Aardvark Therapeutics, Inc. (AARD) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and other parts of this Annual Report contain forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions, forecasts and projections. Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors, including those set forth under Part I, Item 1A, “Risk Factors”, of this Annual Report and elsewhere in this Annual Report. You should carefully read Part I, Item 1A, “Risk Factors”, of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section titled “Special Note Regarding Forward-Looking Statements.”

Overview

We are a clinical-stage biopharmaceutical company focused on developing novel, small-molecule therapeutics to activate innate homeostatic pathways for the treatment of metabolic diseases. We target biological pathways associated with alleviating hunger that we believe have the potential to deliver transformative outcomes for patients. We have focused our efforts on developing selective compounds, targeting Bitter Taste Receptors (TAS2Rs) for hunger-associated conditions. Our initial compounds target TAS2Rs expressed in the gut lumen, which normally respond to the nutrients in food and participate in the gut-brain axis. Our research has shown that activating these receptors can induce secretion of endogenous signaling molecules, including cholecystokinin (CCK) and glucagon-like peptide-1 (GLP-1). Our wholly-owned lead product candidate, ARD-101, is an oral gut-restricted small-molecule agonist of certain TAS2Rs expressed in the gut lumen for which we have initiated a Phase 3 clinical trial for hyperphagia associated with PWS. We also intend to evaluate ARD-101 in a Phase 2 clinical trial for hyperphagia associated with HO. In our completed Phase 2 clinical trial in subjects with hyperphagia associated with PWS, ARD-101 was shown to be well-tolerated and demonstrated clinical activity through a reduction in Hyperphagia Questionnaire for Clinical Trials (HQ-CT) score. We have aligned with the FDA on a protocol for a potentially pivotal Phase 3 clinical trial, which we initiated in December 2024, and we anticipate topline data will be available in early 2026. In furtherance of preparing for this potentially pivotal Phase 3 clinical trial, we have expanded our clinical management and regulatory capabilities, including hiring clinical, regulatory and quality personnel, and we expect to continue to need to expand our clinical management and regulatory capabilities and to rely on third parties to conduct our pivotal clinical trials.

Below is a summary of our portfolio of novel and proprietary small molecule programs that we believe can induce satiety in patients with hunger-associated indications.

Our Hunger Associated TAS2R Pipeline (1)(2)

Beyond our lead product candidate, ARD-101, and our ARD-201 program, we are also developing other programs for the potential treatment of indications with high unmet need, including other indications mediated by TAS2R signaling.

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Since we commenced operations in 2017, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, discovering ARD-101, establishing and maintaining our intellectual property portfolio, conducting research, preclinical studies, and clinical trials, manufacturing of ARD-101 and related raw materials, and providing general and administrative support for these operations.

We have incurred significant net losses and negative cash flows from operations since our inception and, as of December 31, 2024, we had an accumulated deficit of $58.3 million. Our net losses for the years ended December 31, 2024 and 2023 were $20.6 million and $7.2 million, respectively. We expect our expenses and operating losses will increase substantially for the foreseeable future as we:

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continue our development of, seek regulatory approval for, and potentially commercialize ARD-101 and our other product candidates;

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seek to discover and develop additional product candidates;

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conduct our ongoing and planned clinical trials and preclinical studies;

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continue our research and development activities;

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utilize third parties to manufacture ARD-101 and our other product candidates and related raw materials;

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hire additional personnel;

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maintain, expand and protect our intellectual property;

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implement operational, financial and management information systems;

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potentially experience any delays, challenges, or other issues associated with the clinical development of our product candidates, including with respect to our regulatory strategies; and

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incur additional costs associated with being a public company.

If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of and level of expense related to our clinical trials and preclinical studies and our other research and development activities and capital expenditures and the timing and amount of any milestone or royalty payments due under our existing or future license or collaboration agreements.

