Prelude Therapeutics Inc 10-K

Item 8. Financial Statements and Supplementary Data. 95 INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 97 Balance Sheets as of December 31, 2021 and 202 0 98 Statements of Operations and Comprehensive Loss for the Years ended December 31, 2021 and 20 2 0 99 Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2021 and 20 2 0 100 Statements of Cash Flows for the Years ended December 31, 2021 and 202 0 102 Notes to Financial Statements 103 96 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Prelude Therapeutics Incorporated Opinion on the Financial Statements We have audited the accompanying balance sheets of Prelude Therapeutics Incorporated (the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Philadelphia, Pennsylvania March 17, 2022 97 PRELUDE THERAPEUTICS INCORPORATED BALANCE SHEETS December 31, (in thousands, except share and per share data) 2021 2020 Assets Current assets: Cash and cash equivalents $ 31,828 $ 218,309 Marketable securities 259,405 — Prepaid expenses and other current assets 3,882 2,500 Total current assets 295,115 220,809 Restricted cash 4,044 — Property and equipment, net 3,929 2,480 Right-of-use asset 1,707 — Other assets 303 301 Total assets $ 305,098 $ 223,590 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 7,840 $ 3,920 Accrued expenses and other current liabilities 9,621 7,455 Operating lease liability 1,740 — Total current liabilities 19,201 11,375 Other liabilities — 32 Total liabilities 19,201 11,407 Commitments (note 8) Stockholders’ equity: Voting common stock, $ 0.0001 par value: 487,149,741 shares authorized; 36,200,299 and 32,595,301 shares issued and outstanding at December 31, 2021 and 2020, respectively 4 3 Non-voting common stock, $ 0.0001 par value: 12,850,259 shares authorized; 11,402,037 and 11,110,371 shares issued and outstanding at December 31, 2021 and 2020, respectively 1 1 Additional paid-in capital 505,723 319,605 Accumulated other comprehensive income (loss) ( 711 ) — Accumulated deficit ( 219,120 ) ( 107,426 ) Total stockholders’ equity 285,897 212,183 Total liabilities and stockholders’ equity $ 305,098 $ 223,590 See accompanying notes to financial statements. 98 PRELUDE THERAPEUTICS INCORPORATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Year ended December 31, (in thousands, except share and per share data) 2021 2020 Operating expenses: Research and development $ 86,778 $ 48,177 General and administrative 26,957 10,586 Total operating expenses 113,735 58,763 Loss from operations ( 113,735 ) ( 58,763 ) Other income, net 2,041 1,834 Net loss $ ( 111,694 ) $ ( 56,929 ) Per share information: Net loss per share of common stock, basic and diluted $ ( 2.43 ) $ ( 4.56 ) Weighted average common shares outstanding, basic and diluted 46,049,763 12,478,463 Comprehensive loss Net loss $ ( 111,694 ) $ ( 56,929 ) Unrealized gain (loss) on marketable securities, net of tax ( 711 ) — Comprehensive loss $ ( 112,405 ) $ ( 56,929 ) See accompanying notes to financial statements. 99 PRELUDE THERAPEUTICS INCORPORATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) Stockholders’ equity (deficit) Voting common stock Non-voting common stock Additional paid-in capital Accumulated Other Comprehensive Income (Loss) Accumulated deficit Total (in thousands, except shares) Shares Amount Shares Amount Balance at December 31, 2020 32,595,301 $ 3 11,110,371 $ 1 $ 319,605 $ — $ ( 107,426 ) $ 212,183 Issuance of common stock upon exercise of stock options 995,950 — — — 3,504 — — 3,504 Sale of common stock, net of offering costs of $ 739 2,583,334 1 291,666 — 161,411 — — 161,412 Issuance of common stock under ESPP 25,714 — — — 272 — — 272 Unrealized gain (loss) on marketable securities, net of tax — — — — — ( 711 ) — ( 711 ) Stock-based compensation expense — — — — 20,931 — — 20,931 Net loss — — — — — — ( 111,694 ) ( 111,694 ) Balance at December 31, 2021 36,200,299 $ 4 11,402,037 $ 1 $ 505,723 $ ( 711 ) $ ( 219,120 ) $ 285,897 See accompanying notes to financial statements. 100 PRELUDE THERAPEUTICS INCORPORATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (CONTUNIUED) Convertible preferred stock Stockholders’ equity (deficit) (in thousands, except shares) Series A Series B Series C Voting common stock Non-voting common stock Additional paid-in capital Accumulated deficit Total Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance at January 1, 2020 11,736,119 $ 36,595 7,628,846 $ 29,848 — $ — 3,161,653 $ — — $ — $ 1,085 $ ( 50,497 ) $ ( 49,412 ) Exercise of stock options — — — — — — 100,545 — — — 100 — 100 Sale of Series B convertible preferred stock, net of issuance costs of $ 58 — — 7,628,846 29,942 — — — — — — — Sale of Series C convertible preferred stock, net of issuance costs of $ 174 — — — — 3,443,612 49,826 — — — — — — — Conversion of convertible preferred stock upon initial public offering ( 11,736,119 ) ( 36,595 ) ( 15,257,692 ) ( 59,790 ) ( 3,443,612 ) ( 49,826 ) 19,327,052 2 11,110,371 1 146,208 — 146,211 Sale of common stock in initial public offering, net of issuance costs of $ 2,538 — — — — — — 9,573,750 1 — — 166,629 — 166,630 Stock-based compensation expense, including issuance of RSAs — — — — — — 432,301 — — — 5,583 — 5,583 Net loss — — — — — — — — — — — ( 56,929 ) ( 56,929 ) Balance at December 31, 2020 — $ — — $ — — $ — 32,595,301 $ 3 11,110,371 $ 1 $ 319,605 $ ( 107,426 ) $ 212,183 See accompanying notes to financial statements. 