C4 Therapeutics Inc.
02/26/2026 | Press release | Distributed by Public on 02/26/2026 06:50
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
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 our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A, Risk Factors, in this Annual Report on Form 10-K.
Overview
We are a clinical-stage biopharmaceutical company dedicated to delivering on the promise of targeted protein degradation, or TPD, science to create a new generation of small-molecule medicines that transform patients' lives. Leveraging our proprietary TORPEDO platform, we efficiently design and optimize small molecule protein degraders that are highly active against their desired targets by harnessing the body's natural process for destroying unwanted proteins. Our strategy is to develop degraders that modulate clinically validated disease pathways with best-in-class or first-in-class potential to address significant unmet patient needs. To date, our degraders have demonstrated oral bioavailability and catalytic activity, and we have also leveraged our capability to design compounds that are brain penetrant.
Our clinical pipeline has two oncology degraders, cemsidomide, an IKZF1 and IKZF3 degrader, for multiple myeloma, or MM, and CFT8919, an EGFR L858R degrader for non-small-cell lung cancer, or NSCLC. Our discovery strategy is focused on inflammation, neuroinflammation and neurodegeneration across validated pathways with potential to be first-in-class and where there is a strong degrader rationale.
Our most advanced product candidate, cemsidomide, is an orally bioavailable MonoDAC degrader targeting of protein targets called IKZF1 and IKZF3. Cemsidomide is currently in clinical development for multiple myeloma, or MM in a Phase 2 trial in combination with dexamethasone and a Phase 1b trial exploring cemsidomide in combination with elranatamab. Pfizer will supply elranatamab for the Phase 1b trial, pursuant to the Pfizer Agreement. With a strong mechanistic rationale and well-defined biology of targeting IKZF1 and IKZF3, as well as potential best-in-class profile,
cemsidomide has the opportunity to address a significant unmet need across multiple lines of therapy. In August 2021, the United States Food and Drug Administration, or FDA, granted orphan drug designation to cemsidomide for the treatment of MM. In September 2025 at the International Myeloma Society Annual Meeting and in December 2024, we shared data evaluating cemsidomide in combination with dexamethasone in MM that demonstrated a well-tolerated profile with compelling anti-myeloma activity.
Our other clinical oncology product candidate is CFT8919, an orally bioavailable, allosteric, mutant-selective BiDAC degrader of EGFR with an L858R mutation in NSCLC. CFT8919 is currently in clinical development in Greater China conducted by our collaboration partner, Betta Pharma. In preclinical studies, CFT8919 demonstrated equipotent anti-proliferation activity against the major EGFR-inhibitor resistance mutations, including L858R-C797S, L858R-T790M, and L858R-T790M-C797S compared to L858R single mutation in Ba/F3 cell models in vitro. In May 2023, we entered into an exclusive license and collaboration agreement with Betta Pharma for the development and commercialization of CFT8919 in Greater China, including mainland China, Hong Kong SAR, Macau SAR and Taiwan, with us retaining rights to develop and commercialize CFT8919 in the rest of the world. In November 2024, Betta Pharma initiated a Phase 1 clinical trial of CFT8919 in EGFR L858R NSCLC in Greater China and is continuing to progress the trial. Data generated from this trial will inform our ex-China clinical development strategy.
Beyond these initial product candidates, we are further diversifying our pipeline by developing new degraders for our own proprietary pipeline and for the pipeline we are developing in collaboration with Merck KGaA and Roche. We have engineered degraders that have successfully achieved blood-brain barrier penetration in preclinical studies, which is a key step in developing medicines with the potential to treat brain metastases in inflammation, neuroinflammation and neurodegeneration diseases, where degraders may be advantageous.
Recent Developments
In February, 2026, first patient was dosed in the Phase 2 MOMENTUM trial evaluating cemsidomide in combination with dexamethasone.
In October 2025, we entered into a supply agreement with Pfizer, pursuant to which Pfizer will supply elranatamab (ELREXFIO®), a B-cell maturation antigen CD3 targeted bispecific antibody, for the Phase 1b trial of cemsidomide in combination with elranatamab.
In October 2025, we raised $125 million in gross proceeds through an underwritten offering with the potential to earn up to $225 million in additional proceeds if the outstanding warrants are exercised.
