Unless the context indicates otherwise, all references to "OncoSec," "the Company," "we," "us" and "our" in this report refer toOncoSec Medical Incorporated and its consolidated subsidiary. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included in this report. This discussion and analysis of our financial condition and results of operations is not a complete description of our business or the risks associated with an investment in our common stock. As a result, this discussion and analysis should be read together with our condensed consolidated financial statements and related notes included in this report, as well as the other disclosures in this report and in the other documents we file from time to time with theSecurities and Exchange Commission , orSEC , including our Annual Report on Form 10-K for our fiscal year endedJuly 31, 2021 filed with theSEC onOctober 29, 2021 (the "Annual Report"). Pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by theSEC , in preparing this discussion and analysis, we have presumed that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in the Annual Report. This discussion and analysis and the other disclosures in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements relate to future events or circumstances or our future performance and are based on our current assumptions, expectations and beliefs about future developments and their potential effect on our business. All statements in this report that are not statements of historical fact could be forward-looking statements. The forward-looking statements in this discussion and analysis and elsewhere in this report include statements about, among other things, the status, progress and results of our clinical programs and our expectations regarding our liquidity and performance, including our expense levels, and the potential impact of the COVID-19 pandemic. Forward-looking statements are only predictions and are not guarantees of future performance, and they are subject to known and unknown risks, uncertainties and other factors, including the risks described under the heading "Risk Factors" herein and in Part I, Item IA of the Company's most recent Annual Report on Form 10-K and similar discussions contained in the other documents we file from time to time with theSEC . In light of these risks, uncertainties and other factors, the forward-looking events and circumstances described in this report may not occur and our results, levels of activity, performance or achievements could differ materially from those expressed in or implied by any forward-looking statements we make. As a result, you should not place undue reliance on any of our forward-looking statements. Forward-looking statements speak only as of the date they are made, and unless required to by law, we undertake no obligation to update or revise any forward-looking statement for any reason, including to reflect new information, future developments, actual results or changes in our expectations. Overview We are a late-stage immuno-oncology company focused on designing, developing and commercializing innovative, proprietary, intra-tumoral DNA-based therapeutics to stimulate and to augment anti-tumor immune responses for the treatment of cancers. Our core technology platform ImmunoPulse® is a drug-device therapeutic modality platform comprised of proprietary intratumoral electroporation ("EP") delivery devices (the "OMS EP Device") and a proprietary DNA plasmid that triggers transient expression of target protein in cells. The OMS EP Device is designed to deliver plasmid DNA-encoded drugs directly into a solid tumor and promote an immunological response against the cancer. The OMS EP Device can be adapted to treat different tumor types, and consists of an electrical pulse generator, a reusable handle and disposable applicators. Our lead product candidate is a DNA-encoded interleukin-12 ("IL-12") called tavokinogene telseplasmid ("TAVO™"). The OMS EP Device is used to deliver TAVO™ intratumorally, with the aim of reversing the immunosuppressive microenvironment in the treated tumor. The activation of the appropriate inflammatory response can drive a systemic anti-tumor response against untreated tumors in other parts of the body. In 2017, we received Fast Track Designation and Orphan Drug Designation from theU.S. Food and Drug Administration ("FDA") for TAVO™ in metastatic melanoma, which could qualify TAVO™ for expedited FDA review, a rolling Biologics License Application review and certain other benefits.
Our current focus is to pursue our study of TAVO™ in combination with KEYTRUDA® (pembrolizumab) in melanoma and triple negative breast cancer.
28 Performance Outlook We expect to use our available working capital in the near term primarily for the advancement of our existing and planned clinical programs, including performance of the KEYNOTE-695 and KEYNOTE-890 studies and, to a lesser extent, the continuation of our other clinical trials and studies. We anticipate our spending on clinical programs and the development of our next-generation OMS EP Device will continue throughout our current fiscal year, primarily in support of the KEYNOTE-695 and KEYNOTE-890 studies, while our spending on research and development programs will be prioritized, based on our focus on the KEYNOTE-695 and KEYNOTE-890 studies. We expect our cash-based general and administrative expenses to remain relatively flat in the near term, as we seek to continue to leverage internal resources and automate processes to decrease our outside services expenses. See "Results of Operations" below for more information.
