NUVL US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. For a detailed discussion on our business environment, please read Item 1. Business, included in this Annual Report. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical stage biopharmaceutical company focused on creating

precisely

targeted therapies for patients with cancer. We leverage our team’s deep expertise in chemistry and structure-based drug design to develop innovative small molecules that are designed with the aim to overcome the limitations of existing therapies for clinically proven kinase targets. Through addressing the limitations of existing therapies, we believe our programs have the potential to drive deeper, more durable responses with minimal adverse events. We believe these potential benefits will support opportunities for clinical utility earlier in the treatment paradigm.

We focus our discovery efforts on small molecule inhibitors of kinases, a class of cellular targets that can play a central role in cancer growth and proliferation. In particular, we focus on “clinically proven” kinase targets, or those for which therapies have been developed by others to target those kinases, and that such drugs have demonstrated sufficient clinical efficacy and safety data to be approved by the FDA or similar regulatory agency and are established and used in the clinical setting. Currently available kinase inhibitors face multiple limitations, which can include kinase resistance, or the emergence of new mutations in the kinase target that can enable resistance to existing therapies, kinase selectivity, or the potential for existing therapies to inhibit other structurally similar kinase targets and lead to

off-target

adverse events, and limited brain penetrance, or the ability for the therapy to treat disease that has spread or metastasized to the brain. By prioritizing target selectivity, we believe our drug candidates have the potential to overcome resistance, minimize adverse events, optimize brain penetrance to address brain metastases, and drive more durable responses.

We are advancing a robust pipeline of product candidates with parallel lead programs in cancers driven by genomic alterations in the ROS1 and ALK kinases (

i.e.,

ROS1-positive and

ALK-positive,

respectively), along with multiple discovery-stage research programs. We hold worldwide development and commercialization rights to our product candidates.

Our first lead product candidate,

NVL-520,

is a novel ROS1-selective inhibitor designed with the aim to address the clinical challenges of emergent treatment resistance,

CNS-related

adverse events, and brain metastases that may limit the use of currently available ROS1 TKI. Preclinical data has shown that

NVL-520

was brain-penetrant, inhibited wild-type ROS1 fusions, remained active in the presence of mutations conferring resistance to approved and investigational ROS1 inhibitors, and displayed strong selectivity for both wild-type ROS1 and its resistance variants as compared to the structurally related TRKB, thereby minimizing the potential for

off-target

TRKB-related CNS adverse events.

We are currently enrolling patients in the Phase 1 portion of our

ARROS-1

clinical trial, a

first-in-human

Phase 1/2, multicenter, open-label, dose-escalation and expansion study evaluating

NVL-520

as an oral monotherapy in patients with advanced ROS1-positive NSCLC and other solid tumors.

ARROS-1

is comprised of two study components, beginning with a Phase 1 dose-escalation portion to evaluate the safety and tolerability of

NVL-520

in patients with advanced ROS1-positive solid tumors previously treated with at least one ROS1 TKI, as well as to determine the RP2D, characterize the pharmacokinetic profile, and evaluate preliminary anti-tumor activity of

NVL-520.

Once the RP2D is determined, the study may transition directly into a Phase 2 portion designed to support potential registration of

NVL-520

in both ROS1-positive patients with NSCLC who are

TKI-naïve

and who have been previously treated with ROS1 kinase inhibitors.

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Our second lead product candidate,

NVL-655,

is a brain-penetrant

ALK-selective

inhibitor, designed with the aim to address the clinical challenges of emergent treatment resistance,

CNS-related

adverse events, and brain metastases that may limit the use of first-, second-, and third-generation ALK inhibitors. Preclinical data has shown that

NVL-655

was brain-penetrant, inhibited wild-type ALK fusions, remained active in the presence of mutations conferring resistance to approved and investigational ALK inhibitors, and displayed strong selectivity for both wild-type ALK and its resistance variants as compared to the structurally related TRKB, thereby minimizing the potential for

off-target

TRKB-related CNS adverse events. We have submitted an IND for

NVL-655

and the FDA has confirmed that clinical investigation of

NVL-655

may proceed. We plan to initiate the

ALKOVE-1

study, a

first-in-human

Phase 1/2, multicenter, open-label, dose escalation and expansion study investigating

NVL-655

in advanced

ALK-positive

NSCLC and other solid tumors, in the second quarter of 2022.

In addition to our lead programs, we have prioritized a number of additional small molecule research programs following an assessment of medical need, including a second ALK inhibitor program designed with the aim to address emerging compound resistance mutations and a HER2 Exon 20 insertions program. We expect to nominate product candidates for these programs in 2022.

