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. This discussion and other parts of this Annual Report 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.
Overview
We are a biopharmaceutical company focused on developing a diversified pipeline of targeted therapeutic candidates across multiple modalities in order to bring important medicines to cancer patients. Our strategy is to source innovation through both internal discovery efforts and external collaborations, focusing on advanced stage assets with novel technology platforms and differentiated mechanisms. Before we advance a product candidate into clinical development, we evaluate its potential for anti-tumor activity as a single agent as well as its ability to generate an immune system response or to inhibit oncogenic drivers. Using this strategy, we have efficiently developed or in-licensed a portfolio of therapeutic candidates that currently includes eight distinct programs. We currently employ or have consulting agreements with all of our team members.
Our lead product candidate, CLN-081, is an orally available small molecule, irreversible EGFR inhibitor that is designed to selectively target cells expressing mutant EGFR variants, including EGFR exon 20 insertion mutations, with relative sparing of cells expressing wild type EGFR. We are currently evaluating CLN-081 as a treatment for non-small cell lung cancer, or NSCLC, in adult patients with EGFRex20ins mutations in a Phase 1/2a trial. In December 2021, we presented efficacy and safety data from this trial that we believe supports CLN-081’s differentiated clinical profile. In January 2022, we announced that the United States Food and Drug Administration, or FDA, granted CLN-081 Breakthrough Therapy Designation, or BTD.
Following CLN-081, our most advanced product candidates include CLN-049, a bispecific antibody targeting FLT3 and CD3, and CLN-619, a monoclonal antibody designed to stimulate natural killer, or NK, and T cell responses by engaging a unique target, MICA/B. We initiated enrollment in clinical trials in the fourth quarter of 2021 for CLN-619 for patients with advanced solid tumors and CLN-049 for patients with relapsed/refractory acute myeloid leukemia, or r/r AML.
In addition, through our AMBER platform, we are developing CLN-617, a fusion protein combining two potent antitumor cytokines, interleukin-2, or IL-2, and interleukin-12, or IL-12, with a tumor retention domain for the treatment of solid tumors. In November, we announced that we had selected a lead candidate and advanced CLN-617 into IND-enabling studies. We presented preclinical AMBER data at the Society for Immunotherapy of Cancer annual meeting in November 2021. Our pipeline includes four additional preclinical oncology programs: NexGem (CLN-978), an internally developed half-life extended T cell engaging antibody construct designed to simultaneously engage CD19 and CD3; Opal, a bispecific fusion protein that blocks the PD-1 axis and selectively activates the 4-IBB/CD137 pathway on T cells in tumors; Jade, a cell therapy targeting a novel senescence and cancer-related protein we are developing in collaboration with the Fred Hutchinson Cancer Research Center; and a collaboration with Mt. Sinai to optimize and develop HPK1 protein degraders. We currently hold worldwide development and commercialization rights to each of our product candidates, except for CLN-081, where Japan and Greater China rights have been partnered.
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. To support these activities, we (i) identify and secure new programs, (ii) set up new subsidiaries to further advance individual programs, (iii) recruit key management team members, (iv) raise and allocate capital across the portfolio and (v) provide certain shared services, including research and development operations, administrative services, and business development, to our subsidiaries. We do not have any products approved for sale and have not generated any revenue from product sales.
We have four partially-owned development subsidiaries, together the Asset Subsidiaries: Cullinan Pearl Corp., or Cullinan Pearl, which is advancing CLN-081; Cullinan Florentine Corp., or Cullinan Florentine, which is advancing CLN-049; Cullinan MICA Corp., or Cullinan MICA, which is advancing CLN-619; and Cullinan Amber Corp., or Cullinan Amber, which is developing our AMBER platform and advancing CLN-617 as its first product candidate. We hold IP rights and exclusive options for worldwide IP for our earlier-stage programs, NexGem, Opal, Jade and the HPK1 degrader collaboration with Mt. Sinai.
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Since inception, we have funded our operations primarily through the sale of equity securities. As of December 31, 2021, we have received net proceeds of $541.2 million from equity financings, inclusive of our net proceeds of $264.5 million from our IPO. Furthermore, we received $18.9 million in net collaboration revenue from the license agreement, or the Zai License Agreement with Zai Lab Shanghai Company, Limited, or Zai Lab.
As of December 31, 2021, we had cash, cash equivalents and short-term investments of $290.5 million and long-term investments of $140.4 million. We have incurred operating losses and have had negative cash flows from operations since our inception. As of December 31, 2021, we had an accumulated deficit of $158.9 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 therapeutic programs 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.
Impact of COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, or COVID-19, was reported in China and subsequently was declared a pandemic in March 2020 by the World Health Organization. Many countries around the world imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and closed non-essential businesses. The duration and scope of the COVID-19 pandemic continues to be uncertain. Infection rates remain high in many parts of the world, and the virulence and spread of different strains of the virus have caused many local jurisdictions to continue or re-implement quarantines and restrictions on travel and mass gatherings. The level and timing of COVID-19 vaccine distribution across the world will impact the economic recovery and growth and the general economic consequences of the pandemic.
The Company implemented remote working and other protective measures, but thus far, has not experienced a significant disruption or delay in its operations as it relates to the clinical development or drug production of the Company’s product candidates. However, COVID-19 has impacted the pace of our enrollment in our clinical trials and our preclinical studies. In the future, COVID-19-related restrictions may adversely impact our operations. Such events may result in a period of business, supply and drug product manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations.
To date, COVID-19 has not had a financial impact on us. The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic remain difficult to assess or predict, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others, the pandemic has resulted in significant disruptions in the general commercial activity and the global economy and caused financial market volatility and uncertainty in significant and unforeseen ways. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business.
The full extent and duration of the impact of COVID-19 on our operations and financial performance is currently unknown and depends on future developments that are uncertain and unpredictable. While the situation caused by COVID-19 is unprecedented and dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to Part I, Item 1A. Risk Factors of this Annual Report.
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Basis of Presentation and Consolidation
Since our inception, we have created wholly-owned subsidiaries or made investments in certain controlled entities. Losses attributed to noncontrolling interests are reported separately in our consolidated statements of operations and comprehensive loss.
The following Asset Subsidiaries are consolidated into our financial statements:
Cullinan Pearl Corp. Partially-owned Subsidiary November 2018 80 %
Cullinan Amber Corp.(2) Partially-owned Subsidiary December 2019 92 %
Cullinan Florentine Corp.(3) Partially-owned Subsidiary December 2019 95 %
Cullinan MICA Corp.(4) Partially-owned Subsidiary May 2020 45 %
Cullinan Apollo Corp.(5) N/A November 2018 N/A
(1)
Ownership percentages are reflected on a fully-diluted basis.
