Sionna Therapeutics, Inc.

Previous wording

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report. This discussion and analysis and other parts of this Annual Report contain forward-looking statements based upon our current plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and beliefs. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report. You should carefully read the “Risk Factors” section of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Also see the section titled “Cautionary Note Regarding Forward-Looking Statements.”

Current wording

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report. This discussion and analysis and other parts of this Annual Report contain forward-looking statements based upon our current plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and beliefs. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report. You should carefully read the “Risk Factors” section of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Also see the section titled “Cautionary Note Regarding Forward-Looking Statements.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future. For convenience of presentation, some of the numbers have been rounded in the text below.

Previous wording

We are a clinical-stage biopharmaceutical company on a mission to revolutionize the current treatment paradigm for cystic fibrosis (“CF”) patients by developing novel medicines that normalize the function of the cystic fibrosis transmembrane conductance regulator (“CFTR”) protein to deliver clinically meaningful benefit to CF patients. Our goal is to deliver differentiated medicines for people living with CF that can restore their CFTR function to as close to normal as possible by directly stabilizing CFTR’s nucleotide-binding domain 1 (“NBD1”). We believe stabilizing NBD1 is central to unlocking dramatic improvements in clinical outcomes and quality of life for CF patients.

Current wording

We are a clinical-stage biopharmaceutical company on a mission to revolutionize the current treatment paradigm for cystic fibrosis (“CF”) by developing novel medicines that normalize the function of the cystic fibrosis transmembrane conductance regulator (“CFTR”) protein to deliver clinically meaningful benefit to people with CF. Our goal is to deliver differentiated medicines for people with CF that can restore their CFTR function to as close to normal as possible by directly stabilizing CFTR’s nucleotide binding domain 1 (“NBD1”). We believe stabilizing NBD1 is central to unlocking dramatic improvements in clinical outcomes and quality of life for people with CF. We are also advancing a portfolio of complementary CFTR modulator candidates designed to work synergistically with our NBD1 stabilizers to improve CFTR function, as seen in preclinical models.

Previous wording

Since our inception in 2019, we have not generated any revenue. Historically we had funded our operations primarily with proceeds from the sale and issuance of our preferred stock. As of December 31, 2024, we raised aggregate net proceeds of $330.4 million from the sale and issuance of our preferred stock. In February 2025, we completed our initial public offering ("IPO") and raised aggregate net proceeds of$199.6 million from the sale of 12,176,467 shares of common stock, which included 1,588,234 shares of common stock sold pursuant to the underwriters' full exercise of their option to purchase additional shares.

Current wording

Since our inception, we have funded our operations primarily with proceeds from private placements of convertible preferred stock and through net proceeds from our IPO. During 2025, we completed our IPO and raised aggregate net proceeds of$199.6 million from the sale of 12,176,467 shares of common stock, which included 1,588,234 shares of common stock sold pursuant to the underwriters' full exercise of their option to purchase additional shares. As of December 31, 2025, we have raised aggregate net proceeds of$530.0 million. We have not generated any revenue from product sales or other sources.

Previous wording

Due to our significant research, development and manufacturing expenditures, we have accumulated substantial losses and negative cash flows since our inception, including net losses of $61.7 million and $47.3 million for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, we had an accumulated deficit of $181.1 million.

Current wording

Due to our significant research, development and manufacturing expenditures, we have accumulated substantial losses and negative cash flows since our inception, including net losses of $75.3 million and $61.7 million for the years ended December 31, 2025 and 2024, respectively. As of December 31, 2025, we had an accumulated deficit of $256.4 million.

Previous wording

•continue to advance the clinical development of our current and future product candidates, including an NBD1 stabilizer product candidate;

Current wording

•continue to advance the clinical development of our current and future product candidates;

Previous wording

•pursue regulatory approvals for any current or future product candidates, including an NBD1 stabilizer product candidate, that successfully complete clinical trials;

Current wording

•pursue regulatory approvals for any current or future product candidates that successfully complete clinical trials;

Previous wording

We do not have any products approved for sale and have not generated any revenue from product sales. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our current and any future product candidates, which we expect will take a number of years or may never occur. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings or other capital sources, potentially including collaborations, licenses or other strategic arrangements. See the section titled “—Liquidity and Capital Resources.” We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates, or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