Components of Operating Results
Revenues
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for the foreseeable future. Our revenues to date have been generated through research collaboration and license agreements. We recognize revenue over the expected performance period under each agreement. We expect that our revenue for the next several years will be derived primarily from our current collaboration agreements and any additional collaborations that we may enter into in the future. To date, we have not received any royalties under any of our existing collaboration agreements.
For a description of our collaboration agreements with Merck KGaA, Merck Sharp & Dohme, LLC, or Merck, Betta Pharma, Roche, and Biogen, please see Note 8, Collaboration and license agreements, to the consolidated financial statements in this Annual Report on Form 10-K.
Research and development expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, and include:
•salaries, benefits, and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
•expenses incurred under agreements with third parties, including contract research organizations and other third parties that conduct research, preclinical, and clinical activities on our behalf as well as third parties that manufacture our product candidates for use in our preclinical and clinical trials;
•costs of outside consultants, including their fees, and related travel expenses;
•the costs of laboratory supplies and acquiring materials for preclinical studies and clinical trials;
•facility-related expenses, which include direct depreciation costs of equipment and allocated expenses for rent and maintenance of facilities and other operating costs; and
•third-party licensing fees.
We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.
We expect that our research and development expenses will continue to increase substantially in connection with our planned preclinical and clinical development activities.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, legal, business development, and administrative functions. General and administrative expenses also include legal fees relating to corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative expenses will continue to increase in the future to support increased research and development activities. These increases will likely include higher costs related to the hiring of additional personnel; fees to outside consultants, lawyers, and accountants; and investor and public relations.
Impairment of long-lived assets expense
Impairment of long-lived assets expense consists of amounts that are not recoverable when the carrying amount of an asset exceeds the fair value of the asset, when changes in certain circumstances occur.
Restructuring
Restructuring expenses consist of one-time costs incurred under a reduction plan to align with the needs of the business. These costs include employee severance, benefits and related termination costs.
Other income (expense), net
Other income (expense), net primarily consists of the following:
•interest expense and amortization of our long-term debt;
•loss on extinguishment of debt; and
•interest and other income earned on our cash, cash equivalents, and marketable securities and accretion of discount on marketable securities.
Results of operations
Comparison of years ended December 31, 2025 and 2024
Revenue
Revenue from our collaboration and license agreements consisted of the following (in thousands):
| Years Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Revenue from collaboration agreements: | |||||||||||
| Merck KGaA Agreement | $ | 18,482 | $ | 7,304 | |||||||
| Merck Agreement | 6,020 | 3,979 | |||||||||
| Betta Agreement | 649 | 3,415 | |||||||||
| Roche Agreement | 8,796 | 3,988 | |||||||||
| Biogen Agreement | 2,000 | 16,898 | |||||||||
| Total revenue from collaboration agreements | $ | 35,947 | $ | 35,584 | |||||||
The $0.4 million increase in revenue from our collaboration and license agreement in the year ended December 31, 2025 as compared to the year ended December 31, 2024 is primarily driven by:
•a $11.2 million increase in revenue recognized from the Merck KGaA collaboration reflecting the prioritization of one KRAS project;
•a $4.8 million increase in revenue related to the Roche collaboration as the two active programs in the collaboration have progressed to the lead series identification achievement phase in 2025, and a milestone was earned for each program; and
•a $2.0 million increase in revenue recognized under our former exclusive license and collaboration agreement with Merck upon receipt of notice of termination in September 2025.
These increases were partially offset by:
•a $14.9 million decrease in revenue recognized under the Biogen collaboration, as the active research conducted as part of the collaboration concluded in March 2024, and a total of $16.0 million of milestones were achieved and recognized in full during 2024, compared to one $2.0 million milestone achieved and recognized in full during 2025; and
•a $2.9 million decrease in revenue recognized under the Betta Pharma collaboration, as a result higher program activity in the prior year.