Since commencing significant operations in 2018, we have focused substantially all of our efforts and financial resources on research and development activities for our programs, including NVL-520 and NVL-655, establishing and maintaining our intellectual property portfolio, organizing and staffing our company, business planning, raising capital, and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated revenue from product sales or any other source. To date, we have funded our operations primarily with proceeds from the sales of Series A and Series B convertible preferred stock, the issuance of convertible notes (which converted to convertible preferred stock in 2018), debt financing from stockholders (which was settled in convertible preferred stock in February 2021), and most recently, with proceeds from the sale of common stock in the IPO completed in August 2021.

On August 2, 2021, we completed an IPO of our common stock pursuant to which we issued and sold 10,612,500 shares of Class A common stock and 600,000 shares of Class B common stock, including the exercise in full by the underwriters of their option to purchase 1,462,500 additional shares of Class A common stock, at a public offering price of $17.00 per share. We received net proceeds of approximately $174.3 million after deducting underwriting discounts and commissions and offering costs.

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of our product candidates. We reported net losses of $46.3 million and $14.6 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $78.2 million. We expect to incur significant expenses at an increasing rate and increasing operating losses for the foreseeable future. We expect our expenses and capital requirements will increase substantially in connection with ongoing activities, particularly if and as we:

• continue to advance our NVL-520 program in clinical development;

• seek to discover and develop additional product candidates;

• implement operational, financial and management systems;

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• acquire or in-license other product candidates and technologies; and

• operate as a public company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Further, we expect to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets in the U.S. and worldwide resulting from the

ongoing COVID-19 pandemic

and otherwise. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations or financial condition, including requiring us to have to delay, reduce or eliminate our product development or future commercialization efforts. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development efforts.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements into 2024. Our existing cash, cash equivalents and marketable securities will not be sufficient to fund any of our product candidates through regulatory approval, and we anticipate needing to raise additional capital to complete the development and commercialization of our product candidates. See

“—Liquidity and Capital Resources.”

The

global COVID-19 pandemic

continues to rapidly evolve. The extent of the impact of

the COVID-19 pandemic

on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our development activities, clinical trial enrollment, future trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of

the COVID-19 pandemic

or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with our employees working remotely. While we have opened our office for use under strict guidelines as required by federal, state, and local authorities, the majority of our employees are remote. We will continue to actively monitor the rapidly evolving situation related

to COVID-19 and

may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which

the COVID-19 pandemic

may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, and on our ability to initiate and conduct clinical trials in the timelines we expect, remains uncertain.

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Components of Our Results of Operations

Operating expenses

Our operating expenses are comprised of research and development expenses and general and administrative expenses.

Research and development expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

• the cost of laboratory supplies and research materials.

We track our direct external research and development expenses

on a program-by-program basis.

These consist of costs that include fees, reimbursed materials, and other costs paid to consultants, contractors, CMOs, and CROs in connection with our preclinical, clinical and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and, as such, are not separately classified.

We expect that our research and development expenses will increase substantially as we continue to

advance NVL-520 in

clinical development and plan to

advance NVL-655 into

clinical development and expand our discovery, research and preclinical activities in the near term and in the future. Although we are currently enrolling patients in the Phase 1 portion of our

ARROS-1

clinical trial and we plan to initiate the Phase 1/2 trial for our ALK program in the second quarter of 2022, at this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any product candidates we may develop. A change in the outcome of any number of variables with respect to product candidates we may develop could significantly change the costs and timing associated with the development of that product candidate. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:

• the number and scope of preclinical and clinical programs we decide to pursue;

• the number of trials required for regulatory approval;

• the countries in which the trials are conducted;

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• potential additional safety monitoring requested by regulatory authorities;

• the duration of subject participation in the trials and follow-up;

• the receipt of regulatory approvals from applicable regulatory authorities;

Any changes in the outcome of any of these factors could significantly impact the costs, timing and viability associated with the development of our product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, investor and public relations and accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Other income (expense)

Change in fair value of preferred stock tranche rights

Pursuant to the terms of our Series A Preferred Stock Purchase Agreement, we provided investors with the right and obligation to participate in subsequent closings of Series A convertible preferred stock upon the achievement of certain strategic milestones or as determined by the Series A investors (the Series A Tranche Rights). These Series A Tranche Rights met the definition of a freestanding financial instrument as the Series A Tranche Rights were legally detachable and separately exercisable from the Series A convertible preferred stock. The Series A Tranche Rights were initially classified as a liability on our consolidated balance sheet that we remeasured to fair value at each reporting date, and we recognized changes in fair value of the Series A Tranche Rights as a component of other income (expense) in our consolidated statements of operations and comprehensive loss. All Series A Tranche Rights were settled by March 31, 2021.

Other income (expense), net

Other income (expense), net, consists of interest income, interest expense and other income (expense) unrelated to our core operations.

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Income taxes

Since our inception, we have not recorded income tax benefits for the net operating losses incurred or the research and development tax credits generated in each year, due to the uncertainty of realizing a benefit from those items.

