# Cullinan Therapeutics, Inc. (CGEM) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Cullinan Therapeutics, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1789972/000095017023006839/cgem-20221231.htm
Accession: 0000950170-23-006839
Filing date: 2023-03-09
Report date: 2022-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/CGEM/
All MD&A years: /company/CGEM/mda/
Previous year: /company/CGEM/mda/fy2021/ (FY 2021)
Next year: /company/CGEM/mda/fy2023/ (FY 2023)

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”):

•
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:

[[GREPCENT_TABLE]]
[["Consolidated Entities","","Current Relationship","","Date Control First Acquired","","Ownership as of December 31, 2022"],["Cullinan Pearl Corp.","","Divested","","November 2018","","\u2014"],["Cullinan Amber Corp.","","Partially-owned Subsidiary","","December 2019","","94%"],["Cullinan Florentine Corp.","","Partially-owned Subsidiary","","December 2019","","96%"],["Cullinan MICA Corp.","","Partially-owned Subsidiary","","May 2020","","95%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands)","","2022","","","2021"],["License revenue","","$","\u2014","","","$","18,943"],["Operating expenses:"],["Research and development","","","91,948","","","","57,751"],["General and administrative","","","40,189","","","","29,146"],["Total operating expenses","","","132,137","","","","86,897"],["Gain on sale of Cullinan Pearl","","","276,785","","","","\u2014"],["Income (loss) from operations","","","144,648","","","","(67,954",")"],["Other income (expense):"],["Interest income","","","6,611","","","","477"],["Other income (expense), net","","","57","","","","(8",")"],["Net income (loss) before income taxes","","","151,316","","","","(67,485",")"],["Income tax expense","","","42,121","","","","\u2014"],["Net income (loss)","","","109,195","","","","(67,485",")"],["Net loss attributable to noncontrolling interest","","","(2,019",")","","","(1,915",")"],["Net income (loss) attributable to common stockholders of Cullinan","","$","111,214","","","$","(65,570",")"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands)","","2022","","","2021"],["Zipalertinib","","$","16,889","","","$","22,723"],["CLN-049","","","6,605","","","","6,442"],["CLN-619","","","16,815","","","","8,797"],["CLN-978","","","10,822","","","","2,805"],["CLN-617","","","12,110","","","","2,231"],["Early-stage research","","","6,894","","","","2,073"],["Other personnel and unallocated","","","10,795","","","","3,802"],["Equity-based compensation","","","11,018","","","","8,878"],["Total research and development expenses","","$","91,948","","","$","57,751"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands)","","2022","","","2021"],["Net cash used in operating activities","","$","(126,664",")","","$","(43,433",")"],["Net cash provided by (used in) investing activities","","","248,975","","","","(333,775",")"],["Net cash provided by (used in) financing activities","","","(25,933",")","","","268,784"],["Net increase (decrease) in cash and cash equivalents","","$","96,378","","","$","(108,424",")"]]
[[/GREPCENT_TABLE]]

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;

•
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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