Research and Development Expenses
The following table summarizes our research and development expenses (in thousands):
| Years Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Research and development expenses: | |||||||||||
| Personnel expenses | $ | 35,187 | $ | 36,752 | |||||||
| Preclinical and development expenses | 25,226 | 29,364 | |||||||||
| Clinical expenses | 19,544 | 20,808 | |||||||||
| Facilities and supplies | 14,289 | 12,349 | |||||||||
| Professional fees | 5,375 | 6,731 | |||||||||
| Intellectual property and other expenses | 4,619 | 4,633 | |||||||||
| Total research and development expenses | $ | 104,240 | $ | 110,637 | |||||||
The $6.4 million decrease in research and development expense in the year ended December 31, 2025 from the year ended December 31, 2024 is primarily driven by:
•a $4.1 million decrease in preclinical development and discovery expenses as a result of higher drug development costs in 2024 related to start up costs associated with Betta Pharma's Phase 1 trial of CFT8919;
•a $1.6 million decrease in personnel expenses related to lower stock-based compensation expense;
•a $1.4 million decrease in professional fees; and
•a $1.3 million decrease in clinical expenses as a result of our completion of the Phase 1 clinical trial of CFT1946.
These decreases were partially offset by a $1.9 million increase in facilities and supplies due to the end of our sublease agreement in June 2025.
General and Administrative Expenses
The following table summarizes our general and administrative expenses (in thousands):
| Years Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| General and administrative expenses: | |||||||||||
| Personnel expenses | $ | 25,337 | $ | 31,278 | |||||||
| Professional fees | 6,350 | 6,659 | |||||||||
| Facilities and supplies | 3,274 | 2,751 | |||||||||
| Other expenses | 1,235 | 1,436 | |||||||||
| Total general and administrative expenses | $ | 36,196 | $ | 42,124 | |||||||
The $5.9 million decrease in general and administrative expense in the year ended December 31, 2025, as compared to the year ended December 31, 2024, was primarily driven by a $5.9 million decrease in personnel expenses related to lower stock-based compensation expense.
Impairment of long-lived assets expense
The $10.7 million increase in impairment of long-lived assets expense for the year ended December 31, 2025, as compared to the year ended December 31, 2024, is a result of our entry into a new sublease agreement in September 2025, which commenced in February 2026 and will result in net negative cash flows over the term of the sublease.
Restructuring expenses
The $2.4 million decrease of restructuring expenses in the year ended December 31, 2025, as compared to the year ended December 31, 2024, is driven by the restructuring activities that occurred and were completed in 2024.
Other Income (Expense)
The $4.1 million decrease in other income (expense) for the year ended December 31, 2025 as compared to the year ended December 31, 2024 was driven by lower interest income from reduced invested balances and lower interest rates in 2025.
Liquidity and capital resources
Sources of liquidity
Since inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we continue the development of our programs. We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the sale of preferred stock, public offerings of our common stock, and payments from collaboration partners. As of December 31, 2025, we had cash, cash equivalents and marketable securities of approximately $297.1 million.
In November 2021, we filed an automatically effective registration statement on Form S-3, or the Registration Statement, with the SEC which registers the offering, issuance, and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants, and/or units of any combination thereof. We simultaneously entered into a sales agreement with Cowen and Company, LLC (now TD Securities (USA) LLC), as sales agent, to provide for the issuance and sale by us of up to $200.0 million of common stock from time to time in "at-the-market" offerings under the Registration Statement and related prospectus filed with the Registration Statement, or the 2021 ATM Program. Under this Registration Statement, the Company sold a total of 15,318,264 shares of its common stock at an average price of $5.54 per share for proceeds, net of
commissions and fees, of $82.3 million. For the year ended December 31, 2025, 4,132,122 shares of common stock, for net proceeds of $24.4 million, settled under the 2021 ATM Program.
In connection with the execution of the Betta Pharma License Agreement, we entered into a stock purchase agreement dated May 29, 2023, or the Betta Stock Purchase Agreement, with Betta Pharma and an affiliate of Betta Pharma, Betta Investment (Hong Kong) Limited, or Betta Investment, pursuant to which Betta Investment agreed to purchase 5,567,928 shares of the Company's common stock for an aggregate purchase price of approximately $25.0 million, or $4.49 per share, which represented a 25% premium over the 60-trading-day volume weighted average closing price as of two trading days prior to the effective date of the Betta Stock Purchase Agreement. The $25.0 million of proceeds that we received were recorded as $20.0 millionfor the issuance of shares, with the remaining $5.0 million of premium paid on the share price recorded as consideration for revenue under the Betta Pharma License Agreement.The Betta Stock Purchase Agreement has certain restrictions customary to agreements of this nature. Closing under the Betta Stock Purchase Agreement occurred in January 2024 (see Note 8).