As of December 31, 2021, we had U.S. federal and state net operating loss carryforwards of $73.2 million and $72.5 million, respectively, which may be available to offset future taxable income. The federal net operating loss carryforwards include $1.1 million which expire in 2037 and $72.1 million which carryforward indefinitely, but may only be used to offset 80% of annual taxable income. The state net operating loss carryforwards expire at various dates beginning in 2037. As of December 31, 2021, we also had federal and state research and development tax credit carryforwards of $1.6 million and $0.7 million, respectively, which may be available to offset future tax liabilities and expire at various dates beginning in 2033.

Results of Operations

Comparison of the 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,

(in thousands)

Operating expenses:

Other income (expense):

Change in fair value of preferred stock tranche rights (635 ) 2,384 (3,019 )

Other income (expense), net 114 (35 ) 149

Research and development expenses

Year Ended December 31,

(in thousands)

Direct research and development expenses by program:

Unallocated research and development expenses:

Personnel-related (including stock-based compensation) 8,067 3,024 5,043

Research and development expenses were $35.6 million for the year ended December 31, 2021, compared to $15.4 million for the year ended December 31, 2020. The increase in direct research and development expenses related to

NVL-520

of $6.8 million was primarily due to increased manufacturing and clinical costs, partially offset by a decrease in preclinical costs as we progressed

NVL-520

and prepared for the Phase 1 portion of our

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ARROS-1

clinical trial. The increase in direct research and development expenses related to

NVL-655

of $4.4 million was primarily due to increased manufacturing and clinical costs to support our planned clinical trial and increased costs for

IND-enabling

studies, partially offset by a decrease in preclinical costs as we progressed

NVL-655.

The increase in direct research and development expenses related to our discovery programs of $3.6 million was primarily due to an increase in preclinical costs due to progress of our discovery programs. The increase in personnel-related expenses of $5.0 million was primarily due to an increase in headcount. Personnel-related costs for the years ended December 31, 2021 and 2020 included stock-based compensation expense of $1.3 million and $0.7 million, respectively.

General and administrative expenses

Year Ended December 31,

(in thousands)

Personnel-related (including stock-based compensation) $ 5,131 $ 797 $ 4,334

Total general and administrative expenses $ 10,258 $ 1,502 $ 8,756

General and administrative expenses were $10.3 million for the year ended December 31, 2021, compared to $1.5 million for the year ended December 31, 2020. The increase in personnel-related costs of $4.3 million was primarily due to an increase in headcount. Personnel-related costs for the years ended December 31, 2021 and 2020 included stock-based compensation expense of $2.2 million and less than $0.1 million, respectively. The increase in professional and consultant fees of $2.6 million was primarily due to increased legal and audit fees associated with operating as a public company and our ongoing business activities. The increase in other of $1.9 million was primarily due to increased insurance and recruiting expenses associated with operating as a public company and to support our growing organization.

Other income (expense)

Change in fair value of preferred stock tranche rights

The change in the fair value of the Series A Tranche Rights for the year ended December 31, 2021, compared to the year ended December 31, 2020 was primarily due to the change in the fair value of our preferred stock during that period.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for the foreseeable future, if at all. Through December 31, 2021, we have funded our operations primarily with proceeds from the sales of Series A and Series B convertible preferred stock, the issuance or convertible notes (which converted to convertible preferred stock in 2018), debt financing from stockholders (which was settled in convertible preferred stock in February 2021) and most recently, with proceeds from the sale of common stock in the IPO completed in August 2021. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $288.1 million.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

Year Ended December 31,

(in thousands)

Net cash used in operating activities $ (40,000 ) $ (14,949 )

Net cash used in investing activities (220,028 ) —

Net cash provided by financing activities 318,222 22,265

Net increase in cash and cash equivalents $ 58,194 $ 7,316

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Operating activities

During the year ended December 31, 2021, operating activities used $40.0 million of cash, primarily resulting from our net loss of $46.3 million, partially offset by net

non-cash

charges of $4.4 million and net cash provided by changes in our operating assets and liabilities of $1.9 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2021, consisted primarily of a $5.4 million increase in accounts payable and accrued expenses, partially offset by an increase of $3.2 million in other assets.

During the year ended December 31, 2020, operating activities used $14.9 million of cash, resulting from our net loss of $14.6 million and net

non-cash

income of $1.7 million, partially offset by net cash provided by changes in our operating assets and liabilities of $1.3 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2020, consisted primarily of an increase in accounts payable and accrued expenses and other current liabilities of $1.3 million.

Changes in accounts payable, accrued expenses and other current liabilities, prepaid expenses and other current assets and other assets were generally due to growth in our business, the advancement of our research programs and the timing of vendor invoicing and payments.

Investing activities

During the year ended December 31, 2021, net cash used in investing activities was $220.0 million, due to the purchases of marketable securities during the period, partially offset by sales and maturities of marketable securities.

