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 in conjunction with the financial statements and the related notes to those statements included later in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Item 1A. “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Overview
We are a clinical-stage biotechnology company moving towards late-stage development with a diverse portfolio of targeted and immune-mediated product candidates with the potential to be first-in-class to treat a wide range of cancers. Our novel programs range from early research to the lead program, amezalpat (previously known as TPST-1120), that is poised to begin a pivotal study in first-line hepatocellular carcinoma (“HCC”). In addition to amezalpat, our second clinical-stage therapeutic product candidate is TPST-1495, which we expect to start a Phase 2 study in Familial Adenomatous Polyposis (“FAP”) in 2025. We believe both amezalpat and TPST-1495 are the first clinical-stage molecules designed to inhibit their respective targets.
Our philosophy is to build a company based upon not only good ideas and creative science, but also upon the efficient translation of those ideas into therapies that will improve patients’ lives. Each of our programs are designed to provide different and independent approaches to fighting cancer, providing a portfolio of truly diversified assets.
Amezalpat (TPST-1120) Clinical Update
Amezalpat is an oral, small molecule, selective antagonist of peroxisome proliferator-activated receptor alpha (“PPARα”) being developed for the treatment of first-line unresectable or metastatic HCC.
On June 20, 2024, we unveiled positive survival data from the ongoing global randomized Phase 1b/2 clinical study demonstrating that amezalpat delivered a six-month improvement in median overall survival (“OS”) with a hazard ratio (“HR”) of 0.65 when combined with atezolizumab and bevacizumab in comparison to atezolizumab and bevacizumab alone, the standard of care, in the first-line treatment of patients with unresectable or metastatic HCC. Additionally, the survival benefit was preserved across key subpopulations, including patients with PD-L1 negative disease and β-catenin mutated disease, consistent with amezalpat’s proposed mechanism of action targeting both tumor cells directly and the patient’s immune system.
On August 15, 2024, we announced the successful completion of our end-of-Phase 2 meeting with the U.S. Food and Drug Administration (“FDA”) regarding the development of amezalpat for the treatment of first-line unresectable or metastatic HCC. The FDA provided positive feedback on the pivotal Phase 3 clinical trial design, which closely mirrors the positive randomized Phase 2 study. The planned Phase 3 trial is designed to use the current, Phase 2 amezalpat dose and schedule in combination with atezolizumab and bevacizumab and will be compared to atezolizumab and bevacizumab alone, the standard of care. The primary endpoint of the trial will be OS. Additionally, the FDA agreed to a pre-specified early efficacy analysis, which, if met, would potentially reduce the time to primary read-out by up to eight months.
In November 2024, we received a “Study May Proceed” letter from the FDA, authorizing the initiation of our pivotal Phase 3 trial. In January 2025, the FDA granted Orphan Drug Designation (“ODD”) for amezalpat for the treatment of patients with HCC. In February 2025, the FDA granted Fast Track Designation (“FTD”), underscoring the agency’s recognition of the urgent need for new treatment options for HCC. These designations provide potential regulatory benefits, including increased engagement with the FDA, eligibility for accelerated approval and priority review, and, for ODD, potential market exclusivity upon approval. We continue to advance amezalpat’s clinical development in alignment with both the FDA and the European Medicines Agency (“EMA”) and are actively preparing for the initiation of our pivotal Phase 3 study.
TPST-1495
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Our second clinical program, TPST-1495, is a novel, small-molecule dual antagonist of the EP2 and EP4 receptors of prostaglandin E2 (“PGE2”), a pathway implicated in multiple cancers. Our development strategy for TPST-1495 includes evaluation in FAP, a rare genetic disorder that significantly increases the risk of gastrointestinal cancers and for which there are no approved systemic therapies. Given that prostaglandin signaling is also implicated in FAP and based on positive preclinical data in a relevant mouse model, we believe there is strong mechanistic support for this approach.
In March 2025, the Cancer Prevention Clinical Trials Network (“CP-CTNet”) received a “Study May Proceed” letter from the FDA, authorizing the initiation of a National Cancer Institute (“NCI”)-funded Phase 2 clinical trial evaluating TPST-1495 in patients with FAP. This trial, run by CP-CTNet and financially supported by the NCI’s Division of Cancer Prevention, underscores the urgent need for innovative cancer prevention strategies in high-risk patient populations. The Phase 2 study is expected to begin in 2025.
Potential Future Milestones
• Advance amezalpat into a pivotal Phase 3 study in first-line HCC patients where amezalpat will be studied in a combination treatment and compared to a standard-of-care therapy. We believe the continued positive results from the ongoing randomized Phase 1b/2 study provides strategic opportunities for us, and we received positive feedback from the FDA and EMA on the pivotal Phase 3 clinical trial design. We are also evaluating further development in RCC and CCA based on the Phase 1 data presented at ASCO 2022.
