Cullinan Therapeutics, Inc. (CGEM)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K.

Overview

We are a clinical-stage biopharmaceutical company dedicated to creating new standards of care for patients. Our strategy is to identify high-impact targets, which we define as those that inhibit key drivers of disease or harness the immune system to eliminate diseased cells in both autoimmune diseases and cancer, and then select what we believe is the optimal therapeutic modality for those targets. We source innovation both internally and externally, focusing on product candidates with novel technology or differentiated mechanisms. Before we advance a product candidate into clinical development, we evaluate its potential for activity as a single agent as well as its ability to generate an immune response or to inhibit disease processes. Using this strategy, we have built a broad and deep pipeline of targeted immunology and oncology programs that includes multiple distinct clinical-stage product candidates.

Immunology

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CLN-978 is a CD19xCD3 T cell engager ("TCE") that we are developing for autoimmune diseases. CLN-978 is being investigated in a global Phase 1 clinical trial in patients with moderate to severe systemic lupus erythematosus (“SLE”). We plan to share initial clinical data for CLN-978 in SLE in the fourth quarter of 2025. In the second quarter of 2025, we plan to initiate a company-sponsored Phase 1 clinical trial to evaluate CLN-978 in patients with rheumatoid arthritis (“RA”), designed and executed in collaboration with the Friedrich-Alexander University of Erlangen-Nuremberg and Università Cattolica del Sacro Cuore, Rome.

Oncology

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CLN-619, our lead unpartnered oncology program, is a monoclonal antibody that stabilizes expression of MICA/B on the tumor cell surface to promote tumor cell lysis mediated by both cytotoxic innate and adaptive immune cells. CLN-619 is being investigated as both monotherapy and in combination with checkpoint inhibitor (“CPI”) therapy or chemotherapy in an ongoing Phase 1 clinical trial in patients with advanced solid tumors. Initial data from the disease specific expansion cohorts for endometrial and cervical cancers are anticipated in the second quarter of 2025. CLN-619 is also being evaluated in a Phase 1 clinical trial in patients with relapsed/refractory multiple myeloma.

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Zipalertinib (CLN-081/TAS6417), which we are co-developing with an affiliate of Taiho Pharmaceutical Co., Ltd ("Taiho"), is an orally-available small-molecule, irreversible epidermal growth factor receptor ("EGFR") inhibitor that is designed to selectively target cells expressing EGFR exon 20 ("EGFRex20") insertion mutations with relative sparing of cells expressing wild-type EGFR. We are evaluating zipalertinib in a pivotal Phase 2b portion of the REZILIENT1 clinical trial in patients with EGFRex20 non-small cell lung cancer (“NSCLC”) who progressed after prior systemic therapy. In January 2025, we announced the Phase 2b portion of the REZILIENT1 trial met the primary endpoint of overall response rate ("ORR") in patients with EGFRex20 NSCLC who have received prior therapy, and we plan to share full results at mid-year 2025. Pending discussions with the U.S. Food and Drug Administration (the "FDA"), we plan to submit for U.S. regulatory approval in the second half of 2025. Taiho is evaluating zipalertinib in a global Phase 3 clinical trial (“REZILIENT3”) in combination with chemotherapy as a potential first-line treatment for EGFRex20 NSCLC adult patients.

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CLN-049 is a FLT3xCD3 T cell engaging bispecific antibody. CLN-049 is being investigated in an ongoing Phase 1 clinical trial in patients with relapsed/refractory acute myeloid leukemia ("AML") or myelodysplastic syndrome ("MDS"). CLN-049 is also being evaluated in a Phase 1 clinical trial in measurable residual disease positive AML.

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CLN-617 is a fusion protein combining two potent antitumor cytokines, interleukin-2 ("IL-2") and interleukin-12 ("IL-12") with tumor retention domains for the treatment of solid tumors. CLN-617 is being investigated in a Phase 1 clinical trial in patients with advanced solid tumors.

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Preclinical Programs

In addition to the product candidates described above, we are actively developing several preclinical programs by leveraging our own internal expertise and through partnerships with external collaborators.

Recently Discontinued Program

Previously, we were evaluating CLN-418, a fully human bispecific immune activator targeting B7H4 and 4-1BB that we licensed from Harbour BioMed US Inc (“Harbour”) in a Phase 1 clinical trial. In August 2024, following a review of the data from the Phase 1 clinical trial, we notified Harbour of our decision to terminate the license and collaboration agreement for CLN-418 (the “Harbour License Agreement”), effective November 2024. In connection with the termination of the Harbour License Agreement, we discontinued development of CLN-418 and returned development and commercial rights for CLN-418 to Harbour to focus our resources on our other product candidates.

Intellectual Property

We hold the worldwide intellectual property rights for CLN-978, and we hold the worldwide intellectual property rights or exclusive options for worldwide intellectual property for our earlier-stage programs. We have a controlling interest in the worldwide intellectual property rights for CLN-619, CLN-049, and CLN-617. We are co-developing zipalertinib, for which Taiho holds the intellectual property rights, with an affiliate of Taiho. The following table shows our ownership interest as of December 31, 2024 in product candidates in which we have a controlling interest in the worldwide intellectual property rights:

Financing and Business Operations

Since our inception in 2016, we have focused all of our efforts and financial resources on raising capital, organizing and staffing our company, identifying, acquiring or in-licensing and developing product and technology rights, establishing and protecting our intellectual property portfolio and developing and advancing our programs. We do not have any products approved for sale and have not generated any revenue from product sales.

We have funded our operations primarily through the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2024, we have received net proceeds of $842.2 million from equity financings. We have received $18.9 million in revenue from a previous license agreement and cash proceeds of $275.0 million from the sale of our equity interest in our zipalertinib development subsidiary to Taiho. In April 2024, we sold shares of our common stock and pre-funded warrants for shares of our common stock in a private placement (the “2024 Private Placement”) for net proceeds of $262.7 million, after deducting offering expenses of $17.3 million. Refer to Note 7 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional detail regarding the 2024 Private Placement.

As of December 31, 2024, we had cash, cash equivalents, and short-term investments of $399.0 million, and long-term investments and interest receivable of $207.9 million. Interest receivable is included in prepaid expenses and other current assets on the consolidated balance sheets and represents accrued and unpaid interest on our marketable securities. We have a history of significant operating losses and have had negative cash flows from operations since our inception. As of December 31, 2024, we had an accumulated deficit of $368.2 million. We expect to continue to generate operating losses for the foreseeable future. Our future viability is dependent on the success of our research and development and our ability to access additional capital to fund our operations. There can be no assurance that our current operating plan will be achieved or that additional funding will be available on terms acceptable to us, or at all.

We are subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional capital to fund operations. Our current and future product candidates will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require additional capital, adequate personnel and extensive compliance-reporting capabilities. There can be no assurance that our research and development will be successfully completed, that adequate protection for our intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable.

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Components of Our Results of Operations

Revenue

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.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates and programs. These expenses include:

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compensation costs 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 ("CROs");

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costs related to contract manufacturing organizations that are primarily engaged to provide drug substance, raw materials, and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies, and other scientific development services;

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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

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direct and allocated costs related to facilities, information technology, personnel and other overhead.

Development costs and any future potential pre-tax profits from U.S. sales of zipalertinib are shared equally between us and Taiho.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation costs for personnel in executive management, finance, legal, corporate and business development, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax, and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses; and other operating costs.

Impairment of Long-Lived Assets

Impairment of long-lived assets represents the impairment charge for the carrying value in excess of the fair value of the assets. Refer to Note 12 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional details relating to the impairment.