Financing activities

During the year ended December 31, 2021, net cash provided by financing activities was $318.2 million, consisting of proceeds from our IPO, net of underwriting discounts and commissions of $177.3 million and proceeds from the issuance of our Series A and Series B convertible preferred stock of $144.7 million, partially offset by payment of IPO costs of $3.0 million.

During the year ended December 31, 2020, net cash provided by financing activities was $22.3 million, consisting of proceeds from the issuance of our Series A convertible preferred stock, partially offset by the issuance of a promissory note to our scientific founder.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical and clinical activities and clinical trials for our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:

• the clinical development plans we establish for our product candidates;

• the terms of any collaboration agreements we may choose to pursue;

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• the effect of competing technological and market developments;

As of December 31, 2021, we had cash, cash equivalents and marketable securities of $288.1 million. We expect that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements into 2024. Our existing cash, cash equivalents and marketable securities will not be sufficient to fund any of our product candidates through regulatory approval, and we anticipate needing to raise additional capital to complete the development and commercialization of our product candidates. Our estimate as to how long we expect our existing cash, cash equivalents and marketable securities to fund our operations is based on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, 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 those listed above.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, 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. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Other Commitments

We lease certain office space in Cambridge, Massachusetts pursuant to a

month-to-month

lease. We enter into contracts in the normal course of business with our CMOs, CROs and other third parties to support preclinical research studies and other research and development activities. These contracts are generally cancelable by us.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S. (GAAP). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in 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.

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Accrued research and development expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated cost incurred for the services when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on

a pre-determined schedule

or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

• vendors in connection with preclinical development activities;

• CROs in connection with preclinical and clinical studies and testing; and

We base the expense recorded related to contract research and manufacturing on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs and CMOs that conduct services and supply materials. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. While the majority of our service providers invoice us in arrears for services performed, on a

pre-determined

schedule or when contractual milestones are met, some require advance payments. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. We record these as prepaid expenses on our consolidated balance sheet.

Stock-based compensation

We measure stock options with service-based vesting granted to employees,

non-employees

and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. We measure restricted common stock awards using the difference between the purchase price per share of the award, if any, and the fair value of our common stock at the date of grant. Compensation expense for the awards is recognized over the requisite service period, which is generally the vesting period of the respective award. We use the straight-line method to record the expense of awards with only service-based vesting conditions. We account for forfeitures of stock-based awards as they occur.

We classify stock-based compensation expense in our 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.

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 our consolidated financial statements included in this Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company, as defined in

Rule 12b-2 under

the Exchange Act, for this reporting period and are not required to provide the information required under this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NUVALENT, INC.

Index to Consolidated Financial Statements

Page(s)

Consolidated Balance Sheets 160

Consolidated Statements of Operations and Comprehensive Loss 161

Consolidated Statements of Cash Flows 163

Notes to Consolidated Financial Statements 164

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Nuvalent, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Nuvalent, Inc. and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), 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 2020.

Boston, Massachusetts

March 29, 2022

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NUVALENT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

December 31,

Assets

Current assets:

Marketable securities 219,585 —

Prepaid expenses and other current assets 2,517 314

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Current liabilities:

Preferred stock tranche rights — 1,957

Notes payable and accrued interest to stockholder — 2,235

Commitments and contingencies (Note 11)

Stockholders’ equity (deficit):

Accumulated other comprehensive loss (228 ) —

Promissory note from stockholder — (280 )

The accompanying notes are an integral part of these consolidated financial statements.

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NUVALENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses:

Other income (expense):

Change in fair value of preferred stock tranche rights (635 ) 2,384

Other income (expense), net 114 (35 )

Total other income (expense), net (521 ) 2,349

Comprehensive loss:

Other comprehensive loss:

Unrealized losses on marketable securities, net of tax of $0 (228 ) —

The accompanying notes are an integral part of these consolidated financial statements.

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NUVALENT, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

AccumulatedOtherComprehensiveLoss TotalStockholders’Equity(Deficit)

Preferred Stock Common Stock Common Stock AccumulatedDeficit

Shares Amount Shares Amount Shares Amount

Issuance of common stock — — 952,740 — — — — — — — —

Stock-based compensation expense — — — — — — 729 — — — 729

Loss on extinguishment of debt — — — — — — (580 ) — — — (580 )

Unrealized losses on marketable securities — — — — — — — (228 ) — — (228 )

Stock-based compensation expense — — — — — — 3,551 — — — 3,551

The accompanying notes are an integral part of these consolidated financial statements.

