4. Fair Value Measurements

Cash and Cash Equivalents

The Company invests its excess cash in money market funds that are classified as level 1 in the fair value hierarchy, due to their short-term maturity of three months or less, and measures fair value based on quoted prices in active markets for identical assets.

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions and in money market accounts, and at times balances may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held and historically the Company has not experienced any losses in such accounts.

Share Liability and Derivative Liability

On December 17, 2025 (the “Execution Date”), the Company entered into a Research Program Funding Agreement with the Crohn’s and Colitis Foundation (the “CCF”), in which the CCF agreed to provide up to a $0.5 million investment to support the Company’s Phase 1b research program related to PALI-2108 in return for shares of the Company's common stock.

The funding is payable in three tranches (“CCF Milestone Amount”) subject to the achievement of specified milestones. The first milestone (“CCF Milestone 1”) in the amount of $250,000 was due to the Company within approximately 45 days of the Execution Date. Accordingly, as of December 31, 2025, the Company recognized a $250,000 other current receivable for the amount due from CCF in Prepaid and other current assets in the condensed consolidated balance sheets. Pursuant to Accounting Standards Codification ("ASC") 480, Distinguishing Liabilities from Equity ("ASC 480"), the Company also recognized CCF Milestone 1 as a financial instrument that requires liability classification initially recognized at fair value, with subsequent changes in fair value measured at each reporting period thereafter based on the market value of the Company's common stock, which is a level 1 input. Accordingly, as of December 31, 2025, the Company recognized the fair value of CCF Milestone 1 of $312,500 in Share liability in the condensed consolidated balance sheets. In the first quarter of 2026, CCF Milestone 1 was settled in cash, which reduced both the other current receivable and the Share liability to zero as of June 30, 2026. There was no change in the fair value of the Share liability prior to its cash settlement.

The second milestone (“CCF Milestone 2”) is in the amount of $200,000 and is due based on achievement of certain research deliverables. The third milestone (“CCF Milestone 3”) is in the amount of $50,000 and is due upon the final Phase 1b study report. Pursuant to ASC 815-40, Derivatives and Hedging—Contracts in Entity's Own Equity ("ASC 815-40"), CCF Milestone 2 and CCF Milestone 3 were determined to be derivative liabilities initially recognized at fair value, with subsequent changes in fair value measured at each reporting period thereafter based on the market value of the Company's common stock, which is a level 1 input. As of June 30, 2026, neither CCF Milestone 2 nor CCF Milestone 3 has been met. As of both June 30, 2026 and December 31, 2025, the fair value of CCF Milestone 2 was determined to be $50,000 and the fair value of CCF Milestone 3 was determined to be $12,500. The fair value of each of CCF Milestone 2 and CCF Milestone 3 is recognized in Derivative liability in the condensed consolidated balance sheets. There was no change in the fair value of the Derivative liability in the three and six months ended June 30, 2026.

Contingent Consideration Obligation

On September 1, 2023, the Company and Giiant Pharma, Inc. ("Giiant") entered into a research collaboration and license agreement, as amended (“Giiant License Agreement”)(See Note 7, Collaborations and License Agreements). Pursuant to the Giiant License Agreement, the Company incurred a contingent consideration obligation related to future milestone payments. The Company has an obligation to make contingent consideration payments to Giiant, in either cash or shares of the Company’s common stock solely at the Company’s election, upon the achievement of development milestones (as set forth in the Giiant License Agreement). Because the contingent consideration associated with the milestone payments may be settled in shares of the Company's common stock solely at the election of the Company, the Company has determined it should be accounted for under ASC 480, and accordingly has recognized it as a liability measured at its estimated fair value.

At the end of each reporting period, the Company re-measures the contingent consideration obligation to its estimated fair value and any resulting change is recognized in research and development expenses in the condensed consolidated statements of operations. The fair value of the contingent consideration obligation is determined using a probability-based model that estimates the likelihood of success in achieving each of the defined milestones that is then discounted to present value using the Company's incremental borrowing rate. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting hierarchy. The significant assumptions used in the calculation of the fair value as of June 30, 2026 included a discount rate of 23.7% and management's updated projections of the likelihood of success in achieving each of the defined milestones based on empirical, published industry data.

As of June 30, 2026 and December 31, 2025, the entire amount of the contingent consideration obligation of approximately $259,000 and $266,000, respectively, was classified as a noncurrent liability in Contingent consideration obligation in the condensed consolidated balance sheets since it is not expected to be settled within one-year of the respective balance sheet date.

Financial Instruments Not Required to be Remeasured at Fair Value

The Company's other financial assets and liabilities, including restricted cash, accounts receivable, other current receivables, accounts payable, and accrued liabilities are not remeasured to fair value, as the carrying amount of each approximates its fair value due to the short-term nature of these instruments. The carrying value of the Company’s insurance financing debt also approximated its fair value as of December 31, 2025 due to the short-term nature of the instrument and the market rate of interest, which is based on level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

None of the Company’s non-financial assets or liabilities are recognized at fair value on a nonrecurring basis.