Management’s discussion and analysis of our financial condition and results of operations is based on the audited consolidated financial statements included elsewhere in this Form 10-K, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on 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. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Research and Development Expenses and Accruals
We estimate costs of research and development activities conducted by service providers, which include, the conduct of sponsored research, preclinical studies and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued expenses and other current liabilities or prepaid expenses and other current assets on the balance sheets and within research and development expense on the statements of operations.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. As actual costs become known, we adjust accrued liabilities or prepaid expenses. While our actual results could differ from their estimates, we have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical trial investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify estimates of accrued expenses accordingly on a prospective basis.
Ligand Agreement
Under the terms of the Amended Ligand Agreement, we received $15.0 million to fund the development of QTORIN rapamycin, in exchange for Ligand’s right to receive future payments based on the development and commercialization of products covered under the Amended Ligand Agreement. Ligand is entitled to receive up to an additional $5.0 million of milestone payments upon the achievement of certain regulatory milestones by us related to QTORIN rapamycin for the treatment of any and all indications. Our obligation to make milestone payments under the Amended Ligand Agreement was determined to be a derivative liability, and our obligation to make future royalty payments was determined to be a debt instrument.
The accounting for liabilities under the Amended Ligand Agreement requires us to make certain estimates and assumptions about the timing and probability of FDA approval and commercialization, and the amount of future net sales for any product containing QTORIN rapamycin. The estimated future net sales are based on subjective
assumptions that include the estimated size of the addressable patient population and the anticipated pricing of the Company’s products. These assumptions are subject to significant variability, and are thus subject to significant uncertainty.
Royalty payments will be recorded as debt service payments on the royalty agreement liability. Interest expense is determined using the effective interest method based upon risk adjusted cash flow estimates of our expected future royalty payments, yielding an effective interest rate of 44.9% and 39.9% as of December 31, 2025 and 2024, respectively. The effective interest rate is estimated at each balance sheet date based on the rate that would enable the liability to be repaid in full over the anticipated life of the arrangement. This effective interest rate will likely be subject to variability as we continue the development and commercialization of our products. The derivative liabilities — royalty agreement is classified as long term on our balance sheet according to the estimated timing of the occurrence of potential payments.
The fair value of the derivative liabilities — royalty agreement with respect to the potential milestone payments is determined based upon the estimated probabilities and timing of the achievement of milestones, discounted to present value using our estimated weighted average cost of capital. The assumptions used to determine the fair value of the derivative liabilities — royalty agreement at December 31, 2025 and 2024 were (a) weighted cost of capital of 18.0% and 20.0%; and (b) 56.6% and 56.6% probability of achieving regulatory approval of a product by the FDA with a term of 1.50 years and 2.50 years, respectively. Gains and losses arising from changes in fair value of the derivative liabilities — royalty agreement are recognized within our statements of operations as fair value adjustments on the derivative liabilities — royalty agreement and in the balance sheet as a non-current liability for each financial reporting period.
Our estimates and assumptions with respect to the royalty agreement liability and derivative liabilities — royalty agreement are likely to change as we develop and commercialize QTORIN rapamycin, if approved. Any such adjustments that may become necessary will impact the recorded value of the royalty agreement liability and the derivative liabilities — royalty agreement, the accretion of interest expense on the royalty agreement liability and the fair value adjustments on derivative liabilities — royalty agreement.
CVR Agreement
Under the terms of the CVR Agreement, legacy Pieris stockholder’s have the right to receive payments upon the receipt of payments by the us or any of our affiliates under certain strategic partner agreements, including existing collaboration agreements pursuant to which we may be entitled to milestones and royalties in the future and other out-licensing agreements for certain of Pieris’s legacy assets, and upon the receipt of certain research and development tax credits in favor of us or any of its affiliates, in each case as set forth in, and subject to and in accordance with the terms and conditions of, the CVR Agreement.
Management concluded that the CVRs meet the definition of a derivative and will be initially measured at the aggregate estimated fair value of the CVRs and will be subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. Changes in fair value of the CVR derivative are presented in the consolidated statements of operations and comprehensive income (loss). To determine the derivative value at each reporting period, management applies a scenario-based method and weighs them based on the possible likelihood of certain contingencies triggering payments due under the CVR for the liability recognized. The fair value measurements are based on significant inputs not observable in the market, such as estimated cash flows, estimated probabilities of success, and risk-adjustment discount rates, and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement . The estimated value of the CVR is based upon available information and certain assumptions, which our management believes are reasonable under the circumstances.
As of the Closing Date, management concluded that there was no value associated with the CVRs as the likelihood of any payments received in connection with Pieris’ legacy assets was remote. As of December 31, 2025, management recorded a contingent rights value liability of approximately $2.2 million due to a receivable for research and development tax credits by Pieris Pharmaceuticals GmbH at December 31, 2025. In January 2026, the Company paid out approximately $2.0 million to holders of CVRs related to receipt of certain research and development tax credits.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations based on their fair values. All of the stock-based awards are subject only to service-based vesting conditions. Management estimates the fair value of the stock option awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (a) the fair value of the Company’s common stock, (b) the expected stock price volatility, (c) the calculation of expected term of the award, (d) the risk-free interest rate and (e) expected dividends. Management estimates the fair value of the restricted stock awards using the fair value of the Company’s common stock. Forfeitures are recognized as they are incurred.
Prior to the Merger, we periodically estimated the fair value of the our common stock considering, among other things, valuations of its common stock prepared by management with the assistance of a third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Following the Merger, the fair value of our common stock is based on the closing stock price on the date of grant as reported on the Nasdaq Global Market. The expected life of the stock options in years is estimated using the “simplified method,” as prescribed in SEC’s Staff Accounting Bulletin (SAB) No. 107, as the Company has no historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For stock price volatility, we use comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected life of the option. The expected dividend yield is zero as the Company has no history of paying dividends and no plans to do so in the near term. We classify stock-based compensation expense in our consolidated statement of operations and comprehensive (loss) income in the same manner of the award recipient’s payroll costs.
Recently Adopted Accounting Pronouncements
Refer to Note 2, “ Summary of Significant Accounting Policies ,” of the notes to our audited consolidated financial statements appearing elsewhere in this Form 10-K for a discussion of recent accounting pronouncements.
Ite m 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Item 10 of Regulation S-K and are not required to provide the information otherwise required under this item.
Ite m 8. Financial Statements and Supplementary Data.
All financial statements required to be filed hereunder are filed under Item 15(a) of this Form 10-K and are incorporated herein by reference.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and therefore we are permitted to provide a scaled Item 8 disclosure.
There have been no retrospective changes to our consolidated statements of operations for any of the quarters within the two years ended December 31, 2025.
It em 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
I tem 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2025. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2025, our disclosure controls and procedures were (1) designed to ensure that material information relating to us is made known to our principal executive officer and principal financial officer by others, particularly during the period in which this report was prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable SEC rules and forms.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2025.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting as we are a non-accelerated filer and a “smaller reporting company”, as defined in Rule 12b-2 under the Exchange Act.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended December 31, 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
It em 9B. Other Information.
None.
(b) Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
During the quarter ended December 31, 2025, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
It em 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
It em 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to our Proxy Statement for the 2026 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2025.
We have adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of our securities by directors, officers, and employees that we believe are reasonably designed to promote compliance with insider trading laws, rules and regulations, and applicable Nasdaq listing standards. Our insider trading policy states, among other things, that our directors, officers, and employees are prohibited from trading in such securities while in possession of material, nonpublic information. The foregoing summary of our insider trading policies and procedures does not purport to be complete and is qualified by reference to our Insider Trading Policy filed as an exhibit to this Annual Report on Form 10-K. In addition, with regard to trading in our own securities, it is our policy to comply with the federal securities laws and the applicable exchange listing requirements.
It em 11. Executive Compensation.
The information required by this item is incorporated by reference to our Proxy Statement for the 2026 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2025.
It em 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to our Proxy Statement for the 2026 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2025.
It em 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to our Proxy Statement for the 2026 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2025.
