Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K.
Overview
We are a biopharmaceutical company developing potential first- or best-in-class, high-impact therapies for autoimmune diseases and cancer. We pursue promising therapeutic targets while leveraging core expertise in T cell engagers, which are established in oncology and are now advancing into autoimmune diseases. With a clinical-stage pipeline built on a rigorous scientific approach and purposeful innovation, we are advancing our mission to deliver new standards of care for patients.
Immunology
CLN-978 is a CD19xCD3 bispecific T cell engager that we are developing for autoimmune diseases. In the Phase 1 OUTRACE Program, CLN-978 is being evaluated in patients with systemic lupus erythematosus (“SLE”), rheumatoid arthritis (“RA”), and Sjögren’s disease (“SjD”). The OUTRACE SLE Study is an ongoing global Phase 1 clinical trial in patients with moderate to severe SLE. The OUTRACE RA Study is a Phase 1 clinical trial in patients with active, difficult-to-treat RA, which is ongoing in Europe. We plan to share initial clinical data in SLE RA in the second quarter of 2026 and repeat dosing data in RA in the third quarter of 2026. The OUTRACE SjD Study is an ongoing global Phase 1 clinical trial in patients with active, moderate to severe Sjögren’s disease. We plan to share initial clinical data in Sjögren’s disease in the fourth quarter of 2026.
Velinotamig is a BCMAxCD3 bispecific T cell engager that we are developing for autoimmune diseases. Chongqing Genrix Biopharmaceutical Co., Ltd. ("Genrix"), from which we licensed velinotamig, is enrolling a Phase 1 clinical trial in China in patients with autoimmune diseases, initially in patients with SLE, followed by planned future expansion into other indications, and initial clinical data will be shared in the fourth quarter of 2026. We intend to use the data generated from this Phase 1 clinical trial to accelerate global clinical development. Following the completion of the Genrix Phase 1 clinical trial, we will conduct all further development of velinotamig in autoimmune diseases.
Oncology
CLN-049 is a FLT3xCD3 bispecific T cell engager. CLN-049 is being evaluated in an ongoing Phase 1 clinical trial in patients with relapsed/refractory acute myeloid leukemia ("AML") or myelodysplastic syndrome (“MDS”). At the 2025 American Society for Hematology (“ASH”) Annual Meeting, we shared monotherapy efficacy data from the ongoing dose escalation portion of the trial in a heavily pretreated all-comer population of patients with relapsed/refractory AML. We plan to share a clinical data update from the dose escalation portion of the trial in the second half of 2026. We also plan to begin enrolling dose expansion cohorts in the second quarter of 2026 and expect to complete enrollment in the fourth quarter of 2026 to determine the recommended Phase 2 dose for an expected single-arm pivotal registrational trial.
Zipalertinib (CLN-081/TAS6417), on which we are collaborating with an affiliate of Taiho Pharmaceutical Co., Ltd. ("Taiho"), is an orally-available small-molecule, irreversible epidermal growth factor receptor ("EGFR") inhibitor that is designed to selectively target cells expressing EGFR exon 20 insertion mutations (“EGFR ex20ins”) with relative sparing of cells expressing wild-type EGFR.
We are evaluating zipalertinib in the pivotal Phase 2b portion of the REZILIENT1 clinical trial in patients with EGFR ex20ins non-small cell lung cancer ("NSCLC") who progressed after prior systemic therapy. In February 2026, based on the primary efficacy data from REZILIENT1, Taiho completed a rolling submission of a new drug application (“NDA”) seeking accelerated approval of zipalertinib for the treatment of patients with locally advanced or metastatic EGFR ex20ins NSCLC who have previously received platinum-based systemic chemotherapy.
Taiho is evaluating zipalertinib in a global Phase 3 clinical trial (“REZILIENT3”) in combination with chemotherapy as a potential first-line treatment for locally advanced or metastatic EGFR ex20ins NSCLC adult patients. Taiho completed enrollment of the trial in February 2026 and expects to obtain top-line results by the end of 2026.
Taiho is also evaluating zipalertinib in a Phase 2 parallel cohort trial (“REZILIENT2”). Taiho shared emerging data from certain REZILIENT2 cohorts at the International Association for the Study of Lung Cancer (“IASLC”) 2025 World Conference on Lung Cancer (“WCLC”) and European Society for Medical Oncology (“ESMO”) Congress 2025.
