Cullinan Therapeutics, Inc.: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2023. This discussion and other parts of this Quarterly Report on Form 10-Q 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. Please also refer to those factors described in “Part I, Item 1A. Risk Factors” of our 2022 10-K for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company focused on modality-agnostic targeted oncology therapies. 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 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, all of which are clinical-stage, as well as multiple research and discovery programs.

• 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 trial in patients with advanced solid tumors. Given MICA/B is expressed on a wide range of solid tumors and hematological malignancies, we believe CLN-619 has broad therapeutic potential.
• We presented initial clinical data for CLN-619 monotherapy in patients with advanced solid tumors at the 2023 American Society of Clinical Oncology Annual Meeting in June 2023. Data demonstrated monotherapy anti-tumor activity of CLN-619 in heavily pre-treated patients with multiple tumor types with no dose limiting toxicities up to the highest dose tested. Best responses among 22 evaluable patients receiving doses greater than one milligram per kilogram included one confirmed complete response (parotid cancer), two confirmed partial responses (endometrial cancer), and seven patients with stable disease (cervical, ovarian, breast, and salivary gland cancers).
• Based on these initial clinical observations, we have initiated monotherapy expansion cohorts in endometrial and cervical cancers and are evaluating additional disease-specific expansion cohorts.
• In November 2023, we presented a poster at the Society for Immunotherapy Conference (“SITC”) that contained initial biomarker data from the ongoing Phase 1 study of CLN-619 providing evidence for CLN-619’s mechanism of action and demonstrating that clinical activity, including objective response, has been observed in patients with tumor characteristics not typically responsive to checkpoint inhibitor therapy.
• We intend to present initial data from the checkpoint inhibitor therapy combination dose escalation module of the study, 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.
• 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 United States ("U.S.") Food and Drug Administration (the "FDA") has granted Breakthrough Therapy designation to zipalertinib. In collaboration with our partners at Taiho, we are evaluating zipalertinib in a pivotal Phase 2b trial in patients with EGFRex20 non-small-cell lung cancer ("NSCLC") who progressed after prior systemic therapy, and in a global Phase 3 trial (“REZILIENT3”) in combination with chemotherapy as a potential first-line treatment for EGFRex20 NSCLC adult patients.
• We expect to complete enrollment in the Phase 2b pivotal portion of the REZILIENT1 study of zipalertinib in patients with EGFRex20 NSCLC who have progressed after prior systemic therapy by year-end 2024.
• CLN-049 is a FLT3xCD3 T cell engaging bispecific antibody being investigated in patients with relapsed/refractory acute myeloid leukemia or myelodysplastic syndrome.
• Preliminary safety data from an ongoing first-in-human study were published in abstract form as part of the 2023 European Hematology Association Congress.
• Enrollment continues in the ongoing Phase 1 multi-ascending dose study using subcutaneous administration, and we expect to report updated data in the second half of 2024.
• 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 trial in patients with advanced solid tumors with initial clinical data expected in the second half of 2024.
• CLN-978 is a CD19xCD3 T cell engager with extended serum half-life and robust potency against target cells expressing low levels of CD19. In August 2023, we dosed the first patient in our Phase 1 trial of CLN-978 in patients with relapsed/refractory B-cell non-Hodgkin lymphoma.
• 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. We anticipate dosing the first patient in the CLN-617 first-in-human Phase 1 study by year-end 2023.

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 (HPK1) degraders.

We have the option to co-commercialize zipalertinib with Taiho in the United States. We hold worldwide development and commercialization rights to CLN-619, CLN-049, CLN-978 and CLN-617, 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 September 30, 2023, we have received net proceeds of $579.6 million from equity financings, $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 September 30, 2023, we had cash, cash equivalents and short-term investments of $466.4 million and long-term investments and interest receivable of $15.5 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 September 30, 2023, we had an accumulated deficit of $177.1 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.

Basis of Presentation and Consolidation

When we were a private company, we established or acquired development subsidiaries to hold the intellectual property rights for several of our product candidates. As a publicly held company, we do not intend to create new development subsidiaries in the future. Losses attributed to noncontrolling interests in our development subsidiaries are reported separately in our consolidated statements of operations and comprehensive income (loss).

The following table shows our ownership interest as of September 30, 2023 in our development subsidiaries:

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Cullinan MICA

Cullinan MICA Corp. is our development subsidiary that has exclusive worldwide rights to CLN-619, our MICA/B-targeted humanized IgG1 monoclonal antibody.