From inception and up to the date of our IPO in February 2025, we had raised a total of $129.1 million in gross proceeds to fund our operations from the sale and issuance of shares of our convertible preferred stock. In February 2025, we completed our IPO with the sale of 6,120,661 shares of common stock, which included the partial exercise by the underwriters of their option to purchase 232,661 additional shares, at an initial public offering price of $16.00 per share and received net proceeds of approximately $87.5 million. As of December 31, 2024, we had cash, cash equivalents and short-term investments of $73.7 million, which does not include the net proceeds from our IPO. Based upon our current operating plans, we believe that our existing cash, cash equivalents and short-term investments, together with the proceeds from our IPO, will be sufficient to fund our projected operations into 2027. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

We do not have any products approved for sale and have not generated any revenue to date. We do not expect to generate any revenue from product sales until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and may never occur. We will need substantial additional funding in addition to the net proceeds of our IPO to support our continuing operations and pursue our long-term business plan, including to complete the development and commercialization of ARD-101 and our other product candidates, if approved. Accordingly, until such time as we can generate significant revenue from sales of ARD-101 or our other product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, including potential collaborations, licenses, and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce, or terminate our research and development programs or other operations, or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We rely, and expect to continue to rely, on third parties for the manufacture of our ARD-101 and our other product candidates for preclinical and clinical testing, as well as for commercial manufacture if ARD-101 or any of our other product candidates obtain marketing approval. We are

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working with our current manufacturers to ensure that we will be able to scale up our manufacturing capabilities to support our clinical plans. In addition, we rely on third parties to package, label, store, and distribute ARD-101, and we intend to rely on third parties for our commercial products if marketing approval is obtained. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment, and personnel while also enabling us to focus our expertise and resources on the discovery and development of ARD-101 and our other product candidates.

Given our stage of development, we do not yet have a marketing or sales organization or commercial infrastructure; however, we intend to build the necessary sales, marketing and commercialization capabilities and infrastructure over time as our product candidates advance through clinical development. We expect to spend a significant amount in commercial development and marketing costs prior to obtaining regulatory and marketing approval of one or more of our product candidates.

Macroeconomic Trends

We may be affected by unfavorable economic conditions and challenges in the United States and abroad, such as the effects of the ongoing geopolitical conflicts in Ukraine, the Israel-Hamas war, tensions in U.S.-China relations, disruptions in the banking industry and inflationary trends. The fiscal years 2024 and 2023 were marked by significant market uncertainty and increasing inflationary pressures. These market dynamics are expected to continue into 2025, and these and similar adverse market conditions may negatively impact our business, financial position, results of operations and growth prospects. For further discussion of the potential impacts of macroeconomic events on us, refer to Part I, Item 1A, “Risk Factors”, of this Annual Report.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from the sale of products. We do not expect to generate any such revenue unless and until such time as ARD-101, ARD-201 and our other product candidates have advanced through clinical development and regulatory approval, if ever. If we fail to complete preclinical and clinical development of any product candidates or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Operating Expenses

Our operating expenses consist of (i) research and development expenses, (ii) general and administrative expenses and (iii) credit losses recorded on related party convertible promissory note and accounts receivable.

Research and Development

Our research and development (R&D) expenses consist primarily of external and internal costs incurred in performing preclinical and clinical development activities. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Our research and development expenses consist principally of:

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external costs, including:

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fees paid to CROs and consultants in connection with our preclinical studies, toxicology and clinical trials;

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costs related to manufacturing materials for our preclinical studies and clinical trials;

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costs related to compliance with regulatory requirements;

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license fees; and

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internal costs, including:

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personnel-related costs such as salaries, bonuses, payroll taxes, employee benefits, travel, and stock-based compensation expense for employees involved in research and development efforts; and

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facilities-related costs, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance, equipment, and other supplies and services.

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We do not track our research and development expenses on a program-specific basis or allocate our internal costs associated with our discovery and development efforts because these costs are deployed across multiple programs and, as such, are not separately classified. Since our inception and through December 31, 2024, substantially all of our external costs have been related to the research and development of ARD-101.

Although R&D activities are central to our business model, the successful development of ARD-101 and our other product candidates is highly uncertain. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of ARD-101, ARD-201, or any future product candidates due to the inherently unpredictable nature of preclinical and clinical development. There are numerous factors associated with the successful development of a product candidate, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors beyond our control may impact our clinical development programs. Product candidates in later stages of development generally have higher development costs than those in earlier stages of development. As a result, we expect that our R&D expenses will increase substantially for the foreseeable future as we continue to conduct our ongoing R&D activities, advance preclinical research programs toward clinical development, conduct clinical trials, hire additional personnel, and maintain, expand, protect, and enforce our intellectual property portfolio.