In October 2024, the Company filed a registration statement on Form S-3, or the 2024 Registration Statement, with the SEC that became effective on November 13, 2024 and registered the offering, issuance and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. Simultaneously, the Company entered into a sales agreement with TD Securities (USA) LLC, as sales agent, to provide for the issuance and sale by the Company of up to $200.0 million of common stock from time to time in "at-the-market" offerings under the 2024 Registration Statement and related prospectus filed with the 2024 Registration Statement, or the 2024 ATM Program. For the year ended December 31, 2025, a total of 3,769,483 shares of the Company's common stock at an average purchase price of $2.55 had been sold through the 2024 ATM Program, resulting in net proceeds of $9.4 million. No sales were made in 2024 under the 2024 ATM Program. In October 2025, the Company terminated the sales agreement prospectus related to the 2024 ATM Program.
In October 2025, we entered into an underwriting agreement, or the Underwriting Agreement, with Jefferies LLC, TD Securities (USA) LLC and Evercore Group LLC, or collectively, the Underwriters, related to the 2025 Offering, of (i) 21,895,000 shares, or the Shares, of the Company's common stock, par value $0.0001 per share, or the Common Stock; (ii) in lieu of Common Stock to certain investors, Pre-Funded Warrants to purchase an aggregate of 28,713,500 shares of Common Stock, or the Pre-Funded Warrants; (iii) accompanying Class A Warrants to purchase an aggregate of 50,608,500 shares of Common Stock (or pre-funded warrants in lieu thereof), or the Class A Warrants, and together with the Class B Warrants (as defined below), the Class A and Class B Warrants; and (iv) accompanying Class B Warrants to purchase an aggregate of 50,608,500 shares of Common Stock (or pre-funded warrants in lieu thereof), or the Class B Warrants, and together with the Pre-Funded Warrants and the Class A Warrants, the Warrants. Each Share was offered and sold together with accompanying Class A and Class B Warrants each exercisable for one share of Common Stock at a combined offering price of $2.47 per Share and accompanying Class A and Class B Warrants, and each Pre-Funded Warrant was offered and sold together with accompanying Class A and Class B Warrants at a combined offering price of $2.4699 per Pre-Funded Warrant and accompanying Class A and Class B Warrants. We received net proceeds from the 2025 Offering, after deducting the underwriting discount and commissions and estimated offering expenses, of approximately $116.9 million. If all Warrants are exercised, the aggregate net proceeds to us from the 2025 Offering, after deducting underwriting discounts and commissions and estimated offering expenses, are expected to be $341.7 million.
In November 2025, the Company filed a registration statement on Form S-3, or the 2025 Registration Statement, with the SEC that became effective on December 10, 2025 and registered the offering, issuance and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. Simultaneously, the Company entered into a sales agreement with TD Securities (USA) LLC, as sales agent, to provide for the issuance and sale by the Company of up to $125.0 million of common stock from time to time in "at-the-market" offerings under the 2025 Registration Statement and related prospectus filed with the 2025 Registration Statement, or the 2025 ATM Program. No sales have been made under the 2025 ATM program for the year ended December 31, 2025 (See Note 9).
Cash flows
The following table summarizes our sources and uses of cash for the period presented (in thousands):
| Years Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Net change in cash, cash equivalents and restricted cash: | |||||||||||
| Net cash used in operating activities | $ | (98,694) | $ | (65,157) | |||||||
| Net cash used in investing activities | (8,601) | (51,270) | |||||||||
| Net cash provided by financing activities | 126,399 | 45,336 | |||||||||
| Net change in cash, cash equivalents and restricted cash | $ | 19,104 | $ | (71,091) | |||||||
Operating activities
Net cash used in operating activities was $98.7 million for the year ended December 31, 2025 and was driven primarily by:
•our net loss of $105.0 million;
•a $18.8 million decrease in deferred revenue;
•a $6.0 million decrease in accrued expenses and other current liabilities; and
•a $5.8 million decrease in the operating lease liability.
