million and $0.60 million as of December 31, 2023 and December 31, 2022, respectively. Our cash and cash equivalents available at December 31, 2023 are expected to be sufficient to fund our anticipated operating and capital requirements into the first quarter of 2025, but may not be sufficient to fund the Company’s operations for one year from the issuance of the financial statements included in our 2023 Form 10-K. Therefore, we have reported there is substantial doubt about our ability to continue as a going concern. Please refer to the discussion above titled “Going Concern”.
Our ability to continue operations after our current cash resources are exhausted depends on our ability to obtain additional financing or to achieve profitable operations, as to which no assurances can be given. Cash requirements may vary materially from those now planned because of changes in direction of our research and development programs, competitive and technical advances, patent developments, regulatory changes or other developments. If adequate additional funds are not available when required, or if we are unsuccessful in entering into partnership agreements for further development of our pipeline, management may need to curtail our development efforts and planned operations to conserve cash.
Until such time, if ever, as we can generate substantial product revenues to support our business and corporate strategy, we expect to finance our cash needs through a combination of public and private equity offerings, debt financings, at-the-market offerings, government or private party grants, collaborations, strategic alliances, and licensing arrangements. As of December 31, 2023, we did not maintain any lines of credit or equity capital committed for funding.
We continue to explore potential opportunities and alternatives to obtain the additional resources that will be necessary to support our ongoing operations beyond the first quarter of 2025, including raising additional capital through either private or public equity, including at-the-market offerings, or debt financing, or additional program collaborations or non-dilutive funding.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds
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through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. We may not be able to obtain additional funds through equity or debt financings when needed on favorable terms or at all, including as a result of rising interest rates, liquidity concerns at, and failures of, banks and other financial institutions, volatility in the capital markets and related market uncertainty. Further, if we are unable to obtain additional funding to support our current or proposed activities and operations, we may not be able to continue our operations as currently anticipated, which may require us to suspend or terminate any ongoing development activities, modify our business plan, curtail various aspects of our operations, cease operations, or seek relief under applicable bankruptcy laws.
Cash Flows
The following table provides information regarding our cash flows for the periods presented:
Year Ended
December 31,
2023
2022
Cash used in operating activities
$
(18,865,873)
$
(14,692,139)
Cash provided/(used) by/in investing activities
10,222,667
(14,774,813)
Cash provided/(used) by/in financing activities
12,641,343
(78,774)
Effect of exchange rate changes
488,404
(23,797)
Net increase / (decrease) in cash, cash equivalents and restricted cash
$
4,486,541
$
(29,569,523)
Cash Used in Operating Activities
During the year ended December 31, 2023 and 2022, we used $18.9 million and $14.7 million of cash, respectively, in operating activities, primarily to fund our operations related to the development of our product candidates and related general and administrative support activities.
Cash Used in Investing Activities
During the year ended December 31, 2023, cash provided by investing activities was $10.2 million, primarily due to maturity of marketable securities for $12.2 million partially offset by th purchase of marketable securities for $2 million.
During the year ended December 31, 2022, cash used in investing activities was $14.7 million, primarily due to purchase of marketable securities for $17.7 million, partially offset by the maturity of marketable securities for $3 million.
Cash Used/Provided by Financing Activities
During the year ended December 31, 2023, cash provided by financing activities was $12.6 million, mainly related to the net proceeds related to the public offering and the concurrent private placement for $9.2 million, and the net proceeds related to the ATM program for $3.5 million.
During the year ended December 31, 2022, cash used in financing activities was $78 thousand, reflecting the payment of current portion of long-term debt.
Funding Requirements
Our primary use of cash is to fund our operating expenses, which consist of research and development and general and administrative expenditures.
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Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
● the scope, timing, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
● the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates;
● the extent to which we encounter increased costs as a result of global and macroeconomic conditions, including heightened inflation and high interests rates, supply chain disruptions, fluctuating exchange rates, and increases in commodity, energy and fuel prices;
● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
● the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;
● our ability to establish additional collaborations on favorable terms, if at all;
● the costs required to scale up our clinical, regulatory and manufacturing capabilities;
● the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization;
● the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval; and
● revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval.
