HEPION PHARMACEUTICALS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
You should read the following discussion and analysis of our financial condition and results of operations together with and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Annual Report. All amounts in this report are in
U.S.dollars, unless otherwise noted.
We are a biopharmaceutical company headquartered in
Edison, New Jersey, focused primarily on the development of drug therapy for treatment of chronic liver diseases. This therapeutic approach targets fibrosis, inflammation, and shows potential for the treatment of hepatocellular carcinoma ("HCC") associated with non-alcoholic steatohepatitis ("NASH"), viral hepatitis, and other liver diseases. Our cyclophilin inhibitor, Rencofilstat (formerly CRV431), is being developed to offer benefits to address multiple complex pathologies relate to advanced liver disease. Rencofilstat is a pan cyclophilin inhibitor that targets multiple pathologic pathways involved in the progression of liver disease. Preclinical studies with Rencofilstat in NASH models demonstrated consistent reductions in liver fibrosis and additional reductions in inflammation and cancerous tumors in some studies. Rencofilstat additionally showed in vitro antiviral activity towards hepatitis B, C, and D viruses which also trigger liver disease. Preclinical studies also have shown potentially therapeutic activities of Rencofilstat in experimental models of acute lung injury, platelet activation, and SARS-CoV-2 replication. NASH is the form of liver disease that is triggered by what has come to be known as the "Western diet", characterized especially by high-fat, high-sugar, and processed foods. Among the effects of a prolonged Western diet is fat accumulation in liver cells (steatosis) which is described as NAFLD and can predispose cells to injury. NAFLD may evolve into NASH when the fatty liver begins to progress through stages of cell injury, inflammation, fibrosis, and carcinogenesis. People who develop NASH often have additional predisposing conditions such as diabetes and hypertension, but the exact biochemical events that trigger and maintain the progression are not well known. Many people in the early stages of disease do not have significant 43
clinical symptoms and therefore do not know that they have it. NASH becomes evident and a major concern when the liver becomes fibrotic and puts the individual at increased risk of developing cirrhosis and other complications. Individuals with advanced liver fibrosis have significantly higher risk of developing liver cancer, although cancer may also arise in some patients before significant hepatitis or fibrosis. NASH is increasing worldwide at an alarming rate due to the spread of the Western diet, obesity, and other related conditions. Approximately 4-5% of the global population is estimated to have NASH, including the
USA. NASH is the leading reason for individuals requiring a liver transplant in the USA. Considering the serious outcomes linked to advancing NASH, the economic and social burden of the disease is enormous. There are no simple blood tests to diagnose or track the progression of NASH, and no drugs are approved to specifically treat the disease.
Artificial Intelligence (AI)
We have created a proprietary AI tool called, "AI-POWR™ to optimize the outcomes of our current clinical programs and to potentially identify novel indications for Rencofilstat and possibly identify new targets and new drug molecules to broaden our pipeline. AI-POWR™ is our acronym for Artificial Intelligence - Precision Medicine;
Omicsthat include genomics, proteomics, metabolomics, transcriptomics, and lipidomics; World database access; and Response and clinical outcomes. AI-POWR™ allows for the selection of novel drug targets, biomarkers, and appropriate patient populations. AI-POWR™ is used to identify responders from big data sources using our multi-omics approach, while modelling inputs and scenarios to increase response rates. The components of AI-POWR™ include access to publicly available databases, and in-house genomic and multi-omic big data, processed via machine learning algorithms. We believe AI outputs will allow for improved response outcomes through enhanced patient selection, biomarker selection and drug target selection. We believe AI outputs will help identify responders a priori and reduce the need for large sample sizes through study design enrichment. We intend to use AI-POWR™ to help identify which NASH patients will best respond to Rencofilstat. It is anticipated that applying this proprietary platform to our drug development program will ultimately save time, resources, and money. In so doing, we believe that AI-POWR™ is a risk-mitigation strategy that should reap benefits all the way through from clinical trials to commercialization. The AI-POWR™ platform is continually updated with in-house and published data to further refine the accuracy of the neural network. We believe that NASH is a heterogenous disease and we need to have a better understanding of interactions among proteins, genes, lipids, metabolites, and other disease variables to help predict disease progression, regression, and responses to Rencofilstat. All of this is further complicated by variable drug concentrations, patient traits and temporal factors. AI-POWR™ is designed to address many of the typical challenges in drug development, as we believe we can use our proprietary platform to shorten development timelines and increase the delta between placebo and treatment groups. AI-POWR™ will be used to drive our ongoing Phase 2a NASH program and identify additional potential indications for Rencofilstat to expand our footprint in the cyclophilin inhibition therapeutic space. Impact of COVID-19 The COVID-19 outbreak in the United Stateshas caused significant business disruption. The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain. While there has not been a material impact on our consolidated financial statements for the year ended December 31, 2021, a prolonged outbreak could have a material adverse impact on our financial results and business operations, including the timing and our ability to complete certain clinical trials and other efforts required to advance the development of our product candidate and raise additional capital.