• Explore TPST-1495 in a Phase 2 study in patients with FAP with the CP-CTNet in 2025.
• Enhance our pipeline by identifying novel oncology targets and in-licensing opportunities. Although we believe we have a robust pipeline, we continue to evaluate and pursue novel targets and product candidates for acquisition and in-licensing to supplement our internal research efforts and further build our pipeline of targeted molecules for oncology. Through our team’s focus and expertise in oncology and immunology, as well as established relationships with oncology and immunology thought leaders, we believe we are positioning the company as a partner of choice for innovative oncology drug candidate development. Continued advances in the biological understanding of diseases should provide opportunities to further expand our portfolio with preclinical and/or clinical product candidates.
• Explore business development opportunities to maximize the potential of our pipeline and extend financial resources. We believe that our pipeline has broad potential reach and partnerships that bring in additional expertise and/or geographic presence could be important to increase the likelihood of success. We currently own all rights to our programs. We intend to become a fully integrated biopharmaceutical company and build a targeted sales force in the United States to support the commercialization of our drug candidates, if approved.
Recent Events
Roche Master Clinical Supply Agreement
In October 2024, we entered into a master clinical supply agreement (“Roche Supply Agreement”) with F. Hoffmann-La Roche Ltd. (“Roche”), pursuant to which Roche will supply Roche’s atezolizumab (TECENTRIQ) for use in one or more clinical studies conducted by us involving amezalpat in combination with atezolizumab, in each case, in accordance with the applicable study protocol prepared by us and reviewed by Roche. Under the Roche Supply Agreement, the parties may execute one or more clinical supply agreement supplements (each, a “CSA Supplement”) that will set forth the study to be conducted by us, the quantities of atezolizumab to be supplied by Roche for such study, and the delivery timeline for such quantities of atezolizumab.
In October 2024, we entered into a CSA Supplement for Roche to supply atezolizumab to us, free of charge, for use in our planned phase 3 trial.
Stockholder Rights Plan
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We amended our stockholder rights plan on October 9, 2024 and on December 5, 2024 to, among other things, extend the final expiration date until immediately following our 2025 Annual Meeting of Stockholders or, if our stockholders approve the rights plan at or prior to such meeting, to October 10, 2026, unless the rights are earlier redeemed or exchanged by the Company. We do not have any obligation under the rights plan to seek stockholder approval. The rights plan otherwise remains unmodified and in full force and effect in accordance with its original terms. The rights plan is intended to reduce the likelihood that any person or group gains control of Tempest through open market accumulation without paying stockholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that are in the best interests of all stockholders.
Going Concern
We have no products approved for commercial sale and have not generated any revenue from product sales. From inception to December 31, 2024, we have raised $232.1 million, through sales of our capital securities.
We have never been profitable and have incurred operating losses in each period since inception. Our net losses were $41.8 million and $29.5 million for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, we had an accumulated deficit of $207.1 million. Substantially all of the operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to incur significant expenses and increasing operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our product candidates and add personnel necessary to advance our pipeline of clinical-stage product candidates. In addition, operating as a publicly traded company involves the hiring of additional financial and other personnel, upgrading our financial information and other systems, and incurring substantial costs associated with operating as a public company. We expect our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval.
Based on our business strategy, our existing cash and cash equivalents of $30.3 million as of December 31, 2024, will be sufficient to fund our operations through at least the next 12 months from the date our consolidated financial statements were available to be issued. However, our ability to fund continued development, including our Phase 3 clinical trial for amezalpat, will require significant additional capital. Adequate additional financing may not be available to us on acceptable terms, or at all. If additional capital is not available to us on a timely basis, or at all, we will be required to take additional actions, including exploring potential merger opportunities and other strategic options, such as partnerships or collaborations for our programs, or we may need to reduce operating expenses or delay, reduce the scope of, discontinue or alter our research and development activities, or may be forced to wind down its operations. For additional information, see “—Liquidity and Capital Resources” below.
Components of Results of Operations
Research and Development Expense
Research and development expenses represent costs incurred to conduct research and development, such as the development of our product candidates.
We recognize all research and development costs as they are incurred. Research and development expenses consist primarily of the following:
• salaries, benefits and stock-based compensation;
• licensing costs;
• allocated occupancy;
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• materials and supplies;
• contracted research and manufacturing;
• consulting arrangements; and
• other expenses incurred to advance our research and development activities.