Other Income

Other income consists primarily of interest income earned on our cash, cash equivalents, and investments.

Income Taxes

Income taxes consist primarily of federal and state income taxes.

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Results of Operations

Comparison of 2024 and 2023

The following table presents our results of operations for 2024 and 2023 (in thousands):

Research and Development Expenses

For full year 2024, we began disclosing research and development personnel costs without the effect of intercompany allocations to product candidates held by our development subsidiaries and also began disclosing license agreement obligations separately from the related product candidate. We recast prior period financial information to conform to the new presentation. The following table summarizes our research and development expenses for 2024 and 2023 (in thousands):

The $5.3 million decrease in research and development expenses in 2024 compared to 2023 was primarily related to the one-time upfront in-licensing fee for CLN-418 in 2023 ($25.0 million), and decreases in other licensing costs ($1.2 million), and chemistry, manufacturing and controls ("CMC") costs ($5.4 million), partially offset by increases clinical costs ($9.8 million), personnel costs due to increased headcount and expansion of operations to support our research and development activities ($6.6 million), preclinical costs ($5.3 million), equity-based compensation costs ($3.0 million), and other research and development costs ($1.7 million).

General and Administrative Expenses

The $11.5 million increase in general and administrative expenses in 2024 compared to 2023 was primarily due to an increase in professional fees ($4.7 million), an increase in equity-based compensation expense ($4.4 million), an increase in personnel costs ($1.7 million), and an increase in occupancy, insurance and other costs ($0.9 million).

Impairment of Long-Lived Assets

Impairment of long-lived assets represents the impairment charge for the carrying value in excess of the fair value of the assets. Refer to Note 12 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional details relating to the impairment.

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Other Income

The $7.6 million increase in other income in 2024 compared to 2023 was primarily related to higher interest income earned.

Income Tax Expense (Benefit)

The income tax expense recognized for 2024 was driven by the finalization of estimates upon filing our 2023 tax return for the utilization of federal research and development credits generated during 2023 that were carried back to tax year 2022. The income tax benefit recognized for 2023 was driven by the finalization of estimates upon filing our 2022 tax return for the utilization of 2022 and historical tax attributes against the gain on sale of our equity interest in Cullinan Pearl Corp. ("Cullinan Pearl") and the expected utilization of tax attributes generated during 2023 that could be carried back to tax year 2022 and used against the gain on sale of Cullinan Pearl.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests is determined as the difference in the noncontrolling interests in the consolidated balance sheets between the start and end of each reporting period, after taking into account any capital transactions between our development subsidiaries and third parties. Refer to Note 7 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details of capital transactions between our development subsidiaries and third parties.

Liquidity and Capital Resources

Overview

We have a history of significant operating losses and have had negative cash flows from operations since our inception and expect to continue to generate operating losses for the foreseeable future. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. To date, we have funded our operations primarily with proceeds from the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2024, we had cash, cash equivalents, and short-term investments of $399.0 million, and long-term investments and interest receivable of $207.9 million.

Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, investments, and interest receivable, will be sufficient to fund operations into 2028. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We cannot guarantee that we will be able to raise additional capital on reasonable terms or at all.

In May 2023, we entered into an agreement with Cowen and Company, LLC (“Cowen”) to establish an at-the-market equity offering program (the "ATM"), pursuant to which we may offer and sell up to $125.0 million of our common stock from time to time through Cowen, acting as our sales agent. We made no sales under the ATM in 2024. Through December 31, 2024, we have sold approximately 3.3 million shares under the ATM and received net proceeds of $38.4 million, after deducting commissions. As of December 31, 2024, we had $85.6 million in shares of our common stock remaining under the ATM.

In April 2024, we completed the 2024 Private Placement in which we issued approximately 14.4 million shares of our common stock and pre-funded warrants to purchase approximately 0.3 million additional shares of our common stock. We received net proceeds of $262.7 million from the 2024 Private Placement, after deducting offering costs of $17.3 million. Refer to Note 7 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional detail regarding the 2024 Private Placement.

Cash Flows

Comparison of 2024 and 2023

The following table summarizes our sources and uses of cash for 2024 and 2023 (in thousands):

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Cash Flow from Operating Activities

During 2024, our operating activities used $145.3 million of cash, which primarily consisted of our operating expenses, excluding non-cash items, of $158.8 million and a $2.8 million net change in our non-tax operating assets and liabilities, partially offset by interest income, excluding accretion on marketable securities, of $14.2 million, and an income tax refund of $2.3 million. The non-cash operating expenses primarily consisted of equity-based compensation expense.

During 2023, our operating activities used $134.3 million of cash, which primarily consisted of our operating expenses, excluding non-cash items, of $159.9 million, partially offset by interest income, excluding accretion on marketable securities, of $11.5 million, a benefit of $9.3 million from the net change in our non-tax operating assets and liabilities, income tax refunds of $4.4 million, and sublease income of $0.5 million. The non-cash operating expenses primarily consisted of equity-based compensation expense.

Cash Flow from Investing Activities

During 2024, our investing activities used $136.3 million, which consisted of $721.1 million of purchases of marketable securities, partially offset by $584.8 million of proceeds from the maturities of marketable securities.

During 2023, our investing activities provided $35.8 million of cash, which primarily consisted of proceeds of $409.4 million from the maturities of marketable securities, partially offset by the purchase of marketable securities of $373.4 million.

Cash Flow from Financing Activities

During 2024, net cash provided by financing activities was $266.2 million, which consisted of $262.7 million of net proceeds from the issuance of common stock under our 2024 Private Placement and $8.0 million in net proceeds from the issuance of common stock under our equity-based compensation plans, partially offset by $4.4 million paid to acquire shares and options to purchase shares of our CLN-619 development subsidiary that were held by noncontrolling interests.

During 2023, our financing activities provided $40.8 million of cash, which primarily consisted of $38.4 million of net proceeds from the issuance of common stock under our ATM, proceeds of $1.8 million from the issuance of a convertible note by our CLN-619 development subsidiary to a noncontrolling interest, and net issuance of common stock under our equity-based compensation plans of $0.5 million.

Future Funding Requirements

We expect our expenses to continue to increase in connection with our ongoing activities, particularly as we:

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continue the research and development of our current and future 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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experience any delays or encounter any issues with any of the above, including but not limited to failed studies, or trials, complex results, safety issues, or other regulatory challenges;

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develop the necessary processes, controls, and manufacturing capabilities to obtain marketing approval for our current and future product candidates and to support manufacturing on a commercial scale;

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develop and implement plans to establish and operate in-house manufacturing operations and facilities, if deemed appropriate;

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seek regulatory approvals for our current and future product candidates that successfully complete clinical trials;

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hire and retain additional personnel, such as nonclinical, clinical, pharmacovigilance, quality assurance, regulatory affairs, manufacturing, distribution, legal, compliance, medical affairs, finance, general and administrative, commercial, and scientific personnel; and

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develop, maintain, expand, and protect our intellectual property portfolio.

Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, investments, and interest receivable will be sufficient to fund operations into 2028. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. As we progress with our development programs and the regulatory review process, we expect to incur significant expenses related to product manufacturing, pre-commercial activities and commercialization. We may also require additional capital to pursue in-licenses or acquisitions of other programs to further expand our pipeline.