At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. Our future R&D expenses may vary significantly based on a wide variety of factors such as:

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the number and scope, rate of progress, expense and results of our discovery and preclinical activities and clinical trials;

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per patient trial costs;

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the number of trials required for approval;

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the number of sites included in the trials;

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the countries in which the trials are conducted;

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the length of time required to enroll eligible patients;

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the number of patients that participate in the trials;

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the number of doses that patients receive;

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the drop-out or discontinuation rates of patients;

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the potential additional safety monitoring requested by regulatory agencies;

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the duration of patient participation in the trials and follow-up;

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the cost and timing of manufacturing our product candidates;

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the phase of development of our product candidates;

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the extent of changes in government regulation and regulatory guidance;

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the efficacy and safety profile of our product candidates;

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the timing, receipt, and terms of any approvals from applicable regulatory authorities; and

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the extent to which we establish collaboration, license, or other arrangements.

A change in the outcome of any of these variables with respect to development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.

The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for ARD-101 or any future product candidates may be affected by a variety of factors. We may never succeed in achieving regulatory approval for any of our product candidates. Preclinical and clinical development timelines, the probability of success, and total development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments, and our ongoing assessments as to each product candidates’ commercial potential. We will need to raise substantial additional capital in the

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future. In addition, we cannot forecast which product candidate may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and Administrative

Our general and administrative (G&A) expenses consist primarily of personnel-related costs such as salaries, bonuses, payroll taxes, employee benefits, travel, and stock-based compensation expense for employees involved in executive, accounting and finance, legal, and other administrative functions. Other significant costs include allocated facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, insurance costs, and business development expenses.

We expect that our G&A expenses will increase substantially for the foreseeable future as we continue to increase our general and administrative headcount to support our continued R&D activities and, if ARD-101 or our other product candidates receive marketing approval, commercialization activities, as well as to support our operations generally. We also expect to incur increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

Credit Loss – Accounts Receivable and Related Party Convertible Promissory Note

In connection with a Transition Services Agreement (the Transition Services Agreement) entered into with Aardwolf Therapeutics, Inc. (Aardwolf), which was effective through May 31, 2024, we performed certain services and billed Aardwolf monthly. As Aardwolf currently does not have the ability to repay the related party receivables, these amounts are deemed uncollectible and have been written off until such time as Aardwolf has the ability to repay. In addition, in August 2022, we loaned Aardwolf $1.0 million in the form of a convertible promissory note, which, based on its current inability to repay, we also have written off as uncollectible. We will reassess the estimated recovery on previous written off balances at each reporting period.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned on our invested cash and cash equivalents, dividend income and changes in the fair value of equity securities held as investments.

Results of Operations

Comparison of the Year Ended December 31, 2024 and 2023

The following table summarizes our results of operations for each of the periods indicated:

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Research and Development Expenses

The following table summarizes our R&D expenses for each of the periods indicated:

R&D expenses were $17.4 million and $4.5 million for the year ended December 31, 2024 and 2023, respectively. The $12.9 million increase for the year ended December 31, 2024 as compared to the year ended December 31, 2023 resulted primarily from an increase of $9.4 million for external expenses incurred for chemistry, manufacturing and controls (CMC), clinical and toxicology studies primarily related to the development of ARD-101 and a $3.2 million increase in personnel-related costs due to increased headcount and bonuses.

General and Administrative (G&A) Expenses

G&A expenses were $5.3 million and $2.2 million for the year ended December 31, 2024 and 2023, respectively. The $3.1 million increase for the year ended December 31, 2024 as compared to the year ended December 31, 2023 primarily resulted from a $0.7 million increase in personnel-related costs and a $2.0 million increase in legal and other professional costs.

Credit Loss – Related Party Accounts Receivable

Amounts written off as uncollectible related to the Transition Services Agreement with Aardwolf were $0.1 million and $0.8 million for the year ended December 31, 2024 and 2023, respectively. The $0.7 million decrease for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was due to the expiration of the Transition Services Agreement in May 2024.

Other Income, Net

Other income, net was $2.2 million and $0.2 million for the year ended December 31, 2024 and 2023, respectively. The $2.0 million increase for the year ended December 31, 2024 as compared to the year ended December 31, 2023 resulted from higher interest income generated by our invested cash and lower unrealized losses recorded on the change in the fair value of our short-term investments, offset by lower dividend income.

Liquidity and Capital Resources

Sources of Liquidity

We have not generated any revenue from product sales and have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. From inception and up to the date of our IPO in February 2025, we had raised a total of $129.1 million in gross proceeds to fund our operations from the sale and issuance of shares of our convertible preferred stock. In February 2025, we completed our IPO with the sale of 6,120,661 shares of common stock, which included the partial exercise by the underwriters of their option to purchase 232,661 additional shares, at an initial public offering price of $16.00 per share and received net proceeds of $87.5 million.

