Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A (Risk Factors) of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Please also see the section titled "Special Note Regarding Forward-Looking Statements."

Overview

We are a clinical-stage biopharmaceutical company developing innovative oral therapies for patients with autoimmune, inflammatory, and neurodegenerative diseases. Our expertise in medicinal chemistry, structural biology, and immunology enables the discovery of differentiated small molecule therapeutics for conditions with high unmet medical need. Our clinical product candidates address therapeutic indications with substantial commercial opportunity for novel small molecules. For example:

We were incorporated in November 2018. To date, we have focused primarily on organizing and staffing our company, business planning, raising capital and identifying our product candidates and conducting preclinical studies and clinical trials. We have funded our operations primarily through equity and debt financings. We do not have any products approved for sale and have not generated any revenue from product sales.

We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. Our net losses were $135.1 million and $193.0 million for the years ended December 31, 2024 and December 31, 2023, respectively. We had an accumulated deficit of $554.3 million as of December 31, 2024. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on a variety of factors, including the timing and scope of our preclinical studies and clinical trials and our expenditures on other research and development activities.

We do not expect to generate any revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. 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. Accordingly, until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially 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 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 raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

September 2024 Issuance of Series A Non-Voting Convertible Preferred Stock from Private Placement

On September 23, 2024, we entered into a Securities Purchase Agreement (Securities Purchase Agreement) with Aventis Inc., a wholly-owned subsidiary of Sanofi, a global healthcare and pharmaceutical company (together with Aventis Inc., Sanofi), pursuant to which we issued an aggregate of 70,601 shares of Series A non-voting convertible preferred stock, par value $0.0001 per share (Series A Preferred Stock), each convertible into 100 shares of common stock, at an as-converted price of $3.8243 per common share, for gross proceeds of approximately $27.0 million, in a private placement (Series A Private Placement). We received approximately $26.6 million in net proceeds after deducting issuance costs payable by us.

In connection with the Securities Purchase Agreement, we granted Sanofi a right of first negotiation (ROFN) for a license, grant or transfer, including by option or sale, or any rights to research, develop, commercialize, or otherwise exploit VTX3232, our CNS-penetrant NLRP3 inhibitor.

March 2024 Private Placement

In March 2024, we issued and sold 11,174,000 shares of our common stock in a private placement at an offering price of $8.95 per share for aggregate gross proceeds of approximately $100.0 million. We received $95.0 million in net proceeds after deducting fees to the placement agents and offering expenses payable by us.

ATM Sales Agreement

In December 2022, we entered into an Open Market Sales AgreementSM(Sales Agreement) with Jefferies LLC (Jefferies), as sales agent, pursuant to which we could offer and sell, from time to time through Jefferies, shares of common stock providing for aggregate sales proceeds of up to $150.0 million. We have no obligation to sell any shares under the Sales Agreement, and could at any time suspend solicitations and offers under the Sales Agreement.

During the year ended December 31, 2023, we issued and sold 1,176,470 shares of common stock for aggregate gross proceeds of $50.0 million through the Sales Agreement. No shares of common stock were issued under the Sales Agreement during the year ended December 31, 2024.

Impact of Macroeconomic Factors

Economic uncertainty in various global markets, including the U.S. and Europe, caused among other things by political instability and conflict, such as the military conflicts in Ukraine and the Middle East, have led to market disruptions, including significant volatility in commodity prices, credit and capital market instability and supply chain interruptions, which have caused volatile changes to inflation globally. Our business, financial condition and results of operations could be materially and adversely affected by further negative impact on the global economy and capital markets resulting from these or future global economic conditions, particularly if such conditions are prolonged or worsen.

Although, to date, our business has not been materially impacted by these global economic and geopolitical conditions, we are unable to predict the extent to which our operations will be impacted in the short and long term, or the ways in which such instability could impact our business and results of operations. The extent and duration of these market disruptions, whether as a result of the military conflicts in Ukraine and the Middle East and effects of related sanctions, geopolitical tensions, volatile changes to inflation or otherwise, are impossible to predict, but could be substantial. Any such disruptions may also magnify the impact of other risks described in this report.

Financial Operations Overview

Revenues

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products for the foreseeable future. We may also generate revenues in the future from payments or royalties associated with potential partnering or collaboration agreements, but have no plans to enter into such arrangements at this time, other than the aforementioned exploration of potential partnership opportunities for tamuzimod and VTX958.