The largest component of our operating expenses has historically been the investment in research and development activities. We expect research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursues regulatory approvals, which will require a significant investment in costs of clinical trials, regulatory support and contract manufacturing and inventory build-up. In addition, we continue to evaluate opportunities to acquire or in-license other product candidates and technologies, which may result in higher research and development expenses due to license fee and/or milestone payments, as well as added clinical development costs.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in timely developing and achieving regulatory approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist of employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation, for our personnel in executive, finance and accounting, and other administrative functions, as well as fees paid for legal, accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expenses. Legal costs include general corporate legal fees and patent costs. We expect to continue to incur expenses as a result of being a public company, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, additional insurance, investor relations and other administrative expenses and professional services.
Other (Expense) Income , Net
Other (expense) income, net consists primarily of interest expense, interest income, and various income or expense items of a non-recurring nature.
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Results of Operations
The following table summarizes our operating results for the years ended December 31, 2024 and 2023:
Year Ended
Increase/ (Decrease)
Percentage Increase/ (Decrease)
December 31,
2024
2023
2024 vs. 2023
2024 vs. 2023
(in thousands, except percentages)
Operating expenses:
Research and development
$
28,476
$
17,498
$
10,978
63
%
General and administrative
13,550
11,659
1,891
16
%
Operating loss
(42,026
)
(29,157
)
12,869
44
%
Interest expense
(1,316
)
(1,449
)
(133
)
(9
)%
Interest income and other income (expense), net
1,499
1,115
384
34
%
Provision for income taxes
—
—
—
0
%
Net loss
$
(41,843
)
$
(29,491
)
$
12,352
42
%
Research and Development
Our research and development expenses for the years ended December 31, 2024 and 2023 were primarily incurred in connection with our most advanced product candidates, amezalpat and TPST-1495. We typically have various early-stage research and drug discovery projects, as well as various potential product candidates undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research and drug discovery project and our resources are typically deployed across multiple projects. The following table shows our research and development expenses by program for the years ended December 31, 2024 and 2023:
Year Ended
Increase/ (Decrease)
Percentage Increase/ (Decrease)
December 31,
2024
2023
2024 vs. 2023
2024 vs. 2023
(in thousands)
Amezalpat
$
14,206
$
2,691
$
11,515
>100%
TPST-1495
2,307
3,525
(1,218
)
(35
)%
Preclinical and other
2,279
3,398
(1,119
)
(33
)%
Total candidate-specific research costs
18,792
9,614
9,178
95
%
Personnel and other costs
7,108
6,678
430
6
%
Stock-based compensation and depreciation
2,576
1,206
1,370
>100%
Total research and development expenses
$
28,476
$
17,498
$
10,978
63
%
The following table summarizes our research and development expenses for the years ended December 31, 2024 and 2023:
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Year Ended
Increase/ (Decrease)
Percentage Increase/ (Decrease)
December 31,
2024
2023
2024 vs. 2023
2024 vs. 2023
(in thousands)
Research and development outside services
$
16,501
$
8,368
$
8,133
97
%
Compensation expense
4,923
4,203
720
17
%
Stock-based compensation expense
2,222
899
1,323
>100%
Consulting and professional services
2,223
1,141
1,082
95
%
Other expenses
2,607
2,887
(280
)
(10
)%
Total research and development expense
$
28,476
$
17,498
$
10,978
63
%
Research and development expense increased by $11.0 million to $28.5 million for the year ended December 31, 2024, which was primarily attributable to an increase in costs incurred from engaging contract research and manufacturing organizations in preparation for our pivotal Phase 3 trial of amezalpat for the treatment of first-line HCC.
General and Administrative
General and administrative expenses increased by $1.9 million to $13.6 million for the year ended December 31, 2024. The increase was primarily due to an increase in stock-based compensation expense due to increased headcount as well as an increase in expenses related to legal and consulting services.
Other Income (Expense), Net
For the years ended December 31, 2024 and 2023, interest income and other income (expense), net consisted of total interest expense of $1.3 million and $1.4 million, respectively, related to the Oxford Loan, and interest income of $1.5 million and $1.1 million, respectively.
Liquidity and Capital Resources
Overview
Since inception through December 31, 2024, our operations have been financed primarily by net cash proceeds from the sale of our common stock, convertible preferred stock and issuance of debt. As of December 31, 2024, we had $30.3 million in cash and cash equivalents and an accumulated deficit of $207.1 million. We expect that our research and development and general and administrative expenses will increase, and, as a result, we anticipate that we will continue to incur increasing losses in the foreseeable future.