Ite m 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to our Proxy Statement for the 2026 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2025.
PART IV
It em 15. Exhibits, Financial Statement Schedules.
(1) Financial Statements.
Page number in
this Report
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2025 and 2024
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2025 and 2024
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2025 and 2024
Consolidated Statements of Cash Flows for the years ended December 31, 2025 and 2024
Notes to Consolidated Financial Statements
(2) We are not filing any financial statement schedules as part of this Annual Report on Form 10-K because they are not applicable or the required information is included in the financial statements or notes thereto.
(3) The list of Exhibits filed as part of this Annual Report on Form 10-K is set forth on the Exhibit Index below.
The list of Exhibits filed as part of this Annual Report on Form 10-K is set forth on the Exhibit Index below.
None.
It em 16. Form 10-K Summary
Not applicable.
Exhibit Index
Incorporated by Reference (if applicable)
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing
Date
Filed
Herewith
Agreement and Plan of Merger dated as of July 23, 2024, by and among Pieris Pharmaceuticals, Inc., Polo Merger Sub, Inc., and Palvella Therapeutics, Inc.
July 24, 2024
Amended and Restated Articles of Incorporation
December 18, 2014
Certificate of Change to Articles of Incorporation
April 18, 2024
Certificate of Amendment to Articles of Incorporation
December 13, 2024
Certificate of Withdrawal of the Series F Certificate of Designation
December 13, 2024
Certificate of Amendment to Articles of Incorporation
December 13, 2024
Amended and Restated Bylaws
December 18, 2014
Amendment to the Amended and Restated Bylaws
September 3, 2019
Description of Securities
Form of Common Stock Certificate
December 13, 2024
Form of Pre-Funded Warrant
July 24, 2024
Form of Indemnification Agreement
December 18, 2014
2018 Employee Stock Purchase Plan
July 26, 2018
2023 Employee Stock Purchase Plan
August 10, 2023
2014 Employee, Director and Consultant Equity Incentive Plan
December 18, 2014
2016 Employee, Director and Consultant Equity Incentive Plan
July 1, 2016
2019 Employee, Director and Consultant Equity Incentive Plan
July 31, 2019
2020 Employee, Director and Consultant Equity Incentive Plan
June 29, 2020
2020 Employee, Director and Consultant Equity Incentive Plan, as amended
June 29, 2021
2020 Employee, Director and Consultant Equity Incentive Plan, as amended
June 27, 2022
2020 Employee, Director and Consultant Equity Incentive Plan, as amended
June 26, 2023
Development Funding and Royalties Agreement, dated December 13, 2018, by and between Ligand Pharmaceuticals, Inc. and Palvella Therapeutics, Inc.
November 5, 2024
First Amendment to Development Funding and Royalties Agreement, dated May 22, 2020, by and between Ligand Pharmaceuticals, Inc. and Palvella Therapeutics, Inc.
August 9, 2024
Second Amendment to Development Funding and Royalties Agreement, dated November 28, 2023, by and between Ligand Pharmaceuticals, Inc. and Palvella Therapeutics, Inc.
November 5, 2024
Employment Agreement, dated May 20, 2020, by and between Wesley Kaupinen and Palvella Therapeutics, Inc.
August 9, 2024
Severance Agreement, dated May 22, 2020, by and between Kathleen Goin and Palvella Therapeutics, Inc.
August 9, 2024
Offer Letter, dated July 27, 2020, by and between Jeffrey Martini and Palvella Therapeutics, Inc.
August 9, 2024
Offer Letter, dated August 19, 2019, by and between Kathleen Goin and Palvella Therapeutics, Inc.
August 9, 2019
Offer Letter, dated October 9, 2024, by and between Matthew Korenberg and Palvella Therapeutics, Inc.
November 5, 2024
Severance Agreement, dated October 10, 2024, by and between Matthew Korenberg and Palvella Therapeutics, Inc.
November 5, 2024
Offer Letter dated May 21, 2025, by and between Ashley Kline and Palvella Therapeutics, Inc.
August 14, 2025
Severance Agreement, dated May 21, 2025, by and between Ashley Kline and Palvella Therapeutics, Inc.
August 14, 2025
Contingent Value Rights Agreement, dated as of December 13, 2024, by and among, Palvella Therapeutics, Inc. (formerly Pieris Pharmaceuticals, Inc.), Shareholder Representative Services LLC and Computershare Inc. and Computershare Trust Company, N.A.
December 13, 2024
Palvella Therapeutics, Inc. 2019 Equity Incentive Plan
August 9, 2024
Amendment No. 1 to Palvella Therapeutics, Inc. 2019 Equity Incentive Plan
August 9, 2024
Form of Incentive Stock Option Agreement under the Palvella Therapeutics, Inc. 2019
August 9, 2024
Form of Non-Qualified Stock Option Agreement under the Palvella Therapeutics, Inc. 2019 Equity Incentive Plan
August 9, 2024
Palvella Therapeutics, Inc. 2024 Equity Incentive Plan
December 12, 2024
Form of Stock Option Grant Notice and Stock Option Agreement
December 13, 2024
Form of Notice of Grant of Restricted Stock Units Award
December 13, 2024
Office Building Lease, dated October 1, 2025, by and between LMP 353, LLC and Palvella Therapeutics, Inc.
Palvella Therapeutics, Inc. Insider Trading Policy
March 31, 2025
List of Subsidiaries of Palvella Therapeutics, Inc.
Consent of Ernst & Young LLP
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Palvella Therapeutics, Inc. Clawback Policy
March 31, 2025
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
Exhibits and/or schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish supplementally copies of any of the omitted exhibits and schedules upon request by the SEC.
Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(a)(6).
Certain confidential information contained in this exhibit, marked by brackets, has been omitted pursuant to Item 601(b)(10)(iv) because the information (i) is not material and (ii) is the type of information that the Registrant both customarily and actually treats as private and confidential.
Indicates management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized .
Palvella Therapeutics, Inc.
Date: March 31, 2026
/s/ Wesley H. Kaupinen
Wesley H. Kaupinen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Wesley H. Kaupinen
President, Chief Executive Officer and Director
March 31, 2026
Wesley H. Kaupinen
(principal executive officer)
/s/ Matthew E. Korenberg
Chief Financial Officer and Treasurer
March 31, 2026
Matthew E. Korenberg
(principal financial officer and principal accounting officer)
/s/ George M. Jenkins
Chairman
March 31, 2026
George M. Jenkins
/s/ Todd C. Davis
Director
March 31, 2026
Todd C. Davis
/s/ Elaine J. Heron, PhD
Director
March 31, 2026
Elaine J. Heron, PhD
/s/ Christopher Kiritsy
Director
March 31, 2026
Christopher Kiritsy
/s/ Tadd S. Wessel
Director
March 31, 2026
Tadd S. Wessel
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID# 000 42 )
Consolidated Balance Sheets as of December 31, 2025 and 2024
Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2025 and 2024
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2025 and 2024
Consolidated Statements of Cash Flows for the Years ended December 31, 2025 and 2024
Notes to Consolidated Financial Statements
R eport of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Palvella Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Palvella Therapeutics, Inc. (the Company) as of December 31, 2025 and 2024, the related consolidated statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 31, 2025, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2025, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Royalty agreement liability and related interest expense
Description of the Matter
As described in Note 4 to the financial statements, the Company is party to a development funding agreement with Ligand Pharmaceuticals, Inc. (Ligand) (the Ligand Agreement). Pursuant to the Ligand Agreement, as partial consideration for the upfront payment received from Ligand, the Company agreed to pay to Ligand tiered future royalties based on any aggregate annual worldwide net product sales of any products based on QTORIN rapamycin. The Company recorded its obligation to pay tiered royalties under the Ligand Agreement as a debt instrument (royalty agreement liability) on the balance sheet at a carrying value of $11.9M as of December 31, 2025 and has recognized imputed interest expense of $3.9M for the year ended December 31, 2025 using the effective interest rate method. The effective interest rate is estimated at each balance sheet date based on the rate that would enable the liability to be repaid in full over the anticipated life of the arrangement. The effective interest rate may vary during the term of the Ligand Agreement
based on changes in the probability-adjusted cash flow estimates of the Company’s potential future royalty payments under the Ligand Agreement.