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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:

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the scope, progress, results, and costs of drug discovery, laboratory testing, and preclinical and clinical development for our current and future product candidates;

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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;

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the prevalence, duration, and severity of potential side effects or other safety issues experienced by patients receiving our current and future product candidates;

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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;

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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;

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the costs of expanding our facilities to accommodate our expected growth in personnel;

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our ability and the ability of third parties with whom we contract to manufacture adequate clinical and commercial supplies of our current and future product candidates, remain in good standing with regulatory authorities and develop, validate, and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices;

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the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims;

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the extent to which we acquire or in-license technologies or programs;

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the sales price and availability of adequate third-party coverage and reimbursement for our product candidates, if and when approved; and

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the ongoing costs of operating as a public company.

Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity, current ownership interests will be diluted. If we raise additional funds through government or third-party funding, collaboration agreements, strategic alliances, licensing arrangements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Other Commitments

We have certain 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 sheets as of December 31, 2024 and 2023.

As of December 31, 2024, total future minimum lease payments were $2.3 million with $1.5 million payable within 12 months. See Note 12 of our consolidated financial statements included in this Annual Report on Form 10-K for further detail on our lease obligations and the timing of expected future payments.

In addition, we enter into agreements in the normal course of business with CROs for clinical trials and with other vendors for preclinical studies, manufacturing services, and other services and products for operating purposes, which are generally cancelable upon written notice.

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Critical Accounting Policies and Estimates

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

While our significant accounting policies are described in more detail in Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Contract Costs and Accruals

Research and development costs are expensed as incurred. We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical trials and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued research and development liabilities in our consolidated balance sheets and within research and development expense in our consolidated statements of operations and comprehensive income (loss). These costs are a significant component of our research and development expenses.

We accrue for these costs based on factors such as estimates of the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and in accordance with agreements established with our third-party service providers for such services. We make significant judgments and estimates in determining the accrued research and development liabilities balance at each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, the status and timing of services performed, the number of patients enrolled in clinical trials and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. We record advance payments to service providers as prepaid assets, which are expensed as the contracted services are performed.

Equity-Based Compensation Expense

We estimate the fair value of stock options using the Black-Scholes option pricing model, which requires the input of objective and subjective assumptions. Certain assumptions used, including our expected stock price volatility, represent management’s estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, equity-based compensation expense could be materially different for future awards.

We do not have sufficient historical or implied volatility data for our common stock necessary to estimate expected volatility over a period of time commensurate with the expected term of our stock option awards. We use a blended rate to calculate expected volatility that combines our historical volatility with the historical volatilities of the stock prices of similar entities within our industry over a period of time commensurate with the expected term assumption.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A reduction in the carrying value of the deferred tax assets is required when it is not more likely than not that such deferred tax assets are not realizable. Judgment is required to if certain income tax positions are more likely than not of being sustained and may change from period to period when there is a change in judgment.

Recently Issued and Adopted Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K.

Overview

We are a clinical-stage biopharmaceutical company focused on developing modality-agnostic targeted oncology therapies. Our mission is creating new standards of care for patients. Our strategy is to identify high-impact cancer targets, which we define as those that play key roles as either oncogenic drivers or immune system activators, and then select what we believe is the optimal therapeutic modality for those targets. We source innovation both internally and externally, focusing on product candidates with novel technology or 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 response or to inhibit oncogenic processes. Using this strategy, we have built a broad and deep pipeline of targeted oncology programs that includes six distinct clinical-stage product candidates.

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Our lead unpartnered program, CLN-619, is a monoclonal antibody that stabilizes expression of MICA/B on the tumor cell surface to promote tumor cell lysis mediated by both cytotoxic innate and adaptive immune cells. CLN-619 is being investigated as both monotherapy and in combination with checkpoint inhibitor therapy in an ongoing Phase 1 clinical trial in patients with advanced solid tumors. We intend to present initial data from the checkpoint inhibitor therapy combination dose escalation module of the clinical trial, as well as updated data from the monotherapy dose escalation module, in the second quarter of 2024. Initial data from the disease specific expansion cohorts are anticipated in the first half of 2025. Separately, in February 2024, the United States ("“U.S."”) Food and Drug Administration ("“FDA"”) cleared our Investigational New Drug ("“IND"”) application to evaluate CLN-619 in a Phase 1 clinical trial in relapsed/refractory multiple myeloma patients.

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CLN-978 is a CD19xCD3 T cell engager with extended serum half-life and, based on preclinical data, robust potency against target cells expressing low levels of CD19. In August 2023, we dosed the first patient in our Phase 1 clinical trial of CLN-978 in patients with relapsed/refractory B cell non-Hodgkin lymphoma (“B-NHL”). Recently, academic and industry groups have generated clinical data and case series demonstrating that CD19 targeted CAR T cell therapy could lead to sustained improvements in disease, including durable remission in some cases, in several B cell mediated autoimmune indications. Nonetheless, cell therapy has many limitations, including the need for lymphodepleting chemotherapy, which is associated with significant toxicities, an FDA-recognized risk of secondary malignancies, and extended manufacturing timelines due to complexity of production. Based on the emerging clinical data supporting the efficacy of CD19 directed therapy in multiple autoimmune diseases and our belief that CLN-978 may address these limitations of CAR T cell therapy, we are also exploring the development of CLN-978 in autoimmune diseases.

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Zipalertinib (CLN-081/TAS6417), which we are co-developing with an affiliate of Taiho Pharmaceutical Co., Ltd ("Taiho"), is an orally-available small-molecule, irreversible epidermal growth factor receptor ("EGFR") inhibitor that is designed to selectively target cells expressing EGFR exon 20 ("EGFRex20") insertion mutations with relative sparing of cells expressing wild-type EGFR. The FDA has granted Breakthrough Therapy designation to zipalertinib. In collaboration with our partners at Taiho, we are evaluating zipalertinib in the pivotal Phase 2b portion of the REZILIENT1 clinical trial in patients with EGFRex20 non-small-cell lung cancer ("NSCLC") who progressed after prior systemic therapy, and in a global Phase 3 clinical trial (“REZILIENT3”) in combination with chemotherapy as a potential first-line treatment for EGFRex20 NSCLC adult patients. We expect to complete enrollment in the pivotal Phase 2b portion of the REZILIENT1 clinical trial by year-end 2024. Taiho and we will each receive 50% of any future pre-tax profits from potential U.S. sales of zipalertinib.

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CLN-049 is a FLT3xCD3 T cell engaging bispecific antibody being investigated in patients with relapsed/refractory acute myeloid leukemia ("AML") or myelodysplastic syndrome ("MDS"). CLN-049 is currently in an ongoing Phase 1 clinical trial with updated clinical data expected in the second half of 2024. In December 2023, we initiated a second Phase 1 clinical trial designed to evaluate the safety of CLN-049 in minimal residual disease-positive AML.

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CLN-418 is a B7H4x4-1BB fully human bispecific immune activator designed to achieve conditional activation of 4-1BB by targeting B7H4, a tumor-associated antigen that is highly expressed across multiple cancers with minimal expression on normal tissues. CLN-418 is being investigated in an ongoing Phase 1 clinical trial in patients with advanced solid tumors with initial clinical data expected in the second half of 2024.

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CLN-617 is a fusion protein combining two potent antitumor cytokines, interleukin-2 ("IL-2") and interleukin-12 ("IL-12") with tumor retention domains for the treatment of solid tumors. In December 2023, we dosed the first patient in the CLN-617 first-in-human Phase 1 clinical trial.

In addition to the product candidates described above, we are actively developing several preclinical oncology programs, all in the discovery stage, including our collaboration with Icahn School of Medicine at Mount Sinai for the development of novel hematopoietic progenitor kinase 1 degraders.