101 PRELUDE THERAPEUTICS INCORPORATED STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands) 2021 2020 Cash flows used in operating activities: Net loss $ ( 111,694 ) $ ( 56,929 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 915 542 Noncash lease expense 1,328 — Loss on disposal of property and equipment — 11 Stock-based compensation 20,931 5,583 Amortization of premium and discount on marketable securities, net 1,364 — Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 1,382 ) ( 1,155 ) Accounts payable 3,903 1,157 Accrued expenses and other liabilities 2,463 4,614 Operating lease liabilities ( 1,359 ) — Net cash used in operating activities ( 83,531 ) ( 46,177 ) Cash flows used in investing activities: Purchases of marketable securities ( 261,480 ) — Purchases of property and equipment ( 2,323 ) ( 621 ) Net cash used in investing activities ( 263,803 ) ( 621 ) Cash flows provided by financing activities: Proceeds from the sale of common stock, net of offering costs 161,424 — Proceeds from the issuance of common stock upon initial public offering, net of offering costs — 166,630 Proceeds from the sale of Series C convertible preferred stock, net of offering costs — 49,826 Proceeds from the sale of Series B convertible preferred stock, net of offering costs — 29,942 Payment of offering costs ( 303 ) ( 12 ) Payment of capital lease obligation — ( 258 ) Proceeds from issuance of common stock in connection with the exercise of stock options 3,504 100 Proceeds from the issuance of common stock under ESPP 272 — Net cash provided by financing activities 164,897 246,228 Net (decrease) increase in cash and cash equivalents ( 182,437 ) 199,430 Cash, cash equivalents and restricted cash at beginning of year 218,309 18,879 Cash, cash equivalents and restricted cash at end of year $ 35,872 $ 218,309 Supplemental disclosures: Operating lease right-of-use assets obtained in exchange for operating lease liabilities $ 567 — Property and equipment in accounts payable $ 806 $ 765 Unrealized gain (loss) on marketable securities $ ( 711 ) — Offering costs in accrued expenses $ — $ 265 Offering costs in accounts payable $ — $ 24 See accompanying notes to financial statements. 102 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations Prelude Therapeutics Incorporated (the “Company”) was incorporated in Delaware on February 5, 2016 and is a clinical-stage fully integrated oncology company built on a foundation of drug discovery excellence to deliver novel precision cancer medicines to underserved patients. Since beginning operations, the Company has devoted substantially all its efforts to research and development, conducting preclinical and clinical studies, recruiting management and technical staff, administration, and raising capital. 2. Risks and Liquidity The Company is subject to a number of risks common to early-stage companies in the biotechnology industry. Principal among these risks are the uncertainties in the development process, development of the same or similar technological innovations by competitors, protection of proprietary technology, dependence on key personnel, compliance with government regulations and approval requirements, and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval, or that any approved products will be commercially viable. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and contractors. Since its inception, the Company has incurred operating losses and had an accumulated deficit of $ 219.1 million at December 31, 2021. The Company has no revenue to date and devotes its efforts to research and development. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its product candidates currently in development. The Company believes that its cash, cash equivalents and marketable securities as of December 31, 2021 will be sufficient to fund its operating expenses and capital expenditure requirements into the second half of 2024. To fund its operating expenses and capital expenditure requirements after that date, the Company plans to seek additional funding through public or private equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into strategic alliances or other arrangements on favorable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be required to delay, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, which could adversely affect its business prospects. On March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. There is significant uncertainty as to the likely effects of this disease and emerging variants which may, among other things, materially impact the Company’s planned clinical trials. This pandemic or outbreak could result in difficulty securing clinical trial site locations, CROs, and/or trial monitors and other critical vendors and consultants supporting the trial. In addition, outbreaks or the perception of an outbreak near a clinical trial site location could impact the Company’s ability to enroll patients. These situations, or others associated with COVID-19, could cause delays in the Company’s clinical trial plans and could increase expected costs, all of which could have a material adverse effect on the Company’s business and its financial condition. At the current time, the Company is unable to quantify the potential effects of this pandemic on its future financial statements. 103 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued 3. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”). Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of the revisions are reflected in the accompanying financial statements in the period they are determined to be necessary. The most significant estimate relates to accrued clinical trial expenses. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk beyond the normal credit risk associated with commercial banking relationships. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views and manages its operations as a single operating segment. Fair Value of Financial Instruments Management believes that the carrying amounts of the Company’s financial instruments, including cash, restricted cash, accounts payable, and accrued expenses, approximate fair value due to the short-term nature of these instruments. Cash, Cash Equivalents and Restricted cash The Company’s cash equivalents include short-term highly liquid investments with an original maturity of 90 days or less when purchased and are carried at fair value in the accompanying balance sheets. Restricted cash comprises a letter of credit for the benefit of the landlord in connection with the Company’s new lease facility. See note 8 for further details. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheet that total to the amounts shown in the statement of cash flows: December 31, (in thousands) 2021 2020 Cash and cash equivalents $ 31,828 $ 218,309 Restricted cash 4,044 - Total cash, cash equivalents, and restricted cash shown in statement of cash flows $ 35,872 $ 218,309 104 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued Marketable Securities The Company’s marketable securities consist of investments in corporate debt securities and commercial paper that are classified as available-for-sale. The securities are carried at fair value with the unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss), a component of stockholders’ equity (deficit). Realized gains and losses and declines in value determined to be other than temporary are included in the Company’s statements of operations. The Company classifies marketable securities that are available for use in current operations as current assets on the balance sheets. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is recognized using the straight-line method over the estimated useful life of the asset, ranging from 5 - 7 years as follows: Fixed Asset Type Estimated useful life Lab equipment 5 years Furniture and fixtures 7 years Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or the remaining lease term. Assets under capital leases are recorded in property and equipment, net on the balance sheets and depreciated in a manner similar to other property and equipment. Expenditures for repairs and maintenance of assets are charged to expense as incurred, while major betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in the statements of operations. The Company reviews long-lived assets, such as property and equipment, for impairment when events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. If indicators of impairment are present, the assets are tested for recoverability by comparing the carrying amount of the assets to the related estimated future undiscounted cash flows that the assets are expected to generate. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows. Comprehensive loss Comprehensive loss includes net loss and certain changes in stockholders’ equity (deficit) that are excluded from net loss. The Company’s comprehensive loss for the year ended December 31, 2021 comprised net loss and unrealized gain(loss) on marketable securities. The Company’s comprehensive loss was equal to net loss for the year ended December 31, 2020. Stock-Based Compensation The Company measures share-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the awards. Estimating the fair value of share-based awards requires the input of subjective assumptions, including, for stock options, the expected life of the options and stock price volatility. The Company accounts for forfeitures for stock option awards as they occur. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in estimating the fair value of share-based awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. The expected life of the stock options is estimated using the “simplified method”, as the Company has limited historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For stock price volatility, the Company uses comparable public companies as a basis for its 105 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued expected volatility to calculate the fair value of option grants. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected life of the option. Grant Income and Research and Development Tax Credits The Company recognizes grant income and Delaware research and development tax credits, which are refundable irrespective of taxable income, in other income, net in the statements of operations when it is probable that the amounts will be received and the necessary qualifying conditions, as stated in the agreements, are met. Research and Development Research and development costs are expensed as incurred. Research and development expenses consist principally of personnel costs, including salaries, stock-based compensation, and benefits of employees, and other operational costs related to the Company’s research and development activities, including allocated facility-related expenses and external costs of outside vendors, such as clinical research organizations and clinical manufacturing organizations, and other direct and indirect costs. Management makes estimates of the Company’s accrued research and development expenses as of each balance sheet date in the Company’s financial statements based on facts and circumstances known to the Company at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. Income Taxes Income taxes are accounted for under the asset-and-liability method as required by FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income. FASB ASC Subtopic 740-10, Accounting for Uncertainty of Income Taxes , (“ASC 740-10”) defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50 % likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 740-10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively. Net Loss Per Share