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Equity-Based Compensation
12 Months Ended
Dec. 31, 2022
Share-Based Payment Arrangement [Abstract]  
Equity-Based Compensation
(9)
Equity-Based Compensation

The Company recorded equity-based compensation in the following expense categories in the consolidated statements of operations and comprehensive income (loss) in 2022 and 2021:

 

 

Year ended December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Research and development

 

$

11,018

 

 

$

8,914

 

General and administrative

 

 

16,939

 

 

 

15,461

 

Total equity-based compensation

 

$

27,957

 

 

$

24,375

 

2021 Stock Option and Incentive Plan

Cullinan grants equity awards in the form of stock options, restricted stock awards ("RSAs") and RSUs to its employees, directors, consultants and other key persons through the 2021 Stock Option and Incentive Plan (the "2021 Stock Plan"). The Company also grants equity awards outside of the 2021 Stock Plan in the form of stock options as an inducement material to an individual's entering into employment with the Company. As of December 31, 2022, there were approximately 2.2 million shares remaining for future grants under the 2021 Stock Plan.

The 2021 Stock Plan provides that the number of shares reserved and available for issuance under the 2021 Stock Plan will automatically increase each January 1 by 5% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s board of directors or compensation committee. On January 1, 2023, the total number of shares available for issuance under the 2021 Stock Plan increased by approximately 2.3 million shares under this provision.

The options granted have a ten-year term and were issued with an exercise price equal to the closing market price of Cullinan’s common stock on the grant date. For equity awards with service-based vesting conditions, the Company recognizes compensation expense over the vesting period, which is generally over a four-year period. For equity awards with a market-based vesting condition, the Company recognizes compensation expense over the requisite service period. The number of shares awarded, if any, when a market-based award vests will depend on the degree of achievement of the corporate stock price metrics within the performance period of the award.

Determining fair value of options

The fair value of options is estimated using the Black-Scholes option pricing model, which takes into account inputs such as the exercise price, the value of the underlying common stock at the grant date, expected term, expected volatility, risk-free interest rate and dividend yield. The fair value of each grant of options during 2022 and 2021 were determined using the methods and assumptions discussed below:

The expected term of options is determined using the “simplified” method, as prescribed in the SEC Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data.
The risk-free interest rate is based on implied yields available from U.S. Treasury securities with a remaining term equal to the expected term assumed at the grant date.
The expected volatility is based on historical volatilities of similar entities within the Company’s industry over a period of time commensurate with the expected term assumption.
The estimated annual dividend yield was based on the Company’s expectation of not paying dividends on its common stock in the foreseeable future.
The Company considered numerous objective and subjective factors in estimating the fair value of its common stock prior to the IPO, including the concluded equity value based on IPO and liquidation scenarios and their related timing and probabilities of occurrence.

For 2022 and 2021, the weighted-average grant date fair value of the options granted were $9.02 and $15.73 per share, respectively. The grant date fair value was estimated at the time of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions in 2022 and 2021:

 

 

Year Ended
December 31, 2022

 

Year Ended
December 31, 2021

Risk-free interest rate

 

2.65%

 

1.02%

Expected term (in years)

 

6.0

 

6.0

Expected volatility

 

79.81%

 

76.22%

Expected dividend yield

 

0.00%

 

0.00%

Determining fair value of market-based RSUs

The Company measures the fair value of market-based RSUs on the date of grant using a Monte Carlo simulation model. The Monte Carlo simulation requires the input of assumptions, including the Company's stock price, the volatility of its stock price, remaining term in years, expected dividend yield and risk-free rate. The Company used its own trading history to calculate the expected volatility of the market-based RSUs granted. The risk-free interest rate is determined by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected term assumed at the grant date.

The following table details the assumptions used in the Monte Carlo simulation model used to estimate the fair value of the market-based RSUs granted during 2022:

 

 

Year Ended
December 31, 2022

 

Stock price

 

$

12.98

 

Volatility

 

 

82.5

%

Remaining term (years)

 

 

2.7

 

Risk-free rate

 

 

2.9

%

Expected dividend yield

 

 

0.0

 

Stock options

The following table summarizes 2022 and 2021 stock option activity (shares and aggregate intrinsic value in thousands):

 

 

Number of
   Options

 

 

Weighted-Average Exercise Price

 

 

Weighted-Average Remaining Contractual Term (Years)

 

 

