Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, contains forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described below. Please also see the section entitled “Note Regarding Forward-Looking Statements.”
Overview
We are a clinical-stage biopharmaceutical company advancing TCE bispecific antibodies for solid tumors. Our goal is to build an innovative portfolio of TCE bispecific therapeutics, including CTIM-76, a CLDN6 x CD3 TCE, CT-95, an MSLN x CD3 TCE, and CT-202, a Nectin-4 x CD3 TCE.
CTIM-76 is a CLDN6 x CD3 TCE that is intended to redirect T-cell-mediated lysis toward malignant cells expressing CLDN6. CLDN6 is a tight junction membrane protein target expressed in multiple solid tumors and absent from or expressed at low levels in healthy adult tissues. We have an active IND for CTIM-76 with the FDA. We dosed the first patient in our CTIM-76 Phase 1 clinical trial in January 2025. We expect to share Phase 1a interim data for the CTIM-76 trial in June 2026.
CT-95 is an MSLN x CD3 TCE that is intended to redirect T-cell-mediated lysis toward malignant cells expressing MSLN. MSLN is a membrane protein overexpressed in approximately 30% of cancers. We dosed the first patient in our CT-95 Phase 1 trial in April 2025. We expect to share Phase 1a interim data for the CT-95 trial in September 2026.
CT-202 is a Nectin-4 x CD3 TCE that targets Nectin-4, a cell surface protein that is highly and frequently overexpressed in a variety of solid tumors, including bladder, colorectal, lung and breast. Nectin-4 is a clinically validated target for cancer therapy using a traditional antibody-drug conjugate, but it is also associated with certain adverse events, including neuropathy and rash. CT-202 is a pH-dependent TCE that is designed to be preferentially active within the tumor microenvironment. We submitted our application to the HREC in March 2026 to support the initiation of a first-in-human trial for CT-202. We expect to dose the first patient in our CT-202 Phase 1 trial in the third quarter of 2026.
We were incorporated in April 2015 under the laws of the State of Delaware. Since inception, we have devoted substantially all of our resources to developing product and technology rights, conducting research and development, organizing and staffing our company, business planning and raising capital. We operate as one business segment and have incurred recurring losses, the majority of which are attributable to research and development activities, and negative cash flows from operations. We have funded our operations primarily through the sale of common stock, warrants, convertible debt and convertible preferred stock. Our net loss was $36.1 million for the year ended December 31, 2025. As of December 31, 2025, we had an accumulated deficit of $130.9 million.
Asset Acquisition Agreements
CTIM-76: Integral Molecular License Agreement
In April 2021, we entered into a collaboration and licensing agreement with Integral Molecular, Inc. (“Integral”) (the “Integral License Agreement”) for the development of a CLDN6 bsAb for cancer therapy. On February 29, 2024, we further amended (the "Second Amendment") the Research Collaboration and License Agreement (the “Integral License Agreement”, as amended) with Integral to reflect updated financial terms. In the course of our further due diligence review of CTIM-76, we determined that certain of the licensed rights under the Integral License Agreement may incorporate intellectual property rights currently held by a third party. Specifically, at the time of the Second Amendment, we were aware of issued patents in the United States and certain foreign jurisdictions expiring in January 2034, and then in 2025 became aware of a patent that issued in the United States expiring in March 2042, in each instance that potentially covers certain parts of the intellectual property included in CTIM-76. While we believe we will have reasonable defenses against any potential claim of infringement, we may
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not be successful in such efforts, and we also may not be able to obtain a license to such patent on commercially reasonable terms, or at all.
As part of the Second Amendment, Integral’s right to receive certain future payments was reduced as follows: aggregate development and regulatory milestone payments were reduced from $55 million to $15 million, aggregate sales milestone payments were reduced from $130 million to $12.5 million, and a tiered royalty of 8-12% that commenced at first commercial sale was reduced to a flat royalty rate of 6% on net sales beginning no sooner than February 1, 2034. The Second Amendment also narrowed the license grant from Integral to us to only cover CTIM-76, removed any further obligation of us to reimburse Integral for any independently obtained research funding Integral applied against CTIM-76 research, and included mutual releases by the parties.