Basic net loss per share of common stock is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during each period. The weighted-average number of shares of common stock outstanding used in the basic net loss per share calculation does not include unvested restricted stock awards as these instruments are considered contingently issuable shares until they vest. Diluted net loss per share of common stock includes the effect, if any, from the potential exercise of stock options, and the effect from unvested restricted stock awards and restricted stock units which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive. The Company’s unvested restricted stock awards 106 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued entitles the holder to participate in dividends and earnings of the Company, and, if the Company were to recognize net income, it would have to use the two-class method to calculate earnings per share. The two-class method is not applicable during periods with a net loss, as the holders of the unvested restricted stock awards have no obligation to fund losses. The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive: December 31, 2021 2020 Unvested restricted stock awards 611,608 1,214,767 Unvested restricted stock units 20,000 — Stock options 7,179,482 6,839,091 7,811,090 8,053,858 Amounts in the above table reflect the common stock equivalents. Recently Issued Accounting Pronouncements Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. Recently Adopted Accounting Pronouncements On January 1, 2021 , the Company adopted ASC 842 issued by the FASB in February 2016, which was subsequently supplemented by clarifying guidance to improve financial reporting of leasing transactions. The new lease accounting guidance requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for all leases with initial terms longer than 12 months and provides enhanced disclosures on key information of leasing arrangements. The Company adopted the new standard using the modified retrospective transition method utilizing the optional transition method and elected the package of practical expedients. Accordingly, prior periods were not restated to reflect the adopted standard. In accordance with the guidance in ASC 842, components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). The Company has elected the practical expedient to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. Upon adoption, the Company recorded a right of use asset of $ 2.5 million and corresponding operating lease liabilities of $ 2.5 million, with an offset to accrued expenses and other current liabilities of approximately $ 64,000 to eliminate deferred rent on the balance sheets. At lease commencement, the Company records a lease liability based on the present value of lease payments over the expected lease term including any options to extend the lease that the Company is reasonably certain to exercise. The Company calculates the present value of lease payments using an incremental borrowing rate as the Company’s leases do not provide an implicit interest rate. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. At the lease commencement date, the Company records a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date. The Company may enter into leases with an initial term of 12 months or less (“Short-Term Leases”). For Short-Term Leases, the Company records the rent expense on a straight-line basis and does not record the leases on the balance sheet. The Company 107 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued entered into a short-term lease in June 2021 and elected the short-term lease exemption that allows the Company to record the rent expense on a straight-line basis and does not require the recognition of a right-of-use asset or corresponding operating lease liability. Refer to Note 8 for the Company’s lease disclosures. After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement and (ii) the right-of-use lease asset based on the re-measured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Any lease incentives received, and any initial direct costs incurred are amortized on a straight-line basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term. The adoption of the new lease accounting standard did not have a material impact on the Company’s results of operations or cash flows for the year ended December 31, 2021. Accounting guidance not yet adopted In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments ” which has subsequently been amended by ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11, and ASU No. 2020-03 (“ASU 2016-03”). This guidance replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 and must be adopted using a modified retrospective approach, with certain exceptions. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures. In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance: Disclosures by Business Entities about Government Assistance” . The amendments in this Update improve financial reporting by requiring disclosures that increase the transparency of transactions with a government. The amendments require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy (i) the type of transaction (ii) the accounting for the transaction, and (iii) the effect of the transaction on the entity’s financial statements. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 with early adoption permitted. The Company is currently evaluating the impact of this standard but does not expect that it will have a material impact on its financial statements and related disclosures. 