Current wording

We do not have any products approved for sale and have not generated any revenue from product sales. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our current or any future product candidates, which we expect will take a number of years or may never occur. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings or other capital sources, potentially including collaborations, licenses or other strategic arrangements. See the section titled “—Liquidity and Capital Resources.” We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates, or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

Previous wording

As of December 31, 2024, we had cash, cash equivalents and marketable securities of $168.0 million. Based upon our current operating plans, we believe that the net proceeds from the IPO, together with our existing cash, cash equivalents and marketable securities, will be sufficient to fund our operations into 2028. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. In addition, we could utilize our available capital resources sooner than we expect. See the sections titled “—Liquidity and Capital Resources” and “Risk Factors—Risks Related to Our Limited Operating History, Financial Condition and Need for Additional Capital” included elsewhere in this Annual Report.

Current wording

As of December 31, 2025, we had cash, cash equivalents and marketable securities of $310.3 million. Based upon our current operating plans, we believe that our existing cash, cash equivalents and marketable securities, will be sufficient to fund our operations into 2028. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. In addition, we could utilize our available capital resources sooner than we expect. See the sections titled “—Liquidity and Capital Resources” and “Risk Factors—Risks Related to Our Limited Operating History, Financial Condition and Need for Additional Capital” included elsewhere in this Annual Report.

Previous wording

As initial consideration for CFF’s grant of, and forbearance from exercising, its rights under the CFFT-Genzyme Agreement, we paid an upfront fee of $0.2 million and issued CFF shares of our preferred stock, valued at $1.0 million, which were previously recorded as research and development expenses. In addition, we agreed to pay CFF a sub-teen double-digit percentage of any amounts paid by us to Sanofi under the Sanofi License Agreement, other than milestone, royalty or reimbursement payments. We are required to pay CFF a total of up to $40.0 million upon achievement of certain late-stage developmental and commercial milestones. As of December 31, 2024, no milestones were achieved. We are also required to pay revenue-shares of royalty payments to CFF in the low single-digit percentage range based on net sales of licensed products, subject to customary reductions and offsets. Such milestone and royalty payments shall be reduced for products covered by derived patents. Further, a side letter was executed between us and Sanofi, which clarifies the relationship between us, Sanofi and CFF, under which we are obligated to pay Sanofi 20% of the milestones it would have been obligated to pay CFF, net of the milestone amounts it is obligated to pay under the Sanofi License Agreement.

Current wording

License Agreement, other than milestone, royalty or reimbursement payments. We are required to pay CFF a total of up to $40.0 million upon achievement of certain late-stage developmental and commercial milestones. As of December 31, 2025, no milestones were achieved. We are also required to pay revenue-shares of royalty payments to CFF in the low single-digit percentage range based on net sales of licensed products, subject to customary reductions and offsets. Such milestone and royalty payments shall be reduced for products covered by derived patents. Further, a side letter was executed between us and Sanofi, which clarifies the relationship between us, Sanofi and CFF, under which we are obligated to pay Sanofi 20% of the milestones it would have been obligated to pay CFF, net of the milestone amounts it is obligated to pay under the Sanofi License Agreement.

Previous wording

Galapagos pursuant to the Galapagos License Agreement, to the extent such payments are triggered by our use of the licensed rights owned by Galapagos under the AbbVie License Agreement. There were no milestones achieved under the AbbVie License Agreement and Galapagos License Agreement as of December 31, 2024.

Current wording

In addition, we are required to pay AbbVie up to $130.0 million in commercial and sales-based milestone payments, mid to high single-digit royalties on the licensed products or other payments due to Galapagos pursuant to the Galapagos License Agreement, to the extent such payments are triggered by our use of the licensed rights owned by Galapagos under the AbbVie License Agreement. There were no milestones achieved under the AbbVie License Agreement and Galapagos License Agreement as of December 31, 2025.