(2)
Reflects the closing of an additional tranche of Series A Preferred Stock financing of Cullinan Amber and the issuance of common stock of Cullinan Amber to MIT in June 2021.
(3)
Reflects the Company’s ownership after the closing of an additional tranche of Series B Preferred Stock financing of Cullinan Florentine in July 2021.
(4)
Reflects the Company’s ownership after the First Additional Closing of Series A Senior Preferred Stock financing of Cullinan MICA in June 2021.
(5)
Cullinan Apollo Corp. was dissolved in August 2021.
Cullinan Pearl
Cullinan Pearl, incorporated in November 2018, is our partially-owned operating subsidiary that has exclusive worldwide rights, excluding Japan and Greater China, to CLN-081, our orally available small molecule designed as a next generation, irreversible EGFR inhibitor that is in development for the treatment of NSCLC patients with EGFR exon 20 insertion mutations.
In February 2019, Cullinan Pearl entered into a licensing and collaboration agreement with Taiho Pharmaceutical, Co., Ltd., or Taiho Pharma, for the worldwide rights to CLN-081 outside of Japan, which Taiho Pharma retained. Cullinan Pearl also issued to Taiho Ventures, LLC, or Taiho Ventures, an affiliate of Taiho Pharma, 1,860,000 shares of Series A Preferred Stock at a price of $1.00 per share for an aggregate purchase price of $1.9 million. In August 2020, at the election of the board of directors of Cullinan Pearl, Cullinan Pearl completed its subsequent closing of its Series A Preferred Stock financing and issued to Taiho Ventures an additional 1,206,000 shares of Series A Preferred Stock for an aggregate purchase price of $1.2 million.
As of December 31, 2021, we and Taiho Ventures, have purchased an aggregate of $23.0 million in Series A Preferred Stock of Cullinan Pearl.
As of December 31, 2021, we own 87% and Taiho Ventures owns 13% of the Series A Preferred Stock of Cullinan Pearl. Assuming conversion of the Series A Preferred Stock, we own 80%, Taiho Ventures owns 10%, and Taiho Pharma owns 10% of the fully-diluted common stock outstanding of Cullinan Pearl. Pursuant to a voting agreement, by and among Cullinan Pearl, us, Taiho Ventures, and other stockholders of Cullinan Pearl, the Series A Preferred stockholders, acting by majority vote, have the right to appoint two members of the board of directors, Taiho Ventures has the right to appoint one director; our chief executive officer, Nadim Ahmed, serves as the fourth board member; and two independent directors are appointed by a majority of the other four Cullinan Pearl board of directors.
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Cullinan Amber
Cullinan Amber, incorporated in December 2019, is our partially-owned operating subsidiary that has exclusive worldwide rights to the patents related to the technology that originated in the laboratory of Professor Dane Wittrup at the Massachusetts Institute of Technology, or MIT. In December 2019, Cullinan Amber entered into an Exclusive Patent License Agreement with MIT.
In June 2021, upon election by Amber’s board of directors, Amber issued an additional 3,000,000 shares of its Series A Preferred Stock for gross proceeds of $3.0 million to the Company and 153,229 shares of its common stock to MIT in exchange for no consideration as set forth in the license agreement.
As of December 31, 2021, we own 92% of the issued equity of Cullinan Amber, on a fully-diluted basis, including 100% of Series A Preferred Stock.
Pursuant to the Series A Preferred Stock Purchase Agreement, by and among Cullinan Amber and us, upon election by the Cullinan Amber board of directors, we will purchase up to an additional 6,000,000 Series A Preferred Stock at a purchase price of $1.00 per share of Series A Preferred Stock in one or more closings. Pursuant to a voting agreement by and among Cullinan Amber, us, and other stockholders, of the three person board of directors, the holders of Series A Preferred Stock, acting by majority vote, have the right to designate two members of the board of directors.
Cullinan Florentine
Cullinan Florentine, incorporated in December 2019, is our partially-owned operating subsidiary that has exclusive worldwide rights to CLN-049, our bispecific antibody targeting FLT3 and CD3, pursuant to an Exclusive License Agreement, or the Tübingen License Agreement with Deutsches Krebsforschungszentrum, or DKFZ, Eberhard Karls University of Tübingen, Faculty of Medicine, or University of Tübingen, and Universitätsmedizin Gesellschaft für Forschung und Entwicklung mbH, Tübingen, or UFE.
Through December 31, 2021, we have purchased an aggregate of $12.0 million of shares of Series A Preferred Stock and $8.1 million of shares of Series B Preferred Stock of Cullinan Florentine. In connection with the issuance of additional shares of Series A Preferred Stock to us and pursuant to the Tübingen License Agreement, Cullinan Florentine issued to each of DKFZ and UFE an additional 261,540 and 120,270 shares of common stock of Cullinan Florentine, respectively.
As of December 31, 2021, we own 95% of the fully-diluted shares outstanding of Cullinan Florentine, including 100% of Series A Preferred Stock. DKFZ and University of Tübingen currently own, in the aggregate, 5% of the equity of Cullinan Florentine on a fully-diluted basis.
Pursuant to a voting agreement between Cullinan Florentine, we and other stockholders of Series A Preferred Stock, acting by majority vote, have the right to designate two members of the four person board of directors, DKFZ and UFE, acting jointly, have the right to appoint one director, our current chief executive officer, Mr. Ahmed, is the fourth board member.
Cullinan MICA
Cullinan MICA Corp. (formerly known as PDI Therapeutics, Inc.), or Cullinan MICA, of which we assumed operational control in May 2020, is our partially-owned operating subsidiary that owns intellectual property related to CLN-619, our MICA/B-targeted humanized IgG1 monoclonal antibody. We purchased 24% of the issued equity of Cullinan MICA, on a fully-diluted basis, including 89% of the outstanding shares of Series A Senior Preferred Stock. Pursuant to the Series A Senior Preferred Stock Purchase Agreement by and among us, Cullinan MICA, and other stockholders of Cullinan MICA, we will purchase up to an additional $16.0 million of the aggregate $18.0 million Series A Senior Preferred Stock in two additional closings upon the determination of Cullinan MICA’s board of directors. At the first additional closing, the purchasers were required to invest an additional $8.0 million. At the Second Additional Closing, the purchasers are required to invest an additional $10.0 million.
