Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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

Statements in this Annual Report on Form 10-K that are not strictly historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. Some of these factors are more fully discussed in the section of this Annual Report on Form 10-K entitled "Risk Factors" and elsewhere herein. We do not undertake to update any of these forward-looking statements or announce the results of any revisions to these forward-looking statements except as required by law.

We recommend investors read this entire Annual Report on Form 10-K, including the "Risk Factors" section, the consolidated financial statements, and related notes thereto. As used in this Annual Report on Form 10-K, unless the context indicates or otherwise requires, "Palisade," "Palisade Bio," the "Company," "we," "us," and "our" or similar designations in this report refer to Palisade Bio, Inc., a Delaware Corporation, and its subsidiaries. Any reference to "common shares" or "common stock," refers to our $0.01 par value common stock. Any reference to "Leading Biosciences, Inc." or "LBS" refers to our operations prior to the completion of our merger with Seneca Biopharma, Inc. ("Seneca") on April 27, 2021 (the "Seneca Merger"). Any technology that we currently own or may acquire the rights to in the future is referred to by us as either a "product candidate" or "product candidates." Additionally, any reference herein that refers to preclinical studies also refers to nonclinical studies.

OVERVIEW

We are a clinical-stage biopharmaceutical company developing next-generation, once-daily, oral phosphodiesterase-4 ("PDE4") inhibitor prodrugs designed for targeted delivery to the terminal ileum and colon. Our lead clinical product candidate, PALI-2108, is being developed as a treatment for patients living with inflammatory bowel disease ("IBD"), including ulcerative colitis ("UC") and Crohn's disease ("CD").

During 2025, we announced positive results from our Phase 1 human clinical trial of PALI-2108 for the treatment of UC conducted in Canada. The Phase 1 clinical study of PALI-2108 was a single-center, randomized, double-blinded, placebo-controlled clinical study focused on safety, tolerability, and pharmacokinetics ("PK") in both healthy volunteers and UC patients. The clinical study included an open-label UC patient cohort with multiple dosing arms in which we evaluated the pharmacodynamics ("PD") of PALI-2108. On October 16, 2025, we dosed our first patients in an exploratory Phase 1b cohort in Fibrostenotic Crohn's disease ("FSCD") while we complete longer-term chronic safety and toxicology studies. The exploratory Phase 1b cohort in FSCD is expected to be followed by the initiation of Phase 2 clinical programs to assess PALI-2108's efficacy, safety, and tolerability in patients with moderate to severe UC, as well as those with CD.

In addition to conducting clinical studies in Canada, we anticipate data from the exploratory Phase 1b cohort in FSCD together with results from the Phase 1/1b UC program will support Investigational New Drug Application ("IND") submissions to the United States Food and Drug Administration ("FDA") for a Phase 2 UC study in the second quarter of 2026 and a Phase 2 CD study in the second half of 2026.

Crohn's and Colitis Foundation Research Funding Agreement

On December 17, 2025, we entered into a Research Program Funding Agreement (the "CCF Funding Agreement") with the Crohn's & Colitis Foundation (the "CCF"), in which the CCF agreed to provide up to a $0.5 million investment to support our Phase 1b research program related to PALI-2108 in exchange for shares of our common stock.

October 2025 Offering

On October 2, 2025, we closed on an underwritten public offering to issue and sell 197,154,844 shares of common stock and common stock equivalents for net proceeds, including the full exercise of the underwriter's over-allotment option, of approximately $127.6 million, consisting of gross cash proceeds of $138.0 million less underwriting discounts and commissions and other cash equity issuance costs of approximately $10.4 million (the "October 2025 Offering").

July 2025 Warrant Inducement Transaction

On July 23, 2025, we entered into a warrant inducement agreement with an existing holder of certain of our common stock warrants to exercise their existing common stock warrants to purchase an aggregate of 4,318,905 shares of our common stock. The transaction closed on July 25, 2025 for net cash proceeds of approximately $3.4 million consisting of gross cash proceeds of $3.9 million, less cash equity issuance costs of approximately $0.5 million.