These amounts were partially offset by $38.2 million of non-cash expense related to stock compensation expense, depreciation and amortization, and reduction in carrying amount of our right-of-use asset;
Net cash used in operating activities for the year ended December 31, 2024 was driven primarily by:
•our net loss of $105.3 million;
•a $5.2 million decrease in the operating lease liability;
•a $4.3 million increase in prepaid expenses and current and long-term assets; and
•a $1.3 million decrease in accrued expenses and other liabilities.
These amounts were partially offset by:
•a $37.9 million of non-cash expense related to stock compensation expense, depreciation, and reduction in carrying amount of our right-of-use asset;
•a $9.9 million increase in deferred revenue due to the recognition of revenue under our collaboration agreements; and
•an $8.7 million decrease in accounts receivable.
Investing activities
The $8.6 million of net cash used in investing activities for the year ended December 31, 2025 was attributable to $8.0 million for the purchases of marketable securities, net of sales and proceeds from maturities.
The $51.3 million of net cash used in investing activities for the year ended December 31, 2024 was attributable to $51.1 million for the purchases of marketable securities, net sales and proceeds from maturities.
Financing activities
The $126.4 million of net cash provided by financing activities for the year ended December 31, 2025 was primarily driven by:
•$116.9 million of net proceeds from our underwritten offering; and
•$9.3 million of net proceeds from our at-the-market offering.
The $45.3 million of net cash provided by financing activities for the year ended December 31, 2024 was primarily driven by:
•$24.4 million of net proceeds from our at-the-market offering; and
•$20.0 million in proceeds for the closing of the Betta Stock Purchase Agreement.
Funding requirements
Since our inception, we have incurred significant operating losses, and we expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates. In addition, we expect to continue to incur costs associated with operating as a public company.
Specifically, we anticipate that our expenses will increase in the future, if and as we:
•continue our ongoing first-in-human Phase 1/2 trials and advance our product candidates into later stage trials;
•advance additional product candidates into preclinical and clinical development;
•continue to invest in our proprietary TORPEDO platform;
•advance, expand, maintain, and protect our intellectual property portfolio;
•manage staffing needs to meet the changing needs of our business as we advance additional product candidates or continue to develop existing product candidates;
•seek marketing approvals for any product candidates that successfully complete clinical trials; and
•ultimately establish a sales, marketing, and distribution infrastructure and scale up external manufacturing capabilities to commercialize any products for which we may obtain marketing approval.
Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital and operating costs associated with our current and anticipated preclinical and clinical development. Our future capital requirements will depend on many factors, including:
•the progress, costs, and results of ongoing and planned first-in-human clinical trials for our lead product candidates and any future clinical development of those lead product candidates;
•the scope, progress, costs, and results of preclinical and clinical development for our other product candidates and development programs;
•the number and development requirements of other product candidates that we pursue;
•the progress and success of our existing and any future collaborations with third party partners, including whether or not we receive additional research support or milestone payments from our collaboration partners upon the achievement of milestones;
•the costs, timing, and outcome of regulatory review of our product candidates;
•the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
•our willingness and ability to establish additional collaboration arrangements with other biotechnology or pharmaceutical companies on favorable terms, if at all, for the development or commercialization of current or additional future product candidates;
•the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; and
•the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval.
As a result of the anticipated expenditures described above, we will need to obtain substantial additional financing to support our continuing operations and pursue our long-term business plan. Until such time, if ever, that we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt offerings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. Although we may receive potential future milestone and royalty payments under our collaborations with Merck KGaA, Betta Pharma, Roche, and Biogen, we do not have any committed external source of funds as of December 31, 2025. Adequate additional funds may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
If we raise additional capital through the sale of equity securities, each investor's ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common
stockholder. Preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as making acquisitions or capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.
Contractual obligations
The following is a summary of our significant contractual obligations as of December 31, 2025 (in thousands):
| Total |
Less than 1 Year |
1 to 3 Years |
4 to 5 Years |
More than 5 Years |
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|
Operating lease commitments
(see Note 6)
|
$ | 71,125 | $ | 9,366 | $ | 21,008 | $ | 25,198 | $ | 15,553 | |||||||||||||||||||
We enter into contracts in the normal course of business with third-party CROs for clinical trials, preclinical studies, manufacturing and other services and products for operating purposes. These contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancelable obligations under these agreements are not material, and they are not included in the table above. We have not included milestone or royalty payments or other contractual payment obligations in the table above if the timing and amount of such obligations are unknown or uncertain.