Future Funding Requirements

As of December 31, 2024, we had cash, cash equivalents and short-term investments of $73.7 million, which does not include the proceeds from our IPO in February 2025. Based upon our current operating plans, we believe that our existing cash, cash equivalents and short-term investments, together with the proceeds from our IPO, will be sufficient to fund our projected operations into 2027. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have

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based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting preclinical studies, manufacturing and testing product candidates in clinical trials is costly, and the timing of progress and expenses in these studies and trials is uncertain.

We have incurred significant operating losses since our inception and, as of December 31, 2024, we had an accumulated deficit of $58.3 million. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase substantially for the reasons described above.

Our future capital requirements are difficult to predict and depend on many factors, including but not limited to:

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the initiation, type, number, scope, progress, expansions, results, costs, and timing of clinical trials and preclinical studies of our current and future product candidates, including the costs of any third-party products used as combination agents in our combination clinical trials;

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the costs and timing of manufacturing for our product candidates, including commercial manufacture at sufficient scale, if any product candidate is approved;

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the costs, timing, and outcome of regulatory meetings and reviews of our product candidates;

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the costs of obtaining, maintaining, enforcing, and protecting our patents and other intellectual property and proprietary rights;

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our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal control over financial reporting;

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the costs associated with hiring additional personnel and consultants as our clinical and preclinical activities increase;

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the timing and payment of milestone, royalty or other payments we must make pursuant to our existing and potential future license or collaboration agreements with third parties;

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the costs and timing of establishing or securing sales and marketing capabilities if any product candidates is approved;

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our ability to achieve sufficient market acceptance, coverage, and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;

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patients’ willingness to pay out-of-pocket for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors;

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the terms and timing of establishing and maintaining collaborations, licenses, and other similar arrangements;

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costs associated with any products or technologies that we may in-license or acquire; and

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the effects of competing technological and market developments as well as disruptions to and volatility in the credit and financial markets.

We have no other committed sources of capital. 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 primarily through equity offerings, debt financings, or other capital sources, including potential collaborations, licenses, and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common 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 other collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams, product candidates, research programs, intellectual property or proprietary technology, 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 R&D programs or other operations, or grant rights to develop and market our product candidates to third parties that we would otherwise prefer to develop and market ourselves, or on less favorable terms than we would otherwise choose.

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Cash Flows

The following table summarizes our cash flows for each of the periods indicated:

Operating Activities

Net cash used in operating activities was $18.1 million and $5.8 million for the years ended December 31, 2024 and 2023, respectively. The net cash used in operating activities during the year ended December 31, 2024 was primarily due to our reported net loss of $20.6 million, net of non-cash items (including unrealized losses on short-term investments, credit losses, stock-based compensation expense and right-of-use asset amortization) totaling $0.9 million and a $1.6 million net increase of our net operating assets. The net cash used in operating activities during the year ended December 31, 2023 was primarily due to our reported net loss of $7.2 million, net of non-cash charges (including non-cash dividend income, unrealized losses on short-term investments, credit losses, stock-based compensation expense, and right-of-use asset amortization) totaling $1.5 million and a $0.1 million net decrease of our net operating assets. The increase in cash used in operations during the year ended December 31, 2024 in comparison to the year ended December 31, 2023 was primarily attributable to increased research and development activities.

Investing Activities

Net cash used in investing activities was $12.0 million during the year ended December 31, 2024 primarily as a result of the purchase of short-term investments during the period.

Financing Activities

Net cash provided by financing activities was $82.0 million during the year ended December 31, 2024 primarily as a result of proceeds from the sale and issuance of shares of our Series C convertible preferred stock in May 2024 for net proceeds of $82.9 million, offset by payments for deferred IPO costs of $1.2 million.

Contractual Obligations and Other Commitments

We entered into a new lease for office space commencing on August 1, 2024 and expiring on December 31, 2026. Total future aggregate operating lease commitments under the lease agreement is $0.9 million.

In August 2023, we acquired the rights to certain intellectual property, in connection with which we have payment obligations up to an aggregate of $118.5 million that are contingent upon our achievement of specified regulatory and commercial milestones. In addition, in October 2024, we acquired the rights to certain assets in exchange for an upfront cash payment of $0.6 million, in connection with which we have payment obligations up to an aggregate of $62.0 million that are contingent upon our achievement of specified regulatory and commercial milestones. As of December 31, 2024, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales. For additional information regarding this agreement, including our payment obligations thereunder, see Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report.