Previous wording

To date, we have not generated any revenue. In the future, we may generate revenue from product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever, as well as collaboration or license agreements we may enter into with respect to our current or future product candidates. If our development efforts for our current or future product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when or to what extent we will generate revenue as we may never succeed in obtaining regulatory approval for any of our product candidates. If we fail to complete preclinical and clinical development of our current or future product candidates or fail to obtain regulatory approval for any that successfully complete clinical trials, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Current wording

To date, we have not generated any revenue. In the future, we may generate revenue from product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever, as well as collaboration or license agreements we may enter into with respect to our current or future product candidates. We cannot predict if, when or to what extent we will generate revenue as we may never succeed in obtaining regulatory approval for any of our product candidates. If we fail to complete preclinical and clinical development of our current or future product candidates or fail to obtain regulatory approval for any that successfully complete clinical trials, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Previous wording

•the development of commercial-scale manufacturing and distribution processes for our current any future product candidates;

Current wording

•the development of commercial-scale manufacturing and distribution processes for our current and any future product candidates;

Previous wording

A change in the outcome of any of these variables with respect to the development of any current or future product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to delay a planned start of a clinical trial or require us to conduct clinical trials beyond those that we currently anticipate would be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to slower than expected patient enrollment or other reasons, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. We do not have control over many of these factors, including certain aspects of clinical development, the regulatory submissions process, potential threats to our intellectual property rights and general political and economic conditions that may negatively impact our business in the future. We may never obtain regulatory approval for any of our product candidates, and, even if we do, drug commercialization takes several years and millions of dollars in development costs.

Current wording

A change in the outcome of any of these variables with respect to the development of any current or future product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration ("FDA") or another regulatory authority were to delay a planned start of a clinical trial or require us to conduct clinical trials beyond those that we currently anticipate would be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to slower than expected patient enrollment or other reasons, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. We do not have control over many of these factors, including certain aspects of clinical development, the regulatory submissions process, potential threats to our intellectual property rights and general political and economic conditions that may negatively impact our business in the future. We may never obtain regulatory approval for any of our product candidates, and, even if we do, drug commercialization takes several years and millions of dollars in development costs.

Previous wording

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll tax, bonuses, benefits and stock-based compensation charges for those individuals in executive, legal, finance, human resources, information technology and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for auditing, accounting, tax and consulting services, office and information technology costs, insurance costs and facilities, depreciation and other general and administrative expenses that are allocated. We recognize general and administrative expenses in the periods in which they are incurred.

Current wording

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll tax, bonuses, benefits and stock-based compensation charges for those individuals in executive, legal, finance, human resources, business development, information technology and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for auditing, accounting, tax and consulting services. Lastly, corporate overhead expenses such as information technology, insurance, facilities, and depreciation that are not allocated to the Company’s research and development activities are included in general and administrative expenses. We recognize general and administrative expenses in the periods in which they are incurred.

Previous wording

Interest income consists primarily of interest earned and the amortization of discount or premiums on our cash equivalents and marketable securities. We expect our interest income will increase as we invest the cash received from the net proceeds from the IPO.

Current wording

Interest income consists primarily of interest earned and the amortization of discount or premiums on our cash equivalents and marketable securities. Interest income increased in 2025 primarily due to the investment of proceeds from our IPO. We expect interest income to decrease in future periods as our investment balances are reduced through operating activities.

Previous wording

As of December 31, 2024 and 2023, we had $65.6 million and $48.2 million of federal operating loss carryforwards, and $68.2 million and $47.1 million of state operating loss carryforwards, respectively. The federal NOLs are not subject to expiration and the state NOLs begin to expire in 2044. These loss carryforwards are available to reduce future federal taxable income, if any. As of December 31, 2024 and 2023, we have recorded a full valuation allowance against our net deferred tax assets.

Current wording

As of December 31, 2025 and 2024, we had $148.0 million and $65.6 million of federal net operating loss ("NOL") carryforwards, and $155.4 million and $68.2 million of state NOL carryforwards, respectively. The federal NOLs are not subject to expiration and the state NOLs begin to expire in 2045. These loss carryforwards are available to reduce future federal taxable income, if any. As of December 31, 2025 and 2024, we have recorded a full valuation allowance against our net deferred tax assets.

Previous wording

Research and development expenses increased by $16.7 million to $57.3 million for the year ended December 31, 2024, from $40.6 million for the year ended December 31, 2023. The change in research and development expenses was primarily due to the following:

Current wording

Research and development expenses increased by $3.0 million to $60.3 million for the year ended December 31, 2025, from $57.3 million for the year ended December 31, 2024. The increase in research and development expenses was primarily due to:

Previous wording

General and administrative expenses increased by $3.6 million to $13.3 million for the year ended December 31, 2024, from $9.7 million for the year ended December 31, 2023. The increase in general and administrative expenses was primarily due to:

Current wording

General and administrative expenses increased by $15.5 million to $28.7 million for the year ended December 31, 2025, from $13.3 million for the year ended December 31, 2024. The increase in general and administrative expenses was primarily due to:

Previous wording

•$1.9 million increase in personnel-related expenses due to an increase in stock-based compensation; and

Current wording

•$11.1 million increase in personnel-related expenses including stock-based compensation, driven by an increase in the size of our workforce; and

Previous wording

•$1.5 million increase in fees related to the increased use of consultants and professional service organizations.