Auditing the interest expense associated with the royalty agreement liability involved complex and subjective auditor judgment due to the estimation uncertainty involved in determining the probability-adjusted cash flow estimates of the Company’s potential future royalty payments. The Company’s effective interest rate calculation includes probability-adjusted revenue projections for which future royalties will be paid, which are sensitive to significant assumptions including the size of the addressable patient population, the anticipated pricing of the Company’s products, and the probability of successful development and commercialization.
How We Addressed the Matter in Our Audit
To test the interest expense associated with the royalty agreement liability, our audit procedures included, among others, testing the significant assumptions used to develop the estimates and evaluating the completeness and accuracy of the underlying data used by the Company in its effective interest rate calculation. For example, we compared the estimated size of the addressable patient population to a third-party prevalence study and government census data, and we compared the anticipated pricing information to a third-party market analysis. We compared the probability of achieving development and commercial success to studies published in medical journals evaluating clinical advancement and approval rates for similar products. We tested that the revenue projections were updated based on the most recent clinical trial data received in 2025 and recalculated the current year interest expense.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2018.
Philadelphia, Pennsylvania
March 31, 2026
PALVELLA THERAPEUTICS, INC.
C ONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
December 31,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
German research and development tax credit receivable
Prepaid expenses and other current assets
Total current assets
Operating lease right-of-use assets, net
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Derivative liabilities – contingent value right liability
Current portion of operating lease liability
Accrued expenses and other current liabilities
Total current liabilities
Long-term portion of operating lease liability
Royalty agreement liability
Derivative liabilities – royalty agreement
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $ 0.001 ; 10,000,000 shares authorized; 0 and 15,617 shares issued and outstanding at December 31, 2025 and 2024
Common stock, $ 0.001 par value; 200,000,000 shares authorized; 12,380,933 and 11,012,105 shares issued and outstanding at December 31, 2025 and 2024
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
PALVELLA THERAPEUTICS, INC.
C ONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
Year Ended
December 31,
Operating expenses:
Research and development
General and administrative
Total operating expenses
Operating loss
Other (expense) income:
Interest expense – royalty agreement
Interest expense – convertible notes payable
Fair value adjustments on derivative liabilities – royalty agreement
Fair value adjustments on convertible notes payable
Fair value adjustments on derivative liabilities – contingent value right liability
Other income – German R&D tax credit receivable
Interest income, net
Other income (expense), net
Loss before income taxes
Income tax benefit (expense)
Net loss
Other comprehensive loss:
Foreign currency translation gain
Comprehensive loss
Net loss per share of Common Stock – basic and diluted
Weighted-average shares used in computing net loss per share of Common Stock – basic and diluted
The accompanying notes are an integral part of these consolidated financial statements.
PALVELLA THERAPEUTICS, INC.
C ONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
Convertible
Additional
Accumulated Other
Total
Preferred Stock
Preferred Stock
Common Stock
Paid-in
Comprehensive
Accumulated
Stockholders'
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balance at December 31, 2023
Conversion of convertible preferred stock into common stock in connection with Reverse Merger
Conversion of convertible notes into common stock and prefunded warrants in connection with Reverse Merger
Issuance of common stock and prefunded warrants in connection with PIPE
Issuance of preferred stock and common stock to former stockholders of Pieris in connection with Reverse Merger
Transactions costs associated with the Reverse Merger
Stock-based compensation
Foreign currency translation gain
Net loss
Balance at December 31, 2024
Exercise of common stock options for cash, net of expense
Conversion of preferred stock into common stock
Conversion of prefunded warrants into common stock
Equity issuance costs
Stock-based compensation
Foreign currency translation gain
Net loss
Balance at December 31, 2025
The accompanying notes are an integral part of these consolidated financial statements.
PALVELLA THERAPEUTICS, INC.
C ONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss income to net cash used in operating activities:
Non-cash interest expense – royalty agreement
Non-cash interest expense – convertible notes
Change in fair value of derivative liabilities – royalty agreement
Change in fair value of derivative liabilities – contingent value right liability
Change in fair value of convertible notes payable
Stock-based compensation
Non-cash lease operating expense
Costs to issue convertible notes
Change in operating assets and liabilities:
Accounts receivable
German research and development tax credit receivable
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Net cash used in operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Cash acquired from Reverse Merger transaction
Payment of transaction costs in connection with Reverse Merger
Proceeds from PIPE Financing
Payments of transaction costs associated with PIPE Financing
Proceeds from issuance of convertible notes
Payment of transaction costs to issue convertible notes
Proceeds from exercise of stock options
Deferred equity issuance costs
Net cash (used in) provided by financing activities
Effect of exchange rate change on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transaction costs related to Reverse Merger included in accounts payable and accrued expenses
The accompanying notes are an integral part of these consolidated financial statements.
PALVELLA THERAPEUTICS, INC.
N OTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business, Organization and Liquidity
Business
Palvella Therapeutics, Inc. (the “Company,” or “Palvella”) (previously named Pieris Pharmaceuticals, Inc. (“Pieris”)), a Nevada corporation, is a late clinical-stage biopharmaceutical company committed to serving individuals suffering from serious, rare skin diseases and vascular malformations without approved therapies. The Company’s lead product candidate, QTORIN 3.9% rapamycin anhydrous gel (“QTORIN rapamycin”), is based on the Company’s patented QTORIN platform. QTORIN rapamycin is in clinical development for microcystic lymphatic malformations (“microcystic LMs”), cutaneous venous malformations (“cutaneous VMs”) and angiokeratomas. The Company is conducting IND-enabling development for QTORIN pitavastatin for disseminated superficial actinic porokeratosis (“DSAP”). Since inception, the Company has devoted substantially all of its resources to identifying, researching and conducting preclinical and clinical activities for its product candidates, and developing its platform technology, organizing and staffing the Company, business planning, raising capital and establishing its intellectual property portfolio. The Company’s principal executive offices are located in Wayne, Pennsylvania.
Reverse Merger
On December 13, 2024 (the “Closing Date”), the Company consummated the previously announced merger pursuant to the terms of that certain Agreement and Plan of Merger, dated as of July 23, 2024 (the “Merger Agreement”), by and among the Company, Polo Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Pieris (the “Merger Sub”), and Palvella Therapeutics, Inc., a Delaware corporation (“Legacy Palvella”). Pursuant to the Merger Agreement, on the Closing Date, (i) Merger Sub merged with and into Legacy Palvella, with Legacy Palvella as the surviving company in the merger and, after giving effect to such merger, continuing as a wholly owned subsidiary of the Company (the “Reverse Merger”) and (ii) the Company’s name was changed from Pieris Pharmaceuticals, Inc. to Palvella Therapeutics, Inc. (the “Reverse Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). See Note 3 for additional details.
Liquidity
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements—Going Concern , which requires management to assess the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.
Since inception, the Company has incurred net losses and negative cash flows from operations. During the year ended December 31, 2025, the Company reported net loss of $ 41.7 million , and net cash used in operating activities of $ 25.0 million . At December 31, 2025, the Company had an accumulated deficit of $ 135.5 million .
Management does not expect to generate commercial revenue or operating cash flows in the near term, including in the next two years. The Company’s ability to continue as a going concern in the near term is largely dependent on its existing cash and cash equivalents balance and ability to obtain additional sources of financing in order to fund operating expenses, complete development of its product candidates, obtain regulatory approvals, launch, and commercialize its product candidates, and continue research and development programs. Assuming no additional fund raising, the Company’s forecasted cash required to fund operations indicates that the Company has sufficient funds to support operations through at least the one-year period from the issuance date of these consolidated financial statements.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Any references in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). The consolidated financial statements and notes as of December 31, 2025 and 2024 include the accounts of the Company and its subsidiaries. All intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Management considers many factors in selecting appropriate financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements. Management must apply significant judgment in this process and actual results could differ materially from those estimates.