Research and Development Expenses

Research and development expenses consist of expenses incurred while performing research and development activities to discover and develop our product candidates. Direct research and development costs include external research and development expenses incurred under agreements with contract research organizations, consultants and other vendors that conduct our preclinical and clinical activities, expenses related to manufacturing our product candidates for preclinical and clinical studies and laboratory supplies. Indirect research and development costs include personnel-related expenses, consisting of employee salaries, payroll taxes, bonuses, benefits and stock-based compensation charges for those individuals involved in research and development efforts. Costs incurred in our research and development efforts are expensed as incurred.

We typically use our employee, consultant and infrastructure resources across our research and development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or certain external consultant costs to specific product candidates or development programs. These costs are included in unallocated research and development expenses. The following table summarizes research and development expenses by product candidate or development program (in thousands):

	Year ended December 31,
	2024				2023
VTX958	$	24,569			$	80,577
Tamuzimod (formerly VTX002)		34,603				38,363
VTX2735		8,304				3,306
VTX3232		13,523				5,315
Unallocated research and development expenses		36,003				48,206
Total research and development expenses	$	117,002			$	175,767

Substantially all of our research and development expenses to date have been incurred in connection with the discovery and development of our product candidates. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time-consuming. The successful development of product candidates is highly uncertain and subject to numerous risks and uncertainties. Accordingly, at this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of any product candidates and to obtain regulatory approval for one or more of these product candidates. However, during the year ended December 31, 2025, we anticipate to incur less costs associated with the development of our product candidates as compared to costs incurred during the year ended December 31, 2024 due to the mix of product candidates and phase of development.

The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following:

We do not expect any of our product candidates to be commercially available for the next several years, if ever.

General and Administrative Expenses

General and administrative expenses are related to legal and patent costs, finance, human resources and other administrative activities. These expenses consist primarily of legal expenses, personnel costs, including stock-based compensation expenses, outside services, management fees and other general and administrative costs.

We expect that our general and administrative expenses may increase in the future as we expand operations, increase our headcount to support our continued research and development activities and operate as a public reporting company (including increased fees for outside consultants, lawyers and accountants, as well as increased directors' and officers' liability insurance premiums). We have also incurred, and expect to continue to incur, increased costs to comply with stock exchange listing and SEC requirements, corporate governance, internal controls, investor relations and disclosure and similar requirements applicable to public companies, particularly as we ceased to be an emerging growth company as of December 31, 2023. Additionally, if and when we believe that regulatory approval of a product candidate appears likely, we may incur significant increases in our general and administrative expenses related to the sales and marketing of any approved product candidate.

Results of Operations

Comparison of Years Ended December 31, 2024 and 2023

The following table summarizes our consolidated results of operations for the years ended December 31, 2024 and 2023 (in thousands):

		Year ended December 31,
		2024				2023				Change
Operating expenses:
Research and development (includes related party amounts of $1,001 and $1,023, respectively)		$	117,002			$	175,767			$	(58,765	)
General and administrative			31,448				32,227				(779	)
Total operating expenses			148,450				207,994				(59,544	)
Loss from operations			(148,450	)			(207,994	)			59,544
Other (income) expense:
Interest income			(13,416	)			(15,074	)			1,658
Other expense			88				42				46
Total other (income) expense			(13,328	)			(15,032	)			1,704
Net loss		$	(135,122	)		$	(192,962	)		$	57,840
Unrealized gain on marketable securities			261				1,121				(860	)
Foreign currency translation			(54	)			(48	)			(6	)
Comprehensive loss		$	(134,915	)		$	(191,889	)		$	56,974

Research and Development Expense

Research and development expenses were $117.0 million and $175.8 million for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, most research and development expenses have been related to the development of VTX958, tamuzimod, VTX2735 and VTX3232.

For the year ended December 31, 2024, as compared to the year ended December 31, 2023, there was a net decrease in research and development expenses of approximately $58.8 million. This decrease was comprised of a decrease in costs between periods associated with VTX958 of approximately $56.0 million, primarily due to the conclusion of the Phase 2 trials of VTX958 in psoriasis and psoriatic arthritis and wind down of associated program activities, and a decrease in unallocated research and development expenses of approximately $12.2 million, which included decreases in compensation-related expenses of approximately $7.3 million and stock-based compensation expense of $4.0 million, and other decreases in preclinical and discovery expenses. These decreases were partially offset by an increase in costs associated with the VTX2735 program of approximately $5.0 million related primarily to the Phase 2 trial in CAPS patients and preparation for the Phase 2 trial in recurrent pericarditis; and an increase in VTX3232 costs of approximately $8.2 million due to preparation and initiation of Phase 2 trials in participants with Parkinson's disease and participants with obesity and additional risk factors for cardiovascular disease.