OVERVIEW OF FINANCIAL OPERATIONS
From inception through
December 31, 2021, we have an accumulated deficit of $133.5 millionand we have not generated any revenue from operations. We expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products. We do not expect to have such for several years, if at all. On February 16, 2021, we entered into an underwriting agreement (the "Underwriting Agreement") with ThinkEquity, a division of Fordham Financial Management, Inc., as the representative (the "Representative") of the underwriters listed therein (collectively, the "Underwriters"), with respect to an underwritten public offering (the "Offering") of 44,200,000 shares of our common stock, par value $0.0001(the "Shares"), at a public offering price of $2.00per share, which resulted in net proceeds to us of $82.1 million, after deducting underwriting discounts and commissions and offering expenses payable by us. We intend to use the net proceeds of this Offering to fund our research and development activities and general corporate purposes, including working capital, operating expenses and capital expenditures. The Offering closed on February 18, 2021. 44
Our product development efforts are in their early stages and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.
RECENT ACCOUNTING PRONOUNCEMENTS
For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 4, "Recent Accounting Pronouncements" in the accompanying Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS
Comparison of years ended
Year Ended December 31, 2021 2020 Change Revenues $ - - $ - Costs and Expenses: Research and development 20,395,136 11,997,272 8,397,864 General and administrative 10,008,173 8,148,803 1,859,370 Loss from operations (30,403,309) (20,146,075) (10,257,234) Other income (expense): Interest expense (8,859) (31,229) 22,370
Change in fair value of derivatives-warrants and contingent consideration
(2,310,000) (146,050) (2,163,950) Loss before income taxes (32,722,168) (20,323,354) (12,398,814) Income tax (expense) benefit - (30,584) 30,584 Net loss
$ (32,722,168) $ (20,353,938) $ (12,368,230)
We have had no income in the years ended
Research and development expenses for the years ended
December 31, 2021and 2020 were $20.4 millionand $12.0 million, respectively. The increase of $8.4 millionwas primarily due to an increase in stock compensation of $0.8 millionrelated to options granted in 2021, a $0.8 millionincrease in compensation cost due to an increase in headcount, a $5.0 millionincrease clinical trial costs related to the start of the phase 2b trial, and a $2.4 millionincrease in Chemistry, Manufacturing, and Controls, or CMC, costs primarily for an increase in drug costs to support our clinical trials. This was offset by a decrease in consulting services of $0.6 million. General and administrative expenses for the years ended December 31, 2021and 2020 amounted to $10.0 millionand $8.1 million, respectively. The increase of $1.9 millionis primarily due to an increase in stock compensation of $1.5 millionrelated to options granted in 2021, a $0.3 millionincrease in compensation cost due to an increase in headcount, a $0.4 millionincrease in insurance, and a $0.3 millionincrease in miscellaneous expenses. This was offset by a decrease in taxes of $0.3 millionand a $0.3 milliondecrease for consulting and outside services. During the year ended December 31, 2021and 2020, we recorded income tax expense of $0and an income tax benefit of $30,584, respectively, resulting from an adjustment to a deferred tax liability. Refer to Note 10 in the consolidated financial statements included in this Annual Report on Form 10-K.
Cash and capital resources
Sources of liquidity
We have funded our operations through
December 31, 2021primarily through the issuance of convertible preferred stock, the issuance and sale of shares of our common stock in our IPO, and subsequent issuances of shares of our common stock through at-the market offerings. 45
Future funding needs
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 candidate. As a result, we are not profitable and have incurred losses in each period since our inception in 2013. As of
December 31, 2021, we had an accumulated deficit of $133.5 million. We expect to continue to incur significant losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
•pursue the clinical and preclinical development of our current product candidate;
•use our technologies to advance product candidates towards preclinical and clinical development;
•seek regulatory approvals for our product candidate that successfully completes clinical trials, if applicable;
•attract, hire and retain additional clinical, quality control and scientific staff;
•establish our manufacturing capabilities through third parties and increase 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 license other product candidates and technologies; and
•incur additional legal, accounting and other expenses in the course of operating our business, including ongoing costs associated with operating as a public company.