When we were a private company, we established development subsidiaries when we acquired or licensed exclusive worldwide rights to intellectual property, including for CLN-619, CLN-049, and CLN-617. The structure of our financing arrangements with each development subsidiary enables us to increase our economic ownership when we provide additional capital. We have not established development subsidiaries for our other current product candidates and programs. In June 2022, we sold our equity interest in our development subsidiary for zipalertinib to Taiho, and in connection with the sale and pursuant to a co-development agreement, we are co-developing zipalertinib with an affiliate of Taiho. We hold the intellectual property rights for CLN-978 and CLN-418, and we hold intellectual property rights or exclusive options for worldwide intellectual property for our earlier-stage programs. The following table shows our ownership interest as of December 31, 2023 in our development subsidiaries and their product candidates:

Since our inception in 2016, we have focused all of our efforts and financial resources on raising capital, organizing and staffing our company, identifying, acquiring or in-licensing and developing product and technology rights, establishing and protecting our intellectual property portfolio and developing and advancing our programs. We do not have any products approved for sale and have not generated any revenue from product sales.

We have funded our operations primarily through the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2023, we have received net proceeds of $579.6 million from equity financings, inclusive of our net proceeds of $264.5 million from our initial public offering ("IPO"). We have received $18.9 million in revenue from a previous license agreement and cash proceeds of $275.0 million from the sale of our equity interest in Cullinan Pearl Corp. ("Cullinan Pearl") to Taiho in June 2022.

As of December 31, 2023, we had cash, cash equivalents, short-term investments, and interest receivable of $468.3 million. Interest receivable is included in prepaid expenses and other current assets on the consolidated balance sheets and represents accrued and unpaid interest on our marketable securities. We have incurred significant operating losses, with the exception of 2022, and have had negative cash flows from operations since our inception. As of December 31, 2023, we had an accumulated deficit of $200.9 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 current and future product candidates will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require additional capital, adequate personnel and extensive compliance-reporting capabilities. There can be no assurance that our research and development will be successfully completed, that adequate protection for our intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable.

Components of Our Results of Operations

Revenue

We have not generated any revenue from the sale of products since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all.

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Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates and programs. These expenses include:

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compensation costs 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 ("CROs");

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costs related to contract manufacturing organizations, that are primarily engaged to provide drug substance, raw materials, and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies, and other scientific development services;

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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

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direct and allocated costs related to facilities, information technology, personnel and other overhead.

Following the sale of our equity interest in Cullinan Pearl in the second quarter of 2022, development costs and any future potential pre-tax profits from potential U.S. sales of zipalertinib are shared equally between us and Taiho.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation costs for personnel in executive management, finance, legal, corporate and business development, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax, and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses; and other operating costs.

Gain on Sale of Cullinan Pearl

Gain on sale of Cullinan Pearl represents the excess of the consideration received over the carrying value of the non-financial assets sold. Refer to Note 3 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details relating to the transaction.

Impairment of Long-Lived Assets

Impairment of long-lived assets represents the impairment charge for the carrying value in excess of the fair value of the assets. Refer to Note 12 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional details relating to the impairment.

Other Income

Other income consists primarily of interest income earned on our cash, cash equivalents, and investments.

Income Taxes

Income taxes consist primarily of federal and state income taxes.

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Results of Operations

Comparison of 2023 and 2022

The following table presents our results of operations for 2023 and 2022 (in thousands):

Research and Development Expenses

The following table summarizes our research and development expenses for 2023 and 2022 (in thousands):

The $56.2 million increase in research and development expenses in 2023 compared to 2022 was primarily related to increased clinical costs ($33.3 million), an upfront fee due upon in-licensing CLN-418 ($25.0 million), higher personnel costs due to increased headcount and expansion of operations to support our research and development activities ($9.1 million), and higher equity-based compensation costs ($1.2 million), partially offset by lower preclinical costs ($11.0 million) some of which is allocated to product candidates in the above table.

General and Administrative Expenses

The increase of $2.3 million in general and administrative expenses in 2023 compared to 2022 was primarily due to an increase in personnel costs ($3.1 million), an increase in equity-based compensation expense ($1.3 million), and higher occupancy and other costs to support our expanded operations ($0.8 million), partially offset by one-time costs related to the sale of Cullinan Pearl in 2022 that did not recur in 2023 ($2.0 million), and lower legal and other professional service fees ($0.9 million).

Impairment of Long-Lived Assets

Impairment of long-lived assets represents the impairment charge for the carrying value in excess of the fair value of the assets. Refer to Note 12 of our notes to the consolidated financial statements in this Annual Report on Form 10-K for additional details relating to the impairment.

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Gain on Sale of Cullinan Pearl

Gain on sale of Cullinan Pearl represents the excess of the consideration received over the carrying value of the non-financial assets sold. Refer to Note 3 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details relating to the transaction.

Other Income

The $15.2 million increase in other income in 2023 compared to 2022 was primarily related to higher interest income earned.

Income Tax Expense (Benefit)

The income tax benefit recognized for 2023 represents return to provision adjustments for the utilization of 2022 and historical tax attributes against the gain on sale of Cullinan Pearl and the expected utilization of tax attributes generated during 2023 that can be carried back to 2022. The income tax expense recognized for 2022 represents the tax from the gain on sale of Cullinan Pearl, including the expected utilization of tax attributes generated during 2022 and the release of valuation allowance for the expected utilization of certain historical tax attributes against the gain from the sale.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests is determined as the difference in the noncontrolling interests in the consolidated balance sheets between the start and end of each reporting period, after taking into account any capital transactions between our development subsidiaries and third parties. Refer to Note 8 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details of capital transactions between our development subsidiaries and third parties.

Liquidity and Capital Resources

Overview

We have incurred significant operating losses, with the exception of 2022, and have had negative cash flows from operations since our inception and expect to continue to generate operating losses for the foreseeable future. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. To date, we have funded our operations primarily with proceeds from the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2023, we had cash, cash equivalents, short-term investments, and interest receivable of $468.3 million.

Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, investments, and interest receivable, will be sufficient to fund operations into the second half of 2026. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We cannot guarantee that we will be able to raise additional capital on reasonable terms or at all.

In February 2023, we entered into a license and collaboration agreement (the “Harbour License Agreement”) with Harbour BioMed US Inc. ("Harbour"), pursuant to which Harbour granted us an exclusive license for the development, manufacturing and commercialization of CLN-418 in the U.S. Under the terms of the Harbour License Agreement, we paid Harbour an upfront license fee of $25.0 million at signing.

In May 2023, we entered into an agreement with Cowen and Company, LLC (“Cowen”) to establish an at-the-market equity offering program (the "ATM"), pursuant to which we may offer and sell up to $125.0 million of our common stock from time to time through Cowen, acting as our sales agent. In the second quarter of 2023, we sold approximately 3.3 million shares under the ATM and received net proceeds of $38.4 million, after deducting commissions. We have not subsequently made sales under the ATM. As of December 31, 2023, we had $85.6 million in shares of our common stock remaining under the ATM.

Cash Flows

Comparison of 2023 and 2022

The following table summarizes our sources and uses of cash for 2023 and 2022 (in thousands):

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Cash Flow from Operating Activities

During 2023, our operating activities used $134.3 million of cash, which primarily consisted of our operating expenses of $159.9 million excluding non-cash items, partially offset by interest income of $11.5 million excluding accretion on marketable securities, a benefit of $9.3 million from the net change in our non-tax operating assets and liabilities, income tax refunds of $4.4 million, and sublease income of $0.5 million. The non-cash operating expenses primarily consisted of equity-based compensation expense.