Current wording

•$4.0 million increase in fees related to the use of third parties, including consultants and professional service organizations.

Previous wording

Interest income increased by $5.4 million to $8.2 million for the year ended December 31, 2024, from $2.8 million for the year ended December 31, 2023, primarily driven by an increased investment in debt securities due to the proceeds received from the issuance of our Series C preferred stock (the “Series C Financing”) and the amortization of discounts on our investment activity.

Current wording

Interest income increased by $5.1 million to $13.3 million for the year ended December 31, 2025, from $8.2 million for the year ended December 31, 2024, primarily driven by an increased investment in debt securities due to the proceeds received from the initial public offering.

Previous wording

Other income increased by $0.4 million to $0.7 million for the year ended December 31, 2024, from $0.3 million for the year ended December 31, 2023, driven by sublease income in connection with our subleasing agreement.

Current wording

Other income was $0.4 million and $0.7 million for the years ended December 31, 2025, and 2024, respectively, due to sublease income in connection with our subleasing agreement.

Previous wording

Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from operations. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our product candidates and any future product candidates. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings or strategic agreements.

Current wording

Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from operations. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our product candidates and any future product candidates. As such, we expect our research and development and general and administrative costs will continue to increase significantly, including the costs associated with operating as a public company. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings or strategic agreements.

Previous wording

We have funded our operations historically primarily from the sale of proceeds of preferred stock. As of December 31, 2024, we had raised aggregate net proceeds of $330.4 million from the sale of our preferred stock. As of December 31, 2024, we had $168.0 million in cash, cash equivalents and marketable securities.

Current wording

As of December 31, 2025, we had $310.3 million in cash, cash equivalents and marketable securities.

Previous wording

For the year ended December 31, 2023, net cash used in operating activities was $43.7 million primarily due to our net loss of $47.3 million and changes in operating assets and liabilities of $0.8 million, partially offset by $4.4 million of non-cash charges related to stock-based compensation, depreciation, non-cash operating lease expense and amortization of discounts on marketable securities.

Current wording

For the year ended December 31, 2025, net cash used in operating activities was $66.3 million primarily due to our net loss of $75.3 million and changes in operating assets and liabilities of $2.7 million, partially offset by $11.6 million of non-cash charges related to stock-based compensation, depreciation, non-cash operating lease expense and amortization of discounts on marketable securities.

Previous wording

For the year ended December 31, 2024, net cash used in operating activities was $52.8 million primarily due to our net loss of $61.7 million and changes in operating assets and liabilities of $3.1 million, partially offset by $12.0 million of non-cash charges related to non-cash license expense, stock-based compensation, depreciation, non-cash operating lease expense and amortization of discounts on marketable securities.

Current wording

For the year ended December 31, 2024, net cash used in operating activities was $52.8 million primarily due to our net loss of $61.7 million and changes in operating assets and liabilities of $3.1 million, partially offset by $12.0 million of non-cash charges related to stock-based compensation, depreciation, non-cash operating lease expense and amortization of discounts on marketable securities.

Previous wording

Net cash provided by investing activities was $27.4 million during the year ended December 31, 2023, which was primarily driven by maturities of marketable securities of $52.0 million, partially offset by purchases of marketable securities for $23.5 million and purchases of property and equipment of $1.1 million.

Current wording

Net cash used in investing activities was $118.7 million during the year ended December 31, 2025, which was primarily driven by purchases of marketable securities of $325.0 million and purchases of property and equipment of $0.4 million, partially offset by maturities of marketable securities of $206.7 million.

Previous wording

Net cash used in investing activities was $126.9 million during the year ended December 31, 2024, which was primarily driven by purchases of marketable securities of $182.8 million, partially offset by maturities of marketable securities of $56.0 million.

Current wording

Net cash used in investing activities was $126.9 million during the year ended December 31, 2024, which was primarily driven by purchases of marketable securities for $182.8 million, partially offset by maturities of marketable securities of $56.0 million.