Even if we succeed in commercializing our product candidate, we will continue to incur substantial research and development and other expenditures to potentially 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 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 failure to obtain such necessary capital may require us to delay, limit, reduce or terminate our product development programs, marketing 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 research and development of 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 candidate that we may pursue;
•stability, scale and yields during the manufacturing process as we scale up production and formulation of our product candidate 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; 46
• our ability to establish and maintain collaborations, strategic licenses or other agreements 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 or royalties on our future products, if any; and
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. We believe we have enough cash on hand to fund our operations for the next twelve months. We will be required to raise additional capital to continue the development and commercialization of our current product candidate and to continue to fund operations at the current cash expenditure levels. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct, delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize on unfavorable terms.
The following table summarizes our cash flows for the following periods:
Year Ended December 31, 2021 2020 Net cash provided by (used in): Operating activities
$ (31,224,481) $ (16,165,202)Investing activities (130,405) (85,789) Financing activities 81,977,015 43,054,857 Net increase in cash $ 50,622,129 $ 26,803,866As of December 31, 2021, we had working capital of $89.2 millioncompared to working capital of $38.0 millionas of December 31, 2020. The increase of $51.2 millionin working capital is primarily related to an increase in cash and cash equivalents from our equity offerings during 2021 offset by an increase of $3.0 millionto short-term contingent consideration.
Operational activities :
December 31, 2021, we had $91.3 millionin cash. Net cash used in operating activities was $31.2 millionfor the year ended December 31, 2021consisting primarily of our net loss of $32.7 million, adjusted for non-cash charges of $4.7 millionprimarily for stock-based compensation and an increase in the fair value of contingent consideration of $2.3 million. Changes in working capital accounts had a negative impact of $5.6 millionon cash primarily due to an increase in prepaid research costs.
Net cash used in operating activities was
Net cash used in investing activities during the year ended
Net cash used in investing activities during the year ended
Net cash provided by financing activities was
$82.0 millionfor the year ended December 31, 2021due primarily to the issuance of common stock, net of issuance costs for our equity offering of $82.2 millionin February 2021. Net cash provided by financing activities was $43.1 millionfor the year ended December 31, 2020due primarily to the issuance of common stock, net of issuance costs for our equity offerings $42.9 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in
the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with fair value of financial instruments, derivative financial instruments, income taxes, contingencies, research and development, goodwill and in-process research and development, and share-based payments have the greatest potential impact on our consolidated financial statements. We evaluate these estimates on an ongoing basis. Actual results could differ from those estimates under different assumptions or conditions, and any differences could be material. For further information on all of our significant accounting policies, see Note 3 of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Fair value of financial instruments
Financial instruments consist of cash, accounts payable, contingent consideration and derivative instruments. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature, except for contingent consideration and derivative instruments. We record our contingent consideration and derivative instruments at fair value at the end of each reporting period. Contingent consideration was related to the acquisition of
Ciclofilinand recorded on June 10, 2016. The contingent consideration represented the acquisition date fair value of potential future payments, to be paid in cash and our common stock, upon the achievement of certain milestones and in 2016 was estimated based on a probability-weighted discounted cash flow model utilizing a discount rate of 6.5% and a stock price of $19.60. We completed the first segment of our Phase 1 clinical activities for Rencofilstat in October 2018wherein we reached a major clinical milestone of positive data from a Phase I trial of Rencofilstat in humans. This achievement triggered the first milestone payment, as stated in the Merger Agreement for the acquisition of Ciclofilin Pharmaceuticals, Inc.( Ciclofilin,) and we paid a related milestone payment of $1,000,000and issued 1,439 shares of our common stock with a fair value of $55,398, representing 2.5% of our issued and outstanding common stock as of June 2016, to the Ciclofilinshareholders. The Merger Agreement for the acquisition of Ciclofilinwas amended on January 14, 2022(see Note 13 to the consolidated financial statements) and a payment of $2.0 millionwas made in January 2022. Income Taxes We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of the deferred tax asset. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. Potential interest and penalties associated with unrecognized tax positions are recognized in income tax expense. We continue to maintain a full valuation allowance for our U.Sand foreign net deferred tax assets. Income tax expense for the years ended December 31, 2021and 2020 are related to our foreign operations. Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that we can utilize annually to 48
offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on our value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The utilization of these NOLs is subject to limitations based on past and future changes in our ownership pursuant to Section 382 We completed a Section 382 study of transactions in our stock through
December 31, 2021and concluded that we have experienced ownership changes since inception that we believe under Section 382 and 383 of the Code will result in limitations on our ability to use certain pre-ownership change NOLs and credits (see Note 2 to the consolidated financial statements). In addition, we may experience subsequent ownership changes as a result of future equity offerings or other changes in the ownership of our stock, some of which are beyond our control. As a result, the amount of the NOLs and tax credit carryforwards presented in our consolidated financial statements could be limited. Similar provisions of state tax law may also apply to limit the use of accumulated state tax attributes (see Note 10 to the consolidated financial statements).