During 2022, our operating activities used $126.7 million of cash, which primarily consisted of our operating expenses of $103.7 million excluding non-cash items and $37.8 million in payments for a portion of our estimated tax liability from the gain on sale of Cullinan Pearl, partially offset by interest income of $7.9 million excluding amortization on marketable securities, and a benefit of $6.9 million from the net change in our non-tax operating assets and liabilities. The non-cash operating expenses primarily consisted of equity-based compensation expense.

Cash Flow from Investing Activities

During 2023, our investing activities provided $35.8 million of cash, which primarily consisted proceeds of $409.4 million from the maturities of marketable securities, partially offset by the purchase of marketable securities of $373.4 million.

During 2022, our investing activities provided $249.0 million of cash, which primarily consisted of proceeds of $352.9 million from the maturities of marketable securities and proceeds of $275.0 million from the sale of our equity interest in Cullinan Pearl, partially offset by $377.9 million used for the purchase of marketable securities and $1.1 million for the purchase of property and equipment to improve and furnish our leased office space.

Cash Flow from Financing Activities

During 2023, our financing activities provided $40.8 million of cash, which primarily consisted of $38.4 million of net proceeds from the issuance of common stock under our ATM, proceeds of $1.8 million from the issuance of a convertible note by our CLN-619 development subsidiary to a noncontrolling interest, and net issuance of common stock under equity-based compensation plans of $0.5 million.

During 2022, our financing activities used $25.9 million of cash, which primarily consisted of $33.3 million paid to acquire shares of our CLN-619 development subsidiary that were held by noncontrolling interests, partially offset by proceeds of $6.0 million from stock option exercises and proceeds of $1.2 million from the issuance of noncontrolling interests in our CLN-619 development subsidiary.

Future Funding Requirements

We expect our expenses to continue to increase in connection with our ongoing activities, particularly as we advance the clinical trials and manufacturing of our product candidates along with preclinical activities for our current and potential future 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.

Our expenses will also increase as we:

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continue our research and development efforts and submit INDs for our current and future 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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experience any delays or encounter any issues with any of the above, including but not limited to failed studies, or trials, complex results, safety issues, or other regulatory challenges;

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develop the necessary processes, controls, and manufacturing capabilities to obtain marketing approval for our current and future product candidates and to support manufacturing on a commercial scale;

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develop and implement plans to establish and operate in-house manufacturing operations and facilities, if deemed appropriate;

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seek regulatory approvals for our current and future product candidates that successfully complete clinical trials;

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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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Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, investments, and interest receivable will be sufficient to fund operations into the second half of 2026. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. As we progress with our development programs and the regulatory review process, we expect to incur significant expenses related to product manufacturing, pre-commercial activities and commercialization. We may also require additional capital to pursue in-licenses or acquisitions of other programs to further expand our pipeline.

Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates and programs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

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the scope, progress, results, and costs of drug discovery, laboratory testing, and preclinical and clinical development for our current and future product candidates;

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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;

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the prevalence, duration, and severity of potential side effects or other safety issues experienced by patients receiving our current and future product candidates;

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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;

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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;

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the costs of expanding our facilities to accommodate our expected growth in personnel;

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our ability and the ability of third parties with whom we contract to manufacture adequate clinical and commercial supplies of our current and future product candidates, remain in good standing with regulatory authorities and develop, validate, and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices;

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the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims;

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the extent to which we acquire or in-license technologies or programs;

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the sales price and availability of adequate third-party coverage and reimbursement for our product candidates, if and when approved; and

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the ongoing costs of operating as a public company.

Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity, current ownership interests will be diluted. If we raise additional funds through government or third-party funding, collaboration agreements, strategic alliances, licensing arrangements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Other Commitments

We have certain 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, 2023 and 2022.

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As of December 31, 2023, total future minimum lease payments were $4.1 million with $1.7 million payable within 12 months. See Note 13 of our consolidated financial statements included in this Annual Report on Form 10-K for further detail on our lease obligations and the timing of expected future payments.

In addition, we enter into agreements in the normal course of business with CROs for clinical trials and with other vendors for preclinical studies, manufacturing services, and other services and products for operating purposes, which are generally cancelable upon written notice.

Critical Accounting Policies and Estimates

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

While our significant accounting policies are described in more detail in Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Contract Costs and Accruals

Research and development costs are expensed as incurred. We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical trials and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued research and development liabilities in our consolidated balance sheets and within research and development expense in our consolidated statements of operations and comprehensive income (loss). These costs are a significant component of our research and development expenses.

We accrue for these costs based on factors such as estimates of the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and in accordance with agreements established with our third-party service providers for such services. We make significant judgments and estimates in determining the accrued research and development liabilities balance at each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, the status and timing of services performed, the number of patients enrolled in clinical trials and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. We record advance payments to service providers as prepaid assets, which are expensed as the contracted services are performed.

Equity-Based Compensation Expense

We measure the fair value of market-based restricted stock units ("RSUs") on the grant date using a Monte Carlo simulation model. We estimate the fair value of stock options using the Black-Scholes option pricing model. Both the Monte Carlo simulation model and the Black-Scholes option pricing model require the input of objective and subjective assumptions. Certain assumptions used, including our expected stock price volatility, represent management’s estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, equity-based compensation expense could be materially different for future awards.

We do not have sufficient historical or implied volatility data for our common stock necessary to estimate expected volatility over a period of time commensurate with the expected term of our stock option awards. Prior to 2023, the expected volatility used in the Black-Scholes option pricing model for new options was based on historical volatilities of the stock prices of similar entities within our industry over a period of time commensurate with the expected term assumption. In 2023, we determined that a sufficient amount of historical information was available regarding the volatility of our stock price to begin using a blended rate that combines our historical volatility with the historical volatilities of the stock prices of similar entities within our industry over a period of time commensurate with the expected term assumption.

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Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A reduction in the carrying value of the deferred tax assets is required when it is not more likely than not that such deferred tax assets are not realizable. Judgment is required to if certain income tax positions are more likely than not of being sustained and may change from period to period when there is a change in judgment.

Emerging Growth Company Status

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” (“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 $1.235 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.

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 of our consolidated financial statements included in this Annual Report on Form 10-K.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K.

Overview

We are a clinical-stage biopharmaceutical company focused on modality-agnostic targeted oncology. Our strategy is to identify high-impact cancer targets and then select what we believe is the optimal therapeutic modality for those targets. We source innovation both internally and externally, focusing on focusing on product candidates with novel technology platforms or 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 response or to inhibit oncogenic processes. Using this strategy, we have built a broad and deep pipeline of targeted oncology programs that includes six distinct product candidates, of which five are clinical-stage, as well as multiple research and discovery programs.

Zipalertinib (CLN-081/TAS6417), which we are co-developing with an affiliate of Taiho Pharmaceutical, Co. Ltd ("Taiho"), is an orally-available small-molecule, irreversible epidermal growth factor receptor ("EGFR") inhibitor that is designed to selectively target cells expressing EGFR exon 20 insertion ("EGFRex20ins") mutations with relative sparing of cells expressing wild-type EGFR. The U.S. Food and Drug Administration (the "FDA") has granted Breakthrough Therapy designation to zipalertinib. In the fourth quarter of 2022, in collaboration with our partners at Taiho, we initiated a pivotal Phase 2b study in patients with EGFR exon 20 non-small-cell lung cancer ("NSCLC") who progressed after prior systemic therapy. In June 2022, Taiho acquired our equity interest in our partially-owned subsidiary, Cullinan Pearl Corp. (“Cullinan Pearl”), which provided Taiho with worldwide rights to zipalertinib outside of Japan and Greater China, for an upfront payment of $275.0 million. As part of the sale, we are also eligible to receive up to an additional $130.0 million tied to EGFR exon 20 NSCLC regulatory milestones. Concurrently with the closing of the sale of our equity interest in Cullinan Pearl, we entered into a co-development and co-commercialization agreement for zipalertinib with an affiliate of Taiho, pursuant to which we will collaborate to develop zipalertinib and will retain the option to co-commercialize zipalertinib in the United Sates ("U.S."). Development costs, and any future pre-tax profits from potential U.S. sales of, zipalertinib shall be shared equally between us and Taiho.