We believe our cash and cash equivalents as of December 31, 2024 will fund our ongoing working capital, investing, and financing requirements for at least the next 12 months from the date our consolidated financial statements were available to be issued. However, our ability to fund continued development, including our Phase 3 clinical trial for amezalpat, will require significant additional capital. Adequate additional financing may not be available to us on acceptable terms, or at all. If additional capital is not available to us on a timely basis, or at all, we will be required to take additional actions, including exploring potential merger opportunities and other strategic options, such as partnerships or collaborations for our programs, or we may need to reduce operating expenses or delay, reduce the scope of, discontinue or alter our research and development activities, or we may be forced to wind down our operations.
Loan Agreement with Oxford Finance
On January 15, 2021, we entered into a loan and security agreement with Oxford Finance LLC (“Oxford”) to borrow a term loan amount of $35.0 million to be funded in three tranches (the “Loan Agreement”). Tranche A of $15.0 million was funded on
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January 15, 2021. Tranche B of $10.0 million expired on March 31, 2022. Tranche C of $10.0 million is available at Oxford’s option.
On December 23, 2022, the Company entered into a First Amendment to the Loan Agreement. The amendment modified the agreement as follows: (i) each of the Company and Millendo Therapeutics US, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Millendo”), were joined as co-borrowers under the Loan Agreement, (ii) the interest-only repayment period was extended through December 31, 2023 (which interest-only period may be further extended through June 30, 2024 under certain circumstances), and (iii) a security interest in the property of the Company, TempestTx and Millendo, including any intellectual property, was granted to the Lender. In addition, the Lender permitted a one-time prepayment in the amount of $5.0 million which the Company paid on December 23, 2022.
During the fourth quarter of 2023, the Company achieved the circumstances necessary to extend the interest-only repayment period through June 30, 2024. As of December 31, 2024, the balance of the loan payable (net of debt issuance costs) was $6.4 million and a total of $10.0 million in borrowing capacity remained available at the option of Oxford.
The term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15% which is an Index Rate plus 7.10%. Index Rate is the greater of (i) 1-Month CME Term SOFR or (ii) 0.05%.
At-the-Market Offering
In June 2024, we entered into a sales agreement with Jefferies LLC, pursuant to which we may sell, from time to time at our sole discretion through Jefferies, as our sales agent, shares of our common stock (the “ATM Program”). Any shares of our common stock sold will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-280918). We will pay Jefferies a commission up to 3.0% of the gross sales proceeds of any shares of our common stock sold through Jefferies under the ATM Program and also have provided Jefferies with indemnification and contribution rights. As of December 31, 2024, we have sold an aggregate of 21,626,191 shares of our common stock for gross proceeds of approximately $29.6 million, or $28.8 million after deducting commissions and offering expenses, pursuant to the ATM Program. Between January 1, 2025 and March 21, 2025, we sold 1,464,321 shares of our common stock for gross and net proceeds of $1.3 million, pursuant to the ATM Program. As of March 21, 2025, we have approximately $13.4 million available for sale under the ATM Program.
As of the date of this Form 10-K, our public float was less than $75.0 million. As a result, we are subject to the limitations of General Instruction I.B.6 to Form S-3 until such time as our public float exceeds $75 million, which means we only have the capacity to sell shares up to one-third of our public float under the S-3 Registration Statement, including the ATM program, in any twelve-month period. We will remain constrained by the limitations of General Instruction I.B.6 to Form S-3 until such time as our public float exceeds $75 million, at which time the number of securities we may sell under a Form S-3 registration statement will no longer be limited by limitations of General Instruction I.B.6 to Form S-3.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2024 and 2023:
2024
2023
(in thousands)
Cash used in operating activities
$
(33,027
)
$
(27,357
)
Cash used in investing activities
(435
)
(170
)
Cash provided by financing activities
24,500
35,602
Net increase (decrease) in cash and cash equivalents
$
(8,962
)
$
8,075
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Cash flows from operating activities
Cash used in operating activities for the year ended December 31, 2024 was $33.0 million, consisting of a net loss of $41.8 million, add back of non-cash adjustments for depreciation, stock-based compensation, non-cash operating lease expense and other non-cash items totaling $7.2 million, plus changes in operating assets and liabilities of $1.6 million.
Cash used in operating activities for the year ended December 31, 2023 was $27.4 million, consisting of a net loss of $29.5 million, add back of non-cash adjustments for depreciation, stock-based compensation, non-cash operating lease expense and other non-cash items totaling $4.8 million, plus changes in operating assets and liabilities of $2.7 million.
Cash flows from investing activities
Cash used in investing activities for the years ended December 31, 2024 and 2023 was related to purchases of property and equipment, primarily related to office, laboratory and computer equipment.
