| Summary of Significant Accounting Policies | (2) Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and in accordance with applicable rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial reporting. The unaudited consolidated financial statements include accounts of the Company and its consolidated subsidiaries. All intercompany balances have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASUs) of the Financial Accounting Standards Board (FASB). The unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and in the opinion of the Company's management, reflect all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the Company’s financial position, its results of operations and comprehensive income (loss) and its cash flows for the periods presented. The unaudited consolidated financial statements herein do not include all of the disclosures required by GAAP for a complete set of annual audited financial statements, as is permitted by such rules and regulations. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K filed with the SEC on March 17, 2022 for the year ended December 31, 2021 (the 2021 Form 10-K). Use of Estimates The preparation of the accompanying unaudited consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company’s management evaluates the estimates, including those related to expenses and accruals. The Company’s management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates and assumptions reflected in these unaudited consolidated financial statements include, but are not limited to, the fair value of the royalty transfer agreements, accrued research and development expenses, the fair value of equity awards issued by the Company and its subsidiaries prior to the IPO, income taxes and valuation allowance on deferred tax assets. Actual results may differ from these estimates under different assumptions or conditions. Principles of Consolidation The Company consolidates entities in which it has a controlling financial interest. The Company evaluates each of its subsidiaries to determine whether the entity represents a variable interest entity (VIE) for which consolidation should be evaluated under the VIE model, or alternatively, if the entity is a voting interest entity, for which consolidation should be evaluated using the voting interest model (VOE). The Company concluded that none of its subsidiaries is a VIE and has consolidated each subsidiary under the VOE. Under the VOE, the Company consolidates the entity if it determines 1) that it directly, or indirectly, has greater than 50% of the voting shares or other equity holders do not have substantive voting, participation, or liquidation rights, or 2) when the company has a controlling financial interest through its control of the board of directors, and the significant decisions of the entity are made at the board level. The Company has either created or made investments in the following Asset Subsidiaries:
Consolidated Entities Relationship as of March 31, 2022 Date Control First Acquired
Cullinan Amber Corp. Partially-owned Subsidiary December 2019
Cullinan Florentine Corp. Partially-owned Subsidiary December 2019
Cullinan Mica Corp. Partially-owned Subsidiary May 2020
Cullinan Pearl Corp. Partially-owned Subsidiary November 2018 Noncontrolling Interests To the extent that ownership interests in the subsidiaries are held by entities other than the Company, management reports these as noncontrolling interests on the consolidated balance sheets. Earnings or losses are attributed to noncontrolling interests under the hypothetical liquidation at book value (HLBV) method. The HLBV method is a point in time calculation that utilizes inputs to determine the amount that the Company and the noncontrolling interest holders would receive upon a hypothetical liquidation at each balance sheet date based on the liquidation provisions of the respective articles of incorporation. At March 31, 2022, investors and licensors held noncontrolling interests in Amber, Florentine, MICA and Pearl. At March 31, 2021, investors and licensors held noncontrolling interests in Amber, Cullinan Apollo Corp. (Apollo), Florentine, MICA and Pearl. Apollo was dissolved in August 2021. Refer to Note 4 for details relating to the noncontrolling interests. For the three months ended March 31, 2022 and 2021, $ 0.8 million of net loss and $ 1.5 million of net income, respectively, were attributable to noncontrolling interests and recorded in the consolidated statements of operations and comprehensive income (loss) and disclosed within the noncontrolling interests in subsidiaries column in the consolidated statements of stockholders’ equity. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2022 and December 31, 2021, cash equivalents consist of government-backed money market funds. Investments Investments not classified as cash equivalents with maturities of less than twelve months are classified as short-term investments in the consolidated balance sheets. Investments with maturities greater than twelve months for which the Company has the intent and ability to hold the investment for greater than twelve months are classified as long-term investments in the consolidated balance sheets. The Company generally holds investments in marketable securities. Marketable securities are carried at estimated fair value, with unrealized gains or losses included in accumulated other comprehensive income (loss) in stockholders’ equity. The fair value of marketable securities is based on available market information. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Interest and dividends are also included in interest income. The Company periodically reviews its marketable securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. Declines in fair value judged to be other-than-temporary on marketable securities, if any, are included in other income (expense), net. The Company recognized its short-term and long-term investments by security type at March 31, 2022:
Amortized Gross Gross Estimated
(in thousands)
Short-term investments
Corporate notes $ 107,976 $ — $ ( 842 ) $ 107,134
Asset-backed securities 3,034 — ( 36 ) 2,998
Commercial paper 75,918 — ( 189 ) 75,729
US government notes 53,246 — ( 371 ) 52,875
Total short-term investments 240,174 — ( 1,438 ) 238,736
Long-term investments
Corporate notes 88,886 — ( 1,584 ) 87,302
Commercial paper 6,989 — ( 113 ) 6,876
Total long-term investments 95,875 — ( 1,697 ) 94,178
Total investments $ 336,049 $ — $ ( 3,135 ) $ 332,914 The Company recognized its short-term and long-term investments by security type at December 31, 2021:
Amortized Gross Gross Estimated
(in thousands)
Short-term investments
Corporate notes $ 98,642 $ — $ ( 95 ) $ 98,547
Commercial paper 114,174 — ( 27 ) 114,147
US government notes 18,033 — ( 35 ) 17,998
Total short-term investments 230,849 — ( 157 ) 230,692
Long-term investments
Corporate notes 117,868 — ( 596 ) 117,272
Asset-backed securities 3,044 — ( 8 ) 3,036
US government notes 20,166 — ( 77 ) 20,089
Total long-term investments 141,078 — ( 681 ) 140,397
Total investments $ 371,927 $ — $ ( 838 ) $ 371,089 Fair Value of Financial Instruments The following table sets forth the fair value of the Company’s financial assets as of March 31, 2022, allocated into Level 1, Level 2 and Level 3, that was measured on a recurring basis:
Level 1 Level 2 Level 3 Total
(in thousands)
Cash and cash equivalents
Cash $ 47,593 $ — $ — $ 47,593
Money market funds 28,525 — — 28,525
Total cash and cash equivalents 76,118 — — 76,118
Short-term investments
Corporate notes — 107,134 — 107,134
Asset-backed securities — 2,998 — 2,998
Commercial paper — 75,729 — 75,729
US government notes — 52,875 — 52,875
Total short-term investments — 238,736 — 238,736
Long-term investments
Corporate notes — 87,302 — 87,302
US government notes — 6,876 — 6,876
Total long-term investments — 94,178 — 94,178
Total cash, cash equivalents and investments $ 76,118 $ 332,914 $ — $ 409,032 The following table sets forth the fair value of the Company’s financial assets as of December 31, 2021, allocated into Level 1, Level 2 and Level 3, that was measured on a recurring basis:
Level 1 Level 2 Level 3 Total
(in thousands)
Cash and cash equivalents
Cash $ 35,925 $ — $ — $ 35,925
Money market funds 23,849 — — 23,849
Total cash and cash equivalents 59,774 — — 59,774
Short-term investments
Corporate notes — 98,547 — 98,547
Commercial paper — 114,147 — 114,147
US government notes — 17,998 — 17,998
Total short-term investments — 230,692 — 230,692
Long-term investments
Corporate notes — 117,272 — 117,272
Asset-backed securities — 3,036 — 3,036
US government notes — 20,089 — 20,089
Total long-term investments — 140,397 — 140,397
Total cash, cash equivalents and investments $ 59,774 $ 371,089 $ — $ 430,863 Prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities are carried at cost, which management believes approximates fair value due to their short-term nature. Deferred Offering Costs The Company capitalizes costs that are directly associated with in-process equity financings until such financings are consummated, at which time such costs are recorded against the gross proceeds of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive income (loss). The Company incurred $ 2.7 million of deferred offering costs in 2020 and recorded such amounts against the gross proceeds of the Company’s IPO within the statements of stockholders’ equity during the three months ended March 31, 2021. Leases On January 1, 2022, the Company adopted ASU 2016-02, Leases (Topic 842), or ASC 842, which requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet for all leases, except certain short-term leases. In connection with its implementation of ASU 2016-02, the Company adopted the package of three practical expedients, allowing it to carry forward its previous lease classification and embedded lease evaluations and not to reassess initial direct costs as of the date of adoption. The Company also adopted the practical expedient where we combine lease and non-lease components for its real estate leases. The Company’s existing lease obligations relating to a single, corporate location is subject to the new standard and resulted in recording of lease liabilities and right-of-use assets for operating leases on the Company’s balance sheet. The existing lease obligation is classified as an operating lease. The below table details the balance sheet adjustments recorded on January 1, 2022 in connection with the Company’s adoption of ASU 2016-02 (in thousands):
December 31, 2021 January 1, 2022
As Reported under ASC 840 ASC 842 Adjustments As Reported Under ASC 842
Assets
Operating lease right-of-use asset $ — $ 1,311 $ 1,311
Liabilities
Current portion of operating lease liabilities — 505 505
Deferred rent 65 ( 65 ) —
Noncurrent portion of operating lease liabilities — 871 871 In accordance with ASC 842, the Company determines if an arrangement is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. Leases with an initial term of 12 months or less are not recorded in the balance sheet, but payments are recognized as expense on a straight-line basis over the lease term. The Company has elected not to recognize leases with terms of 12 months or less. The Company enters into contracts that contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the rate implicit is not readily determinable, the Company utilizes an estimate of its incremental borrowing rate based upon the available information at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following:
March 31, December 31,
(in thousands)
Accrued bonus $ 799 $ 2,576
Professional fees 1,438 973
Research and development expenses 7,391 5,028
Convertible note and accrued interest 804 —
$ 10,432 $ 8,577 Revenue Recognition The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company enters into licensing arrangements for research and development, manufacturing and commercialization activities, which have components within the scope of ASC 606. Payments pursuant to these arrangements typically include non-refundable, upfront payments, milestone payments upon achieving significant development events, research and development reimbursements, sales milestones and royalties on future product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period. The contracts into which the Company enters generally do not include significant financing components. As part of the accounting for these arrangements, the Company must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above, and d) the measure of progress in step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. Non-Exclusive Licenses If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other elements, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining elements, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods. Milestone Payments At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. Royalties For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license of intellectual property is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. Research and Development Expenses Research and development costs are expensed as incurred and consist primarily of funds for employee wages and funds paid to third parties for the provision of services for product candidate development, clinical and preclinical development and related supply and manufacturing costs, and regulatory compliance costs. At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs. Costs incurred to obtain licenses are recognized as research and development expense as incurred if the technology licensed has no alternative future use. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are received or services are performed. The Company has entered into various research and development related contracts with parties both inside and outside of the United States. The payments related to these agreements are recorded as research and development expenses as incurred. The Company records accrued liabilities for estimated ongoing research and development expenses. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. To date, there have been no material differences between the Company’s accrued costs and actual costs. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). Equity-Based Compensation Equity-based compensation is measured at the grant date for all equity-based awards made to employees and non-employees based on the fair value of the awards and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company has elected to recognize the actual forfeitures by reducing the equity-based compensation expense in the same period as the forfeitures occur. The Company estimated 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 the Company’s common stock prior to IPO and stock price volatility, represent management’s estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, equity-based compensation expense could be materially different for future awards. The Company classifies equity-based compensation in its consolidated statements of operations and comprehensive income (loss) in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. Income Taxes The Company accounts for income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Current income taxes are based on taxable income for federal and state reporting purposes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax expense or benefit is the result of changes in deferred tax assets or liabilities. A valuation allowance is established to reduce deferred tax assets, when the Company concludes that it is more likely than not that some portion, or all of a deferred tax asset will not be realized. In evaluating its ability to recover deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income. The Company recognizes tax benefits from uncertain tax positions if we believe the position is more likely than not to be sustained on examination by the taxing authorities based on the technical merits of the position. The Company makes adjustments to these tax reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of any reserves for uncertain tax positions. Net Loss per Share Basic and diluted net loss per share is determined by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period, without consideration for potential dilutive shares of common stock, such as stock options, unvested restricted stock awards and shares issuable under the employee stock purchase plan. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. Therefore, the weighted-average shares used to calculate both basic and diluted net loss per share are the same for the periods presented. The Company excluded unvested shares of restricted stock awards, stock options and shares issuable under the employee stock purchase plan from the computation of diluted weighted-average shares outstanding as they would be antidilutive. Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard became effective beginning January 1, 2022. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial position and consolidated results of operations. |