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated from local currency into reporting currency, which is U.S. dollars, using the current exchange rate at the balance sheet date for assets and liabilities, and the weighted average exchange rate prevailing during the period for revenues and expenses. The functional currency for foreign subsidiaries is considered to be the local currency for each entity and, accordingly, translation adjustments for these subsidiaries are included in accumulated other comprehensive loss within stockholders’ equity.
Realized and unrealized gains and losses resulting from foreign currency transactions denominated in currencies other than the functional currency are reflected as other (expense) income, net in the consolidated statements of operations.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company holds cash at two accredited financial institutions in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. In addition, the Company also maintains cash in a German bank account in denominations of Euros and U.S. dollars. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company is dependent on contract manufacturing organizations (“CMOs”) to supply products for research and development of its product candidates, including pre-clinical and clinical studies, and for commercialization of its product candidates, if approved. The Company’s development programs could be adversely affected by any significant interruption in its CMOs’ operations or by a significant interruption in the supply of active pharmaceutical ingredients and other components.
Products developed by the Company require approval from the U.S. Food and Drug Administration (“FDA”) or other international regulatory agencies prior to commercial sales. There can be no assurance the Company’s product candidates will receive the necessary approvals. If the Company is denied approvals, approvals are delayed, or it is unable to maintain approvals received, such events could have a materially adverse impact on the Company.
Comprehensive Loss and Accumulated Other Comprehensive (Loss) Income
Other comprehensive (loss) income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments and foreign currency translation gains and losses.
Cash and Cash Equivalents
Cash and cash equivalents are held in accounts at multiple independent financial institutions. Cash equivalents are defined as money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash.
Accounts Receivable
Accounts receivable are amounts due from our vendors as a result of research and development and other services provided, as well as the shipment of clinical product.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies, and similar techniques.
At December 31, 2025 and 2024, the carrying amounts of financial instruments, which include cash and cash equivalents, accounts payable, and accrued expenses and other liabilities, approximate their fair value due to their short maturities. At December 31, 2025 and 2024, the fair value of the royalty agreement liability, which is based on Level 3 inputs (including probability-weighted cash flow estimates of the Company’s potential future royalty payments and a weighted-average cost of capital 18.0 % and 20.0 % , respectively) is approximately $ 61.5 and $ 26.6 million , respectively. The Company records its derivative liabilities at fair value.
Derivative Instruments
The Company evaluates its contracts to determine if those contracts qualify as derivatives under ASC 815, Derivatives and Hedging . For derivative financial instruments that are accounted for as assets or liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date. Any changes in fair value are recorded as other income or expense for each reporting period. Derivative instrument assets or liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet date.
The Company has milestone payments which may be required in connection with the royalty agreement (see Note 4) that were determined to be derivative liabilities. The valuation of the derivative liabilities is based on unobservable inputs and, therefore, represent Level 3 financial liabilities. The fair value of the derivative liabilities – royalty agreement was calculated using the present value of the potential payments using a weighted-average cost of capital and an assessment of the probability of the achievement of the milestones as well as an assessment of the timing of the potential milestone payments.
The derivative liabilities – royalty agreement was initially recorded at fair value, with gains and losses arising for changes in fair value of the derivative liabilities – royalty agreement recognized within the consolidated statements of operations as fair value adjustments on the derivative liabilities at each financial reporting period.
The Company determined that certain contingent payments that may become payable under the CVR Agreement related to the asset sales prior to the Reverse Merger qualified as derivatives under ASC 815. Upon such time that these payments were assessed a fair value, they were recorded as a liability on the balance sheet. These values are then remeasured for future expected payout or receipt, as well as the increase in fair value due to the time value of money. These gains or losses, if any, are recognized in the consolidated statements of operations within other income, net.
The derivative liabilities – CVR agreement was initially recorded at fair value, with gains and losses arising for changes in fair value of the derivative liabilities – CVR recognized within the consolidated statements of operations as fair value adjustments on the derivative liabilities at each financial reporting period.
Research and Development Expenses
Research and development costs are charged to expense as incurred. Research and development expenses include, among other costs, salaries and benefits of scientific personnel and the external cost of producing and testing the clinical material for clinical trials.
The Company has entered various research and development and clinical trial-related contracts. The Company defers and capitalizes prepaid nonrefundable advance research and development payments to third parties for goods and services to be used in future research and development activities and recognizes to research and development expense over the period that the research and development activities are performed, or the services are provided. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and clinical trial costs. When determining the accruals, at the end of a reporting period, the Company analyzes progress of its studies and clinical trials, including the phase or completion of events, invoices received and contracted costs. Actual results could differ from the Company’s estimates.
Stock-Based Compensation
The Company accounts for stock-based compensation awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations based on their fair values. All of the stock-based awards are subject only to service-based vesting conditions. Management estimates the fair value of the stock option awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (a) the fair value of the Company’s common stock, (b) the expected stock price volatility, (c) the calculation of expected term of the award, (d) the risk-free interest rate and (e) expected dividends. Management estimates the fair value of the restricted stock awards using the fair value of the Company’s common stock. Forfeitures are recognized as they are incurred.
Prior to the reverse merger, the Company periodically estimated the fair value of the Company’s common stock considering, among other things, valuations of its common stock prepared by management with the assistance of a third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Following the reverse merger, the fair value of the Company’s common stock is based on the closing stock price on the date of grant as reported on the Nasdaq Global Market. The expected life of the stock options in years is estimated using the “simplified method,” as prescribed in SEC’s Staff Accounting Bulletin (SAB) No. 107, as the Company has no historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected life of the option. The expected dividend yield is zero as the Company has no history of paying dividends and no plans to do so in the near term.
The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner of the award recipient’s payroll costs.
Leases
The Company recognizes right-of-use assets and lease liabilities for leases with original lease terms greater than one year based on the present value of lease payments over the lease term using its incremental borrowing rate on a collateralized basis. Short-term leases, with original lease terms of less than one year, are not recognized on the Consolidated Balance Sheets. The Company leases one office space. The Company is subject to the office lease offering a renewal option to extend the original lease term. The renewal option is included or excluded from right-of-use asset and lease liability based on the Company’s assessment of the probability that the options will be exercised. See Note 11 Operating Lease Commitments.
Government Grants
The Company recognizes grants from governmental agencies when there is reasonable assurance that the Company will comply with the conditions attached to the grant arrangement and the grant will be received. The Company evaluates the conditions of each grant as of each reporting period to evaluate whether the Company has reached reasonable assurance of meeting the conditions of each grant arrangement and that it is expected that the grant will be received as a result of meeting the necessary conditions. Grants are recognized in the consolidated statements of operations on a systematic basis over the periods in which the Company recognizes the related costs for which the government grant is intended to compensate. Specifically, grant income related to research and development costs is recognized as such expenses are incurred. Grant income is recorded as a reduction of research and development costs in the consolidated statements of operations. In September 2024, the Company received a grant award notice from the Department of Health and Human Services in connection with its ongoing Phase 3 clinical trial, SELVA. For the year ended December 31, 2025 and 2024, the Company recognized $ 1.0 million and $ 0.1 million , respectively, of grant income as a reduction to research and development costs in the accompanying consolidated statements of operations. The Company received $ 0.5 million of grant proceeds from the Department of Health and Human Services in May 2025 and $ 0.6 million in October 2025 .
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all the tax benefits will not be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.
The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrued liability for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. The Company has elected to treat interest and penalties, to the extent they arise, as a component of income taxes.
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The Company has evaluated the OBBBA enacted during the year and estimated its impact on the consolidated financial statements to be immaterial. The Company will continue to evaluate the full impact of these legislative changes as additional guidance becomes available.
German Research and Development Tax Credit Receivable
The Company recognizes income associated with research and development (“R&D”) tax credits when the receipt of the R&D tax credit becomes probable. The Company evaluates the conditions of each R&D tax credit as of each reporting period to evaluate whether the Company has reached reasonable assurance of meeting the conditions of each R&D tax credit and that it is expected that the R&D tax credit will be received as a result of meeting the necessary conditions. R&D tax credits are recognized as a component of other income in the consolidated statements of operations once it becomes probable that the amounts will be received. Specifically, income related to the receipt of R&D tax credits is not recorded until it is probable that amounts will be received.