COVID-19 Our operational and financial performance have been affected by the COVID-19 pandemic. Our clinical trials have experienced delays in patient enrollment, potentially due to prioritization of hospital resources toward the COVID-19 pandemic or concerns among patients about participating in clinical trials during a public health emergency. The COVID-19 pandemic is also affecting the operations of government entities, such as the FDA, as well as contract research organizations, third-party manufacturers, and other third-parties upon whom we rely. The extent of the impact on our operations cannot be ascertained at this time.
Results of Operations for the Three Months Ended
The unaudited financial data for the three months endedApril 30, 2022 and 2021 is presented in the following table and the results of these two periods are included in the discussion thereafter. April 30, April 30, $ % 2022 2021 Change Change Revenue $ - $ - $ - - Expenses Research and development 7,030,607 7,589,779 (559,172 ) (7 ) General and administrative 2,517,105 2,847,151 (330,046 ) (12 ) Loss from operations (9,547,712 ) (10,436,930 ) 889,218 (9 )
Gain on extinguishment of debt - 960,790
(960,790 ) (100 ) Other income, net 2,182 1,723 459 27 Interest expense (2,701 ) (1,732 ) (969 ) 56 Foreign currency exchange gain (loss), net (36,191 ) 35,365 (71,556 ) (202 ) Loss before income taxes (9,584,422 ) (9,440,784 ) (143,638 ) 2 Income tax (benefit) expense (3,337,117 ) 1,542 (3,338,659 ) (216,515 ) Net loss$ (6,247,305 ) $ (9,442,326 ) $ 3,195,021 (34 ) Revenue
We have not generated any revenue since our inception, and we do not anticipate generating revenue in the near term.
29
Research and Development Expenses
Our research and development expenses decreased by approximately$0.6 million , from$7.6 million during the three months endedApril 30, 2021 to$7.0 million during the three months endedApril 30, 2022 . This decrease was primarily due to: (i) a$0.8 million decrease in clinical trial related costs to support our various clinical studies and costs for discovery research and product development and (ii) a$0.2 million decrease in stock-based compensation to employees and consultants. These decreases were partially offset by a$0.4 million increase in payroll and related benefit expenses, primarily due to bonuses awarded during the three months endedApril 30, 2022 , while no bonuses were awarded during the three months endedApril 30, 2021 . General and Administrative Our general and administrative expenses decreased by$0.3 million , from$2.8 million during the three months endedApril 30, 2021 , to$2.5 million during the three months endedApril 30, 2022 . This decrease was largely due to the following: (i) a$0.5 million decrease in stock-based compensation to employees and consultants, and (ii) a$0.3 million decrease in consulting expenses. These decreases were partially offset by a$0.2 million increase in payroll and related benefit expenses primarily due to bonuses awarded during the three months endedApril 30, 2022 , while no bonuses were awarded during the three months endedApril 30, 2021 , and a$0.2 million increase in insurance costs related to increased D&O insurance premiums.
Gain on Extinguishment of Debt
Gain on extinguishment of debt decreased by approximately$1.0 million , from$1.0 million for the three months endedApril 30, 2021 to$0 for the three months endedApril 30, 2022 . During the three months endedApril 30, 2021 , the loan under the Paycheck Protection Program (the "PPP") under the CARES Act was forgiven, which resulted in a gain on extinguishment of debt of approximately$1.0 million .