The reduced development and regulatory milestones now reflect a payment due at each of: first patient’s first screening visit in a Phase 1b/2 or Phase 2 clinical trial for CTIM-76, first patient’s first screening visit in a Phase 3 clinical trial for CTIM-76, United States marketing approval for CTIM-76, European Union marketing approval for CTIM-76, United Kingdom marketing approval for CTIM-76, and Japan marketing approval for CTIM-76. The amended commercial milestones now also reflect a payment due upon the achievement of annual net sales of $500 million and annual net sales of $1 billion.
CT-95: Link Purchase Agreement
On July 9, 2024, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which we acquired CT-95 (formerly known as LNK-101), from Link (assignment for the benefit of creditors), LLC (“Link”), which succeeded to the assets of Link Immunotherapeutics Inc. The FDA previously cleared the IND application for CT-95.
Pursuant to the Asset Purchase Agreement, we purchased all of the assets of Link associated with CT-95, including patent rights, know-how, regulatory filings, and inventory of drug substance and drug product (the “Transferred Assets”), on an “as is” and “where is” basis. CT-95 patents are currently being prosecuted and/or maintained in the United States, Europe, Canada, Australia, Japan and Taiwan. We also assumed certain liabilities relating to the Transferred Assets. In consideration of the Transferred Assets, we made a one-time payment to Link of $3.75 million.
CT-202: BioAtla License Agreement
On September 23, 2024, we entered into a license agreement (the “BioAtla License Agreement”) with BioAtla, Inc. ("Bioatla"), pursuant to which we obtained an exclusive, worldwide license to develop, manufacture and commercialize two licensed antibodies (the “BioAtla Assets”), including BA3362 (renamed by the Company as CT-202), BioAtla’s Nectin-4 x CD3 TCE bispecific antibody.
As partial consideration for the exclusive license under the BioAtla License Agreement, we made an upfront payment of $11.0 million, and BioAtla is eligible to receive up to $122.5 million in additional milestone payments based upon the achievement of specified pre-clinical, clinical, development and commercial milestones, as well as tiered mid-single-digit to low double-digit royalties on future net sales for products containing the BioAtla Assets, subject to standard reductions. In October 2025, we achieved a $2.0 million development milestone under the BioAtla License Agreement, which we paid to BioAtla in the fourth quarter of 2025.
Financial Overview
Currently, our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, as well as general and administrative expenditures. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or any future product candidates. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our current and any future product candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval. In addition, if we obtain regulatory approval for any product candidate, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, we have incurred and continue to incur significant costs associated with operating as a public company, including legal,
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accounting, investor relations and other expenses. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenses on other research and development activities.
As of December 31, 2025, we had cash and cash equivalents of $66.0 million, which we expect will be sufficient to fund the estimated duration of the Phase 1a dose escalation portions of our CTIM-76 and CT-95 trials, the estimated expenses to initiate patient enrollment in a first-in-human trial for CT-202, as well as our operations into mid-2027. If the Company is unable to obtain additional financing, the lack of liquidity could have a material adverse effect on the Company’s future prospects.
We will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we plan to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic transactions and/or marketing, distribution or licensing arrangements. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to secure adequate additional funding, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay our pursuit of potential in-licenses or acquisitions.
At-the-Market Offering
On December 2, 2024, we entered into a Sales Agreement (the “ATM Sales Agreement”) with Leerink Partners LLC (the “Agent”). Pursuant to the terms of the ATM Sales Agreement, we may offer and sell shares of common stock having an aggregate offering amount of up to $75.0 million from time to time through the Agent (the “ATM Shares”). Sales of the ATM Shares may be made in sales deemed to be an “at-the-market offering” as defined in Rule 415 under the Securities Act. On December 23, 2024, we sold 14,705,882 shares of our common stock under the ATM Sales Agreement for net proceeds of approximately $14.5 million. On October 24, 2025, we entered into Amendment No. 1 to Sales Agreement (the “Amendment”, and together with the ATM Sales Agreement, the “Amended ATM Sales Agreement”) to provide for an increase in the aggregate offering amount under the Amended ATM Sales Agreement, such that following the filing of a new prospectus supplement with respect to the ATM Shares on October 24, 2025, we may offer and sell ATM Shares having an aggregate offering price of up to $75.0 million, exclusive of ATM Shares previously sold in December 2024. The Agent will be entitled to a commission from the Company of up to 3.0% of the gross proceeds from the sale of ATM Shares sold under the Amended ATM Sales Agreement.