Related Party Transactions
The Company’s board of directors reviews and approves transactions with directors, officers, and holders of 5% or more of its voting securities and their affiliates, each a related party. The material facts as to the related party’s relationship or interest in the transaction are disclosed to its board of directors prior to their consideration of such transaction, and the transaction is not considered approved by its board of directors unless a majority of the directors who are not interested in the transaction approve the transaction.
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the chief operating decision maker (“CODM”), in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its chief executive officer. The Company has determined it operates in one segment.
The Company follows ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) which applies to public entities with a single reportable segment and requires disclosures about each reportable segments’ significant expenses and other segment items on an interim and annual basis. See Note 14 for related disclosures.
Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, preferred stock, stock options and warrants are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. For the years ended December 31, 2025 and 2024 , basic and diluted net loss per share are the same.
Recently Adopted Accounting Standards
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740) (“ASU 2023-09”). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024 and allows for adoption on a prospective or retrospective basis. The Company adopted this ASU for 2025 annual period on a retrospective basis. Refer to Note 12 to the consolidated financial statements for the inclusion of the required disclosures .
Recently Issued (Not Yet Adopted) Accounting Standards
In November 2024, the Financial Account Standards Board ("FASB") issued ASU 2024-03, Income Statement – Disaggregation of Income Statement Expenses (DISE) , which requires disaggregated disclosure of income statement expenses for public business entities (“PBEs”). The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the consolidated financial statements. ASU 2024-03 is effective for all PBEs for
fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. The Company is still evaluating the impacts the ASU has on its consolidated financial statements.
In December 2025, the FASB issued ASU No. 2025-10, Government Grants (Topics 832) - Accounting for Government Grants Received by Business Entities , which provides authoritative guidance for the recognition, measurement and presentation of government grants received by a business entity. The standard is effective for fiscal years beginning after December 15, 2028 and early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
Note 3. Reverse Merger
As discussed in Note 1, on the Closing Date, the Company consummated the previously announced Business Combination with Legacy Palvella, as a result of which Legacy Palvella became a wholly-owned subsidiary of the Company. The Reverse Merger was contemplated and consummated, along with the PIPE Financing (defined below), to generate capital resources to support the advancement of the Company’s pipeline and future operations.
At the consummation of the Merger Agreement on the Closing Date (the “Effective Time”), or immediately prior to where indicated, the following occurred:
All of the then outstanding shares of Legacy Palvella common stock were converted into 1,770,167 shares of the Company’s common stock, based on the exchange ratio of approximately 0.309469242 (the “Exchange Ratio”).
All of the then outstanding shares of the Legacy Palvella’s convertible preferred stock were converted into 4,753,650 shares of the Company’s common stock, based on the Exchange Ratio. Refer to Note 8, Convertible Preferred Stock , for further detail on the conversion of the Company preferred stock.
All outstanding 15,617 shares of Pieris preferred stock remained outstanding through the completion of the Reverse Merger, with no changes to their terms and conditions.
All of the then outstanding Convertible Notes of Legacy Palvella plus accrued interest were converted into 1,179,163 shares of the Company’s common stock and 168,503 prefunded warrants based on the Exchange ratio.
All of the then outstanding stock options of Legacy Palvella were exchanged for options to purchase common stock of the Company, subject to the Exchange Ratio.
While the Company was the legal acquirer of Legacy Palvella in the business combination, for accounting purposes, the Reverse Merger is treated as a reverse recapitalization whereby Legacy Palvella is deemed to be the accounting acquirer, and the historical financial statements of Legacy Palvella became the historical consolidated financial statements of the Company upon the closing of the Reverse Merger. Under this method of accounting, the Company was treated as the “acquired” company and Legacy Palvella was treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Merger was treated as the equivalent of Legacy Palvella issuing stock for the net assets of the Company, accompanied by a recapitalization.
Based on the following factors, the Company determined under the ASC 805, Business Combinations , that the Reverse Merger should be accounted for as a reverse recapitalization:
The Company stockholders owned approximately 60 % of the voting rights in the Company and thus had sufficient voting rights to exert influence over the Company.
The Company designated a majority of the Company’s board of directors and maintained a majority of the composition of management.
At the time of Closing, Pieris did not meet the definition of a business and had nominal assets, meeting the definition of a public shell company. As such, the Reverse Merger was treated as a reverse recapitalization in which Palvella is issuing stock for the net assets of Pieris.
The following table summarizes the fair value of identifiable assets acquired and liabilities assumed as part of the recapitalization (in thousands):
December 13, 2024
Assets
Current assets:
Cash
Accounts receivable
Prepaid expenses and other current assets
Total current assets
Total assets
Liabilities
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Total liabilities
Net assets acquired
In connection with the Reverse Merger, the Company incurred transaction costs of $ 2.5 million. The $ 2.5 million of transaction costs were initially recorded as deferred financing costs on the consolidated balance sheets and then were reclassified to offset to equity upon closing of the reverse merger.
PIPE Financing
Concurrently with the execution of the Merger Agreement on July 23, 2024, Pieris entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors, including BVF Partners, L.P., an existing stockholder of Pieris (the “PIPE Investors”), pursuant to which, among other things, on the Closing Date and immediately following the consummation of the Merger, the PIPE Investors purchased (either for cash or in exchange for the termination and cancellation of outstanding convertible promissory notes issued by Legacy Palvella), and the Company issued and sold to the PIPE Investors, (i) 3,168,048 shares of common stock and (ii) Pre-Funded Warrants, exercisable for 2,466,456 shares of common stock, at a purchase price of $ 13.9965 per share or $ 13.9955 per Pre-Funded Warrant, which represents the per share purchase price of the common stock less the $ 0.001 per share exercise price for each Pre-Funded Warrant, for an aggregate purchase price of approximately $ 78.9 million, consisting of approximately $ 60.0 million in cash and the conversion of approximately $ 18.9 million of principal and interest under outstanding convertible notes issued by Legacy Palvella (the “PIPE Financing”).
Contingent Value Rights Agreement
On December 13, 2024, immediately prior to the Effective Time, Pieris entered into a contingent value rights agreement (the “CVR Agreement”) with a rights agent, pursuant to which holders of Pieris common stock prior to Closing received one non-transferable contingent value right (each, a “CVR”) for each outstanding share of Pieris common stock held by such stockholder immediately prior to Closing. Each CVR represents the contractual right to receive payments upon the receipt of payments by Pieris or any of its affiliates under certain strategic partner agreements, including existing collaboration agreements pursuant to which Pieris may be entitled to milestones and royalties in the future and other out licensing agreements for certain of Pieris’ legacy assets, and upon the receipt of certain research and development tax credits in favor of Pieris or any of its affiliates, in each case as set forth in, and subject to and in accordance with the terms and conditions of, the CVR Agreement. As no amounts related to the CVR Agreement were probable as of the time of the Reverse Merger, no contingencies for the CVR agreement had been recorded on the Closing Date.
Note 4. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
December 31, 2025
Level 1
Level 2
Level 3
Total
Current assets:
Cash and cash equivalents
Total assets measured at fair value
Liabilities:
Derivative liabilities – royalty agreement
Derivative liabilities – contingent value right liability
Total liabilities measured at fair value
December 31, 2024
Level 1
Level 2
Level 3
Total
Current assets:
Cash and cash equivalents
Total assets measured at fair value
Liabilities:
Derivative liabilities – royalty agreement
Derivative liabilities – contingent value right liability
Total liabilities measured at fair value
Cash and cash equivalents as of December 31, 2025 and 2024 includes cash and investments in money market funds. Money market funds, which are cash equivalents, are highly liquid investments and are actively traded. The pricing information on the Company’s money market funds is based on quoted prices in active markets for identical securities. This approach results in a classification of these securities as Level 1 of the fair value hierarchy.