Aggregate Intrinsic Value

 

Outstanding as of December 31, 2020

 

 

4,603

 

 

$

4.30

 

 

 

 

 

 

 

Granted

 

 

5,482

 

 

$

23.82

 

 

 

 

 

 

 

Exercised

 

 

(763

)

 

$

4.30

 

 

 

 

 

 

 

Forfeited

 

 

(63

)

 

$

17.23

 

 

 

 

 

 

 

Outstanding as of December 31, 2021

 

 

9,259

 

 

$

15.77

 

 

 

 

 

 

 

Granted

 

 

2,888

 

 

$

12.96

 

 

 

 

 

 

 

Exercised

 

 

(1,523

)

 

$

4.31

 

 

 

 

 

 

 

Forfeited

 

 

(1,290

)

 

$

13.80

 

 

 

 

 

 

 

Outstanding as of December 31, 2022

 

 

9,334

 

 

$

17.04

 

 

 

8.31

 

 

$

11,526

 

Exercisable as of December 31, 2022

 

 

3,706

 

 

$

15.31

 

 

 

7.32

 

 

$

10,060

 

As of December 31, 2022 and 2021, there were $66.0 million and $75.8 million in unrecognized compensation costs that are expected to be recognized over a remaining weighted-average period of 2.9 and 3.2 years, respectively.

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. The total intrinsic value of options exercised in 2022 and 2021 was $13.1 million and $10.7 million, respectively.

RSUs

In February 2022, the Company granted service-based RSUs to employees and non-employees. In June 2022, the Company entered into an agreement to grant market-based RSUs to its Chief Executive Officer. The following table summarizes the activity related to RSUs during 2022 (shares in thousands):

 

 

Number of
   Shares

 

 

Weighted-Average Grant Date Fair Value

 

Outstanding unvested as of December 31, 2021

 

 

 

 

$

 

Granted(1)

 

 

502

 

 

$

13.28

 

Vested

 

 

(46

)

 

$

13.60

 

Forfeited

 

 

(87

)

 

$

13.60

 

Outstanding unvested as of December 31, 2022

 

 

369

 

 

$

13.16

 

 

(1)
The number granted represents the number of shares issuable upon vesting of service-based and market-based RSUs, assuming the Company achieves its corporate stock price metrics at the target achievement level.

As of December 31, 2022, there was $4.3 million in unrecognized compensation cost related to RSUs expected to be recognized over a remaining weighted-average period of 2.6 years. The total fair value of RSUs that vested during 2022 was $0.6 million.

RSAs

As part of the Reorganization in January 2021, the Company exchanged equity awards issued by the Company and its partially-owned subsidiaries prior to the Reorganization for RSAs of the Company's common stock. The following table summarizes the activity related to RSAs during 2022 and 2021 (shares in thousands) as if the prior equity awards were converted to RSAs at the earliest period presented:

 

 

Number of
   Shares

 

 

Weighted-Average Grant Date Fair Value

 

Outstanding unvested as of December 31, 2020

 

 

364

 

 

$

2.04

 

Vested

 

 

(275

)

 

$

1.45

 

Outstanding unvested as of December 31, 2021

 

 

89

 

 

$

3.87

 

Vested

 

 

(46

)

 

$

3.87

 

Forfeited

 

 

(28

)

 

$

3.87

 

Outstanding unvested as of December 31, 2022

 

 

15

 

 

$

3.87

 

As of December 31, 2022 and 2021, there was $0.1 million and $0.3 million in unrecognized compensation cost related to RSAs expected to be recognized over a remaining weighted-average period of 1.0 and 1.5 years, respectively. The total fair value of RSAs that vested during 2022 and 2021 was $0.6 million and $8.5 million, respectively.

2021 Employee Stock Purchase Plan

The 2021 Employee Stock Purchase Plan (the "ESPP") authorizes the issuance of shares of common stock to participating eligible employees and provides for two six-month offering periods each year. As of December 31, 2022, there were approximately 0.8 million shares remaining for future purchases under the ESPP.

The ESPP provides that the number of shares reserved and available for issuance under the ESPP will automatically increase each January 1 by the lesser of 0.8 million shares of the Company's common stock, 1% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2023, the total number of shares available for issuance under the ESPP increased by approximately 0.5 million shares under this provision.

During each of 2022 and 2021, the Company issued less than 0.1 million shares of its common stock pursuant the ESPP.