Preclinical Programs
In addition to the product candidates described above, we are actively developing several preclinical programs in autoimmune diseases and oncology.
Recently Discontinued Program
CLN-619 is a MICA/B monoclonal antibody that we were previously evaluating in Phase 1 clinical trials. In May 2025, following a review of the CLN-619 data from the disease-specific expansion cohorts for endometrial and cervical cancers, we announced discontinuation of further development of CLN-619 in patients with gynecological cancers as preliminary results did not meet our internal threshold for advancement. In November 2025, after a review of the emerging clinical data in patients with NSCLC and multiple myeloma, we discontinued further development of CLN-619.
CLN-617 is an interleukin-2 and interleukin-12 fusion protein that we were previously evaluating in a Phase 1 clinical trial. In November 2025, after a review of the emerging clinical data in patients with advanced solid tumors, we discontinued further development of CLN-617.
CLN-418 is a B7H4x4-1BB bispecific antibody that we licensed from Harbour BioMed US Inc. (“Harbour”) and were previously evaluating in a Phase 1 clinical trial. In August 2024, following a review of the data from the Phase 1 clinical trial in solid tumors, we notified Harbour of our decision to terminate the license and collaboration agreement for CLN-418 (the “Harbour License Agreement”), effective November 2024. In connection with the termination of the Harbour License Agreement, we discontinued development of CLN-418 and returned development and commercial rights for CLN-418 to Harbour.
Intellectual Property
We directly hold the worldwide intellectual property rights for CLN-978. We hold the worldwide, excluding mainland China, Hong Kong, Macau and Taiwan (collectively referred to as “greater China”), intellectual property rights for velinotamig. We hold the worldwide intellectual property rights for CLN-049 through a development subsidiary that we had a 98% ownership interest in as of December 31, 2025. We are co-developing zipalertinib, for which Taiho holds the intellectual property rights, with an affiliate of Taiho. We hold the worldwide intellectual property rights or exclusive options for worldwide intellectual property for our early-stage programs.
Financing and Business Operations
Since our inception in 2016, we have focused all of our efforts and financial resources on raising capital, organizing and staffing our company, identifying, acquiring or in-licensing and developing product and technology rights, establishing and protecting our intellectual property portfolio, and developing and advancing our programs. We do not have any products approved for sale and have not generated any revenue from product sales.
We have funded our operations primarily through the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2025, we have received net proceeds of $842.2 million from equity financings, $275.0 million from the sale of our equity interest in our zipalertinib development subsidiary to Taiho, and $18.9 million in revenue from a previous license agreement.
As of December 31, 2025, we had cash, cash equivalents, and short-term investments of $377.9 million, and long-term investments and interest receivable of $61.1 million. Interest receivable is included in prepaid expenses and other current assets on the consolidated balance sheets and represents accrued and unpaid interest on our marketable securities. We have a history of significant operating losses and have had negative cash flows from operations since our inception. As of December 31, 2025, we had an accumulated deficit of $588.1 million. We expect to continue to generate operating losses for the foreseeable future. Our future viability is dependent on the success of our research and development and our ability to access additional capital to fund our operations. There can be no assurance that our current operating plan will be achieved or that additional funding will be available on terms acceptable to us, or at all.
We are subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional capital to fund operations. Our current and future product candidates will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require additional capital, adequate personnel and extensive compliance-reporting capabilities. There can be no assurance that our research and development will be successfully completed, that adequate protection for our intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable.
Components of Our Results of Operations
Revenue
We have not generated any revenue from the sale of products since our inception.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates and programs. These expenses include:
compensation costs for employees engaged in research and development functions;
expenses incurred under agreements with organizations that support our drug discovery and development activities;
expenses incurred in connection with the preclinical and clinical development of our product candidates and programs, including under agreements with contract research organizations ("CROs");
costs related to contract manufacturing organizations that are primarily engaged to provide drug substance, raw materials, and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies, and other scientific development services;
the costs of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;
costs related to compliance with quality and regulatory requirements;
payments made under third-party licensing agreements; and
direct and allocated costs related to facilities, information technology, personnel and other overhead.