In addition to zipalertinib, our portfolio includes four other clinical-stage product candidates and one product candidate that is pending FDA clearance for its investigational new drug application (“IND”):

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CLN-049 is a FLT3/CD3 T cell engaging bispecific antibody being investigated in patients with relapsed/refractory acute myeloid leukemia ("AML") or myelodysplastic syndrome ("MDS"). CLN-049 is currently in an ongoing Phase 1 study with initial clinical data expected in mid-2023.

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CLN-619 is a monoclonal antibody that stabilizes expression of MICA/B on the tumor cell surface to promote tumor cell lysis mediated by both cytotoxic innate and adaptive immune cells. CLN-619 has broad therapeutic potential and is being investigated as both monotherapy and in combination with checkpoint inhibitor therapy in an ongoing Phase 1 study in patients with advanced solid tumors with initial clinical data expected in mid-2023.

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CLN-418 is a B7H4/4-1BB bispecific antibody that induces tumor-specific immune activation and is being investigated in an ongoing Phase 1 study in patients with advanced solid tumors with initial clinical data expected in 2024.

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CLN-978 is a CD19/CD3 T cell engaging antibody construct with a human serum albumin ("HSA") binding domain to increase serum half-life. In January 2023, the FDA cleared our IND for CLN-978. We will initially evaluate CLN-978 in a Phase 1 study for the treatment of relapsed/refractory B-cell non-Hodgkin lymphoma ("B-NHL").

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CLN-617 is a fusion protein combining two potent antitumor cytokines, interleukin-2 ("IL-2") and interleukin-12 ("IL-12") with tumor retention domains for the treatment of solid tumors. In February 2023, we filed the IND for CLN-617 and intend to initiate a Phase 1 study by the end of 2023, pending IND clearance.

In addition to the product candidates described above, we are actively developing several preclinical oncology programs, all in the discovery stage, including our collaboration with Icahn School of Medicine at Mount Sinai for the development of novel hematopoietic progenitor kinase 1 degraders.

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We hold worldwide development and commercialization rights to CLN-049, CLN-619, CLN-617 and CLN-978, and we hold U.S. development and commercialization rights to CLN-418.We hold intellectual property rights and exclusive options for worldwide intellectual property for our earlier-stage programs.

Since our inception in 2016, we have focused all of our efforts and financial resources on raising capital, organizing and staffing our company, identifying, acquiring or in-licensing and developing product and technology rights, establishing and protecting our intellectual property portfolio and developing and advancing our programs. We do not have any products approved for sale and have not generated any revenue from product sales.

We have funded our operations primarily through the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2022, we have received net proceeds of $541.2 million from equity financings, inclusive of our net proceeds of $264.5 million from our initial public offering ("IPO"). We have received $18.9 million in revenue from our previous license agreement ("Zai License Agreement") with Zai Lab Shanghai Company, Limited ("Zai Lab") and cash proceeds of $275.0 million from the sale of our equity interest in Cullinan Pearl.

As of December 31, 2022, we had cash, cash equivalents and short-term investments of $467.3 million and long-term investments and interest receivable of $82.8 million. Interest receivable is included in prepaid expenses and other current assets on the consolidated balance sheets and represents accrued and unpaid interest on our marketable securities. With the exception of 2022, we have incurred operating losses and have had negative cash flows from operations since our inception. As of December 31, 2022, we had an accumulated deficit of $47.7 million. Other than the one-time gain from the sale of our equity interest in Cullinan Pearl, 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

The duration and scope of the COVID-19 pandemic continues to be uncertain. The virulence and spread of different strains of the virus remains high in many parts of the world. The extent and duration of the impact of COVID-19 on our operations and financial performance is currently unknown and will depend on future developments that are uncertain and unpredictable. We implemented remote working and other protective measures, but thus far, have not experienced a significant disruption or delay in our operations as it relates to the clinical development or drug production of our product candidates. However, COVID-19 has at times impacted the pace of our enrollment in our clinical trials and the conduct of 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. 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.

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 income (loss).

When we were a private company, we established development subsidiaries when we licensed or acquired exclusive worldwide rights to intellectual property for several of our drug candidates, including Cullinan Florentine Corp. (“Cullinan Florentine”) for CLN-049, Cullinan MICA Corp. (“Cullinan MICA”) for CLN-619, and Cullinan Amber Corp. (“Cullinan Amber”) for CLN-617. Our equity interest in our former development subsidiary, Cullinan Pearl, which had worldwide rights

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to zipalertinib outside of Japan and Greater China, was divested in the second quarter of 2022. As a publicly held company, we do not intend to create new development subsidiaries in the future.

The following partially-owned subsidiaries are consolidated into our financial statements in 2022 and 2021:

Cullinan Pearl

We sold our equity interest in our partially-owned subsidiary, Cullinan Pearl, to Taiho in June 2022. Refer to Note 3 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details relating to the transaction.

Cullinan Amber

Cullinan Amber is our partially-owned operating subsidiary that has a license agreement with the Massachusetts Institute of Technology ("MIT”) that provides exclusive worldwide rights to the patents related to technology that originated in the laboratory of Dr. Karl Dane Wittrup to develop novel multifunctional constructs for delivery of immunostimulatory agents such as cytokines that are retained in the tumor microenvironment (the “MIT License Agreement”).

In June 2021, we purchased 3.0 million shares of Series A preferred stock from Cullinan Amber, and MIT received 0.2 million shares of common stock from Cullinan Amber pursuant to the MIT License Agreement.

In June 2022, we purchased 6.0 million shares of Series A preferred stock from Cullinan Amber, and MIT received 0.3 million shares of common stock from Cullinan Amber pursuant to the MIT License Agreement.

In November 2022, we purchased 10.0 million shares of Series A preferred stock from Cullinan Amber, MIT received 0.5 million shares of common stock from Cullinan Amber pursuant to the MIT License Agreement, and Dr. Wittrup received 0.2 million shares of common stock from Cullinan Amber pursuant to an equity-based compensation agreement.

As of December 31, 2022, we held common shares and Series A preferred stock that represented 94% of Cullinan Amber's outstanding equity. As of December 31, 2022, noncontrolling interests collectively held common shares that represented 6% of Cullinan Amber's outstanding equity.

Cullinan Florentine

Cullinan Florentine 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 with Deutsches Krebsforschungszentrum ("DKFZ"), Eberhard Karls University of Tübingen, Faculty of Medicine, and Universitätsmedizin Gesellschaft für Forschung und Entwicklung mbH, Tübingen ("UFE").

In July 2021, we purchased 7.5 million shares of Series B preferred stock from Cullinan Florentine.

In July 2022, we purchased 3.75 million shares of Series B preferred stock from Cullinan Florentine.

As of December 31, 2022, we held common shares, Series A preferred stock and Series B preferred stock that represented 96% of Cullinan Florentine's outstanding equity. As of December 31, 2022, noncontrolling interests collectively held common shares that represented 4% of Cullinan Florentine's outstanding equity.