Private Placement
On May 1, 2024, we entered into a securities purchase agreement (the “Purchase Agreement”) for the private placement (the “Private Placement”) of (i) 59,032,259 shares (the “PIPE Shares”) of our common stock at a purchase price of $1.55 per PIPE Share, and (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase 5,482,741 shares of common stock (the “Warrant Shares”) at a purchase price of $1.549 per Pre-Funded Warrant. The Pre-Funded Warrants have an exercise price of $0.001 per share of common stock, are immediately exercisable and remain exercisable until exercised in full. The aggregate gross proceeds for the Private Placement were approximately $100 million, before deducting offering expenses of $5.2 million, and the Private Placement closed on May 6, 2024. In September 2025, 2,178,200 Pre-Funded Warrants were exercised on a cashless basis, resulting in the issuance of 2,174,983 shares of common stock. As of December 31, 2025, 3,304,541 Pre-Funded Warrants remained outstanding.
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Components of Our Results of Operations
Operating Expenses
Research and Development Expenses
Research and development expenses have consisted primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred, including:
• expenses incurred to conduct the necessary discovery-stage laboratory work, preclinical studies and clinical trials required to obtain regulatory approval;
• personnel expenses, including salaries, benefits and share-based compensation expense for our employees and consultants engaged in research and development functions;
• costs of funding research performed by third parties, including pursuant to agreements with contract research organizations (“CROs”) that conduct our clinical trials, as well as investigative sites, consultants and CROs that conduct our preclinical and clinical studies;
• expenses incurred under agreements with contract manufacturing organizations, including manufacturing scale-up expenses, milestone-based payments, and the cost of acquiring and manufacturing preclinical study and clinical trial materials;
• fees paid to consultants who assist with research and development activities;
• license payments and acquisitions of acquired in-process research and development assets that have no alternative future use;
• expenses related to regulatory activities, including filing fees paid to regulatory agencies; and
• allocated expenses for facility costs, including rent, utilities and maintenance.
We track outsourced development costs and other external research and development costs to specific product candidates on a program-by-program basis. However, we do not track our internal research and development expenses on a program-by-program basis as they primarily relate to compensation, early research and other costs which are deployed across multiple projects under development.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we increase personnel costs, including share-based compensation, conduct our clinical trials, including later-stage clinical trials, for current and any future product candidates and prepare regulatory filings for our current and any future product candidates.
General and Administrative Expenses
General and administrative expenses have consisted primarily of personnel expenses, including salaries, benefits and share-based compensation expense, for employees and consultants in executive, finance and accounting, legal, operations support, information technology and business development functions. General and administrative expense also includes corporate facility costs not otherwise included in research and development expense, including rent, utilities and insurance, as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services.
We expect that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization efforts and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, legal support and accountants, among other expenses. Additionally, we will continue to incur significant costs associated with being a public company, including expenses related to services associated with
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maintaining compliance with the requirements of Nasdaq and the SEC, insurance and investor relations costs. If any of our current or future product candidates obtain U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.
Interest Income
Interest income consists of interest earned on our cash and cash equivalents.
Other Income (Expense)
Other income (expense) is primarily due to the recognition of foreign currency gains or losses as a result of exchange rate fluctuations on transactions denominated in a currency other than our functional currency.