Pursuant to a co-development agreement, we are collaborating with a Taiho affiliate to develop zipalertinib for the treatment of a genetically defined subset of patients with NSCLC, and Taiho will commercialize zipalertinib. For the agreed-upon indication, we and Taiho share development costs equally, and each party will receive 50% of any future potential pre-tax profits from U.S. sales of zipalertinib. For any additional indications that Taiho chooses to develop independently, Taiho will bear all development costs until they have sufficient data from such indication to support a commercial purpose or submission of zipalertinib for the additional indication. At such time, 50% of Taiho’s independent development costs, subject to certain adjustments, will be deducted from future pre-tax profits for potential U.S. sales of zipalertinib. In November 2025, Taiho independently initiated an ongoing global Phase 3 clinical trial evaluating zipalertinib in an additional indication.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation costs for personnel in executive management, finance, legal, corporate and business development, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax, and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses; and other operating costs.
Other Income
Other income consists primarily of interest income earned on our cash, cash equivalents, and investments.
Income Taxes
In July 2025, the U.S enacted the budget reconciliation bill H.R. 1 into law, which included significant changes to U.S. income tax laws. We have assessed the impacts of H.R. 1 for 2025 and determined that there was no impact on our 2025 effective tax rate. Income taxes consist primarily of federal and state income taxes.
Results of Operations
Comparison of 2025 and 2024
The following table presents our results of operations for 2025 and 2024 (in thousands):
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Other income (expense), net
Net loss before income taxes
Income tax expense
Net loss
Net loss attributable to noncontrolling interests
Net loss attributable to Cullinan
Research and Development Expenses
The following table summarizes our research and development expenses for 2025 and 2024 (in thousands):
CLN-049
CLN-418
CLN-617
CLN-619
CLN-978
Velinotamig
Zipalertinib
Clinical-stage product candidates
Early-stage programs
Research and development personnel and operations
License agreement obligations
Equity-based compensation
Total research and development expenses
The $44.5 million increase in research and development expenses in 2025 compared to 2024 was primarily due to the one-time upfront in-licensing fee for velinotamig ($20.0 million), increases in clinical development costs ($21.9 million), personnel costs relating to higher average headcount during 2025 ($8.2 million), and equity-based compensation expense ($0.5 million), offset partially by decreases in preclinical costs ($3.7 million), and chemistry, manufacturing and controls costs ($2.4 million).
General and Administrative Expenses
The $0.2 million increase in general and administrative expenses in 2025 compared to 2024 was primarily due to increases in professional fees ($1.7 million), and legal costs ($1.6 million), offset partially by decreases in equity-based compensation expense ($2.2 million), and personnel costs ($1.0 million).
Other Income
The $7.7 million decrease in other income in 2025 compared to 2024 was primarily related to lower interest income earned.
Income Tax Expense (Benefit)
We did not record income tax expense or benefit in 2025 due to our net loss before income taxes in the current year and expected losses in future years. The income tax expense recognized for 2024 was driven by the finalization of estimates upon filing our 2023 tax return for the utilization of federal research and development credits generated during 2023 that were carried back to tax year 2022.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests is determined as the difference in the noncontrolling interests in the consolidated balance sheets between the start and end of each reporting period, after taking into account any capital transactions between our development subsidiaries and third parties.
Liquidity and Capital Resources
Overview
We have a history of significant operating losses and have had negative cash flows from operations since our inception and expect to continue to generate operating losses for the foreseeable future. We have not yet commercialized any products, and we do not expect to generate revenue from sales of products for several years, if at all. To date, we have funded our operations primarily with proceeds from the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2025, we had cash, cash equivalents, and short-term investments of $377.9 million, and long-term investments and interest receivable of $61.1 million.
Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, investments, and interest receivable will be sufficient to fund operations into 2029. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We cannot guarantee that we will be able to raise additional capital on reasonable terms or at all.
In June 2025, we entered into a license agreement with Genrix (the "Genrix License Agreement"), pursuant to which Genrix granted us a global (excluding greater China), exclusive license to develop and commercialize velinotamig, a BCMAxCD3 bispecific T cell engager, in all fields of use. Under the terms of the Genrix License Agreement, we paid Genrix an upfront license fee of $20.0 million in June 2025. Refer to Note 6 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional detail regarding the Genrix License Agreement.