In December 2020, the stockholders and the board of directors of Cullinan MICA approved an amendment to its equity plan that decreased the authorized amount of shares under its equity plan such that no further grants could be made under its equity plan. Any authorized but unissued shares under the equity plan were returned to the status of authorized, unissued shares of common stock. In December 2020, we purchased an aggregate of 3,367,804 shares of common stock of Cullinan MICA.
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In June 2021, Cullinan MICA’s board of directors authorized the first additional closing where investors of Series A Senior Preferred Stock purchased an additional $8.0 million of Series A Senior Preferred Stock of Cullinan MICA. The Company purchased 5,385,787 shares while other investors purchased 702,495 shares for $7.1 million and $0.9 million, respectively. As a result of these transactions, our ownership percentage in Cullinan MICA increased to 45%, which remains as of December 31, 2021.
Subject to the completion of Cullinan MICA’s Series A financing, we will own 54% of the fully-diluted capital stock outstanding. Pursuant to a voting agreement, by and among Cullinan MICA, us, and other stockholders of Cullinan MICA, of the five-person board of directors, we have the right to appoint three members of the board of directors.
Cullinan Apollo
Cullinan Apollo, incorporated in November 2018, was our partially-owned operating subsidiary that was formed around VK-2019. In December 2018, Cullinan Apollo licensed the exclusive worldwide rights to VK-2019, an Epstein-Barr Nuclear Antigen 1 inhibitor, from The Wistar Institute, or Wistar. Cullinan Apollo also entered into a Collaborative Research Agreement with Wistar to continue preclinical research and development of VK-2019. In May 2020, Cullinan Apollo discontinued development of VK-2019 and terminated its license and collaboration agreements with Wistar. Cullinan Apollo was dissolved in August 2021.
Components of Our Results of Operations
Revenue
For the year ended December 31, 2021, we recognized $18.9 million of revenue, relating to the upfront fee earned from the Zai License Agreement. We have not generated any revenue from the sale of products since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts for our product candidates are successful and result in regulatory approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
Operating Expenses
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. We expense research and development costs and intangible assets acquired that have no alternative future use as incurred. These expenses include:
•
employee-related expenses, including salaries, related benefits and equity-based compensation expense, for employees engaged in research and development functions;
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expenses incurred under agreements with organizations that support our drug discovery and development activities;
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expenses incurred in connection with the preclinical and clinical development of our product candidates and programs, including under agreements with contract research organizations, or CROs;
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costs related to contract manufacturing organizations, or CMOs, that are primarily engaged to provide drug substance and 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;
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the costs of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;
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costs related to compliance with quality and regulatory requirements;
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payments made under third-party licensing agreements; and
•
direct and allocated costs related to facilities, information technology, personnel and other overhead.
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Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or consumed or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any current or future product candidates.
Our clinical development costs may vary significantly based on factors such as:
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per patient trial costs;
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the number of trials required for approval;
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the number of sites included in the trials;
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the countries in which the trials are conducted;
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the length of time required to enroll eligible patients;
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the number of patients that participate in the trials;
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the number of doses that patients receive;
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the drop-out or discontinuation rates of patients;
•
potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in the trials and follow-up periods;
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the cost and timing of manufacturing our product candidates;
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the phase of development of our product candidates;
•
the efficacy and safety profile of our product candidates; and
•
the number of product candidates we are developing.
The successful development and commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:
•
the timing and progress of nonclinical and clinical development activities;
•
the number and scope of nonclinical and clinical programs we decide to pursue;
•
raising necessary additional funds;
•
the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
•
our ability to maintain our current development programs and to establish new ones;
•
our ability to establish new licensing or collaboration arrangements;
•
the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
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the receipt and related terms of regulatory approvals from applicable regulatory authorities;
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the availability of drug substance and drug product for use in the production of our product candidates;
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establishing and maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
•
our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
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our ability to protect our rights in our intellectual property portfolio;
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•
the commercialization of our product candidates, if and when approved;
•
obtaining and maintaining third-party insurance coverage and adequate reimbursement;
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the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;
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competition with other products; and
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a continued acceptable safety profile of our therapies following approval.
A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates or programs.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel in executive management, finance, corporate and business development, and 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.
We incurred increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support development of our product candidates and programs and our continued research activities.
Other Income
Other income consists primarily of interest income earned on our cash, cash equivalents, short-term investments and long-term investments.
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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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.
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Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
License revenue $ 18,943 $ —
Operating expenses:
Other income (expense):
Other income (expense), net (8 ) (11 )
Net loss attributable to noncontrolling interest (1,915 ) (7,659 )
Net loss attributable to common stockholders of Cullinan $ (65,570 ) $ (51,799 )
Research and Development Expenses
Year Ended December 31,
Research and development expenses were $57.8 million for the year ended December 31, 2021, compared to $43.2 million for the year ended December 31, 2020. We separately disclosed additional details for the research and development expenses incurred in connection with the research and development activities conducted for the product candidates and programs being developed by our partially-owned subsidiaries Cullinan Amber, Cullinan Florentine, Cullinan MICA and Cullinan Pearl, as we believe they represent key portfolio value drivers.
The net increase of $11.2 million of research and development expenses of the Asset Subsidiaries were primarily due to the following ongoing research and development activities for our active programs: (i) increase in trial enrollment and chemistry, manufacturing and controls, or CMC costs relating to CLN-081 of $14.5 million, (ii) increase in preclinical and CMC costs to support IND enabling activities for CLN-619 of $5.0 million offset by a non-recurring non-cash charge of $6.5 million taken in May 2020 for the asset acquisition of CLN-619, (iii) a decrease in preclinical and CMC activity for CLN-049 of $3.2 million relating to the completion of development and manufacturing activity of the drug product and (iv) increase in preclinical and CMC costs to support IND enabling activities for CLN-617 of $1.5 million.
The remaining net increase of $3.3 million in research and development expenses were primarily related to equity-based compensation expense for stock options granted under the 2021 Stock Option and Incentive Plan of $3.0 million, increased headcount and expansion of operations of $1.5 million, offset by a $2.4 million decrease in expenses from the wind down of clinical trial activities for VK-2019 and $1.2 million increase in early stage research activities.
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General and Administrative Expenses
General and administrative expenses were $29.1 million for the year ended December 31, 2021 compared to $17.1 million for the year ended December 31, 2020. The increase of $12.0 million was primarily due to a net increase of $6.4 million in equity-based compensation expense where the Company recorded a non-recurring charge of $6.7 million in the fourth quarter of 2021 due to the transition of our chief executive officer, $2.5 million in directors' and officers' liability insurance and other corporate fees, $1.7 million due to increased headcount to support operations of a public company, $0.5 million for patent fees and $0.6 million costs for system upgrades to enhance information technology environment.