Results of Operations
Comparison of the Years Ended December 31, 2025 and 2024
The following table sets forth our results of operations for the years ended December 31, 2025 and 2024:
Year ended December 31,
2025
2024
$ Change % Change
Operating expenses:
Research and development $ 31,856,252 $ 22,701,335 $ 9,154,917 40 %
General and administrative 7,846,379 7,222,565 623,814 9 %
Loss from operations (39,702,631) (29,923,900) (9,778,731) 33 %
Interest income 3,378,545 3,200,224 178,321 6 %
Other income (expense) 200,471 (1,428) 201,899 *
Net loss $ (36,123,615) $ (26,725,104) $ (9,398,511) 35 %
* Percentage not meaningful
Research and Development Expenses
Research and development expenses increased by approximately $9.2 million for the year ended December 31, 2025 as compared to 2024. The following table summarizes our research and development expenses for the year ended December 31, 2025 as compared to 2024:
Year ended December 31,
2025
2024
$ Change % Change
CTIM-76 $ 6,843,564 $ 5,581,896 $ 1,261,668 23 %
CT-95 4,865,479 4,871,254 (5,775) — %
CT-202 15,573,393 11,151,496 4,421,897 40 %
Personnel-related costs 4,368,441 1,032,516 3,335,925 323 %
Other research and development 205,375 64,173 141,202 220 %
$ 31,856,252 $ 22,701,335 $ 9,154,917 40 %
CTIM-76 expenditures increased by $1.3 million, primarily due to an increase of $3.1 million in clinical costs as a result of continued progression of our ongoing Phase 1 clinical trial. This increase was partially offset by a decrease of $1.0 million in preclinical costs as a result of the completion of IND-enabling studies in early 2024 and a decrease of $0.8 million in contract manufacturing costs. CT-95 expense of $4.9 million for 2025 primarily represents $3.7 million in clinical costs and $1.2 million in preclinical, contract manufacturing, and diagnostic development expenses incurred. CT-95 expense of $4.9 million for 2024 primarily represents consideration paid of $3.75 million to acquire the asset from Link in July 2024 and approximately $1.1 million in other expenses, the majority of which was $0.6 million of clinical start up costs . CT-202 expense of $15.6 million for 2025 primarily represents $8.7 million in contract manufacturing costs, $4.7 million in preclinical expenses, and a $2.0 million
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expense related to achieving a development milestone under the BioAtla License Agreement. CT-202 expense of $11.2 million for 2024 primarily represents the $11.0 million consideration paid under the BioAtla License Agreement entered into in September 2024. Personnel-related costs, which include salaries, benefits and stock-based compensation expense, increased by approximately $3.3 million, primarily due to higher headcount over the prior year as well as termination benefits incurred related to certain employee departures. Other research and development expense increased by approximately $0.1 million, due to allocated expenses as a result of higher headcount over the prior year.
General and Administrative Expenses
General and administrative expenses increased by $0.6 million from $7.2 million for the year ended December 31, 2024 to $7.8 million for the year ended December 31, 2025. The increase was primarily driven by a $0.7 million increase in salaries and personnel-related costs, including share-based compensation, mainly due to higher headcount and compensation adjustments. The increase was partially offset by a decrease in professional fees of $0.1 million.
Interest Income
Interest income increased by approximately $0.2 million for the year ended December 31, 2025 as compared to 2024, primarily due to additional interest earned from higher cash and cash equivalent balances following the Private Placement and other sales of common stock.
Other Income (Expense)
Other income was $0.2 million for the year ended December 31, 2025 as compared to other expense of $1,400 in 2024, primarily due to foreign currency gains in 2025 as a result of exchange rate fluctuations on transactions denominated in a currency other than our functional currency.
Liquidity and Capital Resources
Overview
Since our inception, we have not recognized any revenue and have incurred operating losses and negative cash flows from our operations. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. Since our inception through December 31, 2025, we have funded our operations through the sale of common stock, warrants, convertible debt and convertible preferred stock. As of December 31, 2025, we had $66.0 million in cash and cash equivalents and an accumulated deficit of $130.9 million.
We expect our cash and cash equivalents at December 31, 2025 to fund the estimated duration of the Phase 1a dose escalation portions of our CTIM-76 and CT-95 trials, the estimated expenses to initiate patient enrollment in a first-in-human trial for CT-202, as well as our operations into mid-2027. We have based these estimates on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect.
Funding Requirements
Our primary use of cash is to fund operating expenses, which consist of research and development expenditures and various general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses.
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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 current and any future product candidates that we may pursue;
• the costs of manufacturing our current and any future product candidates for clinical trials and in preparation for regulatory approval and commercialization;
• the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our current and any future product candidates that we may pursue;
• 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;
• expenses needed to attract and retain skilled personnel;
• costs associated with being a public company;
• the costs required to scale up our clinical, regulatory and manufacturing capabilities;
• the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for our current and any future product candidates for which we receive regulatory approval; and
• revenue, if any, received from commercial sales of our current and any future product candidates, should any of our product candidates receive regulatory approval.