Assumptions Used in Determining Fair Value of Derivative Liabilities
The key assumptions used to determine the fair value of the derivative liabilities – royalty agreement at December 31, 2025 and 2024 are as follows:
December 31,
December 31,
Discount rate
Probability rate of achieving FDA approval of a product
Expected term to FDA regulatory approval of a product
1.50 years
2.50 years
Changes in Level 3 Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a reconciliation of the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
Derivative Liabilities – Royalty Agreement
Derivative liabilities - royalty agreement
Balance at January 1
Fair value adjustments on derivative liabilities
Balance at December 31, 2025
The derivative liabilities – royalty agreement is classified as long term on the Company’s consolidated balance sheets according to the estimated timing of the occurrence of the potential payments.
Derivative Liabilities – Contingent Value Right Liability
Derivative liabilities - contingent value right liability
Balance at January 1
Fair value adjustments on derivative liabilities
Balance at December 31, 2025
The derivative liabilities – contingent value rights is classified as short term on the Company’s consolidated balance sheets according to the estimated timing of the occurrence of the potential payments.
The Company applies a scenario-based method and weighs them based on the possible likelihood of certain contingencies triggering payments due under the CVR for the liability recognized. The fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement . The estimated value of the CVR is based upon available information and certain assumptions, which the Company's management believes are reasonable under the circumstances. As of December 31, 2025 and 2024, the fair value adjustment for the CVR is driven from foreign currency translation. The change in fair value has been recorded in fair value adjustments on derivative liabilities - contingent value right liability on the consolidated statement of operations.
Note 5. Strategic Agreements
Ligand Development Funding Agreement
The Company is party to a Development Funding and Royalties Agreement with Ligand Pharmaceuticals, Inc. (“Ligand”), dated December 13, 2018, as amended May 22, 2020 and November 28, 2023 (the “Ligand Agreement”). Under the Ligand Agreement, Ligand has made payments totaling $ 15.0 million to fund the development of QTORIN rapamycin. As partial consideration for the funding received, the Company granted Ligand the right to receive up to $ 8.0 million in milestone payments upon the achievement of certain corporate, financing and regulatory milestones by the Company related to QTORIN rapamycin for the treatment of any and all indications. In add ition, the Company is currently obligated to pay to Ligand tiered royalties ranging from 8.0 % to 9.8 % of any aggregate annual worldwide net product sales of any products based on QTORIN rapamycin. On a licensed product-by-licensed product and country-by-country basis, the royalty period is from the date of first commercial sale of such licensed product in a country until the latest of (i) the expiration of the last valid claim within the licensed patent rights covering such licensed product in the country in which such licensed product is made, used or sold, (ii) the expiration of the regulatory exclusivity term conferred by the applicable regulatory authority in such country with respect to such licensed product, and (iii) the fifteenth anniversary of the first commercial sale of such licensed product in such country.
The Ligand Agreement may be terminated by the earlier of a mutual written agreement of the parties or when the royalties contemplated by the agreement are paid to Ligand. Additionally, Ligand may terminate the agreement for (i) any or no reason upon a 90-day notice to the Company, or (ii) cause in connection with a material breach that the Company does not cure within a certain period of time.
The total amount of potential future milestone payments remaining under the arrangement were $ 5.0 million as of December 31, 2025 and 2024. The potential future milestone payments represent derivative liabilities with a fair value of $ 2.0 million and $ 1.6 million as of December 31, 2025 and 2024, respectively, which are classified as “derivative liabilities – royalty agreement” on the accompanying consolidated balance sheets. See Note 4 for fair value measurements.
The Company’s obligation to pay tiered royalties under the Ligand Agreement was determined to be a debt instrument based on the likelihood of repaying the amounts provided to fund the development of QTORIN rapamycin and that the Company has significant continuing involvement in the generation of the cash flows potentially due to Ligand. This obligation is reflected as royalty agreement liability which is classified as a long-term liability on the accompanying consolidated balance sheets and was $ 17.8 million and $ 11.9 million as of December 31, 2025 and 2024, respectively. Interest expense with respect to the royalty agreement liability is determined using the effective interest method based upon probability-adjusted cash flow estimates of the Company’s potential future royalty payments under the Ligand Agreement, yielding an effective interest rate of 44.9 % and 39.9 % as of December 31, 2025 and 2024, respectively. Changes in these estimates impact the amount of interest expense recognized through the accompanying consolidated statements of operations. During the second quarter of 2024, the Company received data from certain of its clinical trials that reduced the projected net product sales related to QTORIN rapamycin and the corresponding probabilities of successful commercialization, resulting in a significant reduction in the future royalty agreement liability. In addition, in the fourth quarter of 2024, the Company began conducting a Phase 3 clinical trial in microcystic lymphatic malformations. In the fourth quarter of 2025, the Company reported topline data for its Phase 2 clinical trial for cutaneous venous malformations and increased the corresponding probability of commercialization. The Company incurred non-cash interest expense of $ 5.8 million and $ 3.9 million for the years ended December 31, 2025 and 2024, respectively, all of which is a component of the royalty agreement liability on the accompanying consolidated balance sheets.
The Ligand Agreement requires the Company to make certain estimates and assumptions about future development, FDA approval, commercialization, and net sales of any product containing QTORIN rapamycin. These estimates and assumptions are subject to significant variability and are thus subject to significant uncertainty. Therefore, these estimates and assumptions are likely to change as the Company develops and commercializes products containing QTORIN rapamycin that may result in significant future adjustments to the royalty agreement liability, the derivative liabilities, and the accretion of interest expense.
Note 6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
December 31,
December 31,
Professional fees
Compensation expense (1)
Research and development expenses
Other
Total accrued expenses and other current liabilities
Includes accrued severance, bonus, and retention payments of $ 2.1 million for current and former Pieris employees as of December 31, 2024.
Note 7. Convertible Notes Payable
To facilitate its ongoing operations, during the year ended December 31, 2024, the Company entered into the Convertible Notes, each with a maturity date of June 6, 2027 and interest rate of SOFR + 2.0 %, as follows:
Issuance Date
Original Issuance Amount
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
The convertible notes issued in 2024 contained a provision whereby the principal and accrued interest on the Convertible Notes would automatically convert into shares of the Company upon the occurrence of a Qualified Financing, defined as either the earlier to occur of a) issuance of shares of preferred stock resulting in aggregate gross proceeds of at least $ 20,000,000 or b) an initial public offering, in each case on or before the maturity date. As a result of the Reverse Merger, the principal and accrued interest of $ 18.4 million and $ 0.4 million, respectively, associated with the Convertible Notes were automatically converted into an aggregate of 1,179,163 shares of common stock and 168,503 prefunded warrants of the Company in accordance with this provision.
Note 8. Convertible Preferred Stock
In December 2022, the Company issued 1,835,227 shares of Series D Convertible Preferred Stock (“Series D Preferred”) at a price of $ 5.2879 per share. The Series D Preferred also contained a Milestone Closing option for additional shares to be issued following the Company’s receipt of clinical data for the top line Phase 3 data results for QTORIN rapamycin for pachyonychia congenita. Under the Milestone Closing, each Purchaser of the Series D Preferred had the right to purchase, and the Company agreed to sell and issue to each Purchaser at the Milestone Closing, up to that portion of 4,727,775 shares of Series D Preferred which equaled the proportion that the number of shares of Series D Preferred then held by such Purchaser beared to the total number of shares of Series D Preferred outstanding immediately prior to the Milestone Closing, at a purchase price of $ 5.2879 per share. The Company determined that the future tranche right to purchase additional shares of Series D Preferred was not a freestanding financial instrument as it was not separately exercisable and legally detachable. The future tranche right was evaluated as an embedded derivative and was not bifurcated from the Series D Preferred shares since it did not have a net settlement characteristic and therefore did not meet the definition of a derivative.