4. Marketable Securities The following is a summary of the Company’s marketable securities as of December 31, 2021. The Company did not have any marketable securities as of December 31, 2020. (in thousands) Amortized Cost Gross unrealized gain Gross unrealized loss Fair Value Marketable securities Corporate debt securities $ 193,798 $ 1 $ ( 696 ) $ 193,103 Commercial paper 66,318 1 ( 17 ) 66,302 $ 260,116 $ 2 $ ( 713 ) $ 259,405 The Company’s marketable securities generally have contractual maturity dates of 18 months or less. As of December 31, 2021, the Company had 25 securities with a total fair market value of $ 221.8 million in an unrealized loss position. The Company believes that any unrealized losses associated with the decline in value of its securities is temporary and is primarily related to the change in market interest rates since purchase and believes that it is more likely than not that it will be able to hold its debt securities to maturity . 108 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued 5. Fair Value of Financial Instruments Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments be made. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value. The Company follows the provisions of ASC 820, for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements be classified and disclosed in one of the following three categories: • Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. • Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities. • Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis: Fair value measurement at reporting date using (in thousands) Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) December 31, 2021: Assets: Cash equivalents (Money Market Funds) $ 30,520 $ — $ — Marketable securities Corporate debt securities — 193,103 — Commercial paper — 66,302 — Total 30,520 259,405 — December 31, 2020: Assets: Cash equivalents (Money Market Funds) $ 217,072 $ — $ — 6. Property and Equipment Property and equipment consisted of the following: December 31, (in thousands) 2021 2020 Lab equipment $ 4,266 $ 3,010 Leasehold improvements 875 448 Furniture and fixtures 118 105 Construction in progress 668 — 5,927 3,563 Less accumulated depreciation ( 1,998 ) ( 1,083 ) Property and equipment, net $ 3,929 $ 2,480 109 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued In September 2019, the Company signed a 12 -month capital lease for $ 0.4 million of lab equipment with an effective interest rate of 9.67 %. At December 31, 2020, the Company had $ 0.1 million of accumulated amortization related to the capital lease. At December 31, 2020, the Company had no further lease payments under the capital lease. 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: December 31, (in thousands) 2021 2020 Compensation and related benefits $ 4,919 $ 3,614 Research and development 4,615 3,421 Other 87 420 $ 9,621 $ 7,455 8. Commitments Leases The Company leases office and laboratory space in Wilmington, Delaware under a noncancelable lease (the “Lease”), which expires in December 2022. The Lease was amended during the third quarter of 2021 to include additional office and laboratory space to accommodate the Company’s growth. The Company has an option to renew the Lease for an additional 1 -year period. This option to extend was not recognized as part of the Company’s measurement of the right-of-use asset and operating lease liability as of December 31, 2021 . The discount rate used to account for the Company’s operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 10.0 %. The future minimum lease payments under the Lease at December 31, 2021 are as follows: (in thousands) 2022 $ 1,836 Total undiscounted lease payments 1,836 Less imputed interest ( 96 ) Current lease liability $ 1,740 During the fourth quarter of 2021, the Company entered into a lease agreement (the Chestnut Run Lease) with a commencement date of the earlier of (i) the Landlord Work Substantial Completion Date (as such term is defined in the Chestnut Run Lease), or (ii) the date the Company takes possession of the premises for the conduct of the Company’s business (the Commencement Date). The Chestnut Run Lease premises includes approximately 81,000 square feet, located at Chestnut Run Plaza in Wilmington, Delaware (the Premises). The Premises contains both office and lab space the Company intends to use for administrative, research and development and other activities. Upon the Chestnut Run Lease commencement, the Company will recognize a right-of-use asset and operating lease liability in accordance with ASC 842. The Chestnut Run Lease has an initial term of 162 months with 3 five-year extension options and certain expansion rights. The aggregate estimated rent payments due over the initial term of the Chestnut Run Lease is approximately $ 33.8 million. The estimated rent payments due over the next five years is as follows: (in thousands) 2022 $ - 2023 840 2024 2,141 2025 2,350 2026 2,409 Thereafter 26,098 110 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued The Company paid a security deposit in the form of a letter of credit of $ 4.0 million which is included in the balance sheet as restricted cash as of December 31, 2021. The security deposit may be reduced to $ 0.5 million over time in accordance with the terms of the Chestnut Run Lease . In June 2021, the Company entered into a 12 -month noncancelable lease, which commenced on July 1, 2021 and will expire on June 30, 2022 , and has remaining lease payments of approximately $ 0.2 million in 2022. The Company adopted the short-term lease election as afforded by ASC 842 and did not recognize a right-of-use asset and operating lease liability related to this short-term lease. Rent expense for the years ended December 31, 2021 and 2020 was $ 1.8 million and $ 1.2 million, respectively. Employment Agreements The Company entered into employment agreements with key personnel providing for compensation and severance in certain circumstances, as defined in the respective employment agreements. 