Financial Results

Our operating loss for the year ended December 31, 2025 was approximately $18.1 million, which consisted of research and development expenses and general and administrative expenses of approximately $10.2 million and $7.9 million, respectively. Net cash used in operating activities was approximately $10.8 million for the year ended December 31, 2025, which includes a $16.8 million net loss adjusted for $1.6 million of net cash inflows related to changes in operating assets and liabilities and certain non-cash items impacting the net loss. Net cash provided by financing activities was approximately $134.4 million for the year ended December 31, 2025. As of December 31, 2025, we have $133.4 million in cash, cash equivalents and restricted cash.

FINANCIAL OVERVIEW

Research and Development Expenses

Our research and development expenses include:

Through the majority of 2024, the nature of our research and development expenses incurred related primarily to the preclinical activities associated with our joint development of PALI-2108 with our collaboration partner, Giiant Pharma Inc. ("Giiant"). With the approval to commence the Phase 1 clinical trial of PALI-2108, which we received from Health Canada on October 9, 2024, pursuant to terms of the research and collaboration agreement that we have with Giiant ("Giiant License Agreement"), we have assumed all development, manufacturing, regulatory and commercialization activities and costs of PALI-2108. Therefore, our clinical research and development costs directly attributable to the clinical trials of PALI-2108 were higher in 2025 as compared to 2024, offset by a decrease in joint development costs associated with the Giiant License Agreement. We expect our clinical research and development costs will continue to increase in 2026 as we advance PALI-2108 through clinical studies in UC and CD.

Our direct research and development expenses are tracked by product candidate and consist primarily of external costs, such as fees paid under third-party license agreements and to outside consultants, CROs, clinical sites, contract manufacturing organizations ("CMOs") and research laboratories in connection with our preclinical development, process development, manufacturing, clinical development, and regulatory activities. We do not allocate employee costs and costs associated with our discovery efforts, laboratory supplies and facilities, including other indirect costs, to specific product candidates because these costs are deployed across multiple programs and, as such, are not separately classified. As needed, we manage third parties that are engaged to conduct our (i) research activities, (ii)

preclinical, clinical and translational science development activities, (iii) drug manufacturing activities, and (iv) process development. When we perform any research and development or manufacturing activities under a co-development agreement, we record the expense reimbursement from the co-development partner as a reduction to research and development expense once the reimbursement amount is approved for payment by the co-development partner. Pursuant to agreements where we perform research and development activities under a joint development plan, such as our research and collaboration with Giiant, qualifying development costs are expensed as research and development costs as incurred. We recognize expense payments from Giiant, if any, as a reduction to research and development expense once the expense payments are realized or realizable, which is when we receive the cash or we have an undisputed claim to the cash that is probable of collection.

General and Administrative Expenses

Our general and administrative expenses consist primarily of (i) salary and employee-related costs and benefits, including stock-based compensation, (ii) professional fees for legal, intellectual property, investor and public relations, accounting and audit services, insurance costs, director and committee fees, and (iii) general corporate expenses.

Reverse Stock Split

On April 5, 2024, we effected a 1-for-15 reverse stock split of our issued and outstanding common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, each our stockholders received one share of our common stock for every 15 shares such stockholder held immediately prior to the effective time of the Reverse Stock Split. Unless otherwise noted, all common stock shares, common stock per share data and shares of common stock underlying convertible preferred stock, stock-based awards and common stock warrants included in this Annual Report on Form 10-K, including the exercise or conversion price of such equity instruments, as applicable, have been retrospectively adjusted to reflect the Reverse Stock Split.