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NUVALENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Change in fair value of preferred stock tranche rights 635 (2,384 )

Stock-based compensation expense 3,551 729

Non-cash interest income on promissory note (4 ) (5 )

Net amortization of premiums on marketable securities 215 —

Changes in operating assets and liabilities:

Prepaid expenses and other current assets (251 ) (14 )

Other assets (3,196 ) —

Net cash used in operating activities (40,000 ) (14,949 )

Cash flows from investing activities:

Purchases of marketable securities (221,043 ) —

Proceeds from sales and maturities of marketable securities 1,015 —

Net cash used in investing activities (220,028 ) —

Cash flows from financing activities:

Issuance of promissory note to stockholder — (250 )

Payments of insurance costs financed by a third-party (976 ) —

Proceeds from exercise of stock options 12 15

Proceeds from repayment of promissory note to stockholder 284 —

Payments of initial public offering costs (3,020 ) —

Net cash provided by financing activities 318,222 22,265

Net increase in cash and cash equivalents 58,194 7,316

Cash and cash equivalents at beginning of period 10,332 3,016

Cash and cash equivalents at end of period $ 68,526 $ 10,332

Supplemental disclosure of noncash financing information:

Settlement of notes payable and accrued interest for preferred stock $ 2,235 $ —

Insurance premium financed by a third-party $ 1,952 $ —

Loss on extinguishment of debt $ 580 $ —

Settlement of preferred stock tranche rights $ 2,592 $ (1,194 )

The accompanying notes are an integral part of these consolidated financial statements.

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NUVALENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Nuvalent, Inc. (the “Company”) is a clinical stage biopharmaceutical company focused on creating

precisely

targeted therapies for patients with cancer. The Company was founded in January 2017 as a Delaware corporation. The Company is headquartered in Cambridge, Massachusetts.

The Company is subject to risks similar to those of other

pre-commercial

stage companies in the biopharmaceutical industry, including dependence on key individuals, the need to develop commercially viable products, competition from other companies, many of whom are larger and better capitalized, the impact of the

COVID-19

pandemic and the need to obtain adequate additional financing to fund the development of its product candidates. There can be no assurance that the Company’s research and development will be successful, that adequate protection for the Company’s intellectual property will be obtained and maintained, that any product candidates will receive required regulatory approval or that approved products, if any, will be commercially viable. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from the sale of its products.

In March 2020, the World Health Organization declared the

COVID-19

outbreak a pandemic. The Company’s operations have not been significantly impacted by the

COVID-19

pandemic. However, the Company cannot at this time predict the specific extent, duration, or full impact that the

COVID-19

pandemic may have on its financial condition and operations, including its conduct of clinical trials. The impact of the

COVID-19

outbreak on the Company’s financial performance will depend on future developments, including the duration and spread of the pandemic and related governmental advisories and restrictions. These developments and the impact of

COVID-19

on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results may be materially adversely affected.

On July

23

,

2021

, the Company effected a

one-for-5.38213

reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On July

23

,

2021

, the Company filed an amendment to its amended and restated certificate of incorporation, which effected a recapitalization of the Company’s then outstanding common stock to Class A common stock and authorized an additional new class of common stock (“Class B common stock”). The rights of the holders of Class A common stock and Class B common stock are substantially identical, except with respect to voting and conversion.

Each share of Class A common stock is entitled to one vote and shares of Class B common stock are

non-voting,

except as may be required by law.

Each share of Class B common stock may be converted at any time into one share of Class A common stock at the option of its holder, subject to the ownership limitations provided for in the Company’s amended and restated certificate of incorporation.

On August 2, 2021, the Company completed an initial public offering (“IPO”) of its common stock and issued and sold 10,612,500 shares of Class A and 600,000 shares of Class B common stock at a public offering price of $17.00 per share, inclusive of 1,462,500 shares of Class A common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares. The Company received net proceeds of approximately $174.3 million after deducting underwriting discounts and commissions and offering costs. In connection with the IPO, the Company’s outstanding convertible preferred stock automatically converted into shares of Class A and Class B common stock.

Basis of presentation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to

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applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The

consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Nuvalent Securities Corporation. All intercompany balances and transactions have been eliminated.

Since

its inception, the Company has funded its operations primarily with proceeds from sales of preferred stock, issuance of convertible notes (which converted in 2018), debt financing from its investors (which was settled with convertible preferred stock in February 2021), and most recently, with proceeds from the sale of common stock in the IPO completed in August 2021. The Company has incurred recurring losses since inception, including net losses of $46.3 million and $14.6 million for the years ended December 31, 2021 and 2020. As of December 31, 2021, the Company had an accumulated deficit of $78.2 million. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its existing cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the date of issuance of these consolidated financial statements.

The

Company will need to obtain additional funding through public or private equity offerings, debt financings or strategic alliances. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into strategic alliances. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. Arrangements with collaborators or others may require the Company to relinquish rights to certain of its technologies or programs. If the Company is unable to obtain funding, the Company will be required to delay, reduce or eliminate some or all of its research and development programs or the Company may be unable to continue operations. Although management will continue to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations when needed or at all.

2. Summary of Significant Accounting Policies

Use of estimates

The

preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the valuation of common stock prior to the IPO and preferred stock tranche rights prior to their settlement, the valuation of stock-based awards and the accrual of research and development expenses. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions.