We will need additional funds to meet our operational needs and capital requirements for clinical trials, other research and development expenditures, and general and administrative expenses. We currently have no credit facility or committed sources of capital.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic transactions and/or marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred 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 acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic transactions or marketing, or distribution or licensing 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. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Cash Flows
The following table shows a summary of our cash flows for the periods indicated:
Year ended December 31,
2025
2024
Cash used in operating activities $ (26,385,380) $ (14,556,434)
Cash used in investing activities (2,033,948) (14,757,316)
Cash (used in) provided by financing activities (15,268) 109,293,747
Net (decrease) increase in cash and cash equivalents $ (28,434,596) $ 79,979,997
Comparison of the Years Ended December 31, 2025 and 2024
Operating Activities
During the year ended December 31, 2025, we used $26.4 million of cash in operating activities. Cash used in operating activities reflected our net loss of $36.1 million, partially offset by a net change in our operating assets and liabilities of $6.3 million, in-process research and development charges of $2.0 million, and non-cash share-based compensation of $1.3 million. The primary uses of cash were to fund our operations related to the development of our product candidates.
During the year ended December 31, 2024, we used $14.6 million of cash in operating activities. Cash used in operating activities reflected our net loss of $26.7 million and a net change in our operating assets and liabilities of $3.5 million, partially offset by in-process research and development charges of $14.8 million and non-cash share-based compensation of $0.8 million. The primary uses of cash were to fund our operations related to the development of our current and former product candidates.
Investing Activities
During the year ended December 31, 2025, cash used in investing activities was attributable to a payment of $2.0 million under the BioAtla License Agreement for the achievement of a development milestone for CT-202, and purchases of property and equipment totaling $34,000.
During the year ended December 31, 2024, cash used in investing activities was primarily attributable to a payment of $11.0 million under the BioAtla License Agreement for the development of CT-202 and a one-time payment of $3.75 million made to Link to acquire the assets associated with CT-95.
Financing Activities
During the year ended December 31, 2025, we used approximately $15,000, of cash in financing activities related to the payment of remaining offering costs from the sale of ATM Shares under our ATM Sales Agreement.
During the year ended December 31, 2024, financing activities provided $109.3 million, consisting of net proceeds of $94.8 million from the sale of common stock and Pre-Funded Warrants in the Private Placement, as well as net proceeds of $14.5 million from the sale of common stock under our ATM Sales Agreement..
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
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Critical Accounting Policies and Estimates
This management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to prepaid/accrued research and development expenses and share-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be 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. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 3 to our audited consolidated financial statements included elsewhere in this Form 10-K, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development costs include external costs of outside vendors engaged to conduct clinical studies and other research and development activities, acquired in-process research and development, salaries, share-based compensation, and other operational costs related to our research and development activities.
Costs for certain development activities, such as the provision of services for product candidate development, clinical and preclinical development and related supply and manufacturing costs, are estimated based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors with respect to their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued research and development expense, as the case may be. The estimates are adjusted to reflect the best information available at the time of the financial statement issuance. Although we do not expect our estimates to be materially different from amounts actually incurred, our estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary.
Nonrefundable advance payments for goods and services, including fees for clinical trial expenses, process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
Share-Based Compensation
We measure compensation expense for all share-based awards based on the estimated fair value of the share-based awards on the grant date. We use the Black-Scholes option pricing model to value our share-based awards. We recognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. We have not issued awards for which vesting is subject to market or performance conditions.
The Black-Scholes option-pricing model requires the use of subjective assumptions that include the expected stock price volatility and the fair value of the underlying common stock on the date of grant. See Note 7 to our audited consolidated financial statements included elsewhere in this Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our awards granted.
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Recent Accounting Pronouncements
See Note 3 to our audited consolidated financial statements found elsewhere in this Form 10-K for a description of recent accounting pronouncements applicable to our consolidated financial statements.
Emerging Growth Company and Smaller Reporting Company Status
In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Other exemptions and reduced reporting requirements under the JOBS Act include, without limitation, the requirements for providing an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. We will remain an emerging growth company until the earlier to occur of (a) the last day of the fiscal year (i) following October 19, 2026, (ii) in which we have total annual gross revenues of at least $1.235 billion or (iii) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means that we have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and have filed at least one annual report pursuant to the Exchange Act and (b) either (i) the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, or (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We will continue to be a smaller reporting company while either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
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