Results of Operations

The following table summarizes our results of operations for the year ended December 31, 2025 and 2024 (in thousands):

Research and Development Expenses

Our research and development expenses increased by approximately $1.1 million, or 12%, from approximately $9.1 million for the year ended December 31, 2024 to approximately $10.2 million for the year ended December 31, 2025. The increase is primarily attributable to (i) an approximately $2.8 million increase in research and development employee-related expenses, (ii) an approximately $2.5 million net increase in clinical trial-related expenses associated with the Phase 1 clinical trial of PALI-2108, (iii) an approximately $0.9 million increase in chemistry, manufacturing and controls ("CMC") expenses, and (iv) and an approximately $0.4 million net non-cash loss associated with an increase in the fair value of the contingent consideration obligation pursuant to the Giiant License Agreement. These increases were partially offset by an approximately $5.4 million decrease in expenses that were directly related to the preclinical joint development of PALI-2108.

Research and development employee-related expenses increased approximately $2.8 million for the year ended

December 31, 2025, compared to the year ended December 31, 2024, primarily due to an approximately $1.9 million increase in non-cash share-based compensation expense and an approximately $0.9 million increase in research and development salaries and benefits expense as a result of a 133% increase in research and development headcount necessary to support our PALI-2108 development strategy subsequent to the October 2025 Offering, and to a lesser extent, an increase in employee annual bonuses.

We recognized clinical trial-related expenses of approximately $4.0 million for the year ended December 31, 2025, compared to clinical trial-related expenses of $1.5 million for the year ended December 31, 2024, an increase of approximately $2.5 million due to the commencement of our Phase 1 clinical trial of PALI-2108 in November of 2024. CMC expenses increased from approximately $1.0 million for the year ended December 31, 2024 to approximately $1.9 million for the year ended December 31, 2025, primarily due to increased activity related to our upcoming clinical trials.

Preclinical joint development expenses were approximately $4.3 million for the year ended December 31, 2024. We recognized no preclinical joint development costs for the year ended December 31, 2025. In addition, during the year ended December 31, 2025, we recognized a reduction in joint development costs of $1.1 million that was related to funds received by us from Giiant pursuant to the joint development plan, resulting in a net decrease in preclinical joint development expenses of approximately $5.4 million for the year ended December 31, 2025, compared to the year ended December 31, 2024.

We recognized an approximate $0.4 million non-cash loss on the fair value remeasurement of the contingent consideration obligation for the year ended December 31, 2025, compared to an approximate $0.1 million non-cash gain on the fair value remeasurement of the contingent consideration obligation for the year ended December 31, 2024, resulting in a net non-cash year-over-year loss of approximately $0.4 million. On October 16, 2025, the first of the milestones pursuant to the Giiant License Agreement was achieved with the dosing of the first patient in the Company's Phase 1b clinical trial of PALI-2108 in a FSCD cohort. Accordingly, the Company settled this a milestone payment to Giiant in cash in the amount of approximately $0.2 million.

General and Administrative Expenses

Our general and administrative expenses increased by approximately $2.1 million, or 36%, from approximately $5.8 million for the year ended December 31, 2024 to approximately $7.9 million for the year ended December 31, 2025, primarily as a result of (i) an approximately $1.7 million increase in general and administrative employee-related expenses due to an approximately $1.4 million increase in non-cash share-based compensation expense and an approximately $0.3 million increase in salaries and benefits and annual bonuses, (ii) an approximately $0.4 million increase in professional fees and legal expenses, (iii) an approximately $0.1 million increase in shareholder services due to the special meetings of stockholders held in 2025, and (iv) an approximately $0.1 million increase in general operating expenses. These increases were partially offset by an approximately $0.2 million decrease in consultant and contract labor expenses.

Other income (expense)

Other income, net, increased by approximately $0.9 million, or 197%, from approximately $0.4 million for the year ended December 31, 2024 to approximately $1.3 million for the year ended December 31, 2025, primarily as a result of an approximately $0.9 million increase in dividend income, due to the increased investment of excess cash in money market accounts after the October 2025 Offering, and other non-cash losses of less than $0.1 million associated primarily with the write-off of certain other receivable balances for the year ended December 31, 2024 that did not repeat in 2025, partially offset by a non-cash loss of approximately $0.1 million recognized for the year ended December 31, 2025 that related to the fair value of the milestone liabilities recognized upon our entering into the CCF Funding Agreement (Note 5, Stockholders' Equity in Part II Item 8 of this Annual Report on Form 10-K for further details).