Concentrations of credit risk and of significant suppliers

Financial

instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. As of December 31, 2021 and 2020, the Company maintained cash, cash equivalents and marketable securities balances in excess of federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on third-party vendors for the manufacturing of its product candidates. In particular, the Company relies, and expects to continue to rely, on a small number of vendors to manufacture materials and components required for the production of its product candidates. These programs could be adversely affected by a significant interruption in the manufacturing process.

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Cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Fair value measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above (see Note 4). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities.

Marketable securities

The Company’s marketable securities

(non-equity

instruments) are classified as

available-for-sale

and are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity (deficit). Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.

The Company evaluates its marketable securities with unrealized losses for other-than-temporary impairment. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary,” the Company reduces the investment to fair value through a charge recorded in the consolidated statements of operations. No such adjustments were necessary during the periods presented. The Company classifies its marketable securities with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities are available for current operations.

Segment information

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. All of the Company’s operations are in the United States.

Research and development costs

Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, stock-based compensation, employee benefits, consulting costs, and external costs of vendors engaged to conduct research, preclinical and clinical development activities.

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Costs for research and development activities are expensed in the period in which they are incurred. Payments for such activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid expense or accrued research and development expense. Determining the prepaid and accrued balances at the end of any reporting period incorporates certain judgments and estimates by management that are based on information available to the Company including information provided by vendors regarding the progress to completion of specific tasks or costs incurred.​​​​​​​

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.

Stock-based compensation

The Company measures stock options with service-based vesting granted to employees,

non-employees

and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. The Company measures restricted common stock awards using the difference between the purchase price per share of the award, if any, and the fair value of the Company’s common stock at the date of grant. Compensation expense for the awards is recognized over the requisite service period, which is generally the vesting period of the respective award. The Company uses the straight-line method to record the expense of awards with service-based vesting conditions. The Company accounts for forfeitures of stock-based awards as they occur.

The Company classifies stock-based compensation expense 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.

Comprehensive income (loss)

Comprehensive income (loss) includes net income (loss) as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive income (loss) are unrealized gains (losses) on marketable securities.

Net income (loss) per share

Prior to the closing of the IPO, the Company followed

the two-class method

when computing net income (loss) per share, as the Company had issued shares that meet the definition of participating securities.

The two-class method

determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings.

The two-class method

requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Subsequent to the closing of the IPO, basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted stock units. For periods in which the Company reported a net loss, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their affect is anti-dilutive.

The Company has two classes of common stock outstanding: Class A common stock and Class B common stock. As more fully described in Note 8, the rights of the holders of Class A and Class B common stock are substantially identical, except with respect to voting and conversion. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder at any time, subject to the ownership limitations provided for in the Company’s amended and restated certificate of incorporation. The

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Company allocates undistributed earnings attributable to common stock between the common stock classes on a

one-to-one

basis when computing net income (loss) per share. As a result, basic and diluted net income (loss) per share of Class A common stock and share of Class B common stock are equivalent.

The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

As of December 31,

Convertible preferred stock (as converted to common stock) — 16,711,823

Income taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to the provision for income taxes. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a

two-step

process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed

more-likely-than-not

to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Any resulting unrecognized tax benefits are recorded within the provision for income taxes.

Recently issued accounting pronouncements

The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” of the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company.

In February 2016, the FASB issued ASU

No. 2016-02,

Leases (Topic 842) (“ASU

2016-02”),

which requires lessees to recognize most leases on their balance sheet as a

right-of-use

asset and a lease liability. In general, lease arrangements exceeding a one year term must be recognized as assets and liabilities on the balance sheet. Under ASU

2016-02,

a right of use asset and lease obligation is recorded for all leases, whether operating or financing, while the income statement reflects lease expense for operating leases and amortization/interest expense for financing leases. The FASB also issued ASU

2018-10,

Codification Improvements to Topic 842 Leases, and ASU

2018-11,

Targeted Improvements to Topic 842 Leases, which allows the new lease standard to

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be applied as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings rather than retroactive restatement of all periods presented. In June 2020, the FASB issued ASU

No. 2020-05,

which grants a

one-year

effective-date delay for nonpublic entities to annual reporting periods beginning after December 15, 2021 and to interim periods within fiscal years beginning after December 15, 2022. Early adoption continues to be permitted. Upon adoption of this guidance, the Company will record

right-of-use

assets and lease liabilities on its consolidated balance sheet for leases it may have as of the adoption date. The Company is assessing the impact that the adoption of this guidance will have on its consolidated financial statements.