During the normal course of our business, we enter into contracts for research and professional services, and for the purchase of lab supplies used in our research activities. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not separately presented.

Off-Balance Sheet Arrangements

Since our inception, we did not have, and we do not currently have, any off-balance sheet arrangements as defined under the rules and regulations of the SEC.

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Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with 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 accrued expenses and stock-based compensation expense. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report, we believe the following accounting estimates to be most critical to the preparation of our consolidated financial statements.

Accrued R&D Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued R&D expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued R&D expenses as of each balance sheet date based on facts and circumstances known to us at that time. The significant estimates in our accrued R&D expenses include the costs incurred for services performed by our vendors in connection with services for which we have not yet been invoiced.

We base our expenses related to R&D activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct R&D on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows.

There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the R&D expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Advance payments for goods and services that will be used in future R&D activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock-Based Compensation Expense

Stock-based compensation expense represents the cost of the estimated grant date fair value of stock option awards amortized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of all stock option grants using the Black-Scholes option pricing model and recognize forfeitures as they occur.

Estimating the fair value of equity awards at the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of complex variables, including:

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Fair Value of Common Stock. See the subsection titled “—Determination of Fair Value of Our Common Stock” below.

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Risk-Free Interest Rate. We base the risk-free interest rate assumption on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.

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Expected Volatility. Given that our common stock had been privately held prior to our IPO, there was no active trading market for our common stock. The expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group is developed based on companies in the biotechnology industry.

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Expected Term. The expected term represents the period of time that options are expected to be outstanding. Because we do not have significant historical exercise behavior, we determine the expected life assumption using the “simplified” method, which is an average of the contractual term of the option and its vesting period.

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Expected Dividend Yield. We use an expected dividend yield of zero, as we have never paid dividends on our common stock and have no present intention of doing so in the foreseeable future.

These inputs are subjective and generally require significant analysis and judgment to develop. Changes in these assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized.

See Notes 2 and 6 to our audited consolidated financial statements included elsewhere in this Annual Report 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 stock options.

We recorded $0.4 million and $0.3 million of stock-based compensation expense for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, there was $2.3 million of total unrecognized stock-based compensation expense related to unvested stock options with service conditions that we expect to recognize over a remaining weighted-average period of 3.4 years.

Determination of Fair Value of Our Common Stock

Prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering contemporaneous independent third-party valuations of our common stock performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (Practice Aid), and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant, including: the prices at which we sold shares of our convertible preferred stock to outside investors in arms-length transactions, and the superior rights, preferences, and privileges of the convertible preferred stock relative to the common stock at the time of each sale; the progress of our company’s R&D programs, including their stages of development, and our company’s business strategy; external market and other conditions affecting the biotechnology industry, and trends and developments within the biotechnology industry; our company’s financial position, including cash on hand; the lack of an active public market for our company’s common stock; the likelihood of achieving a liquidity event for our company’s securityholders, such as an initial public offering or a sale of the company, taking into consideration prevailing market conditions, trends and developments in our industry; the hiring of key personnel and the experience of management; the analysis of initial public offerings and the market performance and volatility of peer companies in the biopharmaceutical industry, as well as completed mergers and acquisitions of peer companies; and the material risks related to our business and industry, our results of operations and financial position, including our levels of capital resources. Prior to the completion of our IPO, there were significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates included assumptions regarding our future operating performance, the time to completing an initial public offering or other liquidity event, and the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss, and net loss per share of common stock could have been significantly different.

Following the closing of our IPO, our board of directors determines the fair value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.

Recently Adopted Accounting Pronouncements

See Note 2 to each of our audited consolidated financial statements included elsewhere in this Annual Report for recently adopted accounting pronouncements.

Emerging Growth Company and Smaller Reporting Company Status

We qualify as an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include: (i) being permitted to present only two years of audited financial statements, in addition to any required unaudited condensed financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this Annual Report; (ii) reduced disclosure about our executive compensation arrangements; (iii) not being required to hold advisory votes on executive compensation or to obtain stockholder approval of any golden parachute arrangements not previously approved; (iv) an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; and (v) an exemption from compliance with the requirements of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on the financial statements.

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We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of:

(i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more;

(ii) December 31, 2030 (the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO);

(iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or

(iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

We may choose to take advantage of some but not all of these exemptions. We have elected to avail ourselves of this exemption and, therefore, while we are an emerging growth company we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result of this election, our financial statements may not be comparable to those of other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our shares of common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our shares of common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.