Cash flows from financing activities
Cash provided by financing activities for the year ended December 31, 2024 was related to proceeds from the issuance of common stock of $28.9 million, offset by Oxford loan principle payments of $4.4 million.
Cash provided by financing activities for the year ended December 31, 2023 was related to proceeds from the issuance of common stock of $35.6 million.
Funding Requirements
We believe that our available cash and cash equivalents are sufficient to fund existing and planned cash requirements for the next 12 months from the date our consolidated financial statements were available to be issued. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, clinical costs, legal and other regulatory expenses and general overhead costs. We have based our estimates on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we currently expect.
Our future funding requirements will depend on many factors, including the following:
• the costs associated with a pivotal Phase 3 study for amezalpat in first-line HCC patients, as well as other costs associated with the scope, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
• the costs associated with the manufacturing of our product candidates;
• the costs related to the extent to which we enter into partnerships or other arrangements with third parties to further develop our product candidates;
• the costs and fees associated with the discovery, acquisition or in-license of product candidates or technologies;
• our ability to establish collaborations on favorable terms, if at all;
• the costs of future commercialization activities, if any, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
• revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; and
• the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims.
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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies
Until we can generate a sufficient amount of product revenue to finance our cash requirements, if ever, we expect to finance our future cash needs, including those set forth above, primarily through the issuance of additional equity, borrowings and strategic alliances with partner companies. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances 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 additional capital is not available to us on a timely basis, or at all, we will be required to take additional actions, including exploring potential merger opportunities and other strategic options, such as partnerships or collaborations for our programs, or we may need to reduce operating expenses or delay, reduce the scope of, discontinue or alter our research and development activities, or we may be forced to wind down our operations.
Material Cash Requirements
Our material cash requirements primarily relate to the maturities of the principal obligations under our long-term debt, operating leases for office space, trade payables, and accrued expenses. As of December 31, 2024, we have $14.2 million payable within 12 months, including the current loan payable (net of discount and issuance costs) of $6.4 million due to Oxford and $0.9 million related to the Brisbane Lease. Refer to Notes 5 and 6 to our Consolidated Financial Statements for additional information.
Except as disclosed above, we have no long-term debt and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase-order basis. We enter into contracts in the normal course of business with equipment and reagent vendors, CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are cancelable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not determinable.
Critical Accounting Policies and Estimates
Our Management’s Discussion and Analysis of 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 (“US GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
We define our critical accounting policies as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. Our significant accounting policies are more fully described in Note 2 to our Consolidated Financial Statements located elsewhere in this Annual Report. We have listed below our critical accounting policies and estimates that we believe to have the greatest potential impact on our Consolidated Financial Statements. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results and no significant assumptions used have a high degree of subjectivity.
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Research and Development Expenses
We record accrued expenses for estimated costs of our research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and we include these costs in accrued liabilities in the consolidated balance sheets and within research and development expense in the consolidated statements of operations. These costs are a significant component of our research and development expenses. We record accrued expenses for these costs based on the estimated amount of work completed and in accordance with agreements established with these third parties.
We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period, which includes gathering information from multiple sources. In certain circumstances, the determination of the nature and level of services that have been received during the reporting period requires judgment because the timing and pattern of vendor invoicing did not correspond to the level of services provided and invoicing from clinical study sites and other vendors may not yet be available to us. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed, the number of patients enrolled and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers.
Stock-Based Compensation
We recognize noncash stock-based compensation expense related to stock-based awards to employees, non-employees and directors, including stock options, based on the fair value on the grant date using the Black-Scholes option pricing model. The related stock-based compensation is recognized as expense on a straight line-basis over the employee’s, non-employee’s or director’s requisite service period (generally the vesting period). Noncash stock compensation expense is based on awards ultimately expected to vest and is reduced by any forfeitures as they occur.
In determining the fair value of stock options, we use the Black-Scholes option-pricing model. The Black-Scholes model requires the input of subjective assumptions, including expected volatility, expected dividend yield, expected term, risk-free rate of return, and the fair value of the underlying common stock on the date of grant, and generally requires significant judgment to determine.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements for a description of recent accounting pronouncements applicable to our Consolidated Financial Statements.
Smaller Reporting Company Status and a Non-Accelerated Filer
We are a “smaller reporting company,” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, or the Exchange Act, meaning that the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year for which audited financial statements are available as of the determination date and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting 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. If investors consider our common stock less attractive as a result of our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for our common stock and our share price may be more volatile.
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Additionally, as a non-accelerated filer, we may continue to take advantage of the exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
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