Foreign Currency Exchange Gain (Loss), Net
Foreign currency exchange gain (loss), net, decreased by approximately$0.07 million from a$0.04 million gain during the three months endedApril 30, 2021 to a$0.04 million loss for the three months endedApril 30, 2022 . This decrease was primarily due to unrealized foreign currency transaction loss recognized in connection with our Australian subsidiary's intercompany loan. Income Tax (Benefit) Expense InApril 2022 , the Company received$3.3 million in net proceeds from the sale of its New Jersey Net Operating Losses ("NOL") under the State of New Jersey NOL Transfer Program. In 2021, the net proceeds from the sale of its New Jersey NOLs under the State of New Jersey NOL Transfer Program were received in June. 30
Results of Operations for the Nine Months Ended
The unaudited financial data for the nine months ended
April 30, April 30, $ % 2022 2021 Change Change Revenue $ - $ - $ - - Expenses Research and development 20,501,917 26,304,520 (5,802,603 ) (22 ) General and administrative 8,377,722 8,198,580 179,142 2 Loss from operations (28,879,639 ) (34,503,100 ) 5,623,461 (16 )
Gain on extinguishment of debt - 960,790
(960,790 ) (100 ) Other income (expense), net (2,412 ) 660 (3,072 ) (465 ) Interest expense (16,128 ) (12,587 ) (3,541 ) 28 Foreign currency exchange gain (loss), net (399,338 ) 187,039 (586,377 ) (314 ) Loss before income taxes (29,297,517 ) (33,367,198 ) 4,069,681 (12 ) Income tax expense (3,334,167 ) 4,492 (3,338,659 ) (74,325 ) Net loss$ (25,963,350 ) $ (33,371,690 ) $ 7,408,340 (22 ) Revenue
We have not generated any revenue since our inception, and we do not anticipate generating revenue in the near term.
Research and Development Expenses
Our research and development expenses decreased by approximately$5.8 million , from$26.3 million during the nine months endedApril 30, 2021 to$20.5 million during the nine months endedApril 30, 2022 . This decrease was primarily due to the following: (i) a$5.0 million decrease in clinical trial-related costs to support our various clinical studies and costs for discovery research and product development, and (ii) a$0.9 million decrease in stock-based compensation expense to employees and consultants, as there was an accelerated vesting of options during the nine months endedApril 30, 2021 that was not repeated during the nine months endedApril 30, 2022 . General and Administrative Our general and administrative expenses increased by approximately$0.2 million , from$8.2 million during the nine months endedApril 30, 2021 , to$8.4 million during the nine months endedApril 30, 2022 . This increase was largely due to the following: (i) a$0.9 million increase in legal costs, primarily related to$1 million in insurance recoveries received in connection with prior litigation with Alpha Holdings, Inc. in the prior period, (ii) a$0.6 million increase in insurance costs related to increased D&O insurance premiums, and (iii) a$0.2 million increase in director fees paid to the members of the Leadership Committee of the Company's Board of Directors. These increases were partially offset by a$1.4 million decrease in stock-based compensation expense to employees and consultants, as there was an accelerated vesting of options during the nine months endedApril 30, 2021 that was not repeated during the nine months endedApril 30, 2022 .
Gain on Extinguishment of Debt
Gain on extinguishment of debt decreased by approximately$1.0 million , from$1.0 million for the nine months endedApril 30, 2021 to$0 for the nine months endedApril 30, 2022 . During the nine months endedApril 30, 2021 , the PPP loan was forgiven, which resulted in a gain on extinguishment of debt of approximately$1.0 million . 31
Foreign Currency Exchange Gain (Loss), Net
Foreign currency exchange gain (loss), net, decreased by approximately$0.6 million from a$0.2 million gain during the nine months endedApril 30, 2021 to a$0.4 million loss for the nine months endedApril 30, 2022 . This decrease was primarily due to unrealized foreign currency transaction loss recognized in connection with the Australian subsidiary's intercompany loan. Income Tax (Benefit) Expense InApril 2022 , the Company received$3.3 million in net proceeds from the sale of its NOL under the State of New Jersey NOL Transfer Program. In 2021, the net proceeds from the sale of its New Jersey NOLs under the State of New Jersey NOL Transfer Program were received in June.