Liquidity and Capital Resources

We expect to incur substantial losses for the foreseeable future. Since our inception, we have financed our operations through the sales of our securities, issuance of debt, the exercise of common stock warrants, and to a lesser degree, grants and research contracts as well as the licensing of our intellectual property to third parties.

Management believes the October 2025 Offering for net proceeds of $127.6 million will provide sufficient capital to

fund our operations through major clinical development milestones including a Phase 2 primary efficacy readout of PALI-2108 for UC that is expected in the second half of 2027 and a Phase 2 primary efficacy readout of PALI-2108 for CD that is expected in 2028.

Sources of Liquidity

Future capital requirements will depend upon many factors, including the timing and extent of spending on research and development and market acceptance of our products, if approved for commercial sale. We will require additional funding to conduct future clinical activities. We may seek additional funding through public and private financings, debt financings, collaboration agreements, strategic alliances and licensing agreements. Although we have been successful in raising capital in the past, there is no assurance of success in obtaining such additional financing on terms acceptable to us, if at all, and there is no assurance that we will be able to enter into collaborations or other arrangements. If we are unable to obtain funding, it could force delays, reduce or eliminate research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our future business prospects, and the ability to continue operations.

Pursuant to the October 2025 Offering, we issued and sold (a) 113,240,564 shares of our common stock, par value $0.01 per share, at a public offering price of $0.70 per share, and (b) 83,914,280 pre-funded warrants to purchase one share of the our common stock, par value $0.01 per share, at a public offering price of $0.6999 per share. Net proceeds from the offering, including the full exercise of the underwriter's over-allotment option, were approximately $127.6 million, consisting of gross cash proceeds of $138.0 million less underwriting discounts and commissions and other cash equity issuance costs of approximately $10.4 million. We intend to use the net proceeds from the offering for working capital and general corporate purposes, including the development of PALI-2108 for the treatment of UC and CD.

Refer to Note 5, Stockholders' Equity in Part II Item 8 of this Annual Report on Form 10-K for further details of our recent equity transactions.

Warrant Exercises

During the years ended December 31, 2025 and December 31, 2024, total gross cash proceeds from the exercise of outstanding common stock warrants was approximately $7.6 million and $2.5 million, respectively, primarily as a result of the transactions described below.

On July 23, 2025, we entered into an agreement with an accredited and institutional holder (the "July 2025 Warrant Holder") of certain of our existing common stock warrants (the "July 2025 Existing Warrant(s)") to exercise the July 2025 Existing Warrants to purchase up to an aggregate of 4,318,905 shares of our common stock (the "July 2025 Warrant Inducement Agreement"). Pursuant to the July 2025 Warrant Inducement Agreement, the exercise price of each July 2025 Existing Warrant exercised was reduced from $1.40 per share to $0.9047 per share. In consideration for the immediate exercise of the July 2025 Existing Warrants, the July 2025 Warrant Holder received new warrants (the "July 2025 Replacement Warrants") to purchase shares of common stock in a private placement. Pursuant to the July 2025 Warrant Inducement Agreement, the July 2025 Warrant Holder received two July 2025 Replacement Warrants for each July 2025 Existing Warrant exercised (in its entirety, the "July 2025 Warrant Inducement Transaction"). The transaction closed on July 25, 2025 with the Company receiving net cash proceeds of approximately $3.4 million, which consisted of gross cash proceeds of $3.9 million from the exercise of the July 2025 Existing Warrants, less cash equity issuance costs of approximately $0.5 million. We intend to use the net proceeds from the July 2025 Warrant Inducement Transaction for working capital and general corporate purposes, including the development of PALI-2108 for the treatment of UC and CD.