Other Income, Net
Other income, net was $0.5 million during the year ended December 31, 2021 compared to $0.9 million during the year ended December 31, 2020. The decrease of $0.4 million was primarily related to a higher interest income earned in the prior year.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interests were $1.9 million and $7.7 million for the years ended December 31, 2021 and 2020, respectively. Net loss attributable to noncontrolling interests was lower in 2021 compared to 2020, which was primarily due to the allocation of income from the Zai License Agreement to the noncontrolling interests shareholders of Cullinan Pearl. Net loss attributable to noncontrolling interests of $7.7 million for the year ended December 31, 2020 was primarily related to the acquisition of our Asset Subsidiary, Cullinan MICA, of $5.4 million and the issuance of anti-dilution shares in our Asset Subsidiaries, of $1.2 million.
Liquidity and Capital Resources
Overview
Since our inception, we have incurred significant operating losses. 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. As of December 31, 2021, we had cash, cash equivalents and short-term investments of $290.5 million and long-term investments of $140.4 million.
In January 2021, the Company completed its IPO and received net proceeds of $264.5 million from the offering, after deducting underwriting discounts, commissions and other offering expenses. Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, and short-term investments, will be sufficient to fund operations through 2024. 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.
Cash Flows
Comparison of Years Ended December 31, 2021 and 2020
The following table summarizes our sources and uses of cash for each of the periods presented:
Year Ended December 31,
Net cash used in operating activities $ (43,433 ) $ (29,772 )
Net cash used in investing activities (333,775 ) (5,420 )
Net (decrease) increase in cash and cash equivalents $ (108,424 ) $ 104,948
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Cash Flow from Operating Activities
For the year ended December 31, 2021, operating activities used $43.4 million of cash and primarily consisted of our net loss of $67.5 million, changes in net operating assets and liabilities of $3.5 million, and offset by non-cash charges of $27.6 million. Our non-cash charges of $27.6 million primarily consisted of $24.4 million from equity-based compensation expense and a $3.1 million from amortization or accretion on marketable securities.
For the year ended December 31, 2020, operating activities used $29.8 million of cash and primarily consisted of our net loss of $59.5 million, offset by changes in net operating assets and liabilities of $6.9 million, and non-cash charges of $22.8 million. Our non-cash charges of $22.8 million primarily consisted of $14.9 million from equity-based compensation expense, $6.4 million relating to the IPR&D charge in connection with the acquisition of MICA and a $1.2 million license expense in exchange for subsidiary capital stock.
Cash Flow from Investing Activities
For the year ended December 31, 2021, investing activities used $333.8 million of cash and primarily consisted of $525.8 million used for the purchases of marketable securities offset by $192.0 million proceeds from the sales and maturities of marketable securities.
For the year ended December 31, 2020, investing activities used $5.4 million of cash and primarily consisted of net $6.8 million used for the purchases of marketable securities, less than $0.1 million for the purchases of property and equipment, offset by $1.5 million of cash acquired in the MICA asset acquisition.
Cash Flow from Financing Activities
For the year ended December 31, 2021, net cash provided by financing activities was $268.8 million, which primarily consisted of net proceeds from our initial public offering of $267.3 million, proceeds from stock option exercises of $3.3 million, offset by payment of deferred offering costs of $2.7 million.
For the year ended December 31, 2020, net cash provided by financing activities was $140.1 million, which primarily consisted of net proceeds from the issuance of common stock equivalents of $138.9 million and net proceeds related to the issuance of noncontrolling interests of $1.2 million.
Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities, manufacturing and clinical trials of our product candidates. In addition, we have and will continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Our expenses will also increase as we:
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continue our research and development efforts and submit investigational new drug applications, or INDs, for our product candidates and programs;
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conduct preclinical studies and clinical trials for our current and future product candidates;
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take temporary precautionary measures to help minimize the risk of COVID-19 to our employees;
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experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues, or other regulatory challenges;
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develop the necessary processes, controls, and manufacturing capabilities to obtain marketing approval for our product candidates and to support manufacturing on a commercial scale;
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develop and implement plans to establish and operate in-house manufacturing operations and facility;
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seek regulatory approvals for any product candidates that successfully complete clinical trials, if any;
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hire and retain additional personnel, such as non-clinical, clinical, pharmacovigilance, quality assurance, regulatory affairs, manufacturing, distribution, legal, compliance, medical affairs, finance, general and administrative, commercial, and scientific personnel; and
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develop, maintain, expand, and protect our intellectual property portfolio.
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As a publicly-traded company, we incurred significant legal, accounting and other expenses. We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.
To achieve compliance with Section 404 after we no longer qualify as an emerging growth company, we will be required to provide an attestation of our internal controls over financial reporting processes, or ICFR, which will require additional costs and personnel. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, short-term and long-term investments, will be sufficient to fund operations through 2024. 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 commercialization 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 product candidates or 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;
•
timing delays with respect to preclinical and clinical development of our current and future product candidates, including as result of the COVID-19 pandemic;
•
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 product candidates or any 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, or cGMP;
•
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;
126
•
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.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.
Contractual Obligations and Other Commitments
We have certain payment obligations under various license and collaboration agreements. Under these agreements, we are required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory, and sales milestones. The payment obligations under the license and collaboration agreements are contingent upon future events, such as our achievement of specified development, clinical, regulatory, and commercial milestones, and we will be required to make milestone and royalty payments in connection with the sale of products developed under these agreements. As the achievement and timing of these future milestone payments are not probable or estimable, such amounts have not been included in our consolidated balance sheet as of December 31, 2021 and 2020.
We have entered into an operating lease commitment for $3.8 million for our corporate headquarter. Operating lease obligations as of December 31, 2021 were $1.5 million, with $0.6 million payable within 12 months. See Note 10, to our consolidated financial statements for further detail on our 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 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 generally accepted accounting principles, or GAAP, in the United States. 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 to our consolidated financial statements appearing at the end of this Annual Report, 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.
127
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests in our consolidated statements of operations is a result of our investments in our consolidated entities, which include Cullinan Amber, Cullinan Florentine, Cullinan Pearl and Cullinan MICA, and consists of the portion of the net loss of those consolidated entities that is not allocated to us. Earnings or losses are attributed to noncontrolling interests under the hypothetical liquidation at book value, or HLBV, method. The HLBV method is a point in time calculation that utilizes inputs to determine the amount that we and our noncontrolling interest holders would receive upon a hypothetical liquidation at each balance sheet date based on the liquidation provisions of the respective articles of incorporation. We calculate the share of the noncontrolling interests' earning or losses based on the change to the noncontrolling interests' claim on the net asset of each Asset Subsidiaries. Management's estimates of assets, liabilities, costs and expenses impacted the determination of the net asset value of each Asset Subsidiaries.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Upon satisfaction of our performance obligation to Zai Lab in the first quarter of 2021, we recognized revenue of $18.9 million from our license agreement with Zai Lab. The amount recognized represented the upfront fee less foreign tax withholdings as Pearl does not expect to recover such amounts.