General and Administrative Expense

General and administrative expenses were $31.4 million and $32.2 million for the years ended December 31, 2024 and 2023, respectively. The decrease of $0.8 million was primarily due to a decrease in stock-based compensation expense of approximately $1.7 million, offset by increases in compensation-related expenses of approximately $0.5 million and other general and administrative expenses of approximately $0.4 million, including costs associated with operating as a public company and facilities related costs.

Other (Income) Expense

Other income was $13.3 million and $15.0 million for the years ended December 31, 2024 and 2023, respectively. During the years ended December 31, 2024 and 2023, the other income recognized was associated with net accretion income and interest earned on our available-for-sale marketable securities and dividends received from our cash equivalents.

Liquidity and Capital Resources

Sources of Liquidity and Capital Resources

From inception through December 31, 2024, we have funded our operations primarily through the issuance of equity and debt securities. Prior to our initial public offering (IPO) in October 2021, we issued an aggregate of $164.2 million of convertible preferred stock, net of offering costs, to outside investors and related parties and $10.3 million in aggregate principal amount of convertible notes and SAFEs issued to related parties. In October 2021, we received net proceeds of approximately $158.8 million, after deducting underwriting discounts and commissions and offering expenses payable by us, from the sale of our shares of common stock in the IPO. In September 2022, through the closing of a private placement of common stock, we received net proceeds of approximately $165.2 million after deducting transaction-related expenses. In February 2023, we received approximately $48.4 million in net proceeds after deducting commissions and offering expenses payable by us from the sale of shares of our common stock through the Sales Agreement. In March 2024, through the closing of a private placement of common stock, we received net proceeds of approximately $95.0 million after deducting transaction-related expenses. In September 2024, we raised gross proceeds of $27.0 million in connection with the sale of Series A non-voting convertible preferred stock in a private placement to Aventis Inc. As of December 31, 2024, we had cash, cash equivalents and marketable securities of $252.9 million, excluding restricted cash of $1.0 million.

We have not entered into any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Future Funding Requirements

To date, we have generated no revenue and do not expect to generate revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates and we do not know when, or if, this will occur. In addition, our expenses may significantly increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. Moreover, we continue to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of our product candidates, we may incur significant

commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations. Our expenses may increase substantially if and as we:

Based on our current business plan, we believe that existing cash, cash equivalents, and marketable securities will be sufficient to fund our obligations for at least twelve months from the issuance of these consolidated financial statements. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect.

We enter into contracts in the normal course of business with various third-party consultants, contract research organizations (CRO) and contract manufacturing organizations (CMO) for preclinical research, clinical trials and manufacturing activities. These contracts generally provide for termination upon notice. Payments due upon cancellation consist of cancellation fees and payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. Actual expenses associated with these arrangements may be higher or lower than anticipated due to various factors, including progress of our development candidates, enrollment in ongoing clinical trials, which may be competitive and challenging and results from our ongoing and planned clinical trials.

Short-term liquidity needs pertaining to our operating leases are approximately $2.2 million. Long-term liquidity needs pertaining to our operating leases are approximately $12.8 million with our last minimum lease payment due in July 2031. Currently, we have no short-term or long-term purchase commitments.

Our capital expenditures to date have been immaterial and we do not expect to incur significant costs related to capital expenditures in the short or long-term.

The successful development of any product candidate is highly uncertain. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, if approved, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates.

Our future capital requirements will depend on many factors, including:

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity, equity-linked and debt financings, collaborations, strategic alliances and/or licensing arrangements. We do not have any committed external source of funds. 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 diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of 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 collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, 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 when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

Cash Flows

We 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. As of December 31, 2024, we had cash, cash equivalents and marketable securities of $252.9 million, excluding restricted cash of $1.0 million.