Liquidity and Capital Resources
Working Capital
The following table and subsequent discussion summarize our working capital as of each of the periods presented:
At AtApril 30, 2022 July 31, 2021
Current assets$ 21,135,929 $ 49,179,424 Current liabilities 4,686,904 7,961,916 Working capital$ 16,449,025 $ 41,217,508 Current Assets Current assets as ofApril 30, 2022 decreased by$28.1 million to$21.1 million , from$49.2 million as ofJuly 31, 2021 . This decrease was primarily related to the decrease of cash in the amount of$26.5 million and the decrease of prepaid insurance in the amount of$1.1 million . The decrease in cash was due to cash used to support our operations during the nine months endedApril 30, 2022 . The decrease in prepaid insurance was due to amortization of the prepaid director and officer policy. Current Liabilities
Current liabilities as of
Cash Flow
Cash Used in Operating Activities
Net cash used in operating activities for the nine months endedApril 30, 2022 was$25.2 million , as compared to$33.4 million for the nine months endedApril 30, 2021 . The$8.2 million decrease in cash used in operating activities was primarily attributable to a decrease in cash used to support our operating activities, including but not limited to, our clinical trials, research and development activities and general working capital requirements.
Cash Used in Investing Activities
Net cash used in investing activities for the nine months endedApril 30, 2022 was$0.2 million , as compared to$0.8 million for the nine months endedApril 30, 2021 . During the nine months endedApril 30, 2022 , the Company purchased fixed assets for use in its clinical trials. During the nine months endedApril 30, 2021 , the Company licensed generator technology and purchased property and equipment for use in its clinical trials and other research and development
efforts. 32
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was$0.9 million for the nine months endedApril 30, 2022 , as compared to$68.2 million cash provided by financing activities for the nine months endedApril 30, 2021 . Net cash used in financing activities during the nine months endedApril 30, 2022 was primarily attributable to payments on a note payable. Net proceeds during the nine months endedApril 30, 2021 was primarily attributable to the$52.6 million net proceeds received from theAugust 2020 andJanuary 2021 offerings,$5.0 million received from the co-promotion agreement with Sirtex,$5.3 million received from warrant and option exercises and$5.8 million from the purchase of shares under the CGP and Sirtex stock purchase agreements originally entered into onOctober 10, 2019 .
Uses of Cash and Cash Requirements
Our primary uses of cash have been to finance clinical and research and development activities focused on the identification and discovery of new potential product candidates, the development of innovative and proprietary medical approaches for the treatment of cancer, and the design and advancement of pre-clinical and clinical trials and studies related to our pipeline of product candidates. We also use our capital resources on general and administrative activities and building and strengthening our corporate infrastructure, programs and procedures to enable compliance with applicable federal, state and local laws and regulations. Our primary objectives for the next 12 months are to continue the advancement of our KEYNOTE-695 and KEYNOTE-890 studies and, to a lesser extent, our other ongoing clinical trials and studies, and to continue our research and development activities for our next-generation EP device and drug discovery efforts. In addition, we expect to pursue capital-raising transactions, which could include equity or debt financings, in the near term to fund our existing and planned operations and acquire and develop additional assets and technology consistent with our business objectives as opportunities arise.
Going Concern and Management's Plans
The Company has sustained losses in all reporting periods since inception, with an accumulated deficit of approximately$277.7 million as ofApril 30, 2022 . These losses are expected to continue for an extended period of time. Further, the Company has never generated any cash from its operations and does not expect to generate any cash in the near term. The aforementioned factors raise substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the condensed consolidated financial statements. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. As ofJune 1, 2022 , the Company had cash and cash equivalents of$17.3 million . Since inception, cash flows from financing activities has been the primary source of the Company's liquidity. Based on its current cash levels, the Company believes its cash resources are insufficient to meet the Company's anticipated needs for the 12 months following the date the condensed consolidated financial statements are issued.