Also during the year ended December 31, 2025, we received gross proceeds of approximately $3.7 million from the exercise of 3,224,209 common stock warrants that were issued to representatives of the sole underwriter in the October 2025 Offering.

On January 30, 2024, we entered into warrant inducement agreements (the "February 2024 Warrant Inducement Agreements") with certain accredited and institutional holders (collectively, the "February 2024 Warrant Holders") of certain of existing common stock warrants (the "February 2024 Existing Warrants") to exercise the February 2024 Existing Warrants to purchase up to an aggregate of 228,162 shares of our common stock. Pursuant to the February 2024 Warrant Inducement Agreements, the exercise price of each February 2024 Existing Warrant was reduced to $10.97 per share. In consideration for the immediate exercise of the February 2024 Existing Warrants, each of the

February 2024 Warrant Holders received one replacement warrant for each February 2024 Existing Warrant exercised. The transaction closed on February 1, 2024 for net cash proceeds of approximately $2.2 million consisting of gross cash proceeds of approximately $2.5 million, less cash equity issuance costs of approximately $0.3 million.

Cash Flows

As of December 31, 2025, we had $133.4 million in cash, cash equivalents and restricted cash. The following table shows a summary of our cash flows for the years ended December 31, 2025 and 2024 (in thousands):

Net Cash Used in Operating Activities

Cash used in operations decreased by approximately $1.3 million for the year ended December 31, 2025 compared to the year ended December 31, 2024 primarily due to a decrease in net loss after adjusting for non-cash items impacting the net loss, primarily stock-based compensation and related charges, and favorable changes in operating assets and liabilities.

Cash used in operating activities was approximately $10.8 million for the year ended December 31, 2025, which reflects an approximately $16.8 million net loss adjusted for (i) approximately $1.6 million of net cash inflows related to changes in operating assets and liabilities, and (ii) certain non-cash items impacting the net loss, consisting primarily of (a) an approximately $4.0 million non-cash expense recognized for stock-based compensation and related charges, (b) an approximately $0.3 million non-cash expense recognized for the fair value remeasurement of certain financial instrument liabilities, primarily our contingent consideration obligation, partially offset by an approximately $0.2 million payment of our contingent consideration obligation, (c) an approximately $0.1 million non-cash expense recognized for the discount on the common shares to be issued pursuant to the CCF Funding Agreement, (d) an approximately $0.1 million non-cash expense related to the amortization of our operating lease right of use asset, and (e) an approximately $0.1 million non-cash expense related to the write-off of certain deferred equity issuance costs associated with our shelf registration statement that expired in April of 2025. The net cash inflow from operating assets and liabilities was primarily attributable to (i) a net cash inflow of approximately $0.5 million from prepaids and other current assets and other noncurrent assets, which was primarily attributable to the amortization of the current and non-current portions of our prepaid insurance policies, (ii) an approximately $0.6 million increase in accounts payable and accrued liabilities, primarily due to higher clinical trial-related expenses and translational science expenses as a result of increased clinical trial activity, partially offset by lower accrued joint development expenses associated with the Giiant License Agreement, and (iii) an approximately $0.6 million increase in accrued compensation and benefits due to an increase in the employee bonus accrual, which will be paid in 2026. The operating asset and liabilities inflows were partially offset by an approximately $0.1 million cash outflow related to payments of our operating lease.