In connection with the issuance of the Series D Preferred, the Company amended and restated its certificate of incorporation (as amended, the “Amended Certificate”) such that it was authorized to issue 29,000,000 shares of common stock ( 25,500,000 voting and 3,500,000 non-voting) and 20,655,895 shares of preferred stock, with 2,241,903 shares designated as Series A-1 Convertible Preferred stock (“Series A-1 Preferred”), 1,240,134 shares designated as Series A-2 Convertible Preferred stock (“Series A-2 Preferred”), 1,533,528 shares designated as Series B Convertible Preferred stock (“Series B Preferred”), 8,509,995 shares designated as Series C Convertible Preferred stock (“Series C Preferred”) and 7,130,335 shares designated as Series D Preferred.
The Company’s Series A-1, Series A-2 and Series B, Series C, and Series D preferred stock (collectively, “convertible preferred stock”) was subject to certain pre-existing anti-dilution provisions that were triggered upon the closing of the PIPE Financing. The private placement in the Company closed immediately before the Closing. At the effective time of the Reverse Merger, each issued and outstanding share of the Company convertible preferred stock converted automatically into 0.309469242 shares of the Company’s common stock, at the option of the preferred shareholder. At the Closing, the Company issued an aggregate of 4,753,650 shares of its common stock to the Company’s preferred shareholders.
Note 9. Stockholders’ Equity
Upon closing of the Reverse Merger, pursuant to the terms of the Amendment to the Company’s Amended and Restated Articles of Incorporation with the Nevada Secretary of State, the Company was authorized to issue up to 200,000,000 shares of common stock, par value $ 0.001 per share (“Common Stock”). As of December 31, 2025 and 2024 , 12,380,933 and 11,012,105 shares of Common Stock were issued and outstanding, respectively.
In connection with the Reverse Merger, 15,617 shares of Preferred Stock were issued and convert on a factor of 13.34 common shares for each preferred share:, and consisted of the following as of December 31, 2024:
Series A Convertible, 85 shares issued and outstanding
Series B Convertible, 4,026 shares issued and outstanding
Series C Convertible, 3,506 shares issued and outstanding
Series D Convertible, 3,000 shares issued and outstanding
Series E Convertible, 5,000 shares issued and outstanding
In October 2025, 15,617 shares of Preferred Stock were converted into 208,324 shares of Common Stock. No shares of Preferred Stock were outstanding as of December 31, 2025.
Common Stock, Preferred Stock, and Pre-Funded Warrants
Each share of the Company’s common stock is entitled to one vote and all shares rank equally as to voting and other matters. Dividends may be declared and paid on the common stock from funds legally available therefor, if, as and when determined by the Board of Directors.
The Company has pre-funded warrants outstanding to purchase an aggregate of 1,394,780 shares of common stock as of December 31, 2025. In October 2025, the Company issued to entities affiliated with BVF 535,837 shares of Common Stock upon the exercise of pre-funded warrants and issued to entities affiliated with BVF an additional 535,839 shares of Common Stock upon the exercise of pre-funded warrants in December 2025. The pre-funded warrants are exercisable at any time for an exercise price of $ 0.001 , except that the pre-funded warrants cannot be exercised by the holders if, after giving effect thereto, the holders would beneficially own more than 9.99 % of the outstanding common stock, subject to certain exceptions. However, any holder may increase or decrease such percentage to any other percentage (not in excess of 19.99 %) upon at least 61 days’ prior notice from the holder to the Company. The holders of the pre-funded warrants will not have the right to vote the shares underlying the pre-funded warrants on any matter except to the extent required by Delaware law. These warrants were classified as equity.
Prior to the Reverse Merger, Legacy Pieris had issued multiple series (Series A through E) of Preferred Stock to certain entities affiliated with Biotechnology Value Fund, L.P., or BVF. In each case, each share Preferred Stock is convertible into 13.34 shares of the Common Stock (subject to adjustment as provided in the Certificate of Designation for each series) at any time at the option of the holder, provided that the holder is prohibited from converting the Preferred Stock into shares of Common Stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99
% of the total number of shares of Common Stock then issued and outstanding, or the Beneficial Ownership Limitation. The holder may reset the Beneficial Ownership Limitation to a higher or lower number, not to exceed 19.99 % of the total number of common shares issued and outstanding immediately after giving effect to a conversion, upon providing written notice to the Company. Any such notice providing for an increase to the Beneficial Ownership Limitation will be effective 61 days after delivery to the Company.
Series A, Series B, Series C, Series D and Series E Preferred Stock rank senior to Common Stock; senior to any class or series of capital stock of the Company created after the designation of and specifically ranking by its terms as junior to the five series of Preferred Stock; in parity with each other and with any class or series of capital stock of the Company created after the designation of and specifically ranking by its terms as in parity with the existing five series of Preferred Stock; and junior to any class or series of capital stock of the Company created after the designation of and specifically ranking by its terms as senior to the existing five series of Preferred Stock. In the event of the Company’s liquidation, dissolution or winding up, subject to the rights of holders of Preferred Stock, holders are entitled to receive a payment equal to $ 0.001 per share of Preferred Stock pursuant to the rights and preferences discussed above, plus an additional amount equal to any dividends declared but unpaid on such shares. However, if the assets of the Company are insufficient to comply with the preceding sentence, then all remaining assets of the Company shall be distributed ratably to holders of the shares of the existing five series of Preferred Stock.
For each series of Preferred Stock, the Company designated the requisite number of shares of its authorized and unissued preferred stock as a specific series of Preferred Stock and filed a Certificate of Designation with the Nevada Secretary of State.
Shares of Preferred Stock generally have no voting rights, except as required by law and except that the consent of holders of a majority of the then outstanding Preferred Stock is required to amend the terms of the Certificate of Designation for each respective series of Preferred Stock. Holders of Preferred Stock are entitled to receive any dividends payable to holders of the Company's common stock subject to the rights and preferences discussed above, in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily and/or the right to receive dividends.
Note 10. Equity Incentive Plans
In connection with the Reverse Merger, the Company stockholders approved the 2024 Equity Incentive Plan (the “2024 Plan”) on December 13, 2024. The 2024 Plan provides for the grant of incentive stock options, nonqualified stock options, and stock awards, any of which may be performance-based, and for incentive bonuses, which may be paid in cash, Common Stock or a combination thereof.
The number of shares reserved for issuance under the 2024 Plan is equal to 3,455,433 shares of Common Stock.
As of December 31, 2025, 2,322,854 shares of Common Stock were issued under the 2024 Plan.
In connection with the Reverse Merger, all of the options outstanding under the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) were adjusted with respect to the number of shares and exercise price to reflect the Exchange Ratio. As of December 31, 2025, 576,244 shares of Common Stock were outstanding under the 2019 Plan and no further grants will be made under the 2019 Plan.
For incentive stock options and non-statutory stock options, the option exercise price may not be less than 100 % of the estimated fair value on the date of grant. Options granted to employees typically vest over a four-year period but may be granted with different vesting terms. The options expire ten years from the grant date.
The following table summarizes stock option activity for the Company’s equity incentive plans for the year ended December 31, 2025:
Common
Weighted
Weighted
Shares
Average
Average
Underlying
Exercise
Remaining
Stock
Price per
Contractual
Options
Share
Life (in years)
Outstanding at January 1, 2024
Granted
Exercised
Forfeited / Cancelled
Outstanding at December 31, 2024
Granted
Exercised
Forfeited / Cancelled
Outstanding at December 31, 2025
Exercisable at December 31, 2025
The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2025 was $ 131.2 million and $ 43.4 million , respectively.
Total stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2025 and 2024 is as follows (in thousands):
Year Ended
December 31,
Research and development
General and administrative
Total stock-based compensation expense
As of December 31, 2025, there was approximately $ 30.1 million of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a remaining weighted-average service period of 2.89 years.
The weighted average fair value of stock options granted during the year ended December 31, 2025 was $ 28.31 per share which was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Expected volatility
Risk-free interest rate
Expected term (years)
Expected dividend yield
Note 11. Operating Lease Commitments
The Company entered into an operating lease arrangement that commenced on October 1, 2025 with unrelated parties for office space located in Wayne, PA. The lease expires on September 30, 2028 , and the Company has the option of extending the lease for two additional one-year terms. The Company did not include options to extend its lease terms as part of its right-of-use asset and lease liabilities. The lease is subject to additional variable charges, including common area maintenance and property insurance. Given the variable nature of such costs, they are recognized as expense as incurred. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized based on the present value of lease payments over the lease term.