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Cullinan MICA

Cullinan MICA, formerly known as PDI Therapeutics, Inc., is our partially-owned operating subsidiary that owns intellectual property related to CLN-619, our MICA/B-targeted humanized IgG1 monoclonal antibody.

In June 2021, we purchased 5.4 million shares of Series A senior preferred stock from Cullinan MICA, and certain other existing investors purchased 0.7 million shares of Series A senior preferred stock from Cullinan MICA for $0.9 million.

In March 2022, we purchased 6.7 million shares of Series A senior preferred stock from Cullinan MICA, and certain other existing investors purchased 0.9 million shares of Series A senior preferred stock from Cullinan MICA for $1.2 million.

In October 2022, we purchased convertible notes for Series A senior preferred stock from Cullinan MICA, and certain other existing investors purchased convertible notes for Series A senior preferred stock from Cullinan MICA for $0.2 million.

In October 2022, we purchased 1.5 million shares Cullinan MICA's Series A senior preferred stock, 2.0 million shares of Cullinan MICA's Series A junior preferred stock, and 11.5 million shares of Cullinan MICA's Series A-2 junior preferred stock of Cullinan MICA from two of Cullinan MICA's other stockholders for $30.7 million.

In November 2022, we purchased 0.4 million shares of Cullinan MICA's common stock and 0.9 million of options for Cullinan MICA's common stock from five of Cullinan MICA’s other stockholders for $2.6 million. We also exercised our options to purchase 0.9 million shares of common stock from Cullinan MICA.

As of December 31, 2022, we held 95% of the fully-diluted shares outstanding of Cullinan MICA, including 96% of its Series A preferred stock. As of December 31, 2022, noncontrolling interests collectively owned 5% of the fully-diluted shares outstanding of Cullinan MICA, including 4% of its Series A preferred stock.

Components of Our Results of Operations

License Revenue

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. For 2021, we recognized $18.9 million of revenue, relating to the upfront fee earned from the Zai License Agreement.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the research and development of our wholly-owned and jointly-developed product candidates and programs. These expenses include:

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compensation costs 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 ("CROs");

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costs related to contract manufacturing organizations, that are primarily engaged to provide drug substance, raw materials and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies and other scientific development services;

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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

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direct and allocated costs related to facilities, information technology, personnel and other overhead.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation costs for personnel in executive management, finance, corporate and business development, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax, and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses; and other operating costs.

Our general and administrative expenses will continue to increase as we continue to increase our headcount to support development of our product candidates and programs and our continued research activities.

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Gain on Sale of Cullinan Pearl

Gain on sale of Cullinan Pearl represents the excess of the consideration received over the carrying value of the non-financial assets sold. Refer to Note 3 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details relating to the transaction.

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 consist primarily of federal and state income taxes.

Results of Operations

Comparison of 2022 and 2021

The following table presents our results of operations for 2022 and 2021:

License Revenue

In 2021, we recognized $18.9 million of revenue relating to the upfront fee earned from the Zai License Agreement.

Research and Development Expenses

Following the sale of our equity interest in Cullinan Pearl in the second quarter of 2022, development costs and any future potential pre-tax profits from U.S. sales of zipalertinib are shared equally between us and Taiho. The $5.8 million decrease in zipalertinib research and development expenses in 2022 compared to 2021 was primarily related to a one-time sublicense fee in 2021 that did not recur in 2022 ($3.0 million), a decrease in chemistry, manufacturing and controls ("CMC") costs ($2.7 million), and a benefit of from our co-development agreement with Taiho ($0.9 million), partially offset by an increase in preclinical costs ($0.7 million).

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The $8.0 million increase in CLN-619 research and development expenses in 2022 compared to 2021 was primarily attributable to increased CRO costs following further enrollment in our ongoing Phase 1 dose-escalation study ($5.2 million) and higher CMC costs to obtain sufficient supply of CLN-619 to support current and future clinical trial activities ($2.6 million).

The $8.0 million increase in CLN-978 research and development expenses in 2022 compared to 2021 was primarily due to higher CMC costs to obtain sufficient supply of CLN-978 to support future clinical trial activities ($3.5 million), an increase in preclinical activities to support IND-enabling activities ($3.3 million), and one-time payments due to a contract research organization for achieving certain regulatory milestones ($0.8 million).

The $9.9 million increase in CLN-617 research and development expenses in 2022 compared to 2021 was primarily related to higher CMC costs to obtain sufficient supply of CLN-617 to support current and future clinical trial activities ($5.5 million) an increase in preclinical activities to support IND-enabling activities ($3.2 million), and higher personnel-related costs to support these increased activities ($1.0 million).

The remaining $14.0 million increase in research and development expenses in 2022 compared to 2021 was primarily related to an increase in early-stage research activities ($4.8 million), increased headcount and expansion of operations to support our research and development activities ($7.0 million), and higher equity-based compensation due to our increased headcount ($2.1 million).

General and Administrative Expenses

The increase of $11.0 million in general and administrative expenses in 2022 compared to 2021 was primarily due to an increase in personnel costs relating to increased headcount ($3.5 million), an increase in professional service fees to support our expanded operations ($3.0 million), non-recurring costs related to the Cullinan Pearl sale ($2.0 million), an increase in equity-based compensation expense due to our increased headcount ($1.5 million), and higher facilities costs ($0.8 million).

Gain on Sale of Cullinan Pearl

The $276.8 million gain on sale of Cullinan Pearl represents the excess of the consideration received over the carrying value of the non-financial assets sold. Refer to Note 3 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details relating to the transaction.

Other Income

The increase in other income in 2022 compared to 2021 of $6.2 million was primarily related to higher interest income earned.

Income Tax Expense

The income tax expense was $42.1 million in 2022. The net income tax expense recognized for 2022 represents the tax from the gain on sale of Cullinan Pearl, including the utilization of current year and certain historical tax attributes.

We did not record a provision for income taxes in 2021.

Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interests was $2.0 million and $1.9 million in 2022 and 2021, respectively. Net loss attributable to noncontrolling interests is determined as the difference in the noncontrolling interest in the consolidated balance sheets between the start and end of each reporting period, after taking into account any capital transactions between the partially-owned subsidiaries and the third parties. Refer to Note 8 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional details of capital transactions between the partially-owned subsidiaries and third parties.

Liquidity and Capital Resources

Overview

We have incurred significant operating losses, with the exception of the one-time gain on the sale of our equity interest in Cullinan Pearl in 2022, and negative cash flows from operations since our inception and expect to continue to generate operating losses for the foreseeable future. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. To date, we have funded our operations primarily with proceeds from the sale of equity securities and from licensing or selling the rights to our product candidates. As of December 31, 2022, we had cash, cash equivalents, and short-term investments of $467.3 million and long-term investments and interest receivable of $82.8 million.

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Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, short-term investments and long-term investments, will be sufficient to fund operations into 2026. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We cannot guarantee that we will be able to raise additional capital on reasonable terms or at all.

In June 2022, we sold our equity interest in our partially-owned subsidiary, Cullinan Pearl, to Taiho for an upfront payment of $275.0 million.

In October and November 2022, we purchased equity interests in Cullinan MICA from other Cullinan MICA stockholders for $33.3 million which increased our ownership of Cullinan MICA to 95%.

In February 2023, we entered into a license and collaboration agreement (the “Harbour License Agreement”) with Harbour BioMed US Inc. ("Harbour"), pursuant to which Harbour granted us an exclusive license for the development, manufacturing and commercialization of CLN-418 in the U.S. Under the terms of the Harbour License Agreement, we paid Harbour an upfront license fee of $25 million at signing.