In June 2016, the FASB issued ASU

No. 2016-13,

Financial Instruments – Credit Losses (Topic 326). The new standard adjusts the accounting for assets held at amortized costs basis, including marketable securities accounted for as available for sale, and trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For public entities except smaller reporting companies, this guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those years. For nonpublic entities and smaller reporting companies, this guidance was effective for annual reporting periods beginning after December 15, 2021. Early adoption is permitted for all entities. In November 2019, the FASB issued ASU

No. 2019-10,

which deferred the effective date for nonpublic entities to annual reporting periods beginning after December 15, 2022, including interim periods within those years. Early application continues to be allowed. The Company is currently assessing the impact of the adoption of this guidance on its consolidated financial statements.

3. Marketable Securities

Marketable securities by security type consisted of the following (in thousands):

AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses Fair Value

Government securities (due within one year) 4,583 — (10 ) 4,573

U.S. treasury securities (due within one year) 10,056 — (9 ) 10,047

Corporate bonds (due after one year through two years) 36,218 1 (99 ) 36,120

Government securities (due after one year through two years) 4,045 — (8 ) 4,037

The Company had no marketable securities as of December 31, 2020.

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4. Fair Value Measurements

The following tables present the Company’s fair value hierarchy for its assets and liabilities, which are measured at fair value on a recurring basis (in thousands):

Fair Value Measurements at December 31, 2021 Using:

Level 1 Level 2 Level 3 Total

Assets:

Cash equivalents:

Marketable securities:

Fair Value Measurements at December 31, 2020 Using:

Level 1 Level 2 Level 3 Total

Liabilities:

Preferred stock tranche rights $ — $ — $ 1,957 $ 1,957

Money

market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. Corporate bonds, commercial paper and government securities were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy. During the years ended December 31, 2021 and 2020, there were no transfers in or out of Level 3.

The following table provides a roll-forward of the aggregate fair values of the Company’s preferred stock tranche rights, for which fair value was determined by Level 3

inputs (in thousands):

Preferred StockTranche Rights

Change in fair value 635

Settlement of preferred stock tranche rights (2,592 )

Fair value at December 31, 2021 $ —

The preferred

stock tranche rights represented the fair value of the rights and obligations of the original purchasers of the Series A convertible preferred stock to participate in subsequent closings of Series A convertible preferred stock upon the achievement of certain strategic milestones or as determined by the Series A investors (the “Series A Tranche Rights”), which were fully settled by March 31, 2021. The Series A Tranche Rights met the definition of a freestanding financial instrument as the Series A Tranche Rights were legally detachable and separately exercisable from the Series A convertible preferred stock. The fair value of the Series A Tranche Rights were initially classified as a liability and recorded at fair value and were subject to remeasurement at each reporting date until each Series A Tranche Right was exercised. The fair values of the Series A Tranche Rights were based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The Company’s valuation of the Series A Tranche Rights utilized a scenario-based valuation analysis, which incorporated assumptions and estimates to value the Series A Tranche Rights and a probability assessment of the achievement of the milestones. The Company assessed these assumptions and estimates at the end of each reporting period as additional information impacting the assumptions were obtained.

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The quantitative elements associated with the Company’s Level 3 inputs impacting the fair value measurement of the Series A Tranche Rights included the fair value per share of the underlying convertible preferred stock, the expected term of the Series A Tranche Rights, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying convertible preferred stock. The Company determined the fair value per share of the underlying convertible preferred stock by taking into consideration its most recent sales of its convertible preferred stock as well as additional factors that the Company deemed relevant. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimated its expected stock volatility based on the historical volatility of a representative group of public companies in the biotechnology industry for the expected terms. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected terms. The Company estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. The Company assessed the probabilities of achieving the milestones related to each tranche upon issuance and at the end of each reporting period. Probabilities ranged from 90.0% to 100.0% and expected terms ranged from 0.2 years to 1.6 years. As of December 31, 2020, the fair value of the Company’s Series A convertible preferred stock was $0.53 per share.

The Series A Tranche Rights were exercised in March 2020, August 2020 and February 2021. All Series A Tranche Rights were settled by March 31, 2021.

5. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

December 31,

Accrued employee compensation and benefits $ 2,730 $ 636

Accrued external research and development expenses 1,757 405

Accrued insurance 976 —

6. Notes Payable to Related Party

In February

2017, the Company issued $2.0 million of promissory notes (the “Notes”) to Deerfield Healthcare Innovations Fund, L.P. and Deerfield Private Design Fund, IV, L.P. (collectively “Deerfield”), an investor in the Company. The Notes accrued interest at a rate of 2.81% per annum, compounded annually, and matured upon the earlier of a change in control event as defined in the Company’s charter or five years from issuance. In connection with the issuance of the Notes, the Company entered into a revenue share agreement with Deerfield for contingent payments of a low single digit percentage rate of net sales of commercial product (see Note 11).

In February

2021, the Company issued 5,025,604 shares of Series A convertible preferred stock in full settlement of the Notes and accrued interest. The issuance of the Series A convertible preferred stock was recorded at fair value and as a result, the Company recorded a loss on extinguishment of debt of $0.6 million upon the conversion representing the difference between the carrying value of the Notes and the fair value of the Series A convertible preferred stock. The loss on extinguishment of debt was recognized as additional

paid-in

capital, a component of stockholders’ equity (deficit), due to the related party nature of the Notes.