In April 2024, we completed a private placement (the "2024 Private Placement") in which we issued approximately 14.4 million shares of our common stock and pre-funded warrants to purchase approximately 0.3 million additional shares of our common stock. We received net proceeds of $262.7 million from the 2024 Private Placement, after deducting offering costs of $17.3 million. Refer to Note 7 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional detail regarding the 2024 Private Placement.
We have an at-the-market equity offering program (the "ATM") through an agreement established with Cowen and Company, LLC (“Cowen”) in May 2023, pursuant to which we may offer and sell up to $125.0 million of our common stock from time to time through Cowen, acting as our sales agent. We made no sales under the ATM in 2025. Through December 31, 2025, we have sold approximately 3.3 million shares under the ATM and received net proceeds of $38.4 million, after deducting commissions. As of December 31, 2025, we had $85.6 million in shares of our common stock remaining under the ATM.
Cullinan is eligible to receive a $30.0 million payment from Taiho upon U.S. regulatory approval of zipalertinib for the treatment of patients with locally advanced or metastatic EGFR ex20ins NSCLC who have previously received platinum-based systemic chemotherapy. Cullinan is also eligible to receive up to a $100.0 million payment from Taiho upon U.S. regulatory approval of zipalertinib for the first-line treatment for adult patients with locally advanced or metastatic EGFR ex20ins NSCLC. We and Taiho will each receive 50% of any future pre-tax profits from potential U.S. sales of zipalertinib.
Cash Flows
Comparison of 2025 and 2024
The following table summarizes our sources and uses of cash for 2025 and 2024 (in thousands):
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash Flow from Operating Activities
During 2025, our operating activities used $175.8 million of cash, which primarily consisted of our operating expenses, excluding non-cash items, of $205.3 million, partially offset by interest income, excluding accretion on marketable securities, of $15.9 million, $11.1 million net change in our non-tax operating assets and liabilities, and income tax refunds of $3.0 million. The non-cash operating expenses primarily consisted of equity-based compensation expense.
During 2024, our operating activities used $145.3 million of cash, which primarily consisted of our operating expenses, excluding non-cash items, of $158.8 million and a $2.8 million net change in our non-tax operating assets and liabilities, partially offset by interest income, excluding accretion on marketable securities, of $14.2 million, and an income tax refund of $2.3 million. The non-cash operating expenses primarily consisted of equity-based compensation expense.
Cash Flow from Investing Activities
During 2025, our investing activities provided $180.0 million, which consisted primarily of $416.6 million of proceeds from the maturities of marketable securities, partially offset by $236.5 million of purchases of marketable securities.
During 2024, our investing activities used $136.3 million, which consisted of $721.1 million of purchases of marketable securities, partially offset by $584.8 million of proceeds from the maturities of marketable securities.
Cash Flow from Financing Activities
During 2025, our financing activities provided $1.1 million of cash, which consisted of net proceeds from the issuance of common stock under equity-based compensation plans.
During 2024, our financing activities provided $266.2 million, which consisted of $262.7 million of net proceeds from the issuance of common stock under our 2024 Private Placement and $8.0 million in net proceeds from the issuance of common stock under our equity-based compensation plans, partially offset by $4.4 million paid to acquire shares and options to purchase shares of our CLN-619 development subsidiary that were held by noncontrolling interests.
Future Funding Requirements
We expect our expenses to continue to increase in connection with our ongoing activities, particularly as we:
continue research and development of our current and future product candidates and programs;
conduct preclinical studies and clinical trials for our current and future product candidates;
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, or trials, complex results, safety issues, or other regulatory challenges;
develop the necessary processes, controls, and manufacturing capabilities to obtain marketing approval for our current and future product candidates and to support manufacturing on a commercial scale;
develop and implement plans to establish and operate in-house manufacturing operations and facilities, if deemed appropriate;
seek regulatory approvals for our current and future product candidates that successfully complete clinical trials;
hire and retain additional personnel, such as nonclinical, clinical, pharmacovigilance, quality assurance, regulatory affairs, manufacturing, distribution, legal, compliance, medical affairs, finance, general and administrative, commercial, and scientific personnel; and
develop, maintain, expand, and protect our intellectual property portfolio.
Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, investments, and interest receivable will be sufficient to fund operations into 2029. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. As we progress with our development programs and the regulatory review process, we expect to incur significant expenses related to product manufacturing, pre-commercial activities and commercialization. We may also require additional capital to pursue in-licenses or acquisitions of other programs to further expand our pipeline.
Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates and programs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:
the scope, progress, results, and costs of drug discovery, laboratory testing, and preclinical and clinical development for our current and future product candidates;
timely completion of our preclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;
the prevalence, duration, and severity of potential side effects or other safety issues experienced by patients receiving our current and future product candidates;
our ability to establish and maintain collaborations and license agreements on favorable terms, if at all, and the extent to which we acquire or in-license technologies or programs, if at all;
our ability to enroll clinical trials in a timely manner and to quickly resolve any delays or clinical holds that may be imposed on our development programs;
the costs of expanding our facilities to accommodate our expected growth in personnel;
our ability and the ability of third parties with whom we contract to manufacture adequate clinical and commercial supplies of our current and future product candidates, remain in good standing with regulatory authorities and develop, validate, and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices;
the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims;
the extent to which we acquire or in-license technologies or programs;
the sales price and availability of adequate third-party coverage and reimbursement for our product candidates, if and when approved; and
the ongoing costs of operating as a public company.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity, current ownership interests will be diluted. If we raise additional funds through government or third-party funding, collaboration agreements, strategic alliances, licensing arrangements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Other Commitments
We have certain contractual obligations under various license and collaboration agreements. Under these agreements, we will be required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory, and sales milestones, and we will be required to make milestone and royalty payments in connection with the sale of products developed under these agreements. In addition, under our co-development agreement, if Taiho generates sufficient data to support commercial purposes or a regulatory submission for new zipalertinib indications that it independently develops, half of Taiho’s independent development costs, subject to certain adjustments, will be deducted from future pre-tax profits related to potential U.S. sales of zipalertinib. As the achievement and timing of these future contractual obligations are not probable or estimable, such amounts have not been included in our consolidated balance sheets as of December 31, 2025 and 2024.
As of December 31, 2025, total future minimum lease payments were $3.1 million, with $1.0 million payable within 12 months. See Note 12 of our consolidated financial statements included in this Annual Report on Form 10-K for further detail on our lease obligations and the timing of expected future payments.
In addition, we enter into agreements in the normal course of business with CROs for clinical trials and with other vendors for preclinical studies, manufacturing services, and other services and products for operating purposes, which are generally cancelable upon written notice.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Research and Development Contract Costs and Accruals
Research and development costs are expensed as incurred. We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical trials 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 research and development liabilities in our consolidated balance sheets and within research and development expense in our consolidated statements of operations and comprehensive income (loss). These costs are a significant component of our research and development expenses.
We accrue for these costs based on factors such as estimates of the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and in accordance with agreements established with our third-party service providers for such services. We make significant judgments and estimates in determining the accrued research and development liabilities balance at each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, the status and timing of services performed, the number of patients enrolled in clinical trials and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. We record advance payments to service providers as prepaid assets, which are expensed as the contracted services are performed.
Equity-Based Compensation Expense
We estimate the fair value of stock options using the Black-Scholes option pricing model, which requires the input of objective and subjective assumptions. Certain assumptions used, including our expected stock price volatility, represent management’s estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, equity-based compensation expense could be materially different for future awards.
We do not have sufficient historical or implied volatility data for our common stock necessary to estimate expected volatility over a period of time commensurate with the expected term of our stock option awards. We use a blended rate to calculate expected volatility that combines our historical volatility with the historical volatilities of the stock prices of similar entities within our industry over a period of time commensurate with the expected term assumption.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A reduction in the carrying value of the deferred tax assets is required when it is not more likely than not that such deferred tax assets are not realizable. Judgment is required to if certain income tax positions are more likely than not of being sustained and may change from period to period when there is a change in judgment.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued and adopted accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitati ve 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.
Item 8. Financial Statement s and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial statements is found in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.