Research and Development Contract Costs and Accruals
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 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. To date, there have been no material differences between our accrued costs and actual costs.
Equity-Based Compensation Expense
We estimate the fair value of the stock options using the Black-Scholes option pricing model, which requires the input of objective and subjective assumptions. Certain assumptions used, including the fair value of our common stock prior to the time of the initial public offering and stock price volatility, represent management’s estimates and involve inherent uncertainties and the application of management’s judgment and selection of comparable companies. 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. For such reporting periods, we estimated expected volatility based the common stock of a selected peer group of similar publicly traded companies for which sufficient historical volatility data was available. As a result, if factors change and management uses different assumptions, equity-based compensation expense could be materially different for future awards.
128
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. Judgement 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 judgement. Due to the Company's lack of earnings history, management determined that a full valuation allowance is required to offset the net deferred tax assets at December 31, 2021 and 2020.
Emerging Growth Company and Smaller Reporting Status
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or an EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early.
We will remain an emerging growth company until the earliest to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.
We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year or that the market value of our stock held by non-affiliates is less than $250 million. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time, we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to of our consolidated financial statements appearing at the end of this Annual Report.
129
Item 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.
Item 8. Financial Statements 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices of financial disclosure required to be reported under this Item.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial Officer), to allow timely decisions regarding required disclosure. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2021, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at the reasonable assurance level as of December 31, 2021.
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) or an attestation report of our independent registered accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Except to the extent provided below, the information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission, or SEC, with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(1)
For a list of the financial statements included herein, see Index to the Consolidated Financial Statements on page F-1 of this Annual Report on Form 10-K, incorporated into this Item by reference.
(2)
Financial statement schedules have been omitted because they are either not required or not applicable or the information is included in the consolidated financial statements or the notes thereto.
(3)
The exhibits filed as part of this Annual Report are set forth on the Exhibit Index immediately following our consolidated financial statements. The Exhibit Index is incorporated herein by reference.
Item 16. Form 10-K Summary.
The Company has elected not to include summary information.
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CULLINAN ONCOLOGY, INC.
Index to Financial Statements
Page
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Cullinan Oncology, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cullinan Oncology, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2018.
Boston, Massachusetts
March 17, 2022
F-2
CULLINAN ONCOLOGY, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Assets
Current assets:
Prepaid expenses and other current assets 6,098 2,072
Property and equipment, net 77 130
Long-term investments 140,397 —
Liabilities and Stockholders' Equity
Current liabilities:
Accrued expenses and other current liabilities 8,577 4,641
Long-term liabilities:
Commitments and contingencies (Note 10)
Stockholders' equity:
Accumulated other comprehensive loss (838 ) (2 )
Total liabilities and stockholders' equity $ 437,185 $ 214,708
See accompanying notes to the consolidated financial statements.
(1) The consolidated balance sheet as of December 31, 2020 is derived from the consolidated financial statements as of that date and was retroactively adjusted, including shares and per share amounts, as a result of the Reorganization and Reverse Stock Split. See Note 3 to the consolidated financial statements for additional details.
F-3
CULLINAN ONCOLOGY, INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
Year Ended December 31,
License revenue $ 18,943 $ —
Operating expenses:
Other income (expense):
Other income (expense), net (8 ) (11 )
Net loss attributable to noncontrolling interest (1,915 ) (7,659 )
Net loss attributable to common stockholders of Cullinan $ (65,570 ) $ (51,799 )
Net loss per share, basic and diluted $ (1.52 ) $ (2.60 )
Comprehensive loss:
Unrealized gain/(loss) on investments (836 ) 2
Comprehensive loss attributable to noncontrolling interest (1,915 ) (7,659 )
Comprehensive loss attributable to Cullinan $ (66,406 ) $ (51,797 )
See accompanying notes to the consolidated financial statements.
(1) The shares and per share amounts for the year ended December 31, 2020 were derived from the consolidated financial statements as of that date and were retroactively adjusted as a result of the Reorganization and Reverse Stock Split. See Note 3 to the consolidated financial statements for additional details.
F-4
CULLINAN ONCOLOGY, INC.
Consolidated Statements of STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Shares Amount Subsidiaries Capital Loss Deficit Equity
Noncontrolling interest acquired in MICA — — 5,673 — — — 5,673
Issuance subsidiary preferred stock — — 1,206 — — — 1,206
Issuance subsidiary common stock — — 1,183 — — — 1,183
Unrealized gain on investments — — — — 2 — 2
Issuance subsidiary preferred stock — — 923 — — — 923
Issuance subsidiary common stock — — 67 — — — 67
Unrealized loss on investments — — — — (836) — (836)
See accompanying notes to the consolidated financial statements.
(1) The consolidated balance sheets as of December 31, 2020 and 2019 are derived from the consolidated financial statements as of such date and was retroactively adjusted, including shares and per share amounts, as a result of the Reorganization and Reverse Stock Split. See Note 3 to the consolidated financial statements for additional details.
F-5
CULLINAN ONCOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 53 62
Amortization or accretion on marketable securities 3,098 233
License expense in exchange for subsidiary common stock 67 1,183
Acquired in-process research and development assets — 6,447
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (3,269 ) (462 )
Other assets — (18 )
Accrued expenses and other current liabilities 4,563 1,750
Net cash used in operating activities (43,433 ) (29,772 )
Investing activities:
Purchases of property and equipment — (10 )
Net cash acquired in Mica asset acquisition — 1,450
Proceeds from sales and maturities of marketable securities 192,038 62,903
Net cash used in investing activities (333,775 ) (5,420 )
Financing activities:
Proceeds from issuance of common stock equivalents(1) — 145,450
Proceeds from initial public offering 267,268 —
Payment of issuance costs related to common stock equivalents(1) — (6,572 )
Payment of deferred offering costs (2,688 ) —
Proceeds from issuance of noncontrolling interests 923 1,206
Proceeds from stock options exercises 3,281 56
Cash and cash equivalents at beginning of period 168,198 63,250
Cash and cash equivalents at end of period $ 59,774 $ 168,198
SUPPLEMENTAL NONCASH DISCLOSURE
Noncash financing activities
Deferred offering costs paid in the prior year $ 65 $ —
Deferred offering costs in accounts payable and accrued expenses $ — $ 2,093
See accompanying notes to consolidated financial statements.