Cullinan Florentine

Cullinan Florentine Corp. is our development 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, Eberhard Karls University of Tübingen, Faculty of Medicine, and Universitätsmedizin Gesellschaft für Forschung und Entwicklung mbH, Tübingen.

Cullinan Amber

Cullinan Amber Corp. is our development subsidiary that has exclusive worldwide rights to CLN-617, our fusion protein combining two potent antitumor cytokines, IL-2 and IL-12, with tumor retention domains for the treatment of solid tumors, pursuant to a license agreement with the Massachusetts Institute of Technology ("MIT”). The license agreement with MIT 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.

Cullinan Pearl

We sold our equity interest in our development subsidiary, Cullinan Pearl, to Taiho in June 2022, which provided Taiho with worldwide rights to zipalertinib outside of Japan, mainland China, Hong Kong, Macau, and Taiwan.

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:

• compensation costs 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 ("CROs");
• costs related to contract manufacturing organizations that are primarily engaged to provide drug substance, raw material 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;
• 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.

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.

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 Quarterly Report on Form 10-Q for additional details relating to the impairment.

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 in this Quarterly Report on Form 10-Q 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 the Three and Nine Months Ended September 30, 2023 and 2022

The following table presents our results of operations for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

Research and Development Expenses

The following table summarizes our research and development expenses for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

The $14.1 million increase in research and development expenses in the three months ended September 30, 2023 compared to the same period in 2022 was primarily related to increased clinical costs ($8.7 million), increased chemistry, manufacturing and controls ("CMC") costs ($3.5 million), higher personnel costs due to increased headcount and expansion of operations to support our research and development activities ($2.2 million), and higher equity-based compensation costs ($2.1 million), partially offset by a decrease in preclinical costs ($2.3 million), some of which is allocated to product candidates in the above table.

The $42.7 million increase in research and development expenses in the nine months ended September 30, 2023 compared to the same period in 2022 was primarily related to the upfront fee due upon in-licensing CLN-418 ($25.0 million), increased clinical costs ($20.5 million), higher personnel costs due to increased headcount and expansion of operations to support our research and development activities ($7.6 million), and higher equity-based compensation costs ($1.4 million), partially offset by lower preclinical costs ($9.3 million) some of which is allocated to product candidates in the above table, and a decrease in CMC costs ($2.2 million).

General and Administrative Expenses

The increase of $0.9 million in general and administrative expenses in the three months ended September 30, 2023 compared to the same period in 2022 was primarily due to increases in other personnel costs ($0.9 million) relating to increased headcount, and equity-based compensation costs ($0.4 million), partially offset by decreases in legal and other professional fees ($0.7 million).

The increase of $2.9 million in general and administrative expenses in the nine months ended September 30, 2023 compared to the same period in 2022 was primarily due to increases in personnel costs ($2.4 million), equity-based compensation costs ($1.1 million), legal and other professional fees ($0.5 million), and occupancy and other costs to support our expanded operations ($1.0 million), partially offset by a decrease in one-time expenses related to the sale of Cullinan Pearl in 2022 that did not recur in 2023 ($2.0 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 Quarterly Report on Form 10-Q for additional details relating to the impairment.

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 in this Quarterly Report on Form 10-Q for additional details relating to the transaction.

Other Income

The $3.7 million increase in other income in the three months ended September 30, 2023 compared to the same period in 2022 was primarily related to higher investment income.

The $13.1 million increase in other income in the nine months ended September 30, 2023 compared to the same period in 2022 was primarily related to higher investment income.

Income Tax Expense (Benefit)

We did not record income tax expense or benefit for the three and nine months ended September 30, 2023.

The income tax benefit was $2.5 million and income tax expense was $44.0 million for the three and nine months ended September 30, 2022, respectively. The net income tax expense of $44.0 million recognized for the nine months ended September 30, 2022 represented the expected tax from the gain on sale of Cullinan Pearl, partially offset by the expected utilization of tax attributes generated during the period 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

There was no net loss attributable to noncontrolling interests during the three months ended September 30, 2023. Net loss attributable to noncontrolling interests was $0.2 million for the nine months ended September 30, 2023. Net loss attributable to noncontrolling interests was $0.1 million and $1.7 million during the three and nine months ended September 30, 2022, 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 our development subsidiaries and third parties. Refer to Note 7 of our notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q 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, 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 September 30, 2023, we had cash, cash equivalents and short-term investments of $466.4 million and long-term investments and interest receivable of $15.5 million.