Previous wording

Net cash provided by financing activities was $179.0 million during the year ended December 31, 2024, as compared to $31,000 during the year ended December 31, 2023. The increase in net cash provided by financing activities was primarily due to the Series C Financing which occurred in March 2024, compared to no financings completed during 2023, partially offset by $2.5 million of payments for offering costs related to our IPO, which closed in February 2025.

Current wording

Net cash provided by financing activities was $179.0 million during the year ended December 31, 2024, during which time the Company closed its Series C Financing.

Previous wording

As of December 31, 2024, we had cash, cash equivalents and marketable securities of $168.0 million. Based upon our current operating plans, we believe that the net proceeds from our IPO, together with our existing cash, cash equivalents and marketable securities, will be sufficient to fund our operations into 2028. However, our forecast for the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Additionally, conducting preclinical studies and clinical trials is costly, and the timing of progress and expenses in these studies and trials is uncertain. We will need to raise substantial additional capital in the future.

Current wording

As of December 31, 2025, we had cash, cash equivalents and marketable securities of $310.3 million. Based upon our current operating plans, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations into 2028. However, our forecast for the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Additionally, conducting preclinical studies and clinical trials is costly, and the timing of progress and expenses in these studies and trials is uncertain. We will need to raise substantial additional capital in the future.

Previous wording

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

Current wording

•the costs associated with hiring additional personnel and consultants as our clinical and pre-commercial activities increase;

Previous wording

We enter into contracts in the normal course of business with CROs, CDMOs and other vendors to assist in the research and development activities and other services and products for operating purposes. These contracts generally provide for termination at any time upon a certain amount of prior notice.

Current wording

We enter into contracts in the ordinary course of business with CROs, CDMOs and other vendors to assist in the research and development activities and other services and products for operating purposes. These contracts generally provide for termination at any time upon a certain amount of prior notice.

Previous wording

We measure stock-based awards granted to employees, directors and non-employees based on their fair value on the date of the grant. We recognize compensation expense for awards to employees and directors over the requisite service period, which is generally the vesting period of the respective award. Compensation expense for awards to non-employees with service-based vesting conditions is recognized in the same manner as if we had paid cash in exchange for the goods or services, which is generally over the vesting period of the award. For stock-based awards with service-based vesting conditions, we recognize compensation expense using the straight-line method. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option and our expected dividend yield. 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 judgment to develop. See Note 12, “Stock-based Compensation” in our consolidated financial statements included elsewhere in this Annual Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted for the years ended December 31, 2024 and 2023. For awards to non-employees, the expected term of the option is equal to the contractual term of the non-employees’ service agreement. The fair value of each restricted common stock award is estimated on the date of grant based on the fair value of our common stock on that same date.

Current wording

We measure all stock options and other stock-based awards granted to employees, directors and non-employees based on their fair value on the date of the grant. We recognize compensation expense for awards to employees and directors over the requisite service period, which is generally the vesting period of the respective award. Compensation expense for awards to non-employees with service-based vesting conditions is recognized in the same manner as if we had paid cash in exchange for the goods or services, which is generally over the vesting period of the award. Our stock-based payments include stock options and grants of restricted common stock awards. For stock-based awards with service-based vesting conditions, we recognize compensation expense using the straight-line method. The fair value of each restricted common stock award is estimated on the date of grant based on the fair value of our common stock on that same date. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option and our expected dividend yield. 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 judgment to develop. See Note 12, “Stock-based Compensation” in our consolidated financial statements included elsewhere in this Annual Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted for the years ended December 31, 2025 and 2024. For awards to non-employees, the expected term of the option is equal to the contractual term of the non-employees’ service agreement.

Previous wording

Prior to our IPO, there was no public market for our common stock. As a result, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant with input from management, considering our most recently available third-party valuations of common stock, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuation was prepared using either the option pricing method (“OPM”) or the hybrid method, both of which used a market approach to estimate our equity value. The OPM treats common stock and convertible preferred stock as call options on the equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under the OPM, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the convertible preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. The hybrid method is a probability-weighted expected return method ("PWERM") where the equity value in one or more of the scenarios is calculated using an OPM. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for us assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.

Current wording

Prior to the completion of our IPO, there was no public market for our common stock. As a result, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant with input from management, considering our most recently available third-party valuations of common stock, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, including the option pricing method and the probability-weighted expected return method. These methodologies required the use of significant management judgment and assumptions.