(1) Changes in equity activities for the year ended December 31, 2020 were retroactively adjusted, including shares and per share amounts, as a result of the Reorganization and Reverse Stock Split. See Note 3 to the consolidated financial statements for additional details.
F-6
CULLINAN ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Nature of Business and Basis of Presentation
Organization
Cullinan Oncology, Inc., together with its consolidated subsidiaries (Cullinan or the Company), is a biopharmaceutical company developing a diversified pipeline of targeted oncology therapies for cancer patients. Cullinan’s predecessor company, Cullinan Pharmaceuticals, LLC was formed in September 2016 and was subsequently renamed Cullinan Oncology, LLC (the LLC) in November 2017. The LLC’s wholly-owned subsidiary, Cullinan Management, Inc. (Management), was formed in September 2016 and became the surviving entity in a reverse merger with the LLC in January 2021. In February 2021, the Company changed its name from Cullinan Management, Inc. to Cullinan Oncology, Inc.
As of December 31, 2021, the Company had four development subsidiaries, or Asset Subsidiaries: Cullinan Amber Corp. (Amber), Cullinan Florentine Corp. (Florentine), Cullinan MICA Corp. (MICA) and Cullinan Pearl Corp. (Pearl). As of December 31, 2020, the LLC had five development subsidiaries: Amber, Cullinan Apollo Corp. (Apollo), Florentine, MICA and Pearl. Apollo was dissolved in August 2021.
Reorganization, Reverse Stock Split and Initial Public Offering
In January 2021, the Company completed its initial public offering (IPO) in which it issued and sold 13,685,000 shares of its common stock, including 1,785,000 shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $21.00 per share. The shares began trading on the Nasdaq Global Select Market on January 8, 2021 under the symbol “CGEM”. The net proceeds received by the Company from the offering were $264.5 million, after deducting underwriting discounts, commissions and other offering expenses.
Immediately prior to the effectiveness of the Company’s registration statement, the Company completed its reorganization, whereby the LLC merged with and into Management and Management was the surviving entity. Management was the registrant in the IPO. Pursuant to the Reorganization, all outstanding Redeemable Preferred Units, Non-Voting Incentive Units and common units converted into shares of Management common stock while common unit options were exchanged for stock options. Immediately following the Reorganization, the Company effected a one-for-7.0390 reverse stock split of its issued and outstanding shares of common stock (the Reverse Stock Split).
Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements prior to the Reorganization and notes thereto have been adjusted retroactively, where applicable, to reflect the effect of the Reorganization and Reverse Stock Split. Refer to Note 3 for additional details relating to the Reorganization and Reverse Stock Split.
Liquidity
The Company has incurred operating losses and negative cash flows from operations since its inception and expects to continue to generate operating losses for the foreseeable future. The Company’s ultimate success depends on the outcome of its research and development activities as well as the ability to commercialize the Company’s product candidates. The Company is subject to a number of risks including, but not limited to, the need to obtain adequate additional funding for the ongoing and planned clinical development of its product candidates. Due to the numerous risks and uncertainties associated with pharmaceutical products and development, the Company is unable to accurately predict the timing or amount of funds required to complete development of its product candidates, and costs could exceed the Company’s expectations for a number of reasons, including reasons beyond the Company’s control. The Company has incurred losses since inception and has an accumulated deficit of $158.9 million as of December 31, 2021.
Since inception, the Company has funded its operations primarily through the sale of equity securities. The Company expects that its cash, cash equivalents and short-term investments of $290.5 million and long-term investments of $140.4 million as of December 31, 2021, will be sufficient to fund its operating expenses and capital expenditure requirements through at least the next twelve months from the date of issuance of these consolidated financial statements.
F-7
(2)
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and in accordance with applicable rules and regulations of the United States Securities and Exchange Commission (SEC) for financial reporting. The consolidated financial statements include accounts of the Company and its consolidated subsidiaries. All intercompany balances have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASUs) of the Financial Accounting Standards Board (FASB).
In the opinion of the Company's management, the consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the Company’s financial position, its results of operations and comprehensive loss and its cash flows for the periods presented.
Use of Estimates
The preparation of the accompanying consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company’s management evaluates the estimates, including those related to expenses and accruals. The Company’s management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the fair value of the royalty transfer agreements, accrued research and development costs, the valuation of acquired in-process research and development asset and the fair value of equity awards issued by the Company and its subsidiaries prior to the IPO. Actual results may differ from these estimates under different assumptions or conditions.
Principles of Consolidation
The Company consolidates entities in which it has a controlling financial interest. The Company evaluates each of its subsidiaries to determine whether the entity represents a variable interest entity (VIE) for which consolidation should be evaluated under the VIE model, or alternatively, if the entity is a voting interest entity, for which consolidation should be evaluated using the voting interest model (VOE). The Company concluded that none of its subsidiaries is a VIE and has consolidated each subsidiary under the VOE. Under the VOE, the Company consolidates the entity if it determines 1) that it directly, or indirectly, has greater than 50% of the voting shares or other equity holders do not have substantive voting, participation, or liquidation rights, or 2) when the company has a controlling financial interest through its control of the board of directors, and the significant decisions of the entity are made at the board level.
The Company has either created or made investments in the following Asset Subsidiaries:
Cullinan Amber Corp. Partially-owned Subsidiary December 2019
Cullinan Florentine Corp. Partially-owned Subsidiary December 2019
Cullinan Mica Corp. Partially-owned Subsidiary May 2020
Cullinan Pearl Corp. Partially-owned Subsidiary November 2018
Noncontrolling Interests
To the extent that ownership interests in the subsidiaries are held by entities other than the Company, management reports these as noncontrolling interests on the consolidated balance sheets. Earnings or losses are attributed to noncontrolling interests under the hypothetical liquidation at book value (HLBV) method. The HLBV method is a point in time calculation that utilizes inputs to determine the amount that the Company and the noncontrolling interest holders would receive upon a hypothetical liquidation at each balance sheet date based on the liquidation provisions of the respective articles of incorporation. At December 31, 2021, investors and licensors held noncontrolling interests in Amber, Florentine, MICA and Pearl. At December 31, 2020, investors and licensors held noncontrolling interests in Amber, Apollo, Florentine, MICA and Pearl. Refer to Note 4 for details relating to the license agreements and Note 6 for details relating to the noncontrolling interests.