The following table sets forth a summary of the net cash flow activity for each of the periods indicated:

		Year ended December 31,
		2024				2023
		(in thousands)
Net cash provided by (used in):
Operating activities		$	(130,873	)		$	(166,522	)
Investing activities		$	(15,506	)		$	100,940
Financing activities		$	122,115			$	53,329

Operating Activities

Net cash used in operating activities was $130.9 million for the year ended December 31, 2024 and was primarily due to our net loss of $135.1 million offset by $14.8 million for noncash items and a net decrease of $10.6 million in operating assets and liabilities. The noncash items included approximately $22.9 million for stock-based compensation expense, approximately $1.4 million for the amortization of operating right-of-use assets and depreciation expense, offset by approximately $9.5 million for the net accretion of investments in available-for-sale marketable securities. The $10.6 million change in operating assets and liabilities was primarily attributable to a decrease in accrued expenses and accounts payable of approximately $9.6 million, an increase in prepaid expenses and other assets of approximately $0.2 million and a decrease in operating lease liabilities of $0.8 million.

Net cash used in operating activities was $166.5 million for the year ended December 31, 2023 and was primarily due to our net loss of $193.0 million offset by $20.7 million for noncash items and a net increase of $5.8 million in operating assets and liabilities. The noncash items included approximately $28.6 million for stock-based compensation expense, approximately $1.0 million for the amortization of operating right-of-use assets and depreciation expense and approximately $0.3 million for the loss on impairment of the Encinitas ROU asset and associated furniture and fixtures, offset by approximately $9.2 million for the net accretion of investments in available-for-sale marketable securities. The $5.8 million change in operating assets and liabilities was primarily attributable to an increase in accrued

expenses of approximately $6.0 million, a decrease in accounts payable of approximately $0.7 million, and a decrease in prepaid expenses and other assets of approximately $0.6 million, offset by a decrease in operating lease liabilities of approximately $0.1 million.

Investing Activities

Net cash used in investing activities was $15.5 million for the year ended December 31, 2024 and was primarily related to the purchase of $283.7 million of investments in available-for-sale marketable securities and purchases of property and equipment of approximately $0.2 million, offset by $268.4 million in proceeds from maturities of available-for-sale marketable securities

Net cash used in investing activities was $100.9 million for the year ended December 31, 2023 and was primarily related to $373.7 million in proceeds from maturities of available-for-sale marketable securities, offset by the purchase of $272.3 million of investments in available-for-sale marketable securities and purchases of property and equipment of approximately $0.5 million.

Financing Activities

Net cash provided by financing activities was $122.1 million for the year ended December 31, 2024 and was attributable to approximately $95.0 million in net proceeds from the issuance of common stock in our March 2024 private placement, $26.6 million in net proceeds from the issuance of Series A Preferred Stock in our September 2024 private placement, $0.3 million in proceeds from the exercise of stock options and $0.2 million in proceeds from the issuance of common stock under the 2021 Employee Stock Purchase Plan (2021 ESPP).

Net cash provided by financing activities was $53.3 million for the year ended December 31, 2023 and was attributable to approximately $48.4 million in net proceeds from the issuance of common stock under the Sales Agreement, approximately $4.7 million in proceeds from the exercise of stock options and approximately $0.2 million in proceeds from the issuance of common stock under the 2021 ESPP.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are 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 prepaid and accrued clinical trial and research and development costs, the measurement of the fair value of stock-based awards, available-for-sale marketable securities, the measurement of operating lease right-of-use assets and operating lease liabilities, and the evaluation of long-lived assets for impairment. 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 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies and estimates to be most critical to the preparation of our consolidated financial statements.

Long-Lived Assets

We evaluate long-lived assets, including property, equipment and operating lease right-of-use (ROU) assets, for impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We group assets at the lowest level for which cash flows are separately identified in order to measure an impairment. Events or circumstances that would result in an impairment review include a significant change in the use of an asset, the planned sale or disposal of an asset, or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset or asset group. If the asset or asset group is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset or asset group exceeds its fair value.

We entered into the Sublease in July 2023 with Neurocrine for office space in San Diego, California which became our headquarters in August 2023. As noted in Note 2, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements, we test ROU assets when impairment indicators are present. We determined impairment triggers had occurred for the Sublease and the associated furniture and fixtures (the San Diego Asset Group) as a result of the decline of our stock price. Therefore, we performed an

undiscounted cash flow analysis for the San Diego Asset Group as of December 31, 2024. Based on the undiscounted cash flow analysis, we determined the San Diego Asset Group had a net carrying value that was in excess of its estimated undiscounted future cash flows. Therefore, we performed a discounted cash flow analysis to measure the fair value of the San Diego Asset Group. The fair value of the San Diego Asset Group is measured on a non-recurring basis and classified as Level 3 in the fair value hierarchy, and was determined based on estimates of future discounted cash flows. The estimated future discounted cash flows of the San Diego Asset Group exceeded the carrying value of the San Diego Asset Group. As a result, no impairment charge associated with the San Diego Asset Group was recorded during the year ended December 31, 2024.