Cash used in operating activities was approximately $12.2 million for the year ended December 31, 2024, which reflects an approximately $14.4 million net loss adjusted for (i) approximately $1.4 million of net cash inflows related to changes in operating assets and liabilities, and (ii) certain non-cash items impacting the net loss, consisting primarily of (a) an approximately $0.7 million non-cash expense recognized for stock-based compensation and related charges, (b) an approximately $0.1 million non-cash expense associated with the issuance of our common stock as payment for vendor services provided, and (c) an approximately $0.1 million non-cash expense related to the amortization of our operating lease right of use asset. The net cash inflow from operating assets and liabilities was primarily attributable to an approximately $0.1 million cash outflow related to payments of our operating lease that was more than offset by approximately $1.6 million cash inflow from (i) an approximately $0.8 million decrease in prepaids and other current assets and other noncurrent assets, which was primarily attributable to the amortization of the current and non-current portions of our prepaid insurance policies, and (ii) an approximately $0.8 million increase in accounts payable and accrued liabilities, which was primarily due to additional drug manufacturing accruals associated with the clinical trials of PALI-2108 and an increase in accrued joint development expenses associated with the Giiant License Agreement. These increases in accounts payable and accrued liabilities were partially offset by a decrease in accrued severance payments and lower accrued fees to our board of directors ("Board") and Board committee fees.

Net Cash Provided by Financing Activities

For the year ended December 31, 2025, cash provided by financing activities of approximately $134.4 million was attributable to cash proceeds net of underwriting discounts and commissions and cash equity issuance costs of approximately $127.6 million from the October 2025 Offering and net cash proceeds of approximately $7.1 million from the exercise of common stock warrants, including those exercised in conjunction with the July 2025 Warrant Inducement Transaction, partially offset by payments made on our insurance financing arrangements of approximately $0.3 million.

For the year ended December 31, 2024, cash provided by financing activities of approximately $9.6 million was attributable to net cash proceeds of approximately $2.2 million from the exercise of common stock warrants in conjunction with our warrant inducement transaction in February 2024, net cash proceeds of approximately $3.5 million from our private placement financing completed in May of 2024, and cash proceeds net of underwriting discounts and commissions and cash equity issuance costs of approximately $4.4 million from our underwritten public offering of stock completed in December of 2024, partially offset by payments made on our insurance financing arrangements of approximately $0.4 million.

Contractual Obligations

Insurance Financing Arrangement

In June of 2025, we entered into an agreement to finance an insurance policy that renewed in May of 2025. The insurance financing arrangement is secured by the associated insurance policy and is payable over a 9-month period commencing with the first payment that was payable on June 30, 2025. As of December 31, 2025, the aggregate remaining balance under our insurance financing arrangement of approximately $0.1 million will be paid in the first quarter of 2026.

Other than the remaining insurance financing arrangement payments due in 2026, as of December 31, 2025 we have no other minimum debt payments required in 2026 or thereafter.

Future Liquidity Needs

We have incurred significant operating losses and negative cash flows from operations since our inception. To date, we have not been able to generate significant revenues nor achieve operating profitability. Based upon our cash and cash equivalents balance of $133.4 million as of December 31, 2025, we believe we have sufficient capital to fund our operations through major clinical development milestones including a Phase 2 primary efficacy readout of PALI-2108 for UC that is expected in the second half of 2027 and a Phase 2 primary efficacy readout of PALI-2108 for CD that is expected in 2028. Notwithstanding, should our anticipated level of operations significantly change, we may require additional financing sooner than anticipated. Further, beyond the readout expected in 2028, we will require additional financing to continue at our expected level of operations, including a Phase 3 clinical trial and possible commercialization of PALI-2108 for the treatment of UC and CD.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments, and assumptions that impact the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. Our estimates are based on historical experience, known trends, 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 value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies.

Our significant accounting policies used in the preparation of the consolidated financial statements are described in more detail in Note 2 in Part II, "Item 8. Financial Statement and Supplemental Data" of this Annual Report on Form 10-K. We believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations:

Accrued research and development expenses

We expense research and development costs as incurred pursuant to Accounting Standards Codification ("ASC") 730, Research and Development Costs. We are required to make estimates of our accrued expenses resulting from our obligations under contracts or agreements with, as applicable, research and development collaboration partners, CROs, clinical sites, manufacturers, vendors, and consultants in connection with conducting research and development activities, including those related to our ongoing clinical operations. The financial terms of these contract arrangements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows that do not match the periods over which services are provided or milestones are met under the associated research and development contract. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. We make estimates of our accrued research and development expenses as of each balance sheet date based on facts and circumstances known at that time. We accrue for research and development expenses for which the estimated services have been provided but we have not yet been invoiced as of the balance sheet date. There may be instances in which payments made to our service providers will temporarily exceed the level of services provided and result in a prepayment of the research and development expenses. If the actual timing of the performance of services or the level of effort varies from its estimate, we adjust the accrual or prepaid expense balance accordingly.