F-8
For the years ended December 31, 2021 and 2020, $1.9 million and $7.7 million of net loss, respectively, were attributable to noncontrolling interests and are recorded in the consolidated statements of operations and comprehensive loss and disclosed within the noncontrolling interests in subsidiaries column in the consolidated statements of stockholders' equity.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For years ended December 31, 2021 and 2020, the Company recognized $0.8 million in unrealized loss and less than $0.1 million in unrealized gain on investments, respectively.
Segments
The Company has determined that its Chief Executive Officer is the Chief Operating Decision Maker (CODM). The Company operates and manages the business as one reporting and one operating segment, which is the business of developing early stage cancer therapeutics. The Company’s CODM reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of the Company’s assets are located in the United States.
Concentration of Credit Risk and Other Risks and Uncertainties
The Company has no significant off-balance sheet risk. Cash and cash equivalents are primarily maintained with two major financial institutions in the United States. Deposits at banks may exceed the insurance provided on such deposits. These deposits may be redeemed upon demand, and therefore, bear minimal risk.
The Company is subject to certain risks and uncertainties and believes that changes in any of the following areas could have a material adverse effect on future financial position or results of operations: ability to obtain future financing; regulatory approval and market acceptance of, and reimbursement for, product candidates; performance of third-party clinical research organizations and manufacturers upon which the Company relies; protection of the Company’s intellectual property; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; and the Company’s ability to attract and retain employees necessary to support its growth.
The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for drug substance and drug products related to these programs. These programs could be adversely affected by a significant interruption in the supply.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2021 and 2020, cash equivalents consist of government-backed money market funds.
Investments
Investments not classified as cash equivalents with maturities of less than twelve months are classified as short-term investments in the consolidated balance sheets. Investments with maturities greater than twelve months for which the Company has the intent and ability to hold the investment for greater than twelve months are classified as long-term investments in the consolidated balance sheets. The Company generally holds investments in marketable securities.
Marketable securities are carried at estimated fair value, with unrealized gains or losses included in accumulated other comprehensive income (loss) in stockholders’ equity. The fair value of marketable securities is based on available market information. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Interest and dividends are also included in interest income. The Company periodically reviews its marketable securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. Declines in fair value judged to be other-than-temporary on marketable securities, if any, are included in other income (expense), net.
F-9
The Company recognized its short-term and long-term investments by security type at December 31, 2021:
AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value
(in thousands)
Short-term investments
Long-term investments
The Company recognized its short-term investments by security type at December 31, 2020:
AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value
(in thousands)
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). As required by FASB ASC Topic 820, Fair Value Measurement (ASC Topic 820) the Company’s financial assets are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under ASC Topic 820, and its applicability to the Company’s financial assets, are described below:
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date of identical, unrestricted assets.
Level 2—Quoted prices for similar assets, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.
Level 3—Pricing inputs are unobservable for the asset, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset.
Asset-backed securities, commercial paper and corporate and U.S. government notes are primarily valued using market quotations or prices obtained from independent pricing sources which may employ various pricing methods to value the investments including matrix pricing.
F-10
The following table sets forth the fair value of the Company’s financial assets as of December 31, 2021, allocated into Level 1, Level 2 and Level 3, that was measured on a recurring basis:
Level 1 Level 2 Level 3 Total
(in thousands)
Cash and cash equivalents
Short-term investments
Long-term investments
The following table sets forth the fair value of the Company’s financial assets as of December 31, 2020, allocated into Level 1, Level 2 and Level 3, that was measured on a recurring basis:
Level 1 Level 2 Level 3 Total
(in thousands)
Cash and cash equivalents
Short-term investments
Prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities are carried at cost, which management believes approximates fair value due to their short term nature.
Deferred Offering Costs
The Company capitalizes costs that are directly associated with in-process equity financings until such financings are consummated at which time such costs are recorded against the gross proceeds of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive loss. The Company incurred $2.7 million of deferred offering costs in 2020 and recorded such amounts against the gross proceeds of the Company’s IPO within the statements of stockholders’ equity for the year ended December 31, 2021.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is recognized using the straight-line method over the estimated useful life of each asset as follows:
Computers 3 years
Office furniture and equipment 5 years
Leasehold improvements Shorter of the useful life of the asset or the lease term
F-11
Maintenance and repairs that do not improve or extend the life of the assets are expensed when incurred. Upon sale or retirement of assets, the cost and accumulated depreciation and amortization are removed from the consolidated balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss in the period realized.
Property and equipment consisted of the following:
December 31,
(in thousands)
Office furniture and equipment 134 134
Total property and equipment, gross 309 309
Less: accumulated depreciation (232 ) (179 )
Total property and equipment, net $ 77 $ 130
Depreciation expense was less than $0.1 million for each of the years ended December 31, 2021 and 2020.
Accrued liabilities and other current liabilities
Accrued expenses and other current liabilities consist of the following:
December 31,
(in thousands)
Professional fees and other 973 1,049
Research and development costs 5,028 1,829
Asset Acquisitions
The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets, which includes transactions costs. Goodwill is not recognized in asset acquisitions. In an asset acquisition, the cost allocated to acquire in-process research and development (IPR&D) with no alternative future use is charged to research and development expense at the acquisition date.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated. Impairment charges are recognized at the amount by which the carrying amount of an asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. There was no impairment of long-lived assets for any of the periods presented.
F-12
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company enters into licensing arrangements for research and development, manufacturing and commercialization activities, which have components within the scope of ASC 606. Payments pursuant to these arrangements typically include non-refundable, upfront payments, milestone payments upon achieving significant development events, research and development reimbursements, sales milestones and royalties on future product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period. The contracts into which the Company enters generally do not include significant financing components. As part of the accounting for these arrangements, the Company must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above, and d) the measure of progress in step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below.
Non-Exclusive Licenses
If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other elements, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining elements, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
F-13
Milestone Payments
At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties
For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license of intellectual property is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.
Research and Development Expenses
Research and development costs are expensed as incurred and consist primarily of funds for employee wages and funds paid to third parties for the provision of services for product candidate development, clinical and preclinical development and related supply and manufacturing costs, and regulatory compliance costs. At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs.
Costs incurred to obtain licenses are recognized as research and development expense as incurred if the technology licensed has no alternative future use. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are received or services are performed.
The Company has entered into various research and development related contracts with parties both inside and outside of the United States. The payments related to these agreements are recorded as research and development expenses as incurred. The Company records accrued liabilities for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. To date, there have been no material differences between the Company’s accrued costs and actual costs.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Equity-Based Compensation
Equity-based compensation is measured at the grant date for all equity-based awards made to employees and non-employees based on the fair value of the awards and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company has elected to recognize the actual forfeitures by reducing the equity-based compensation expense in the same period as the forfeitures occur.