The Company has recorded right-of-use assets of $ 0.6 million and lease liabilities of $ 0.6 million for its operating lease on the consolidated balance sheet as of December 31, 2025.
The following are the components of lease cost recognized within general and administrative expense on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2025:
December 31,
Operating lease cost
Variable lease cost
Short-term lease cost
As of December 31, 2025, the weighted average remaining lease life and weighted average discount rate were as follows:
December 31,
Operating leases
Weighted average remaining lease term (years)
Weighted average discount rate
As of December 31, 2025, the future minimum rental payments due under non-cancelable leases are as follows:
Operating
Leases
Fiscal years ending December 31,
Thereafter
Total gross minimum lease payments
Less: imputed interest
Subtotal
Less: current portion
Long-term portion of lease liability
As of December 31, 2025 , the Company had no leases that had not yet commenced. There were no material leases during the year ended December 31, 2024 .
Note 12. Income Taxes
The Company reported a loss before income taxes consisting of the following (in thousands):
December 31,
Domestic
Foreign
Loss before income taxes
The Company had no provision for income taxes for the years ended December 31, 2025 and 2024.
A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate is as follows:
December 31,
U.S. federal statutory rate
Foreign tax effects
Tax credits
Change in valuation allowance
Nontaxable or nondeductible items
Other adjustments
Effective income tax rate
*While the underlying tax effects remain unchanged from the prior year, certain reconciling items have been reallocated consistent with the required ASU 2023-09 disclosure.
The components of deferred tax assets and liabilities related to net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income taxes purposes were as follows (in thousands):
December 31,
Deferred tax assets:
Royalty agreement liabilities
Net operating loss
Section 174 R&D capitalization
Stock-based compensation
Accrued expenses and other
Other tax credits
Orphan drug credit
Lease liabilities
Startup costs
Deferred tax assets before valuation allowance
Deferred tax liabilities
Right of use assets
Other deferred tax liabilities
Net deferred tax
Valuation allowance
Net deferred tax assets
(Increase) decrease in valuation allowance
In assessing the realizability of the net deferred tax asset, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the NOLs. Management believes that it is more likely than not that the Company’s deferred income tax assets will not be realized. As such, there is a full valuation allowance in the amount of $ 106.1 million and $ 93.3 million against the net deferred tax assets as of December 31, 2025 and 2024, respectively. The increase in the valuation allowance of deferred tax assets as of December 31, 2025 was primarily a result of operating losses.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2025 and 2024 , the company reported no liabilities for unrecognized tax benefits along with no related interest and penalty exposure as accrued income tax on the accompanying consolidated balance sheets. Income tax returns for the tax years 2019 through 2025 remain subject to examination by the taxing authority jurisdictions.
As of December 31, 2025, the Company had net operating loss carryforwards for U.S. federal income tax purposes of $ 129.4 million and net operating loss carryforwards for state income tax purposes of $ 113.3 million . Federal tax loss carryforwards that were created prior to December 31, 2017 expire through 2037 and federal losses created after that date do not expire. State loss carryforwards expire starting in 2035. In addition, the Company has orphan drug credits of $ 0.2 million to reduce future federal taxes through 2039. Pursuant to Section 382 of the Internal Revenue Code of 1986, or the Code, and similar state tax law, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss and tax credit carryforwards that may be used in future years. Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation under Section 382 of the Code due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company completed a Section 382 study through December 31, 2020. Based on the study, the Company underwent an ownership change for Section 382 purposes which occurred in February 2018. As a result of the ownership change, the Company’s net operating and tax credit carryforwards as of the ownership change dates are subject to under Section 382; however, these are not expected to result in any of the impacted net operating and tax credit carryforwards to expire unutilized. Any net operating or tax credits generated after the February 2018 change are not subject to this annual . However, subsequent ownership changes, as defined by Section 382, may potentially further limit the amount of net operating and tax credit carryforwards that could be utilized to offset future taxable income and tax. The Company is currently open to examination under the statute of by the Internal Revenue Service and state jurisdictions for the tax years ended 2019 through the current year . Carryforward tax attributes generated in years past may still be adjusted upon future examination if they have or will be used in a future period. The Company is not under examination by the Internal Revenue Service or any other jurisdictions for any tax years.
As of December 31, 2025, the Company had German corporate income tax and trade tax net operating loss carryforwards of approximately $ 219.4 million and $ 215.1 million , respectively. Under current German laws, tax loss carryforwards may only be used to offset any relevant later assessment period (calendar year) of $ 1.2 million plus 60 % of the exceeding taxable income and trade profit of such period and do not expire. In addition, certain transactions, including transfers of shares or interest in the loss holding entity, may result in the partial or total forfeiture of tax losses existing at that date. Partial or total forfeiture of tax losses may further occur in corporate reorganizations of the loss holding entity.
Note 13. Commitments and Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when future expenditures are probable and such expenditures can be reasonably estimated.
Legal Proceedings
From time to time, the Company may face legal claims or actions in the normal course of business. The Company is not currently subject to any material legal proceedings.
Note 14. Segment Information
The Company is comprised of one reportable segment, the Company operations. As of December 31, 2025, the Company operations segment has not generated any product revenue since inception, as it does not yet have approved products for sale. However, the Company operations segment anticipates future revenue generation upon the successful development and commercialization of product candidates either independently or through partnerships.
The Company expects to primarily generate revenue in North America, with its long-lived assets also concentrated in this region, and manages its business activities on a consolidated basis. Decisions concerning the allocation of the Company’s resources are made by the Company’s Chief Operating Decision Maker (CODM), which is the Company’s
Chief Executive Officer (CEO). The CODM views the Company’s operations as a single operating segment which is the business of discovering and developing products for individuals with serious and rare skin diseases.
The Company’s significant segment expenses that are regularly provided to the CODM are related to:
Research and Development Expenses : These expenses include costs incurred in conducting research and development activities for the specific clinical trials including facilities costs, license fee and other costs incurred in connection with preclinical research and development activities. Research and development also encompass non-program specific costs such as salaries and stock-based compensation costs, third party consulting fees, and other related costs.
General and Administrative Expenses : These expenses include costs associated with the overall administration and management of the Company, including salaries and benefits for administrative personnel, professional service fees (e.g., accounting and legal services) and other office expenses.
The CODM assesses performance for the Company operations segment and decides how to allocate resources based on net income or loss that is also reported on the income statement as consolidated net income or loss and the measure of segment assets as reported on the balance sheet as total consolidated assets. Net income or loss is used to monitor budget versus actual results as well as assess the general performance of the segment in a given period.
The following table reconciles segment direct profit or loss to the Company’s consolidated results:
Year Ended
December 31,
(in thousands)
Research and development:
QTORIN rapamycin for microcystic LM
QTORIN rapamycin for microcystic LM - Government grant income
QTORIN rapamycin for cutaneous VM
QTORIN CMC
Non-program specific and unallocated research and development expenses:
Salaries and stock-based compensation
Consultants
Other
Total research and development
General and administrative:
Salaries and stock-based compensation
Consultants
Other
Total general and administrative
Loss from operations
Note 15. Subsequent Events
In January 2026, the Company paid out approximately $ 2.0 million to holders of C VRs in accordance with the CVR Agreement entered into immediately prior to closing of the Merger on December 13, 2024.
On February 25, 2026, the Company entered into an underwriting agreement in connection with its previously announced underwritten public offering of 1,600,000 shares of its Common Stock, par value $ 0.001 per share, at a price to the public of $ 125.00 per share. Under the terms of the underwriting agreement, the Company granted the underwriters an option to purchase up to an additional 240,000 shares of Common Stock at the same price. The option was exercised and the offering closed on February 27, 2026.
The offering resulted in net proceeds of approximately $ 215.8 million , after deducting underwriting discounts and commissions and other offering expenses.