In February 2024, we entered into two separate lease termination agreements related to non-cancellable leases entered into in July 2021, September 2021 and May 2022, each expiring on June 30, 2026. These leases are for office facilities in Encinitas, California and the associated furniture and fixtures (the Encinitas Asset Group). During the third quarter of 2023, we determined impairment triggers had occurred for the Encinitas Asset Group when the Sublease was executed and we moved our headquarters to the office space in San Diego, California. Therefore, we performed an undiscounted cash flow analysis for the Encinitas Asset Group as of July 21, 2023. Based on the undiscounted cash flow analysis, we determined the Encinitas Asset Group had a net carrying value that exceeded its estimated undiscounted future cash flows and the fair value for the Encinitas Asset Group. The fair value of the Encinitas Asset Group measured on a non-recurring basis, which is classified as Level 3 in the fair value hierarchy, was determined based on estimates of future discounted cash flows. The estimated fair value was compared to the net carrying value and as a result, the Encinitas Asset Group held and used with a carrying amount of $1.4 million was determined to have a fair value of $1.1 million, resulting in an impairment charge of $0.3 million, of which an immaterial amount was associated with the furniture and fixtures included in the Encinitas Asset Group. During the year ended December 31, 2023, $0.2 million of the impairment charge was recorded in research and development expenses and $0.1 million of the impairment charge was recorded in general and administrative expenses within the consolidated statements of operations and comprehensive loss. We wrote off the ROU assets and operating lease liabilities associated with the Encinitas Asset Group of $0.8 million and $0.9 million, respectively, during the first quarter of 2024. See Note 7, Leases, in the notes to the consolidated financial statements for further discussion.

Assumptions and estimates used to determine cash flows in the evaluation of impairment and fair values used to determine the impairment are subject to a degree of judgment and complexity. Any future changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in additional impairment charges, and such changes could be material.

Accrued Clinical Trial and Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each consolidated 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 expenses as of each consolidated balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The significant estimates in our accrued clinical trial and research and development expenses include the costs incurred for services performed by our vendors in connection with clinical trial and research and development activities for which we have not yet been invoiced.

We base our expenses related to clinical trial and research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct clinical trials and research and development 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 clinical trial and research and development 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 clinical trial or research and development 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 grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of equity awards using the Black-Scholes option pricing model and recognize forfeitures as they occur. Estimating the fair value of equity awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of variables, including the risk-free interest rate, the expected stock price volatility, the expected term of stock options, the expected dividend yield and the fair value of the underlying common stock on the date of grant. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. See Note 8 to our consolidated financial statements included elsewhere in this Annual Report on 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 stock options granted, if any, during the years ended December 31, 2024 and 2023.

Other Company Information

Transition from Emerging Growth Company and Smaller Reporting Company Status

On December 31, 2023, we ceased to be an "emerging growth company" ("EGC"), as defined in the JOBS Act, due to our large accelerated filer status. Accordingly, we may no longer take advantage of EGC-related reduced reporting requirements that are otherwise applicable to public companies. For example, we have previously elected to take advantage of the extended transition period for complying with new or revised accounting standards. EGC status also exempted us from having to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b).

On December 31, 2023, we also ceased to be a "smaller reporting company" ("SRC") because the market value of our stock held by non-affiliates exceeded $700 million as of June 30, 2023. However, on June 30, 2024, the market value of our stock held by non-affiliates was less than $560 million and we have not yet generated any revenue, and thus we regained qualification as a SRC under Rule 12b-2 of the Exchange Act. Accordingly, we elected to comply with the scaled disclosure relief thereby available to SRCs with our Form 10-Q for the period ended June 30, 2024, as well as each periodic report thereafter, including this report.

Recent Accounting Pronouncements

A description of recent accounting pronouncements that may potentially impact our financial positions, results of operations or cash flows is disclosed in Note 2 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.