Our process around estimating accrued research and development expenses involves reviewing open contracts and purchase requisitions, communicating with our personnel, consultants, and research and development collaboration partners 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.

Expense payments made to Giiant pursuant to the terms of the Giiant License Agreement for qualifying development costs are expensed only as the associated research and development costs are incurred or other aspects of the drug development or related activities are achieved. In instances where the expense determined to be recognized exceeds the payments made to the Giiant, we recognize an accrual of joint development expenses. In addition, there may be instances in which payments made to Giiant will temporarily exceed the level of services provided, which results in a prepayment of the joint development expenses. We record expense payments from Giiant, if any, as a reduction to research and development expense once the expense payments are realized or realizable, which is when Company receives the cash or has an undisputed claim to the cash that is probable of collection, pursuant to the terms of the Giiant License Agreement and the principles of ASC 450, Gain Contingencies. The Company has determined that Giiant is not considered a customer under ASC 606.

Although we do not expect our estimates of research and development expenses 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.

Contingent Consideration Obligation

Pursuant to the Giiant License Agreement, we incurred a contingent consideration obligation consisting of milestone payments. Because the contingent consideration associated with the milestone payments may be settled in shares of our common stock solely at the election of the Company, we have determined it should be accounted for under ASC 480, Distinguishing Liabilities from Equityand accordingly we have recognized it as a liability measured at its estimated fair value. As of September 1, 2023, the date the contingent consideration obligation was incurred, the initial fair value of the liability was determined to be approximately $0.2 million.

At the end of each reporting period, we remeasure the contingent consideration obligation to its estimated fair value and any resulting change is recognized in research and development expenses in the consolidated statements of operations. The fair value of the contingent consideration obligation is determined using a probability-based model that estimates the likelihood of success in achieving each of the defined milestones, which is then discounted to present value using our incremental borrowing rate. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant assumptions used in the calculation of the fair value as of December 31, 2025 included a discount rate of 15.26% and management's updated projections of the likelihood of success in achieving the one remaining defined milestone based on empirical, published industry data.

As of December 31, 2025 and December 31, 2024, the entire amount of contingent consideration obligation of approximately $0.3 million and $0.2 million, respectively, was classified as a noncurrent liability in the consolidated balance sheets.

The change in the fair value of the contingent consideration obligation for the year ended December 31, 2025 was a loss of approximately $0.4 million, primarily due to an increase in the liability concurrent with the expected dosing our first patients in an exploratory Phase 1b cohort in FSCD, which with an amendment in the trial protocol we determined met the milestone definition pursuant to the Giiant License Agreement. The milestone was achieved on October 16, 2025 and we settled this a milestone payment to Giiant in cash in the amount of approximately $0.2 million in the fourth quarter of 2025.

The change in the fair value of the contingent consideration obligation for the year ended December 31, 2024 was a gain of approximately $0.1 million and was primarily due to the reduction in the milestone payments that would be due to Giiant upon the achievement of certain development milestones pursuant to an amendment to the Giiant License Agreement, partially offset by an increase in management's projected likelihood of success in achieving each of the defined milestones as a result of our commencement of a Phase 1 trial in November of 2024. The change in the revaluation of the liability in the years ended December 31, 2025 and December 31, 2024 is recognized in research and development expenses in the consolidated statements of operations.

Recently Issued and Adopted Accounting Pronouncements

See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.