F-14
The Company estimated the fair of the stock options using the Black-Scholes option pricing model, which requires the input of objective and subjective assumptions. Certain assumptions used, including the fair value of the Company’s common stock prior to IPO and 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.
The Company classifies equity-based compensation in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Current income taxes are based on taxable income for federal and state reporting purposes. Deferred income 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 using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is provided when it is more likely than not that some portion, or all of a deferred tax asset will not be realized. Due to the Company's lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance at both December 31, 2021 and 2020.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount of benefit that is greater than fifty percent likely to be realized upon settlement. Changes in measurement are reflect in the period in which the change in judgment occurs.
Net Loss per Share
Basic and diluted net loss per share is determined by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period, without consideration for potential dilutive shares of common stock, such as stock options, unvested restricted stock awards and shares issuable under the employee stock purchase plan. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. Therefore, the weighted-average shares used to calculate both basic and diluted net loss per share are the same for the periods presented. The Company excluded unvested shares of restricted stock awards, stock options and shares issuable under the employee stock purchase plan from the computation of diluted weighted-average shares outstanding as they would be antidilutive.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
The JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an emerging growth company.
F-15
Recently Adopted Accounting Pronouncements
In August 2020, FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which, among other things, provides guidance on how to account for contracts on an entity’s own equity. ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, ASU 2020-06 eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher than shareholder’s rights, and (3) whether collateral is required. In addition, ASU 2020-06 requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. ASU 2020-06 may be applied on a full retrospective or modified retrospective basis. ASU 2020-06 became effective January 1, 2022 including interim periods presented within that year. Early adoption of the ASU is permitted by the Company effective January 1, 2021. The Company adopted ASU 2020-06 beginning on January 1, 2021. The adoption of ASU 2020-06 did not materially impact the Company’s consolidated financial statements and associated disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either operating or financing, with such classifications affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. ASU 2016-02 was recently delayed for emerging growth companies that elected to adopt new accounting standards on the adoption date required for private companies and will be effective for the Company’s annual reporting period beginning on January 1, 2022 and interim periods beginning in the first quarter of 2023.
The Company will adopt ASU 2016-02 in the first quarter of 2022 using a modified retrospective approach under which the cumulative effect of initially applying the standard will be recognized as an adjustment to its opening 2022 retained earnings, with no restatement of prior year amounts. The Company will apply an optional package of practical expedients intended to ease transition to the standard for existing leases by, among its provisions, allowing the Company to carry forward its original lease classification conclusions without reassessment. The Company also intends to elect application of the practical expedient to not separate non-lease components from lease components for purposes of measuring its lease-related balances.
Based on assessment efforts to date, the Company estimates that the adoption of ASU 2016-02 will result in initial increases in its long-term assets and liabilities of approximately $1.3 million to $1.4 million relating to its existing lease commitments that will become subject to balance sheet recognition. These balances will fluctuate over time as the Company's lease portfolio changes as a result of ongoing lease-related activity. The standard also requires enhanced quantitative and qualitative lease-related disclosures. Recognition of lease expense in the consolidated statement of operations and comprehensive loss will not significantly change.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard became effective beginning January 1, 2022. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial position and consolidated results of operations upon adoption.
(3)
Reorganization and Reverse Stock Split
Immediately prior to the completion of the IPO in January 2021, the LLC completed the Reorganization. Prior to the Reorganization, Management was a wholly-owned subsidiary of the LLC. The LLC was also the direct parent company of the Company’s development subsidiaries. Pursuant to the Reorganization, Management acquired all the assets of the LLC, including all of the stock the LLC owned of Amber, Apollo, Florentine, MICA and Pearl (collectively the Asset Subsidiaries), and assumed all of the LLC’s liabilities and obligations.
F-16
Following the Reorganization, all of Management’s outstanding Preferred Stock automatically converted on a one-for-one basis into common stock of Management. The Company then effected the Reverse Stock Split. Immediately prior to completion of the Company’s IPO, the existing units of the LLC were cancelled and the number of shares of common stock exchanged and issued to the LLC’s unitholders in the Reorganization is shown in the below table by unit class, on a split adjusted basis:
The amount presented for Non-Voting Incentive Units included unvested outstanding Non-Voting Incentive Units that were exchanged for restricted stock of Management. The amount presented for Common Units included the unvested outstanding Restricted Common Units, exchanged for Management’s restricted stock, and issued and unvested Common Unit Options, that were exchanged for Management’s stock options. The unvested awards are subject to the same time-based vesting conditions as the original awards.
The Reorganization was accounted for as a reverse acquisition, where the LLC was determined to be the accounting acquirer and Management to be the legal acquiree, and recapitalization for financial reporting purposes. Accordingly, the historical financial statements of the LLC became the Company’s historical financial statements, including the comparative prior periods. All share and per share amounts in these consolidated financial statements and related notes have been retroactively adjusted, where applicable, for all periods presented. The shares of the Company’s common stock for periods prior to the Reorganization represent the outstanding units of the LLC recalculated to give effect to the Reorganization and Reverse Stock Split.
All LLC units that were previously reported as Redeemable Preferred Units, or temporary equity, were converted to common stock of the Company upon the execution of the Reorganization and have been reclassified to stockholders’ equity for all periods presented, as if the Reorganization occurred at the beginning of the earliest period presented in the Company’s financial statements for the years ended December 31, 2020 and 2019:
As Reported Adjustment As Adjusted
(in thousands)
Redeemable Preferred Units
Series Seed Redeemable Preferred Units $ 3,956 $ (3,956 ) $ —
Series B Redeemable Preferred Units 97,909 (97,909 ) —
Stockholders' Equity (Members' Deficit)
Non-Voting Incentive Units 1 (1 ) —
Common Stock — 3 3
Accumulated other comprehensive loss (2 ) — (2 )
Non-controlling interests in subsidiaries 1,304 — 1,304
F-17
As Reported Adjustment As Adjusted
(in thousands)
Redeemable Preferred Units
Series Seed Redeemable Preferred Units $ 3,956 $ (3,956 ) $ —
Series B Redeemable Preferred Units 83,872 (83,872 ) —
Series C Redeemable Preferred Units — — —
Stockholders' Equity (Members' Deficit)
Non-Voting Incentive Units 1 (1 ) —
Common Stock — 2 2
Accumulated other comprehensive loss (4 ) — (4 )