The Company recognizes it will need to raise additional capital to continue operating its business and fund its planned operations, including research and development, clinical trials and, if regulatory approval is obtained, commercialization of its product candidates. In addition, the Company will require additional financing if it desires to in-license or acquire new assets, research and develop new compounds or new technologies and pursue related patent protection, or obtain any other intellectual property rights or other assets. There is no assurance that additional financing will be available to the Company when needed, that management will be able to obtain financing on terms acceptable to the Company, or whether the Company will become profitable and generate positive operating cash flow. The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of our clinical development programs. Similarly, if our common stock is delisted from the Nasdaq Capital Market, it may limit our ability to raise additional funds. See "Nasdaq Deficiency Notice" below. The ongoing COVID-19 pandemic has also caused volatility in the global financial markets and threatened a slowdown in the global economy, which may negatively affect our ability to raise additional capital on attractive terms or at all. If the Company is unable to raise sufficient additional funds when needed, on favorable terms or at all, the Company will not be able to continue the development of its product candidates as currently planned or at all, will need to reevaluate its planned operations and may need to delay, scale back or eliminate some or all of its development programs, reduce expenses or cease operations, any of which would have a significant negative impact on its prospects and financial condition. 33 Sources of Capital We have not generated any revenue since our inception, and we do not anticipate generating revenue in the near term. Historically, we have raised the majority of the funding for our business through offerings of our common stock and warrants to purchase our common stock. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders would experience further dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur debt, our fixed payment obligations, liabilities and leverage relative to our equity capitalization would increase, which could increase the cost of future capital. Further, the terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such as limitations on our ability to incur additional debt or issue additional equity or other operating restrictions that could adversely affect our ability to conduct our business, and any such debt could be secured by any or all of our assets pledged as collateral. Additionally, we may incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other costs. Nasdaq Deficiency Notice OnJune 2, 2022 , we received notice (the "Notice") from theNasdaq Stock Market LLC ("Nasdaq") that the Company is not in compliance with Nasdaq Listing Rule 5550(a)(2), as the minimum bid price of our common stock had been below$1.00 per share for 30 consecutive business days as of the date of the Notice. The Notice has no immediate effect on the listing of our common stock, which will continue to trade at this time on the Nasdaq Capital Market under the symbol "ONCS." In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have a period of 180 calendar days, or untilNovember 29, 2022 , to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed$1.00 per share for at least ten consecutive business days during this 180 calendar day period. In the event we do not regain compliance byNovember 29, 2022 , we may be eligible for an additional 180 calendar day grace period if the Company meets the continued listing requirement for market value of publicly held shares ($1 million ) and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price, and we provide written notice to Nasdaq of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If we do not regain compliance within the allotted compliance period(s), Nasdaq will provide notice that our common stock will be subject to delisting from the Nasdaq Capital Market. In that event, we may appeal such delisting determination to a hearings panel. We are currently evaluating our alternatives to resolve the listing deficiency. To the extent that we are unable to resolve the listing deficiency, there is a risk that our common stock may be delisted from Nasdaq, which would adversely impact liquidity of our common stock and potentially result in even lower bid prices for our common stock. OnNovember 29, 2021 , we notified Nasdaq thatRobert E. Ward had resigned as a member of the Board of Directors and the Company's Audit Committee, as disclosed on our Current Report filed on Form 8-K onNovember 30, 2021 . After giving effect toMr. Ward's resignation, the Company's Audit Committee no longer consisted of three independent members as required by Nasdaq Listing Rule 5605(c)(2)(A). OnDecember 8, 2021 , we received a letter from Nasdaq noting that we no longer complied with the requirement of Listing Rule 5605. The letter also acknowledged that the Listing Rules provide a cure period in order for us to regain compliance until the earlier of our next annual meeting of stockholders orNovember 23, 2022 . OnJune 9, 2022 , the Board of Directors appointed Mr.Joon Kim , an incumbent independent director, to the Audit Committee. OnJune 13, 2022 , Nasdaq confirmed that we had regained compliance under Listing Rule 5605. Critical Accounting Policies Use of Estimates The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles inthe United States of America ("U.S. GAAP"), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Such estimates include the Company's ability to continue as a going concern and certain calculations related to that determination, stock-based compensation, the accrual of research, product development and clinical obligations, impairment of long-lived assets, determining the Incremental Borrowing Rate for calculating Right-Of-Use ("ROU") assets and lease liabilities and accounting for income taxes, including the related valuation allowance on the deferred tax asset and uncertain tax positions. The Company bases its estimates on historical experience and on various other assumptions that it believes 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, the Company reviews its estimates to ensure that they appropriately reflect changes in the business or as new information becomes available. Actual results may differ from these estimates. 34
Impairment of Long-Lived Assets
The Company periodically assesses the carrying value of intangible and other long-lived assets, and whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. The assets are considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment, which includes consideration of the following events or changes in circumstances: ? the asset's ability to continue to generate income from operations and positive cash flow in future periods; ? loss of legal ownership or title to the asset(s); ? significant changes in the Company's strategic business objectives and utilization of the asset(s); and ? the impact of significant negative industry or economic trends. If the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined by the application of discounted cash flow models to project cash flows from the assets. In addition, the Company bases estimates of the useful lives and related amortization or depreciation expense on its subjective estimate of the period the assets will generate revenue or otherwise be used by it. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less selling costs. The Company also periodically reviews the lives assigned to long-lived assets to ensure that the initial estimates do not exceed any revised estimated periods from which the Company expects to realize cash flows from its assets.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects, as well as partner-funded collaborative research and development activities. These costs include direct and research-related overhead expenses, which include salaries, stock-based compensation and other personnel-related expenses, facility costs, supplies, depreciation of facilities and laboratory equipment, as well as research consultants and the cost of funding research at universities and other research institutions, and are expensed as incurred. Costs to acquire technologies that are utilized in research and development that have no alternative future use, are expensed when incurred. In accordance with ASC 730-20, the Company accounts for upfront, non-refundable research and development payments received from a related party as a long-term liability as there has not been a substantive and genuine transfer of risk and there is a presumption that the Company is obligated to repay the related party.
Accruals for Research and Development Expenses and Clinical Trials
The Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company accounts for these expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company determines accrual estimates through financial models and takes into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company's clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. 35 Equity-Based Awards The Company grants equity-based awards (typically stock options or restricted stock units) under our stock-based compensation plan and outside of our stock-based compensation plan, with terms generally similar to the terms under our stock-based compensation plan. The Company estimates the fair value of stock option awards using the Black-Scholes option valuation model. For employees, directors and consultants, the fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. The Company estimates the fair value of restricted stock unit awards based on the closing price of the Company's common stock on the date of issuance.
Our Australian, wholly-owned, subsidiary incurs research and development expenses, primarily in the course of conducting clinical trials. The Australian research and development activities qualify for the Australian government's tax credit program, which provides a 43.5% credit for qualifying research and development expenses. The tax credit does not depend on our generation of future taxable income or ongoing tax status or position. Accordingly, the credit is not considered an element of income tax accounting under ASC 740 and is recorded against qualifying research and development expenses in the Company's condensed consolidated statements of operations. Leases
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets represent the Company's right to use an underlying asset during the lease term, and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on the Company's condensed consolidated balance sheets. Lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using our incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the condensed consolidated balance sheet. The Company's leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease and non-lease components as a single lease component for
all its leases.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 to our condensed consolidated financial statements included in this report.
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