Critical accounting estimates
This management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or the United States GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. 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. We evaluate our estimates and assumptions on an ongoing basis. Our 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, Summary of significant accounting policies, to our consolidated financial statements in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenues from contracts
We account for our revenue in accordance with Accounting Standards Codification, or ASC, 606,Revenue from Contracts with Customers, or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps at inception of the agreement or upon material modification of the agreement: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
We consider the pattern of satisfaction of the performance obligations under step (v) above to be a critical accounting estimate. More specifically, the determination of the level of achievement of research and development service performance obligations, whose pattern of satisfaction is measured using costs incurred to date as compared to total costs incurred and expected to be incurred in the future is driven by a critical accounting estimate.
In estimating the costs expected to be incurred in the future, management uses its most recent budget and long-range plan, adjusted for any pertinent information. While this is our best estimate as of the reporting period, costs expected to be incurred in the future require management judgment as the scope and timing of research and development activities may change significantly over time. We may adjust the scope of our research and development activities based on several factors, such as additional work needed to support advancement of a product candidate or a change in the number of patients in trials. Further, research and development services may no longer be within the scope of a collaboration agreement, as has been the case with certain of our programs. The timing of when research and development costs are expected to be incurred may change as a result of external factors, such as delays caused by manufacturing or supply chain, or difficulty in enrolling patients; or internal factors, such as prioritization of programs. Our estimate of the scope and
timing of research and development services performed relative to the actual scope and timing may have a significant impact on revenue recognition.
Prepaid and accrued research and development expenses
As part of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing quotations and contracts, identifying 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 the accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. In addition, 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 expense, in which case such amounts are reflected as prepaid expenses and other current assets. 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 the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could have a significant impact on reported amounts.
Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other current assets. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Operating leases (incremental borrowing rate)
We account for leases in accordance with ASC Topic 842, Leases, or ASC 842. Under ASC 842, at inception or upon modification of a lease arrangement, we may be required to remeasure our lease liabilities and the corresponding right-of-use assets. The lease liability is measured by calculating the present value of lease payments under the lease arrangement using the incremental borrowing rate. Incremental borrowing rate is the rate of interest that we would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term equal to the lease term in a similar economic environment.
Since the incremental borrowing rates implicit in our leases are not readily determinable, we use the estimated incremental borrowing rates based on the information available at commencement date in determining the discount rate used to calculate the present value of lease payments. As we have no recent external borrowings, the incremental borrowing rates are determined using information on indicative borrowing rates that would be available to us based on the value and borrowing term provided by financial institutions, adjusted for company and market specific factors. This determination requires management judgment, including when determining peer groups, our own risk profile, and when adjusting for company and market specific factors.
Although we do not expect our estimates of the incremental borrowing rates to generate material differences within a reasonable range of sensitivities, judgment is involved in selecting an appropriate rate, and the rate selected for our leases will have an impact on the value of the lease liability and corresponding right-of-use asset in the consolidated balance sheets.
Stock options
We account for all stock-based awards granted to employees and non-employees as stock-based compensation expense at fair value. Our stock-based payments include stock options, restricted stock units, and grants of common stock, including common stock subject to vesting. The measurement date for awards is the date of grant, and stock-based compensation costs are recognized as expense over the requisite service period, which is generally the vesting period, on a straight-line basis. Stock-based compensation expense is classified in the consolidated statements of operations and comprehensive loss based on the function to which the related services are provided. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model includes various assumptions, including the expected term of the award, the expected volatility and the expected risk-free interest rate over the expected term of the award, expected dividend payments, and the fair value of the common stock underlying the stock-based award.
We consider the expected volatility to be a critical accounting estimate. As we do not have sufficient trading history, we use the average historical volatility of a representative group of publicly traded biopharmaceutical companies, including our own, to calculate the expected volatility for use in the Black-Scholes option pricing model. This assumption reflects our
best estimate, but it involves inherent uncertainties based on market conditions generally outside our control. As a result, if a different volatility had been used, stock-based compensation cost could have been materially impacted.
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