7. Convertible Preferred Stock

The Company had issued Series A convertible preferred stock (the “Series A”) and Series B convertible preferred stock (the “Series B”). The Series A and Series B are collectively referred to as the “Preferred Stock”.

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Preferred Stock consisted of the following as of December 31, 2020:

(in thousands) (in thousands)

In

April 2021, the Company issued and sold 65,223,679 shares of Series B at a price of $2.0698 per share, for gross proceeds of $135.0 million. There were no tranche rights granted in connection with the Series B issuance and sale. Upon the closing of the IPO, all of the shares of the Company’s outstanding Preferred Stock automatically converted into shares of Class A and Class B common stock.

8. Common Stock

On

July 23, 2021, the Company filed an amendment to its amended and restated certificate of incorporation, which effected a recapitalization of the Company’s then outstanding common stock to Class A common stock and authorized an additional new class of Class B common stock.

The

rights of the holders of Class A common stock and Class B common stock are substantially identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote and shares of Class B common stock

are non-voting, except

as may be required by law.Each share of Class B common stock may be converted at any time into one share of Class A common stock at the option of its holder, subject to the ownership limitations provided for in the Company’s amended and restated certificate of incorporation.

Restricted common stock

The

Company has outstanding shares of restricted common stock. Shares of unvested restricted common stock may not be sold or transferred by the holder. Vesting may be accelerated upon a change in control, as defined in the restricted stock agreement. If the holders cease to have a business relationship with the Company, the Company may repurchase any unvested shares of common stock held by these individuals at their original purchase price (which was a nominal amount).

9. Stock-Based Compensation

2017 stock option and grant plan

The

Company’s 2017 Stock Option and Grant Plan (the “2017 Plan”) provided for the Company to grant incentive stock options or nonqualified stock options and other equity awards to employees, directors and consultants of the Company. The 2017 Plan was administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions were determined at the discretion of the board of directors, or its committee if so delegated. Upon effectiveness of the Company’s 2021 Stock Option and Incentive Plan (the “2021 Plan”) in August 2021, the remaining shares available under the 2017 Plan ceased to be available for issuance and no future issuances will be made under the 2017 Plan.

2021 equity incentive plan

On

July 23, 2021, the Company’s board of directors adopted and its stockholders approved the 2021 Plan, which became effective on July 28, 2021. The 2021 Plan provides for the grant of incentive stock

options, non-qualified stock

options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, cash-based awards and dividend equivalent rights. The number of Class A shares of common stock initially reserved for issuance under the 2021 Plan is 5,866,004, which shall be cumulatively increased on January 1, 2022 and each January 1 thereafter by 5.0% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of

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directors

.

The shares of Class A common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2021 Plan and the 2017 Plan will be added back to the shares of Class A common stock available under the 2021 Plan. As of December 31, 2021, 5,267,107 shares remained available for future issuance under the 2021 Plan. The number of authorized shares reserved for issuance was increased by 2,414,871 shares effective as of January 1, 2022, in accordance with the provisions of the 2021 Plan described above.

2021 employee stock purchase plan

On July 23, 2021, the Company’s board of directors adopted and its stockholders approved the 2021 Employee Stock Purchase Plan (the “ESPP”), which became effective on July 28, 2021. A total of 473,064 shares of Class A common stock were reserved for issuance under this plan. In addition, the number of shares of Class A common stock that may be issued under the ESPP will automatically increase on January 1, 2022, and

each January thereafter through January 1, 2031, by the least of (i)

473,064

shares of Class A common stock, (ii)

1

% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31st or (iii) such lesser number of shares as determined by the administrator of the Company’s ESPP. As of December 31, 2021, no offering periods have commenced under the ESPP. The number of authorized shares reserved for issuance was increased by

473,064

shares effective as of January 1, 2022, in accordance with the provisions of the ESPP described above.

Stock option valuation

The

fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The

following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options

granted:

Year Ended December 31,

Risk-free interest rate 0.8 % 0.4 %

Expected volatility 79.8 % 81.2 %

Expected dividend yield — —

Expected term (in years) 6.1 6.3

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Table of Contents

The following table summarizes the Company’s option activity since December 31, 2020:

(in years) (in thousands)

The

aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2021 and 2020 was $0.3 million and less than $0.1 million, respectively.

The

weighted average grant-date fair value of stock options granted during the years ended December 31, 2021 and 2020 was $5.87 per share and $0.49 per share, respectively.

Restricted common stock

During

2017, the Company issued and sold 1,300,600 shares of restricted common stock at par value to the scientific founder of the Company (the “Original Shares”). The Original Shares vested as to 25% of the total on the date of grant and the remaining 75% were vested over a period of three years.