In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, ("ASC 450"), we record accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. We, in accordance with this guidance, does not recognize gain contingencies until realized.
Research and development
Research and development costs, which include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, license costs, regulatory and scientific consulting fees, as well as contract research, insurance and FDA consultants, are accounted for in accordance with ASC Topic 730, Research and Development ("ASC 730"). Also, as prescribed by this guidance, patent filing and maintenance expenses are considered legal in nature and therefore classified as general and administrative expense, if any. We do not currently have any commercial biopharmaceutical products and do not expect to have such for several years, if at all. Accordingly, our research and development costs are expensed as incurred. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we have no history of successful commercialization of product candidates to base any estimate of the number of future periods that would be benefited. Also as prescribed by ASC 730, non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. At
December 31, 2021and 2020, we had prepaid research and development costs of $5.9 millionand $1.8 million, respectively.
In accordance with ASC Topic 350, Intangibles -
Goodwilland Other ("ASC Topic 350"), goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment annually, in our fourth quarter, and between annual tests if we become aware of an event or a change in circumstances that would indicate the carrying value may be impaired. The annual, or interim (if events or changes in circumstances indicate that it is more likely than not that the asset is impaired), goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the quantitative impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, we recognize a goodwill loss in an amount equal to any excess. Goodwillrelates to amounts that arose in connection with the acquisition of Ciclofilin. Goodwillrepresents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. We performed a quantitative assessment of goodwill for fiscal year 2021 and determined that the fair value of our reporting unit was in excess of its carrying value. We performed a qualitative assessment of goodwill 49
for fiscal year 2020 and determined that it was not more likely than not that goodwill was impaired. There was no impairment of goodwill for the years ended
December 31, 2021and 2020. In-Process Researchand Development ("IPR&D") acquired in a business combination is capitalized as indefinite-lived assets on our consolidated balance sheets at the acquisition-date fair value. Once the project is completed, the carrying value of the IPR&D is reclassified to other intangible assets, net and is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the IPR&D projects are expensed as incurred. The projected discounted cash flow models used to estimate the fair values of our IPR&D assets, acquired in connection with the Ciclofilinacquisition, reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including: (i) probability of successfully completing clinical trials and obtaining regulatory approval; (ii) market size, market growth projections, and market share; (iii) estimates regarding the timing of and the expected costs to advance clinical programs to commercialization; (iv) estimates of future cash flows from potential product sales; and (v) a discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related impairments, if any. The annual, or interim if events or changes in circumstances indicate that it is more likely than not that the asset is impaired), IPR&D impairment test is performed by comparing the fair value of the asset to the asset's carrying amount. When testing indefinite-lived intangibles for impairment, we may assess qualitative factors for its indefinite-lived intangibles to determine whether it is more likely than not that the asset is impaired. Alternatively, we may bypass this qualitative assessment for our indefinite-lived intangible asset and perform the quantitative impairment test that compares the fair value of the indefinite-lived intangible asset with the asset's carrying amount. If IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to the revised fair value with the related impairment charge recognized in the period in which the impairment occurs. If the carrying value of the asset becomes impaired as the result of unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing our programs, we could incur significant charges in the period in which the impairment occurs. We performed a quantitative assessment of IPR&D for fiscal year 2021 and determined that the asset was not impaired. We performed a qualitative assessment of IPR&D for fiscal year 2020 and determined that it was not more likely than not that IPR&D was impaired. There was no impairment of IPR&D for the year ended December 31, 2021and 2020.
ASC Topic 718, Compensation-Stock Compensation ("ASC 718"), requires companies to measure the cost of employee and non-employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. Generally, we issue stock options with only service-based vesting conditions and record the expense for awards using the straight-line method (see Note 9 to the consolidated financial statements). We account for awards granted to employees that are in excess of what is available to grant as a liability and is recorded at fair value each reporting period in the consolidated financial statements. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The estimated expected stock volatility is based on the historical volatility of our common stock. The expected term of stock options has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the
U.S. Treasuryyield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements
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