401(k) Defined Contribution Plan The Company sponsors a 401(k) defined‑contribution plan covering all employees. Participants are permitted to contribute up to 100 % of their eligible annual pretax compensation up to an established federal limit on aggregate participant contributions. The Company provides a safe harbor match with a maximum amount of 3 % of the participant’s compensation. During 2021 the Company made matching contributions of $ 0.5 million. The Company did no t make any matching contributions in 2020. Research Collaboration Agreement In September 2021, the Company entered into a research collaboration agreement estimated to last for approximately one year (the “Darwin Health Agreement”) with Darwin Health, Inc. (“DarwinHealth”). Under the terms of the Darwin Health Agreement, DarwinHealth will utilize their drug discovery technologies and certified methodologies in precision oncology to advance and accelerate clinical development for certain of the Company’s programs across a broad range of tumor subtypes. The Company will pay DarwinHealth a total of $ 3.0 million in three equal installments over the one-year term (the “Research Term”) to fund the research and, if the Company adopts any of DarwinHealth’s development ideas, the Company will be responsible for the development, manufacturing, and commercialization of any such products. For the year ended December 31, 2021, research and development expense related to this agreement recognized in the statement of operations was $ 1.0 million. In addition to research funding, DarwinHealth is eligible to receive future research, development and regulatory milestones of up to $ 3.0 million for each product candidate and is also eligible to receive tiered royalties in the low single digits on net sales of each product developed using DarwinHealth’s development technologies or methods. However, within eighteen-months following the Research Term, the Company, in its sole discretion, may notify DarwinHealth that it will not utilize its development ideas and will be entitled to receive a refund of $ 0.5 million. Other Research and Development Arrangements The Company enters into agreements with contract research organizations (“CROs”) to assist in the performance of research and development activities. Expenditures to CROs will represent a significant cost in clinical development for the Company. 9. Convertible Preferred Stock and Common Stock Preferred Stock Financings In May 2019, the Company issued an aggregate of 7,628,846 shares of Series B convertible preferred stock (“Series B”) to existing investors at $ 3.9325 per share for aggregate net proceeds of $ 29.8 million. 111 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued Pursuant to the Series B Stock Purchase Agreement, the Series B investors could elect to purchase an aggregate of 7,628,846 additional shares of the Company’s Series B at a fixed purchase price of $ 3.9325 per share (the “Series B Future Tranche Right”). The Company determined that the Series B Future Tranche Right did not meet the definition of a freestanding financial instrument as it was not legally detachable. The Series B Future Tranche Right was also evaluated as an embedded derivative and the Company determined it did not meet the definition of a derivative instrument for which bifurcation would be required. In March 2020, the Company’s Series B investors exercised their Future Tranche Right and purchased 7,628,846 shares of Series B for net proceeds of approximately $ 29.9 million. In August 2020, the Company’s existing Convertible Preferred Stock investors as well as a new investor purchased 3,443,612 shares of Series C at a price of $ 14.5197 per share for net proceeds of approximately $ 49.8 million. Initial Public Offering In September 2020, the Company completed its IPO in which the Company sold 9,573,750 shares of its common stock at a public offering price of $ 19.00 per share. The Company received net proceeds of $ 166.6 million after deducting underwriting discounts, commissions, and other offering expenses paid by the Company. In addition, immediately prior to the closing of the IPO on September 29, 2020, (i) all of the Company’s outstanding shares of convertible preferred stock converted into an aggregate of 30,437,423 shares of common stock (of which, 11,110,371 shares are non-voting common stock) and (ii) the Company filed an amended and restated certificate of incorporation to, among other things, increase the number of authorized shares of common stock to 500,000,000 . Follow-on Offering In January 2021, the Company sold 2,875,000 shares of its common stock at a public offering price of $ 60.00 per share. The Company received net proceeds of $ 161.4 million after deducting underwriting discounts, commissions, and other offering expenses paid by the Company. Common Stock The Company has two classes of common stock; “voting common stock” and “non-voting common stock.” The holders of the voting common stock are entitled to one vote for each share of voting common stock held at all meetings of stockholders . Except as otherwise required by law, the holders of non-voting common stock shall not be entitled to vote at any meetings of stockholders (or written actions in lieu of meetings) and the shares of non-voting common stock shall not be included in determining the number of shares voting or entitled to vote on any matter. Unless required by law, there shall be no cumulative voting. Any holder of non-voting common stock may elect to convert each share of non-voting common stock into one fully paid and non-assessable share of voting common stock at any time by providing written notice to the Company; provided that as a result of such conversion, such holder, together with its affiliates and any members of a Schedule 13(d) group with such holder, would not beneficially own in excess of 9.99 % of the Company’s common stock immediately prior to and following such conversion, unless otherwise as expressly provided for in the Company’s restated certificate of incorporation. However, this ownership limitation may be increased (not to exceed 19.99 %) or decreased to any other percentage designated by such holder of non-voting common stock upon 61 days’ notice to the Company. 