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 through at least twelve months from the date of issuance of our consolidated financial statements. 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 in February 2023.

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 the three months ended September 30, 2023. In the nine months ended September 30, 2023, we sold approximately 3.3 million shares under the ATM and received net proceeds of $38.4 million, after deducting commissions. As of September 30, 2023, we had $85.6 million in shares of our common stock remaining under the ATM.

Comparison of the Nine Months Ended September 30, 2023 and 2022

The following table summarizes our sources and uses of cash for the nine months ended September 30, 2023 and 2022:

(in thousands)

Cash Flow from Operating Activities

For the nine months ended September 30, 2023, operating activities used $116.1 million of cash, which primarily consisted of our operating expenses of $145.2 million, and $4.7 million used to pay for a portion of our estimated tax liability resulting from the gain on sale of Cullinan Pearl, partially offset by net non-cash charges of $17.0 million, interest income of $15.7 million, a benefit of $0.6 million from the net change in our non-tax operating assets and liabilities, and sublease income of $0.5 million. The net non-cash charges primarily consisted of $22.9 million of equity-based compensation expense, partially offset by $6.5 million in accretion on our marketable securities.

For the nine months ended September 30, 2022, operating activities used $101.7 million of cash, which primarily consisted of operating expenses of $99.5 million, and $32.6 million used to pay for a portion of our estimated tax liability resulting from the gain on sale of Cullinan Pearl, partially offset by non-cash charges of $22.6 million, a benefit of $4.8 million from the net change in our non-tax operating assets and liabilities and interest income of $3.2 million. The non-cash charges primarily consisted of $20.4 million from equity-based compensation expense and $1.9 million in amortization on marketable securities.

Cash Flow from Investing Activities

For the nine months ended September 30, 2023, net cash used by investing activities was $15.7 million, which primarily consisted of $307.4 million of purchases of marketable securities, partially offset by $291.9 million of proceeds from the sales and maturities of marketable securities.

For the nine months ended September 30, 2022, net cash provided by investing activities was $277.6 million, which primarily consisted of $275.0 million of proceeds from the sale of our equity interest in Cullinan Pearl, and $220.3 million from the sales and maturities of investments, partially offset by the purchase of $217.5 million of investments.

Cash Flow from Financing Activities

For the nine months ended September 30, 2023, net cash provided by financing activities was $40.5 million, which primarily consisted of $38.4 million of net proceeds from the issuance of common stock under our ATM, and $1.8 million from the issuance of a convertible note by Cullinan MICA to a noncontrolling interest.

For the nine months ended September 30, 2022, net cash provided by financing activities was $7.0 million, which primarily consisted of $5.8 million from stock option exercises and $1.2 million from the issuance of noncontrolling interests.

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 studies for our current and 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 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 (“IND") for our product candidates and programs;
• conduct preclinical studies and clinical trials for our current and future product candidates;
• 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;
• 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 facilities, if deemed appropriate;
• 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
• 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 through at least twelve months from the date of issuance of our consolidated financial statements. 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:

• 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;
• 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;
• 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;
• 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.

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 September 30, 2023 and December 31, 2022.

As of September 30, 2023, total future minimum lease payments were $4.6 million with $1.9 million payable within twelve months. See Note 12 to our consolidated financial statements included in this Quarterly Report on Form 10-Q 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 critical accounting policies have not materially changed from those described in the 2022 10-K, except for our accounting policy for equity-based compensation.

Equity-Based Compensation

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 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, 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.

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.

Emerging Growth Company Status

In April 2012, the Jumpstart Our Business Startups Act (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 of 1933, as amended, 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 $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 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 Quarterly Report on Form 10-Q.

Information required by this Item is not applicable as we are electing scaled disclosure requirements available to smaller reporting companies with respect to this Item.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial Officer), to allow timely decisions regarding required disclosure. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2023, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies our judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at the reasonable assurance level as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, that occurred during the fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K"), which could materially affect our business, financial condition or future results. The risk factors disclosure in our 2022 10-K is qualified by the information that is described in this Quarterly Report on Form 10-Q. The risks described in our 2022 10-K are not our only risks. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition or future results.