Cash Flows

Comparison of 2022 and 2021

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

Cash Flow from Operating Activities

During 2022, we used $126.7 million of cash for operating activities, primarily consisting of our operating expenses of $132.1 million and $37.8 million in payments for our estimated tax liability from the gain on sale of Cullinan Pearl, partially offset by non-cash charges of $29.8 million and a benefit of $11.2 million from the net change in our operating assets and liabilities. The non-cash charges primarily consisted of equity-based compensation expense and amortization and accretion on our marketable securities.

During 2021, we used $43.4 million of cash for operating activities, primarily consisting of our operating expenses of $86.9 million and the net change in our operating assets and liabilities of $3.5 million, partially offset by non-cash charges of $27.6 million and the $18.9 million upfront payment received pursuant to our license agreement with Zai Lab. The non-cash charges primarily consisted of equity-based compensation expense and amortization and accretion on our marketable securities.

Cash Flow from Investing Activities

During 2022, our investing activities provided $249.0 million of cash, which primarily consisted of proceeds of $352.9 million from the sales and maturities of marketable securities and proceeds of $275.0 million from the sale of our equity interest in Cullinan Pearl, partially offset by $377.9 million used for the purchase of marketable securities and $1.1 million used for the purchase of property and equipment to improve and furnish our leased office space.

During 2021, our investing activities used $333.8 million of cash, which primarily consisted of $525.8 million used for the purchases of marketable securities, partially offset by proceeds of $192.0 million from the sales and maturities of marketable securities.

Cash Flow from Financing Activities

During 2022, our financing activities used $25.9 million of cash, which primarily consisted of $33.3 million paid to acquire shares of Cullinan MICA held by noncontrolling interests, partially offset by proceeds of $6.0 million from stock option exercises and proceeds of $1.2 million from the issuance of noncontrolling interests.

During 2021, our financing activities provided $268.8 million of cash, which primarily consisted of net proceeds of $267.3 million from our initial public offering and proceeds of $3.3 million from stock option exercises, partially offset by payment of deferred offering costs of $2.7 million.

Future Funding Requirements

We expect our expenses to continue to increase 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

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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 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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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 facilities, if deemed appropriate;

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seek regulatory approvals for any product candidates that successfully complete clinical trials;

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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.

Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, and short-term and long-term investments, will be sufficient to fund operations into 2026. 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:

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the scope, progress, results, and costs of drug discovery, laboratory testing and preclinical and clinical development for our current and future product candidates;

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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;

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the prevalence, duration and severity of potential side effects or other safety issues experienced by patients receiving our product candidates or future product candidates;

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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;

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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;

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the costs of expanding our facilities to accommodate our expected growth in personnel;

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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;

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the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims;

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the extent to which we acquire or in-license technologies or programs;

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the sales price and availability of adequate third-party coverage and reimbursement for our product candidates, if and when approved; and

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the ongoing costs of operating as a public company.

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Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity, current ownership interests will be diluted. If we raise additional funds through government or third-party funding, collaboration agreements, strategic alliances, licensing arrangements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Other Commitments

We have certain 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, 2022 and 2021.

As of December 31, 2022, total future minimum lease payments were $6.0 million with $1.9 million payable within 12 months. See Note 13 of our consolidated financial statements included in this Annual Report on Form 10-K for further detail on our lease obligations and the timing of expected future payments.

In addition, we enter into agreements in the normal course of business with CROs for clinical trials and with other vendors for preclinical studies, manufacturing services, and other services and products for operating purposes, which are generally cancelable upon written notice.

Critical Accounting Policies and Estimates

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

While our significant accounting policies are described in more detail in Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled in exchange for these goods and services. To achieve this core principle, we apply the following five steps: 1) identify the customer contract; 2) identify the contract’s performance obligations; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when or as a performance obligation is satisfied.

The transaction price is determined based on the consideration to which we will be entitled. The transaction price may include fixed amounts, variable amounts, or both. We allocate the transaction price based on the estimated standalone selling price of the underlying performance obligations. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the respective performance obligation. We also utilize judgement in assessing whether or not variable consideration is constrained or if it can be allocated specifically to one or more performance obligations in the arrangement.

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When a performance obligation is satisfied, revenue is recognized for the amount of the transaction price allocated to that performance obligation on a relative standalone selling price basis, which excludes estimates of variable consideration that are constrained. For performance obligations consisting of licenses and other promises, we utilize judgment to assess whether the combined performance obligation is satisfied over time or at a point in time and the recognition pattern for the portion of the transaction price allocated to the performance obligation. 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 such amounts were not expected to be recovered.

Research and Development Contract Costs and Accruals

Research and development costs are expensed as incurred. We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical trials and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued research and development liabilities in our consolidated balance sheets and within research and development expense in our consolidated statements of operations and comprehensive income (loss). These costs are a significant component of our research and development expenses.

We accrue for these costs based on factors such as estimates of the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and in accordance with agreements established with our third-party service providers for such services. We make significant judgments and estimates in determining the accrued research and development liabilities balance at each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, the status and timing of services performed, the number of patients enrolled in clinical trials and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. We record advance payments to service providers as prepaid assets, which are expensed as the contracted services are performed.

Equity-Based Compensation Expense

We measure the fair value of market-based RSUs on the grant date using a Monte Carlo simulation model. We estimate the fair value of the stock options using the Black-Scholes option pricing model. Both the Monte Carlo simulation model and the Black-Scholes option pricing model require 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.

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. We recorded income tax expense for 2022 due to the expected tax from the gain on sale of Cullinan Pearl, partially offset by the release of valuation allowance for expected utilization of current year and certain historical tax attributes against the gain on from the sale. Due to our lack of earnings history previous to the current fiscal year, management determined that a full valuation allowance was required to offset the net deferred tax assets at December 31, 2022.

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.

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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 $1.235 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 on Form 10-K 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 of our consolidated financial statements included in this Annual Report on Form 10-K.

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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:

(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;

•
expenses incurred under agreements with organizations that support our drug discovery and development activities;

•
expenses incurred in connection with the preclinical and clinical development of our product candidates and programs, including under agreements with contract research organizations, or CROs;

•
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;

•
the costs of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;

•
costs related to compliance with quality and regulatory requirements;

•
payments made under third-party licensing agreements; and

•
direct and allocated costs related to facilities, information technology, personnel and other overhead.

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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:

•
per patient trial costs;

•
the number of trials required for approval;

•
the number of sites included in the trials;

•
the countries in which the trials are conducted;

•
the length of time required to enroll eligible patients;

•
the number of patients that participate in the trials;

•
the number of doses that patients receive;

•
the drop-out or discontinuation rates of patients;

•
potential additional safety monitoring requested by regulatory agencies;

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

•
the cost and timing of manufacturing our product candidates;

•
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;

•
the receipt and related terms of regulatory approvals from applicable regulatory authorities;

•
the availability of drug substance and drug product for use in the production of our product candidates;

•
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;

•
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;

•
the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;

•
competition with other products; and

•
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:

Research and Development Expenses

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:

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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:

•
continue our research and development efforts and submit investigational new drug applications, or INDs, for our product candidates and programs;

•
conduct preclinical studies and clinical trials for our current and future product candidates;

•
take temporary precautionary measures to help minimize the risk of COVID-19 to our employees;

•
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;

•
develop the necessary processes, controls, and manufacturing capabilities to obtain marketing approval for our product candidates and to support manufacturing on a commercial scale;

•
develop and implement plans to establish and operate in-house manufacturing operations and facility;

•
seek regulatory approvals for any product candidates that successfully complete clinical trials, if any;

•
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

•
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;

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•
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.

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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.

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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.

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