We will need additional funding to meet our operational needs and capital requirements for our preclinical studies and clinical trials, other research and development expenditures, and business development activities. Because of the numerous risks and uncertainties associated with the development of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, including at-the-market offerings, debt financings, government or private party grants, collaborations, strategic alliances and licensing arrangements. We may not be able to obtain additional funds through equity or debt financings when needed on favorable terms or at all. See “Financing Requirements; Current Financing Environment” and “Liquidity and Capital Resources”.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, defined benefit pension liability, share-based compensation, recognition of research grants
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and the going concern assessment. Our actual results may differ from these estimates under different assumptions or conditions. During the year ended December 31, 2023, there were no material changes to our critical accounting policies. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Accrued Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time at the date of the preparation of the financial statements. There may be instances in which payments made to our vendors exceed the level of services provided, and result in a prepayment reported under other current assets, which are subsequently expensed in the statement of operations when the related activity has been performed. To date, there have been no material differences between our estimates of accrued expenses reported at each balance sheet date and the amounts actually incurred.
Pension obligations
We operate defined benefit pension plans and defined contribution pension plans in accordance with local regulations and practices. These plans are funded by regular contributions made by the employer and the employees to a third-party. For defined benefit pension plans, the liability recognized in the balance sheets is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The overfunded or underfunded status of the defined benefit plans is calculated as the difference between plan assets and the projected benefit obligations. Estimates are used in determining the assumptions incorporated in the calculation of the pension obligations, which is supported by input from independent actuaries. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in ‘‘Accumulated Other Comprehensive Income (Loss)’’ in the statements of equity and are charged or credited to income over the employees’ expected average remaining working lives. The measurement date used for our employee defined benefit plan is December 31.
Share-based compensation
We recognize compensation costs related to share based compensation granted to employees, consultants and directors, based on the estimated fair value of the awards as of the grant date. We estimate the grant date fair value, and the resulting share-based compensation, using the Black-Scholes option-pricing model. The grant date fair value of the stock based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. We estimate the fair value of stock options using the Black-Scholes option-pricing model, which requires assumptions, including the fair value of our common stock prior to our initial public offering, volatility, the expected term of exercise, the risk free interest rate for a period that approximates the expected term of exercise, and our expected dividend yield. Certain assumptions used in our Black-Scholes option-pricing model represent management’s best estimates and involve a number of assumptions and the application of management’s judgment, as they are inherently subjective. We recognize expenses related to Restricted Stock Units (or RSUs) based on their fair market value, determined as the closing price on Nasdaq of our common stock as of the grant date, on a straight-line basis over the requisite service period. For Restricted Stock Units with market or performance based vesting conditions (or PRSUs), the fair value at grant date is calculated using an option-pricing model (Monte Carlo Simulation) or based on management’s assessment of the likelihood of concurrence of the underlying performance, respectively.
Research Grants
Under the terms of the research and development grants awarded, we are entitled to receive reimbursement of our allowable direct expenses. Contributions from research and development activities under the grants are recorded based on management’s best estimate of the periods in which the related expenditures are incurred and activities performed and are classified in the statement of operations as a reduction to research and development expenses.
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Going Concern Assessment
At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The assessment over going concern is based on management’s most updated budget and forecast and does not take into consideration estimated future cash inflows that are not certain as of the date of preparation of the financial statements.
JOBS Act
We qualify as an “emerging growth company”, as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to public companies that are not emerging growth companies. These provisions include, but are not limited to: being permitted to report only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial conditions and results of operations disclosure; an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, registration statements and proxy statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, the information we provide might be different from the information that is available for other public companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and the market price of our common stock may be more volatile.
We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenue of $1.07 billion or more, (ii) December 31, 2026, (iii) the date on which we have issued more than $1.0 billion of non-convertible debt instruments during the previous three fiscal years or (iv) the date on which we are deemed a “large accelerated filer” under the rules of the SEC with at least $700 million of outstanding equity securities held by non-affiliates.
Recent Accounting Pronouncements
A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our audited financial statements included elsewhere in this Annual Report.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Under SEC rules and regulations, because we are considered to be a “smaller reporting company”, we are not required to provide the information required by this item in this Annual Report
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