10. Stock-Based Compensation The Company has two equity incentive plans: the 2016 Equity Incentive Plan, as amended, and the 2020 Equity Incentive Plan. New awards can only be granted under the 2020 Equity Incentive Plan (the “Plan”). The total number of shares initially authorized under the Plan was 4,680,000 , which was increased on January 1, 2021 and will automatically increase on January 1st of each year, continuing for ten years , in an amount equal to five percent of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year, subject to the discretion of the board of directors or compensation committee to determine a lesser number of shares shall be added for such year. At December 31, 2021, 5,314,849 shares were available for future grants and on January 1, 2022, 2,380,116 shares were added to the Plan. The Plan provides for the granting of common stock, incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and/or stock appreciation rights to employees, directors, and other persons, as determined by the Company’s board of directors. The Company’s stock options vest based on the terms in each award 112 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued agreement, generally over four-year periods with 25 % of options vesting after 1 year and then monthly thereafter, and have a term of ten years . The Company measures stock-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the awards. The Company recorded stock-based compensation expense in the following expense categories in its accompanying statements of operations: Year Ended December 31, (in thousands) 2021 2020 Research and development $ 9,469 $ 2,585 General and administrative 11,462 2,998 $ 20,931 $ 5,583 Stock Options The following table summarizes stock option activity for the Plan in the years indicated: Number of shares Weighted average exercise price per share Weighted average remaining contractual term (years) Outstanding at January 1, 2020 2,269,742 $ 1.66 9.20 Granted 4,785,630 $ 11.35 Exercised ( 100,545 ) $ 0.99 Forfeited ( 115,736 ) $ 1.37 Outstanding at December 31, 2020 6,839,091 $ 8.46 9.17 Granted 2,600,231 $ 31.14 Exercised ( 995,950 ) $ 3.52 Forfeited ( 1,263,890 ) $ 19.79 Outstanding at December 31, 2021 7,179,482 $ 15.36 8.66 Exercisable at December 31, 2021 2,057,975 $ 6.99 8.04 At December 31, 2021, the aggregate intrinsic value of outstanding options and exercisable options was $ 25.1 million and $ 13.2 million, respectively. The following table summarizes information about stock options outstanding and exercisable at December 31, 2021 under the Plan: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $0.31 - $7.37 2,352,647 7.76 $ 1.80 1,233,638 $ 1.75 $7.38 - $13.08 2,465,488 8.67 12.85 777,587 12.85 $13.09 - $31.30 1,760,632 9.61 27.58 4,219 17.99 $31.31 - $88.98 600,715 9.35 43.02 42,531 50.79 7,179,482 2,057,975 The weighted-average grant date fair value of options granted was $ 22.80 and $ 10.12 per share for the years ended December 31, 2021 and 2020, respectively. The aggregate intrinsic value of options exercised was $ 26.9 million for the year 113 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued ended December 31, 2021 . The Company recorded stock-based compensation expense of $ 19.9 million and $ 4.8 million for the years ended December 31, 2021 and 2020 , respectively, related to stock options. As of December 31, 2021 , the total unrecognized compensation expense related to unvested stock option awards was $ 68.4 million, which the Company expects to recognize over a weighted-average period of 3.03 years . The fair value of each option was estimated on the date of grant using the weighted average assumptions in the table below: Year Ended December 31, 2021 2020 Expected volatility 87.46 % 115.17 % Risk-free interest rate 0.94 % 0.43 % Expected life (in years) 6.04 6.25 Expected dividend yield — — Restricted Stock Awards and Units The Company issues restricted stock awards (“RSA”) to employees that generally vest over a four-year period with 25 % of awards vesting after 1 year and then monthly thereafter. Any unvested shares will be forfeited upon termination of services. The fair value of an RSA is equal to the fair market value price of the Company’s common stock on the date of grant. RSA expense is recorded on a straight-line basis over the vesting period. The following table summarizes activity related to RSA stock-based payment awards: Number of shares Weighted- average grant date fair value Unvested balance at January 1, 2020 1,335,349 $ 1.42 Granted 432,301 $ 3.26 Vested ( 552,883 ) $ 1.37 Unvested balance at December 31, 2020 1,214,767 $ 2.09 Vested ( 603,159 ) $ 1.89 Unvested balance at December 31, 2021 611,608 $ 2.29 The Company recorded stock-based compensation expense of $ 0.9 million and $ 0.8 million for the years ended December 31, 2021 and 2020, respectively, related to RSAs. As of December 31, 2021, the total unrecognized expense related to all RSAs was $ 1.3 million, which the Company expects to recognize over a weighted-average period of 1.83 years. The Company issues restricted stock units (“RSU”) to employees that generally vest over a four-year period with 25 % of awards vesting after 1 year and then quarterly thereafter. Any unvested shares will be forfeited upon termination of services. The following table summarizes activity related to RSU stock-based payment awards: Number of shares Weighted- average grant date fair value Outstanding at January 1, 2021 — Granted 45,000 $ 26.91 Forfeited ( 25,000 ) $ 33.78 Outstanding at December 31, 2021 20,000 $ 18.32 114 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued The Company recorded stock-based compensation expense of $ 20 thousand for the year ended December 31, 2021 related to RSUs. At December 31, 2021 the total unrecognized expense related to the RSUs was $ 0.3 million, which the Company expects to recognize over 3.76 years. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan (the “ESPP”), which as of December 31, 2021 had 931,342 shares of common stock reserved for future issuance. The Company issued 25,714 shares under the ESPP in 2021. The number of shares of the Company’s common stock that may be issued pursuant to rights granted under the ESPP shall automatically increase on January 1st of each year and continuing for ten years beginning in 2021, in an amount equal to one percent of the total number of shares of all classes of the Company’s common stock outstanding on December 31st of the preceding calendar year, subject to the discretion of the board of directors or compensation committee to determine a lesser number of shares shall be added for such year. As such, on January 1, 2022, 476,023 shares were added to the ESPP. Under the ESPP, eligible employees can purchase the Company’s common stock through accumulated payroll deductions at such times as are established by the compensation committee. Eligible employees may purchase the Company’s common stock at 85 % of the lower of the fair market value of the Company’s common stock on the first day of the offering period or on the last day of the offering period. Eligible employees may contribute up to 15 % of their eligible compensation. Under the ESPP, a participant may not accrue rights to purchase more than $ 25,000 worth of the Company’s common stock for each calendar year in which such right is outstanding. The ESPP is considered compensatory under the FASB stock compensation rules. Accordingly, share-based compensation expense is determined based on the option’s grant-date fair value as estimated by applying the Black Scholes option-pricing model and is recognized over the withholding period. The Company recognized share-based compensation expense of $ 0.2 million for the year ended December 31, 2021 related to the ESPP. 11. Income Taxes The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities were as follows: December 31, (in thousands) 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 60,495 $ 28,283 Research and development credits 11,240 4,753 Stock-based compensation 2,448 33 Accrued expense 1,290 — Lease liabilities 485 — Gross deferred tax assets 75,958 33,069 Less: valuation allowance ( 75,371 ) ( 32,899 ) Total deferred tax asset 587 170 Deferred tax liability Right-of-use assets ( 476 ) — Depreciation ( 111 ) ( 170 ) Total deferred tax liabilities ( 587 ) ( 170 ) Net deferred tax assets $ — $ — In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to allow for the realization of deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability. Accordingly, a full valuation allowance has been recorded against the Company’s net deferred tax assets as of December 31, 2021 and December 115 PRELUDE THERAPEUTICS INCORPORATED NOTES TO FINANCIAL STATEMENTS — Continued 31, 2020 . The valuation allowance increased by $ 42.5 million and $ 17.5 million during the years ended December 31, 2021 and 2020 , respectively. A reconciliation of the federal income tax rate to the Company’s effective tax rate is as follows: Year ended December 31, 2021 2020 Federal tax benefit at statutory rate ( 21.0 )% ( 21.0 )% State tax, net of federal benefit ( 7.7 ) ( 6.5 ) Permanent differences ( 3.5 ) 1.2 Research and development ( 5.8 ) ( 4.4 ) Change in valuation allowance 38.0 30.7 — % — % The following table summarizes carryforwards of federal and state net operating losses (“NOL”) and research tax credits: December 31, (in thousands) 2021 2020 NOL carryforwards - Federal $ 217,038 $ 101,471 NOL carryforwards - State 217,038 101,471 Research tax credits - Federal 11,206 4,720 Research tax credits - State 43 43 The NOL carryforwards begin expiring in 2036 for federal and Delaware state income tax purposes, however; all federal and Delaware state NOL carryforwards generated subsequent to January 1, 2018, are able to be carried forward indefinitely. As of December 31, 2021, the Company also had federal and Delaware research and development tax credit carryforwards of $ 11.2 million and $ 43 thousand, respectively, that will begin to expire in 2036 and 2031 , respectively, unless previously utilized. The NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. To date, the Company has not performed an analysis to determine whether or not ownership changes have occurred since inception. Delaware state NOLs may also be limited. As of December 31, 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations. Due to NOL and tax credit carry forwards that remain unutilized, income tax returns for all tax years remain subject to examination by the taxing jurisdictions. The NOL carryforwards remain subject to review until utilized. 116 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.